Smith Barney
Managed Governments Fund Inc.
388 Greenwich Street
New York, New York 10013
1-800-451-2010
Statement of Additional
Information
November 28,
1997 as amended
June 17, 1998
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectus of Smith Barney Managed
Governments Fund Inc. (the Fund), dated November 28, 1997, as amended or
supplemented from time to time, and should be read in conjunction with the
Funds Prospectus. The Funds Prospectus may be obtained from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or
telephone number listed above. This Statement of Additional Information,
although not in itself a prospectus, is incorporated by reference into the
Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional Information, except where shown
below:
Management of the Fund ............1
Investment Objective and Management Policies ....4
Purchase of Shares .....14
Redemption of Shares 15
Distributor....... 16
Valuation of Shares .17
Exchange Privilege 17
Performance Data (See in the Prospectus Performance) 18
Taxes (See in the Prospectus Dividends, Distributions and Taxes) 20
Additional Information 22
Financial Statements 22
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are as
follows:
Name Service
Smith Barney Inc.
(Smith Barney) Distributor
Smith Barney Mutual Funds Management Inc.
(SBMFM) Investment Adviser and
Administrator
PNC Bank, National Association (PNC) Custodian
First Data Investor Services Group, Inc. (First Data) Transfer
Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional Information.
Directors and Executive Officers of the Fund
The names of the Directors and executive officers of the Fund, together with
information as to their principal business occupations during the past five
years, are shown below. Each Director who is an interested person of the
Fund, as defined in the Investment Company Act of 1940, as amended (the
1940 Act), is indicated by an asterisk.
Herbert Barg (Age 74). Private Investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
Alfred Bianchetti (Age 74). Retired; formerly Senior Consultant to Dean
Witter Reynolds Inc. His address is 19 Circle End Drive, Ramsey, New Jersey
07446.
Martin Brody (Age 76). Consultant, HMK Associates. Retired Vice Chairman
of the Board of Restaurant Associates Corp. and a Director of Jaclyn, Inc.
His address is c/o HMK Associates, 30 Columbia Turnpike, Florham Park, New
Jersey 07932.
Dwight B. Crane (Age 60). Professor, Harvard Business School. His address
is c/o Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02163.
Burt N. Dorsett, Director (Age 67). Managing Partner of Dorsett McCabe
Management, Inc., an investment counseling firm; Director of Research
Corporation Technologies, Inc., a non-profit patent-clearing and licensing
firm. His address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Director (Age 71). Chairman of the Board and President of
The Dress Barn, Inc. His address is 30 Dunnigan Drive, Suffern, New York
10901.
Stephen E. Kaufman (Age 65). Attorney. His address is 277 Park Avenue,
New York, New York 10172.
Joseph J. McCann (Age 67). Financial Consultant; Retired Financial
Executive of Ryan Homes, Inc. His address is 200 Oak Park Place, Pittsburgh,
Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age 64).
Managing Director of Smith Barney, Chairman of the Board of Smith Barney
Strategy Advisers Inc. and President and Director of SBMFM and Travelers
Investment Advisor, Inc. (TIA); prior to July 1993, Senior Executive Vice
President of Shearson Lehman Brothers Inc.; Vice Chairman of Shearson Asset
Management. Mr. McLendon is Chairman of the Board and Investment Officer of
certain other Smith Barney Mutual Funds. His address is 388 Greenwich
Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director (Age 64). President, Cornelius C. Rose
Associates, Inc., financial consultants, and Chairman and Director of
Performance Learning Systems, an educational consultant. His address is P.O.
Box 335, High Street, Enfield, New Hampshire 03748.
James J. Crisona, Director Emeritus. Attorney; formerly Justice of the
Supreme Court of the State of New York. His address is 118 East 60th Street,
New York, New York 10022.
A Director Emeritus may attend meetings of the Funds Board of Directors
but has no voting rights at such meetings.
James E. Conroy, First Vice President and Investment Officer (Age 47).
Investment Officer of SBMFM; prior to July 1993, Managing Director of
Shearson Lehman Advisors. Mr. Conroy serves as Investment Officer of certain
other Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 40). Managing
Director of Smith Barney; Chief Financial Officer of Smith Barney Mutual
Fund; Director and Senior Vice President of SBMFM and TIA. Mr. Daidone
serves as Senior Vice President and Treasurer of certain other Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 46). Managing Director of Smith Barney;
General Counsel and Secretary of SBMFM and TIA. Ms. Sydor also serves as
Secretary of certain other Smith Barney Mutual Funds. Her address is 388
Greenwich Street, New York, New York 10013.
As of November 25, 1997, the Directors and officers of the Fund, as a
group, beneficially owned less than 1.00% of the outstanding common stock of
the Fund. As of November 25, 1997, to the knowledge of the Fund and its
Board of Directors, no single shareholder or group (as the term is used in
Section 13(d) of the Securities Act of 1933) beneficially owned more than 5%
of the outstanding shares of the Fund.
No Director, officer or employee of Smith Barney or of any parent or
subsidiary receives any compensation from the Fund for serving as a Director
or officer of the Fund. The Fund pays each Director who is not an officer,
director or employee of Smith Barney or any of its affiliates a fee of $4,000
per annum plus $500 per meeting attended and each Director emeritus who is
not an officer, director or employee of Smith Barney or any of its affiliates
a fee of $2,000 per annum plus $250 per in-person meeting and $100 per
telephonic meeting. The Fund reimburses all Directors for travel and out-of-
pocket expenses. For the fiscal year ended July 31, 1997, such fees and
expenses totaled $12,063.99.
For the fiscal year ended July 31, 1997, the Directors of the Fund were
paid the following compensation:
Director
Aggregate
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
$6,200
$0
$105,175
18
Alfred
Bianchetti
6,100
0
51,500
13
Martin Brody
6,000
0
124,286
21
Dwight Crane
6,100
0
140,375
24
Burt Dorset+
6,200
0
47,400
13
Elliot Jaffe
6,100
0
51,000
13
Stephen
Kaufman
6,200
0
92,336
15
Joseph McCann
6,200
0
52,700
13
Heath
McLendon
- - ---
0
- - ---
42
Cornelius
Rose
6,200
0
51,400
13
James
Crisona**
- - ---
0
20,575
12
Issac
Grainger **
1,550
0
3,500
_________________________
* The aggregate remuneration paid to the Directors by the Fund for the fiscal
year ended July 31, 1997 amounted to $12,063.99 (including reimbursement
for travel and out-of-pocket expenses).
** Upon attainment of age 80, Fund Trustees are required to change to emeritus
status. Trustees Emeritus are entitled to serve in emeritus status for a
maximum of 10 years, during which time they are paid 50% of the annual
retainer fee and meeting fees otherwise applicable to Fund Trustees,
together with reasonable out-of-pocket expenses for each meeting attended.
Mr. Crisona, and Mr. Grainger are Directors Emeritus and as such may attend
meetings but have no voting rights.
Investment Adviser and Administrator - SBMFM
SBMFM serves as investment adviser to the Fund pursuant to an investment
advisory agreement (the Advisory Agreement) which was most recently
approved by the Board of Directors, including a majority of Directors who are
not interested persons of the Fund or SBMFM (the Independent
Directors), on July 16, 1997. SBMFM is a wholly owned subsidiary of Smith
Barney Holdings Inc. (Holdings), which, in turn, is a wholly owned
subsidiary of Travelers Group Inc. (Travelers). The Advisory Agreement
is dated July 30, 1993 and was first approved by the Board of Directors,
including a majority of the Independent Directors, on April 7, 1993. The
services provided by SBMFM under the Advisory Agreement are described in the
Prospectus under Management of the Fund. SBMFM pays the salary of any
officer or employee who is employed by both it and the Fund.
As compensation for investment advisory services, the Fund pays SBMFM a
fee computed daily and paid monthly at the following annual rates of the
Funds average daily net assets: 0.45% up to $1 billion; and 0.415% in excess
of $1 billion. For the fiscal years ended July 31, 1995, 1996 and 1997, the
Fund paid SBMFM $3,107,867, $2,816,295 and $2,661,308, respectively, in
investment advisory fees.
SBMFM also serves as administrator to the Fund pursuant to a written
agreement dated April 20, 1994 (the Administration Agreement), which was
most recently approved by the Funds Board of Directors, including a majority
of the Independent Directors, on July 16, 1997. The services provided by
SBMFM under the Administration Agreement are described in the Prospectus
under Management of the Fund. SBMFM pays the salary of any officer and
employee who is employed by both it and the Fund and bears all expenses
incurred in connection with the performance of its services. As compensation
for administration services, the Fund pays SBMFM a fee computed daily and
paid monthly at the annual rate of 0.20% of the value of the average daily
net assets of the Fund up to $1 billion and 0.185% of the value of the
average daily net assets in excess of $1 billion.
The Fund bears expenses incurred in its operations, including: taxes,
interest, brokerage fees and commissions, if any; fees of Directors who are
not officers, directors, shareholders or employees of Smith Barney, SEC fees
and state Blue Sky qualification fees; charges of custodians; transfer and
dividend disbursing agents 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 Funds independent auditor to examine and report on the
Funds financial statements and highlights for the fiscal year ending July
31, 1998.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Funds 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 pools stated average life also may be shortened by
unscheduled payments on the underlying mortgages. Factors affecting mortgage
prepayments include the level of interest rates, general economic and social
conditions, the location of the mortgaged property and the age of the
mortgage. Because prepayment rates of individual pools vary widely, it is
not possible to accurately predict the average life of a particular pool. As
noted above, it is a common practice to assume that prepayments will result
in an average life ranging from two to ten years for pools of fixed-rate 30
year mortgages. Pools of mortgages with other maturities or different
characteristics will have varying average life assumptions. The actual
maturity of and realized yield on specific FHLMC and FNMA certificates will
vary based on the prepayment experience of the underlying pool of mortgages.
U.S. Government Securities
Direct obligations of the United States Treasury include a variety of
securities that differ in their interest rates, maturities and dates of
issuance. Treasury Bills have maturities of less than one year, Treasury
Notes have maturities of one to ten years and Treasury Bonds generally have
maturities of greater than ten years at the date of issuance.
In addition to direct obligations of the United States Treasury, debt
obligations of varying maturities issued or guaranteed by the United States
government or its agencies or instrumentalities (U.S. government
securities) include securities issued or guaranteed by the Federal Housing
Administration, Federal Financing Bank, Export-Import Bank of the United
States, Small Business Administration, GNMA, General Services Administration,
Federal Home Loan Banks, FHLMC, FNMA, Maritime Administration, Tennessee
Valley Authority, Resolution Trust Corporation, District of Columbia Armory
Board, Student Loan Marketing Association and various institutions that
previously were or currently are part of the Farm Credit System (which has
been undergoing a reorganization since 1987). Because the United States
government is not obligated by law to provide support to an instrumentality
that it sponsors, the Fund will invest in obligations of such an
instrumentality only if SBMFM determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
The Fund may invest up to 5% of its net assets in U.S. government
securities for which the principal repayment at maturity, while paid in U.S.
dollars, is determined by reference to the exchange rate between the U.S.
dollar and the currency of one or more foreign countries (Exchange Rate-
Related Securities). Exchange Rate-Related Securities are issued in a
variety of forms, depending on the structure of the principal repayment
formula. The principal repayment formula may be structured so that the
security-holder will benefit if a particular foreign currency to which the
security is linked is stable or appreciates against the U.S. dollar. In the
alternative, the principal repayment formula may be structured so that the
securityholder benefits if the U.S. dollar is stable or appreciates against
the linked foreign currency. Finally, the principal repayment formula can be
a function of more than one currency and, therefore, be designed in either
the aforementioned forms or a combination of those forms.
Investment in Exchange Rate-Related Securities entails special risks.
There is the possibility of significant changes in rates of exchange between
the U.S. dollar and any foreign currency to which an Exchange Rate-Related
Security is linked. If currency exchange rates do not move in the direction
or to the extent anticipated at the time of purchase of the security, the
amount of principal repaid at maturity might be significantly below the par
value of the security, which might not be offset by the interest earned by
the Fund over the term of the security. The rate of exchange between the
U.S. dollar and other currencies is determined by the forces of supply and
demand in the foreign exchange markets. These forces are affected by the
international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. The
imposition or modification of foreign exchange controls by domestic or
foreign governments or intervention by central banks also could affect
exchange rates. Finally, there is no assurance that sufficient trading
interest to create a liquid secondary market will exist for particular
Exchange Rate-Related Securities due to conditions in the debt and foreign
currency markets. Illiquidity in the forward exchange market and the high
volatility of the foreign exchange market may from time to time combine to
make it difficult to sell an Exchange Rate-Related Security prior to maturity
without incurring a significant price loss.
Writing Put and Call Options
The principal reason for writing covered call options on securities is to
attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected).
Nevertheless, the call writer retains the risk of a decline in the price of
the underlying security. Similarly, the principal reason for writing covered
put options is to realize income in the form of premiums. The writer of a
covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premium that the Fund may receive may
be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing activities.
Options written by the Fund normally will have expiration dates between
one and nine months from the date written. The exercise price of the options
may be below, equal to, or above, the current market values of the underlying
securities at the times the options are written. In the case of call options
these exercise prices are referred to as in-the-money, at-the-money,
and out-of-the-money, respectively.
The Fund may write (a) in-the-money call options when SBMFM expects that
the price of the underlying security will remain flat or decline moderately
during the options period, (b) at-the-money call options when SBMFM expects
that the price of the underlying security will remain flat or advance
moderately during the option period and (c) out-of-money call options when
SBMFM expects that the price of the security may increase but not above a
price equal to the sum of the exercise price plus the premiums received from
writing the call option. In any of the preceding situations, if the market
price of the underlying security declined and the security is sold at this
lower price, the amount of any realized loss will be offset wholly or in part
by the premium received. Out-of-money, at-the-money and in-the-money put
options (the reverse of call options as to the relations of exercise price to
market price) may be utilized in the same market environments that such call
options are used in equivalent transactions.
So long as the obligation of the Fund as the writer of an option
continues, the Fund may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring it to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the Fund effects a closing purchase transaction. The Fund
can no longer effect a closing purchase transaction with respect to an option
once it has been assigned an exercise notice. To secure its obligation to
deliver the underlying security when it writes a call option, or to pay for
the underlying security when it writes a put option, the Fund will be
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the Clearing
Corporation) or similar clearing corporation and the securities exchange on
which the option is written.
An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities exchange
or in the over-the-counter market. The Fund expects to write options only on
national securities exchanges or in the over-the-counter market.
The Fund may realize a profit or loss upon entering into a closing
transaction. In cases in which the Fund has written an option, it will
realize a profit if the cost of the closing purchase transaction is less than
the premium received upon writing the original option and will incur a loss
if the cost of the closing purchase transaction exceeds the premium received
upon writing the original option.
Purchasing Put and Call Options
Buying a put option on a U.S. government security will give the Fund the
right to sell the security at a particular price and may act to limit, until
that right expires, the Funds 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 Funds 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 Funds assets would be invested
in call options.
The Fund may enter into closing transactions with respect to put and call
options that it purchases, exercise the options, or permit the options to
expire. Profit or loss from a closing transaction will depend on whether the
amount that the Fund received on the transaction is more or less than the
premium paid for the options plus any related transaction costs.
Although the Fund generally will purchase or write only those options for
which SBMFM believes that there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient
trading interest to create a liquid secondary market on a securities exchange
will exist for any particular options or at any particular time, and for some
options no such secondary market may exist. A liquid secondary market in an
option may cease to exist for a variety of reasons. In the past, for
example, higher than anticipated trading activity or order flow, or other
unforeseen events, have at times rendered certain of the facilities of
national securities exchanges inadequate and resulted in the institution of
special procedures, such as trading rotations, restrictions on certain types
of orders or trading halts or suspensions in one or more options. There can
be no assurance that similar events, or events that may otherwise interfere
with the timely execution of customers orders, will not recur.
In such event, it might not be possible to effect closing transactions in
particular options. If, as a covered call option writer, the Fund is unable
to effect a closing purchase transaction in a secondary market, it will not
be able to sell the underlying security until the option expires or it
delivers the underlying security upon exercise.
Securities exchanges generally have established limitations governing the
maximum number of calls and puts of each class which may be held or written,
or exercised within certain periods, by an investor or group of investors
acting in concert (regardless of whether the options are written on the same
or different securities exchanges or are held, written or exercised in one or
more accounts or through one or more brokers). It is possible that the Fund
and other clients of SBMFM and certain of their affiliates may be considered
to be such a group. A securities exchange may order the liquidation of
positions found to be in violations of these limits, and it may impose
certain other sanctions. At the date of this Statement of Additional
Information, the positions and exercise limited for common stocks on United
States exchanges were 3,000, 5,500 or 8,000 options per stock (i.e., options
representing 300,000, 550,000 or 800,000 shares), depending on various
factors relating to the underlying security and the Funds combined stock and
options position.
Additional risks exist with respect to certain of the U.S. government
securities for which the Fund may write covered call options. If the Fund
writes covered call options on mortgage-backed securities, the securities
that it holds as cover may, because of scheduled amortization or unscheduled
prepayments, cease to be sufficient cover. The Fund will compensate for the
decline in the value of the cover by purchasing an appropriate additional
amount of those securities.
The trading market in options on U.S. governments securities has varying
degrees of depth for various securities. SBMFM will attempt to take
appropriate measures to minimize risks relating to the Funds 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 Funds 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 Funds net income
or other gain will be greater than if this type of leverage had not been
used. Conversely, if the income or other gain from the incremental assets is
not sufficient to cover this cost, the net income or other gain of the Fund
will be less than if the reverse repurchase agreement had not been used.
The Fund currently intends to invest not more than 33% of its net assets
in reverse repurchase agreements.
When-Issued Securities and Delayed Delivery Transactions
In order to secure what SBMFM considers to be an advantageous price or
yield, the Fund may purchase U.S. government securities on a when-issued
basis or purchase or sell U.S. government securities for delayed delivery.
The Fund will enter into such purchase transactions for the purpose of
acquiring portfolio securities and not for the purpose of leverage. Delivery
of the securities in such cases occurs beyond the normal settlement periods,
but no payment or delivery is made by the Fund prior to the reciprocal
delivery or payment by the other party to the transaction. In entering into
a when-issued or delayed-delivery transaction, the Fund relies on the other
party to consummate the transaction and may be disadvantaged if the other
party fails to do so.
U.S. government securities normally are subject to changes in value based
upon changes, real or anticipated, in the level of interest rates and, to a
lesser extent, the publics perception of the creditworthiness of the
issuers. In general, U.S. government securities tend to appreciate when
interest rates decline and depreciate when interest rates rise. Purchasing
U.S. government securities on a when-issued basis or delayed-delivery basis,
therefore, can involve the risk that the yields available in the market when
the delivery takes place may actually be higher than those obtained in the
transaction itself. Similarly, the sale of U.S. government securities for
delayed delivery can involve the risk that the prices available in the market
when the delivery is made may actually be higher than those obtained in the
transaction itself.
The Fund will at times maintain in a segregated account at PNC cash or
liquid securities equal to the amount of the Funds 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 Funds 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 Funds payment obligations).
Lending of Portfolio Securities
As stated in the Prospectus, the Fund has the ability to lend securities
from its portfolio to brokers, dealers and other financial organizations.
Such loans, if and when made, may not exceed 33 1/3% of the Funds total
assets, taken at value. The Fund may not lend its portfolio securities to
Smith Barney or its affiliates without specific authorization from the
Securities and Exchange Commission (the SEC). Loans of portfolio
securities by the Fund will be collateralized by cash, letters of credit or
securities issued or guaranteed by the United States government or its
agencies which are maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. From time to
time, the Fund may return a part of the interest earned from the investment
of collateral received for securities loaned to the borrower and/or a third
party, which is unaffiliated with the Fund or with Smith Barney and which is
acting as a finder.
In lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities, as well as either
investing the cash collateral in short-term instruments or by obtaining yield
in the form of interest paid by the borrower when U.S. government securities
are used as collateral. Requirements of the SEC, which may be subject to
further modifications, currently provide that the following conditions must
be met whenever portfolio securities are loaned: (a) the Fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (b)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (c) the Fund must be
able to terminate the loan at any time; (d) the Fund must receive reasonable
interest on the loan, as well as an amount equal to any dividends, interest
or other distributions on the loaned securities, and any increase in market
value; (e) the Fund may pay only reasonable custodian fees in connection with
the loan; and (f) voting rights on the loaned securities may pass to the
borrower; however, if a material event adversely affecting the investment
occurs, the Funds Board of Directors must terminate the loan and regain the
right to vote the securities. The risks in lending portfolio securities, as
with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or
possible loss of rights in the collateral should the borrower fail
financially. Loans will be made to firms deemed by SBMFM to be of good
standing and will not be made unless, in the judgment of SBMFM, the
consideration to be earned from such loans would justify the risk.
Transactions in Interest Rate Futures Contracts and Related Options
The Fund may enter into interest rate futures contracts and options on
interest rate futures contracts that are traded on a U.S. exchange or board
of trade. These investments may be made by the Fund for the purpose of
hedging against changes in the value of its portfolio securities due to
anticipated changes in interest rates and market conditions and not for
purposes of speculation. The Fund will not be permitted to enter into
futures and options contracts (other than those considered bona fide hedging
by the Commodity Futures Trading Commission) for which aggregate initial
margin deposits and premiums exceed 5% of the fair market value of the Funds
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 Funds 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 Funds 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 Funds
existing position in the contract.
There are several risks in connection with the use of futures contracts as
a hedging device. Successful use of futures contracts by the Fund is subject
to the ability of SBMFM to predict correctly movements in the direction of
interest rates. These predictions involve skills and techniques that may be
different from those involved in the management of the Fund. In addition,
there can be no assurance that there will be a perfect correlation between
movements in the price of the securities underlying the futures contract and
movements in the price of the securities which are the subject of the hedge.
A decision as to whether, when and how to hedge involves the exercise of
skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of market behavior or unexpected trends in interest
rates.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that a liquid
market will exist for the contracts at any particular time. Most domestic
futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract no trades may be made
that day at a price beyond that limit. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial losses. In such
event, and in the event of adverse price movements, the Fund would be
required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the portfolio being
hedged, if any, may partially or completely offset losses on the futures
contract.
If the Fund had hedged against the possibility of an increase in interest
rates adversely affecting the value of securities held in its portfolio and
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if the Fund has insufficient cash, it may have to sell securities to meet
daily variation margin requirements at a time when it may be disadvantageous
to do so. These sales of securities may, but will not necessarily, be at
increased prices which reflect the decline in interest rates.
Purchasing Options. Options on interest rate futures contracts are
similar to options on securities, except that an option on an interest rate
futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in an interest rate futures contract (rather than
to purchase securities) at a specified exercise price at any time prior to
the expiration date of the option. A call option gives the purchaser of such
option the right to take a long position, and obliges its writer to take a
short position in a specified underlying futures contract at a stated
exercise price at any time prior to the expiration date of the option. A
purchaser of a put option has the right to enter into a short position, and
the writer has the obligation to enter into a long position in such contract
at the exercise price during the option period. If an option is exercised on
the last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing price of the interest rate
futures contract on the expiration date. The potential loss related to the
purchase of an option on interest rate futures contracts is limited to the
premium paid for the option (plus transaction costs), and there are no daily
cash payments to reflect changes in the value of the underlying contract.
However, the value of the option does change daily and that change is
reflected in the net asset value of the Fund.
The purchase of put options on interest rate futures contracts is
analogous to the purchase of protective puts on debt securities so as to
hedge a portfolio of debt securities against the risk of rising interest
rates. The Fund may purchase put options on interest rate futures contracts
if SBMFM anticipates a rise in interest rates. Because of the inverse
relationship between trends in interest rates and the values of debt
securities, a rise in interest rates would result in a decline in the value
of the Funds portfolio securities. Because the value of an interest rate
futures contract moves inversely in relation to changes in interest rates, as
is the case with debt securities, a put option on such a contract becomes
more valuable as interest rates rise. By purchasing put options on interest
rate futures contracts at a time when SBMFM expects interest rates to rise,
the Fund would seek to realize a profit to offset the loss in value of its
portfolio securities, without the need to sell such securities.
The Fund may purchase call options on interest rate futures contracts if
SBMFM anticipates a decline in interest rates. Historically, unscheduled
prepayments on mortgage-backed securities (such as GNMA certificates) have
increased in periods of declining interest rates, as mortgagors have sought
to refinance at lower interest rates. As a result, if the Fund purchases
such securities at a premium prior to a period of declining interest rates,
the subsequent prepayments at par will reduce the yield on such securities by
magnifying the effect of the premium in relationship to the principal amount
of securities, and may, under extreme circumstances, result in a loss to the
Fund. This effect may not be offset by any appreciation in value in a debt
security normally attributable to the interest rate decline. To protect
itself against the possible erosion of principal on securities purchased at
premium, the Fund may purchase call options on interest rate futures. The
option would increase in value as interest rates decline, thereby tending to
offset any reductions of the yield on portfolio securities purchased at a
premium resulting from the effect of prepayments on the amortization of such
premiums.
Writing Options. The Fund may write put and call options on interest rate
futures contracts other than as part of closing sale transactions, in order
to increase its ability to hedge against changes in interest rates. A call
option gives the purchaser of such option the right to take a long position,
and obliges the Fund as its writer to take a short position in a specified
underlying futures contract at a stated exercise price at any time prior to
the expiration date of the option. A purchaser of a put option has the right
to take a short position, and obliges the Fund as the writer to take a long
position in such contract at the exercise price during the option period.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the debt securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration is
below the exercise price, the Fund will retain the full amount of the option
premium, which provides a partial hedge against any decline that may have
occurred in the Funds 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 Funds purchase price upon exercise of the
option maybe greater than the price at which the debt securities might be
purchased in the cash market, and, therefore, a loss may be realized when the
difference between the exercise price and the market value of the debt
securities is greater than the premium received for writing the option.
As is currently the case with respect to its purchases of futures, the
Fund will write put and call options on interest rate futures contracts only
as a hedge against changes in the value of its securities that may result
from market conditions, and not for purposes of speculation.
When the Fund writes a call or a put option, it will be required to
deposit initial margin and variation margin pursuant to brokers requirements
similar to those applicable to interest rate futures contracts described
above. In addition, net option premiums received for writing options will be
included as initial margin deposits. At any time prior to the expiration of
the option, the Fund may elect to close the position.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on interest rate futures contracts.
These risks include the lack of assurance of perfect correlation between
price movements in the option on interest rate futures, on the one hand, and
price movements in the portfolio securities that are the subject of the
hedge, on the other hand. In addition, the Funds 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 Funds 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 Funds investment in
premiums paid for call and put options at any one time may not exceed 5% of
the value of the Funds 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 Funds outstanding shares. The
remaining restrictions may be changed by a vote of the Funds 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 Statement of
Additional Information and any future change in those practices would require
Board approval and appropriate disclosure to investors.
Portfolio Turnover
While the Fund does not intend to trade in securities for short-term profits,
securities may be sold without regard to the amount of time that they have
been held by the Fund when warranted by the circumstances. Certain practices
which may be employed by the Fund would result in a turnover rate in excess
of 100%. A portfolio turnover rate of 100% would occur, for example, if all
of the Funds securities were replaced once during a period of one year. For
the 1997, 1996 and 1995 fiscal years, the Funds rates of portfolio turnover
(the lesser of purchases or sales of portfolio securities, excluding short-
term securities, for the year divided by the monthly average value of
portfolio securities) were 121%, 275%, and 292%, respectively.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are made by SBMFM, subject
to the overall supervision and review of the Funds Board of Directors.
Portfolio securities transactions for the Fund are effected by or under the
supervision of SBMFM.
The Fund normally purchases newly issued U.S. government securities
directly from the U.S. Treasury or from the agency or instrumentality that is
the issuer. Certain U.S. government securities are purchased from an
underwriter acting as principal. Other purchases and sales usually are
placed with those dealers from which it appears that the best price or
execution will be obtained; such dealers may be acting as either agents or
principals. No brokerage commissions typically are paid by the Fund on
purchases and sales of portfolio securities. The purchase price paid by the
Fund to underwriters of newly issued securities and dealers in the after-
market normally are executed at a price between the bid and asked prices.
SBMFM selects dealers for portfolio transactions in its best judgment and
in a manner deemed fair and reasonable to shareholders. The primary
considerations are the availability of the desired security and the prompt
execution of orders in an effective manner at the most favorable prices.
Subject to these considerations, dealers which provide supplemental
investment research and statistical or other services to SBMFM may receive
orders for portfolio transactions by the Fund. Information so received
enables SBMFM to supplement its own research and analysis with the views and
information of other securities firms. Such information may be useful to
SBMFM in serving both the Fund and other clients, and, conversely,
supplemental information obtained by the placement of business of other
clients may be useful to SBMFM in carrying out its obligations to the Fund.
While investment decisions for the Fund are made independently from those
of the other accounts managed by SBMFM, investments of the type that the Fund
may make also may be made by such other accounts. When the Fund and one or
more other accounts managed by SBMFM are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for
sales will be allocated in a manner believed by SBMFM to be equitable to
each. In some cases, this procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or disposed of by
the Fund.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in the Prospectus
applies to purchases made by any purchaser, which is defined to include
the following: (a) an individual; (b) an individuals spouse and his or her
children purchasing shares for his or her own account; (c) a trustee or other
fiduciary purchasing shares for a single trust estate or single fiduciary
account; (d) a pension, profit-sharing or other employee benefit plan
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the Code), and qualified employee benefit plans of employers who
are affiliated persons of each other within the meaning of the 1940 Act;
(e) tax-exempt organizations enumerated in Section 501(c)(3) or (13) of the
Code; and (f) a trustee or other professional fiduciary (including a bank, or
an investment adviser registered with the SEC under the Investment Advisers
Act of 1940, as amended) purchasing shares of the Fund for one or more trust
estates or fiduciary accounts. Purchasers who wish to combine purchase
orders to take advantage of volume discounts should contact a Smith Barney
Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in Class
A shares of the Fund and in Class A shares of other Smith Barney Mutual Funds
offered with a sales charge, including the purchase being made, of any
purchaser is $25,000 or more. The reduced sales charge is subject to
confirmation of the shareholders holdings through a check of appropriate
records. The Fund reserves the right to terminate or amend the combined right
of accumulation at any time after written notice to shareholders. For
further information regarding the right of accumulation, shareholders should
contact a Smith Barney Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The public
offering price for a Class A and Class Y share of the Fund is equal to the
net asset value per share at the time of purchase, plus for Class A shares an
initial sales charge based on the aggregate amount of the investment. The
public offering price for a Class B and Class C share (and Class A share
purchases, including applicable rights of accumulation, equaling or exceeding
$500,000), is equal to the net asset value per share at the time of purchase
and no sales charge is imposed at the time of purchase. A contingent
deferred sales charge (CDSC), however, is imposed on certain redemptions
of Class B and Class C shares, and Class A shares when purchased in amounts
equaling or exceeding $500,000. The method of computation of the public
offering price is shown in the Funds financial statements incorporated by
reference in their entirety into this Statement of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed (a)
for any period during which the New York Stock Exchange, Inc. (NYSE) is
closed (other than for customary weekend and holiday closings), (b) when
trading in markets the Fund normally utilizes is restricted, or an emergency
exists, as determined by the SEC, so that disposal of the Funds 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
Funds 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 Funds 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 shareholders 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
shareholders shares at the time the Withdrawal Plan commences.) To the
extent that withdrawals exceed dividends, distributions and appreciation of a
shareholders investment in the Fund, there will be a reduction in the value
of the shareholders investment and continued withdrawal payments will reduce
the shareholders investment and may ultimately exhaust it. Withdrawal
payments should not be considered as income from investment in the Fund.
Furthermore, as it generally would not be advantageous to a shareholder to
make additional investments in the Fund at the same time he or she is
participating in the Withdrawal Plan, purchases by such shareholders in
amounts of less than $5,000 ordinarily will not be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates with
the Transfer Agent as agent for Withdrawal Plan members. All dividends and
distributions on shares in the Withdrawal Plan are reinvested automatically
at net asset value in additional shares of the Fund. Withdrawal Plans should
be set up with a Smith Barney Financial Consultant. A shareholder who
purchases shares directly through the Transfer Agent may continue to do so
and applications for participation in the Withdrawal Plan must be received by
the Transfer Agent no later than the eighth day of the month to be eligible
for participation beginning with that months withdrawal. For additional
information, shareholders should contact a Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Funds distributor on a best efforts basis
pursuant to a written agreement (the Distribution Agreement), which was
most recently approved by the Funds Board of Directors on July 16, 1997. For
the fiscal years ended July 31, 1995, 1996 and 1997, Smith Barney received
$1,626,500, $279,000, and $148,000, respectively, in sales charges for the
sale of the Funds Class A shares and did not reallow any portion thereof to
dealers. For the fiscal years ended July 31, 1995, 1996, and 1997 Smith
Barney received $466,900, $489,000, and $216,000 respectively, representing
CDSC on redemption of the Funds 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 investors brokerage account, and Smith Barney may benefit
from the temporary use of the funds. The investor may designate another use
for the funds prior to settlement date, such as an investment in a money
market fund (other than the Smith Barney Exchange Reserve Fund) of the Smith
Barney Mutual Funds. If the investor instructs Smith Barney to invest the
funds in a Smith Barney money market fund, the amount of the investment will
be included as part of the average daily net assets of both the Fund and the
Smith Barney money market fund, and affiliates of Smith Barney which serve
the funds in an investment advisory or administrative capacity will benefit
from the fact that they are receiving fees from both such investment
companies for managing these assets computed on the basis of their average
daily net assets. The Funds Board of Directors has been advised of the
benefits to Smith Barney resulting from three-day settlement procedures and
will take such benefits into consideration when reviewing the Advisory,
Administration and Distribution Agreements for continuance.
For the fiscal year ended July 31, 1997, Smith Barney incurred
distribution expenses totaling approximately $709,664.00 consisting of
approximately $19,265 for advertising, $4,061 for printing and mailing of
prospectuses, $353,198 for support services, $151,000 to Smith Barney
Financial Consultants, and $140 in accruals for interest on the excess of
Smith Barney expenses incurred in distributing the Funds shares over the sum
of the distribution fees and CDSC received by Smith Barney from the Fund.
Distribution Arrangements
To compensate Smith Barney for the services it provides and for the expense
it bears under the Distribution Agreement, the Fund has adopted a services
and distribution plan (the Plan) pursuant to Rule 12b-1 under the 1940
Act. Under the Plan, the Fund pays Smith Barney a service fee, accrued daily
and paid monthly, calculated at the annual rate of 0.25% of the value of the
Funds average daily net assets attributable to the Class A, Class B and
Class C shares. In addition, the Fund pays Smith Barney a distribution fee
with respect to the Class B and Class C shares primarily intended to
compensate Smith Barney for its initial expense of paying Financial
Consultants a commission upon sales of those shares. The Class B
distribution fee is calculated at the annual rate of 0.50% of the value of
the Funds average daily net assets attributable to the shares of the Class.
The Class C distribution fee is calculated at the annual rate of 0.45% of
the value of the Funds average daily net assets attributable to the shares
of the Class.
The following service and distribution fees were incurred during the
periods indicated:
Service Fees
Fiscal Year
Ended
7/31/97
Fiscal Year
Ended
7/31/96
Fiscal Year
Ended 7/31/95
Class A
1,078,39
2
1,252,233
1,291,642
Class B
258,560
307,888
434,551
Class C
3,736
2,113
329
Distribution Fees
Fiscal Year
Ended
7/31/97
Fiscal Year
Ended
7/31/96
Fiscal Year
Ended 7/31/95
Class A
- - -0-
- - -0-
- - -0-
Class B
258,560
615,775
869,103
Class C
3,736
3,802
445
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Funds Board of Directors,
including a majority of the Independent Directors. The Plan may not be
amended to increase the amount of the service and distribution fees without
shareholder approval, and all material amendments of the Plan also must be
approved by the Directors and Independent Directors in the manner described
above. The Plan may be terminated with respect to a Class at any time,
without penalty, by vote of a majority of the Independent Directors or by
vote of a majority of the outstanding voting securities of the Class (as
defined in the 1940 Act) on not more than 30 days written notice to any
other party to the Plan. Pursuant to the Plan, Smith Barney will provide the
Funds 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 Years 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
Funds 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 Funds 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 Funds 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 Funds 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 shareholders state of residence, on the basis of relative net
asset value per share at the time of exchange as follows:
A. Class B shares of any fund may be exchanged without a sales charge.
Class B shares of the Fund exchanged for Class B shares of another fund
will be subject to the higher applicable CDSC of the two funds and, for
purposes of calculating CDSC rates and conversion periods, will be deemed
to have been held since the date the shares being exchanged were deemed
to be purchased.
B. Class C shares of any fund may be exchanged without a sales charge.
For purposes of calculating CDSC rates and conversion periods, Class C
shares of the Fund exchanged for Class C shares of another fund will be
deemed to have been held since the date the shares bring exchanged were
deemed to be purchased.
Dealers other than Smith Barney must notify the Transfer Agent of the
investors prior ownership of Class A shares of the same Class in a fund with
different investment objectives when they believe that a shift between funds
is an appropriate investment decision. This privilege is available to
shareholders residing in any state in which the fund shares being acquired
may legally be sold. Prior to any exchange, the shareholder would obtain and
review a copy of the current prospectus of each fund into which an exchange
is being considered. Prospectuses may be obtained from a Smith Barney
Financial Consultant.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset
value and the proceeds are immediately invested, at a price as described
above, in shares of the fund being acquired. Smith Barney reserves the right
to reject any exchange request. The exchange privilege may be modified or
terminated at any time after written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote its yield or total return in
advertisements or in reports and other communications to shareholders. The
Fund may include comparative performance information in advertising or
marketing the Funds shares. Such performance information may include data
from the following industry and financial publications: Barrons, 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 Funds average annual total returns for Class A shares were as follows
for the periods indicated:
6.79% for the one-year period beginning August 1, 1996 through July 31,
1997;
5.68% per annum during the five-year period beginning on August 1, 1992
through July 31, 1997; and
7.64% per annum during the ten-year period beginning in August 1, 1987
through July 31, 1997.
The average annual total return figures assume that the maximum 4.5% sales
charge has been deducted from the investment at the time of purchase. If the
maximum sales charge of 4.5% had not been deducted at the time of purchase,
the average annual total return for the same periods would have been 11.84%,
6.66%, and 8.13%, respectively.
The Funds average annual total returns for Class B shares were as follows
for the periods indicated:
6.77% for the one-year period beginning August 1, 1996 though July 31,
1997; and
6.29% per annum during the period from commencement of operations
(November 6, 1992) through July 31, 1997.
The average annual total return figures assume that the maximum applicable
CDSC has been deducted from the investment at the time of redemption. If the
maximum applicable CDSC had not been deducted at the time of redemption, the
average annual total return for the same periods would have been 11.27% and
6.46%, respectively.
The Funds average total returns for Class C shares (formerly designated
Class D shares) were as follows for the periods indicated:
10.30% for the one-year period beginning August 1, 1996 through July 31,
1997; and
5.39% per annum during the period from commencement of operations (June
29, 1993) through July 31, 1997.
The average annual total return figures assume that the maximum applicable
CDSC has been deducted from the investment at the time of redemption. If the
maximum applicable CDSC had not been deducted at the time of redemption, the
average annual total return for the same periods would have been 11.30% and
5.39%, respectively.
Aggregate Total Return
Aggregate total return figures represent the cumulative change in the
value of an investment in the Class for the specified period and are computed
by the following formula:
ERV-P
P
Where: P = a hypothetical initial payment of $10,000
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of the 1-, 5-, or 10-year
period at the end of the 1-, 5- or 10-year period (or
fractional portion thereof), assuming reinvestment of all
dividends and distributions.
The Funds aggregate totals returns for Class A shares were as follows for
the periods indicated:
6.79% for the one-year period beginning August 1, 1996 through July 31,
1997;
31.83% during the five-year period beginning on August 1, 1992 through
July 31, 1997; and
108.72% during the ten-year period beginning on August 1, 1987 through
July 31, 1997.
These aggregate total return figures assume that the maximum 4.50% sales
charge has been deducted from the investment at the time of purchase. If the
maximum sales charge had not been deducted at the time of purchase, the Class
A shares aggregate total return for the same periods would have been 1.84%,
38.07%, and 118.47%, respectively.
The Funds aggregate total returns for Class B shares were as follows for the
periods indicated:
6.77% for the one-year period beginning August 1, 1996 through July 31,
1997; and
33.49% during the period from commencement of operations (November 6,
1992) through July 31, 1997.
These aggregate total return figures assume that the maximum applicable CDSC
has been deducted from the investment at the time of redemption. If the
maximum CDSC had not been deducted at the time of redemption, the Class B
shares aggregate total return for the same periods would have been 11.27%
and 34.49%, respectively.
The Funds aggregate total returns for Class C shares (formerly designated
Class D shares) were as follows for the periods indicated:
10.30% for the one-year period beginning August 1, 1996 through July 31,
1997; and
23.97% during the period from commencement of operations (June 29, 1993)
through July 31, 1997.
These aggregate total return figures assume that the maximum applicable CDSC
has been deducted from the investment at the time of redemption. If the
maximum CDSC had not been deducted at the time of redemption, the Class C
shares aggregate total return for the same periods would have been 11.30%
and 23.97%, respectively.
Performance will vary from time to time depending upon market conditions, the
composition of the Funds portfolio, operating expenses and the expenses
exclusively attributable to the Class. Consequently, any given performance
quotation should not be considered representative of the Class performance
for any specified period in the future. Because performance will vary, it
may not provide a basis for comparing an investment in the Class with certain
bank deposits or other investments that pay a fixed yield for a stated period
of time. Investors comparing the Class performance with that of other
mutual funds should give consideration to the quality and maturity of the
respective investment companies portfolio securities.
It is important to note that the total return figures set forth above are
based on historical earnings and are not intended to indicate future
performance
TAXES
Taxation of the Fund
The following is a summary of certain Federal income tax considerations that
may affect the Fund and its shareholders. This summary is not intended as a
substitute for individual tax advice and investors are urged to consult their
own tax advisors as to the tax consequences of an investment in the Fund.
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Provided that the Fund (a)
qualifies as a regulated investment company and (b) distributes at least 90%
of its net investment income (including, for this purpose, net realized
short-term capital gains), the Fund will not be liable for Federal income
taxes to the extent that its net investment income and its net realized long-
and short-term capital gains, if any, are distributed to its shareholders.
Interest received from U.S. government securities, and gains from the sale of
U.S. government securities and from the Funds 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 Funds
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
Funds shares and regardless of whether the distribution is received in
additional shares or in cash. However, if a shareholder receives a
distribution taxable as long-term capital gain with respect to any share and
if such share is held by the shareholder for six months or less, then any
loss on the redemption or exchange of such share, up to the amount of the
distribution, will be treated as long-term capital loss. Dividends and
distributions paid by the Fund generally will not be eligible for the
dividends received deduction for corporations.
If a shareholder (a) incurs a sales charge in acquiring or redeeming
shares of the Fund, (b) disposes of those shares within 90 days and (c)
acquires shares in a mutual fund for which the otherwise applicable sales
charge is reduced by reason of a reinvestment right (i.e., exchange
privilege), the original sales charge increases the shareholders 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 shareholders 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 shareholders tax
basis in the newly acquired shares. Furthermore, the same rule also applies
to a disposition of the newly acquired or redeemed shares made within 90 days
of the second acquisition. This provision prevents a shareholder from
immediately deducting the sales charge by shifting his or her investment in a
family of mutual funds.
Investors considering buying shares of the Fund on or just prior to a
record date for a taxable dividend or capital gain distribution should be
aware that, regardless of whether the price of the Fund shares to be
purchased reflects the amount of the forthcoming distribution payment, any
such payment will be a taxable dividend or distribution payment.
If a shareholder fails to furnish a correct taxpayer identification
number, fails to fully report dividend or interest income, or fails to
certify that he or she has provided a correct taxpayer identification number
and that he or she is not subject to backup withholding, then the
shareholder may be subject to a 31% backup withholding tax with respect to
(a) dividends and distributions and (b) proceeds of any redemption of Fund
shares. An individuals 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 shareholders regular Federal income tax liability.
Taxation of the Funds 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 Funds holding period with respect to the debt
security that it has acquired will begin on the date of purchase of the debt
security, rather than on the date that the put was written.
For Federal income tax purposes, gains and losses on interest rate futures
contracts, options on interest rate futures contracts, and certain other
options that are traded on a qualified board of trade (collectively referred
to herein as section 1256 contracts) are taxed pursuant to a special
mark-to-market system. Pursuant to the mark-to-market system, the Fund
may be treated as realizing a greater or lesser amount of gains or losses
than actually realized. As a general rule, gain or loss on section 1256
contracts is treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss, and accordingly, the mark-to-market system generally
will affect the amount of capital gains or losses taxable to the Fund and the
amount of distributions to a shareholder. Moreover, if the Fund invests in
both section 1256 contracts and offsetting positions in such contracts,
then the Fund might not be able to receive the benefit of certain recognized
losses for an indeterminate period of time. The Fund expects that its
activities with respect to section 1256 contracts and offsetting positions in
such contracts (a) will not cause it or its shareholders to be treated as
receiving a materially greater amount of capital gains or distributions than
actually realized or received and (b) will permit it to use substantially all
of its losses for the fiscal years in which such losses actually occur.
Section 1092 of the Code provides rules, overriding the rules described
above, in the case of straddles. Straddles are defined to include
offsetting positions in actively traded personal property. It is not
clear under current law under what circumstances one investment made by the
Fund, such as in options or futures contracts, would be treated as
offsetting another investment also held by the Fund, such as the
underlying debt security (or vice versa) and, therefore, whether the Fund may
be treated as having entered into a straddle. In general, investment
positions may be offsetting if there is a substantial diminution in the risk
of loss from holding one position by reason of holding one or more other
positions. If two or more positions constitute a straddle, a realized loss
from one position (including a mark-to-market loss) must be deferred to the
extent of unrecognized gain in an offsetting position. Furthermore, with
respect to such positions, the holding period rules described above may be
modified to recharacterize long-term gain as short-term gain (but not, as a
general rule, for purposes of the less than 30% requirement described above),
or to recharacterize short-term loss as long-term loss, in connection with
certain straddle transactions. Moreover, interest and other carrying charges
allocable to personal property that is part of a straddle must be
capitalized. Section 1092 also provides that wash sale rules are
applicable to transactions in which a position is sold at a loss and a new
offsetting position is acquired within or has been held for a prescribed
period. To the extent that the straddle rules apply to positions established
by the Fund, losses realized by the Fund may be deferred or recharacterized
as long-term losses, and long-term gains realized by the Fund may, for
certain purposes, be converted to short-term gains.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders, and is not intended as a substitute
for careful tax planning. Shareholders are urged to consult their tax
advisors with specific reference to their own tax situations, including state
and local tax liabilities.
ADDITIONAL INFORMATION
The Fund was incorporated on June 15, 1984 under the name Shearson Government
Mortgage Income Fund Inc. On January 20, 1988, November 4, 1992, July 30,
1993 and October 14, 1994, the Fund changed its name to Shearson Lehman
Managed Governments Inc., Shearson Lehman Brothers Managed Governments Fund,
Smith Barney Shearson Managed Governments Fund Inc. and Smith Barney Managed
Governments Fund Inc., respectively.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania,
serves as the custodian of the Fund. Under its custody agreement with the
Fund, PNC holds the Funds 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 Funds 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 Funds Annual Report for the fiscal year ended July 31, 1997 accompanies
this Statement of Additional Information.
Smith Barney
Managed
Governments
Fund Inc.
Statement of
Additional
Information
November 28, 1997
Smith Barney
Managed Governments Fund Inc.
388 Greenwich Street
New York, NY 10013
...................................Fund........................
SMITH BARNEY
A Member of Travelers Group
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