<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SMITH BARNEY INCOME FUNDS
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(I)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
<PAGE>
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
-2-
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SMITH BARNEY PREMIUM TOTAL RETURN FUND
May 24, 1999
Dear Valued Premium Total Return Fund Shareholder:
I am writing to inform you about some important changes that have been
approved by the Board of Trustees of the Smith Barney Income Funds regarding
the management of the Smith Barney Premium Total Return Fund (the "Fund").
I want to assure you that the objective of the Fund remains constant:
current income and secondarily, capital appreciation. The Fund is designed to
help investors gain the advantages of both income-generating securities and
overall stock market participation with less downside risk. That was one of
the reasons why you originally invested in the Fund.
Over time, the financial markets have altered the Fund's areas of
opportunities. In particular, we no longer see a sufficient amount of
dividend-paying stocks that have been part of the Fund's central strategy
since its inception. In fact, as you may have heard on the news or read
recently in the financial press, the average dividend yield offered by the
stocks in the S&P 500 Index is now less than 1.4%. This change in the income-
generating capability of many large-company stocks has led us to carefully re-
evaluate the Fund's core investment strategy over the past several quarters.
Because of this and other important considerations, the Board of Trustees of
Smith Barney Income Funds voted to appoint Salomon Brothers Asset Management
as the Fund's interim sub-adviser for a period of up to 120 days. In addition,
the Trustees approved, and are today presenting to shareholders, a proposal
that Salomon Brothers Asset Management continue as the Fund's sub-adviser
after the interim period pursuant to a new sub-advisory agreement that would
run for two years from the date of shareholder approval and from year to year
thereafter. Boston Partners Asset Management, L.P., the Fund's previous sub-
adviser is no longer associated with the Fund. Ross S. Margolies, a Managing
Director and Chief Investment Officer of Salomon Brothers Asset Management,
has been designated by Salomon Brothers Asset Management to serve as the
Fund's interim portfolio manager, effective April 26, 1999.
A shareholder meeting regarding the proposed change in the Fund's sub-
adviser is scheduled to take place on or about Wednesday, June 30, 1999. I ask
that you take a few moments to review the accompanying proxy materials
carefully. If you do not plan to attend the shareholder meeting, please
complete the proxy card and return it as soon as possible in the postage-paid
envelope.
We believe that the proposed changes are appropriate for the Fund and
represent a meaningful refocusing of the Fund's direction. We consider Ross S.
Margolies as one of the premier managers in the Citigroup family of asset
management businesses.
As noted previously, the Fund will continue to be managed to achieve its
stated objective of income and, secondarily, capital appreciation. Ross S.
Margolies and his portfolio management team bring substantial talent and
capability to the Fund. This means that you and your Smith Barney Financial
Consultant should have the added confidence that risk and reward will be
balanced to provide you with competitive total returns in the future.
<PAGE>
And while no guarantees can be given, I think you will agree with me that
these proposed Fund changes bode well for its future. Thank you for taking the
time to read this letter and the accompanying proxy statement. We look forward
to helping you pursue your financial goals in the years ahead.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
<PAGE>
SMITH BARNEY PREMIUM TOTAL RETURN FUND
388 Greenwich Street
New York, New York 10013
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Please take notice that a Special Meeting of shareholders (the "Special
Meeting") of Smith Barney Premium Total Return Fund (the "Fund") (a series of
Smith Barney Income Funds, the "Trust") will be held at the offices of SSBC
Fund Management Inc. ("SSBC"), 388 Greenwich Street, Conference Room 26D, New
York, New York 10013, on Wednesday, June 30, 1999, at 3:00 p.m., Eastern time,
for the following purpose:
(1) To approve or disapprove a new sub-investment advisory agreement
among the Fund, SSBC and Salomon Brothers Asset Management Inc.
The appointed proxies, in their discretion, will vote on any other business
as may properly come before the Special Meeting or any adjournments thereof.
Holders of record of shares of the Fund at the close of business on May 7,
1999 are entitled to notice of and to vote at the Special Meeting and at any
adjournments thereof.
In the event that the necessary quorum to transact business or the vote
required to approve or reject any proposal is not obtained at the Special
Meeting, the persons named as proxies may propose one or more adjournments of
the Special Meeting, in accordance with applicable law, to permit further
solicitation of proxies. Any such adjournment will require the affirmative
vote of the holders of a majority of the Fund's shares present in person or by
proxy at the Special Meeting. The persons named as proxies will vote in favor
of such adjournment those proxies which they are entitled to vote in favor and
will vote against any such adjournment those proxies to be voted against that
proposal.
By order of Board of Trustees,
Christina T. Sydor
Secretary
May 24, 1999
----------------
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETING ARE REQUESTED TO
COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH
NEEDS NO POSTAGE IF MAILED IN THE CONTINENTAL UNITED STATES. INSTRUCTIONS FOR
THE PROPER EXECUTION OF PROXY CARDS ARE SET FORTH ON THE FOLLOWING PAGE. IT IS
IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.
<PAGE>
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance to
you and avoid the time and expense to the Fund involved in validating your
vote if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration on the
proxy card.
3. All Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of
registration. For example:
<TABLE>
<CAPTION>
Registration Valid Signature
------------ ---------------
<S> <C>
Corporate Accounts
(1) ABC Corp. ..................................... ABC Corp.
(2) ABC Corp. ..................................... John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer........................ John Doe
(4) ABC Corp. Profit Sharing Plan.................. John Doe, Trustee
Trust Accounts
(1) ABC Trust...................................... Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78................................. Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA.................. John B. Smith
(2) Estate of John B. Smith........................ John B. Smith Jr., Executor
</TABLE>
2
<PAGE>
SMITH BARNEY PREMIUM TOTAL RETURN FUND
388 Greenwich Street
New York, New York 10013
PROXY STATEMENT
----------------
FOR THE SPECIAL MEETING OF SHAREHOLDERS
To Be Held On June 30, 1999
----------------
General
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Trustees (the "Board") of Smith Barney Premium Total
Return Fund (the "Fund") (a series of Smith Barney Income Funds, the "Trust")
for use at the Special Meeting of shareholders of the Fund, to be held at the
offices of SSBC Fund Management Inc., 388 Greenwich Street, Conference Room
26D, New York, New York 10013, on Wednesday, June 30, 1999 at 3:00 p.m.,
Eastern time, and at any and all adjournments thereof (the "Special Meeting").
This Proxy Statement, the Notice of Special Meeting and proxy card are first
being mailed to shareholders on or about May 24, 1999 or as soon as
practicable thereafter. Any proxy may be revoked at any time prior to exercise
thereof by giving written notice to the Secretary of the Trust at the address
indicated above or by voting in person at the Special Meeting. All properly
executed proxies received in time for the Special Meeting will be voted as
specified in the proxy or, if no specification is made, in favor of the
proposal referred to in the Proxy Statement.
Proxy solicitations will be made primarily by mail, but proxy solicitations
also may be made by telephone, telegraph or personal interviews conducted by
officers and employees of the Trust; Salomon Smith Barney Inc., ("Salomon
Smith Barney") a dealer of shares of the Fund; SSBC Fund Management Inc.,
("SSBC" or the "Manager"), the investment adviser of the Fund and/or First
Data Investor Services Group, Inc. ("First Data"), transfer agent of the Fund.
Such representatives and employees will not receive additional compensation
for solicitation activities. Salomon Smith Barney has retained the services of
First Data to assist in the solicitation of proxies. The aggregate cost of
solicitation of the shareholders of the Fund is expected to be approximately
$325,000. The costs of the proxy solicitation and expenses incurred in
connection with the preparation of this Proxy Statement and its enclosures
will be borne by the Fund. The Fund also will reimburse expenses of forwarding
solicitation materials to beneficial owners of shares of the Fund.
If the Fund records votes by telephone, it will use procedures designed to
authenticate shareholders' identities, to allow shareholders to authorize the
voting of their shares in accordance with their instructions, and to confirm
that their instructions have been properly recorded. Proxies voted by
telephone may be revoked at any time before they are voted in the same manner
that proxies voted by mail may be revoked.
The presence at the Special Meeting, in person or by proxy, of the holders
of a majority of the outstanding shares of the Fund entitled to vote shall be
necessary and sufficient to constitute a quorum for the transaction of
business at the Special Meeting. In the event that the necessary quorum to
transact business or the vote required to approve or reject any proposal is
not obtained at the Special Meeting, the persons named as proxies may propose
one or more adjournments of the Special Meeting in accordance with applicable
law to permit further solicitation of proxies.
1
<PAGE>
In determining whether to adjourn the Special Meeting, the following factors
may be considered: the nature of the proposal that is the subject of the
Special Meeting, the percentage of votes actually cast, the percentage of
negative votes actually cast, the nature of any further solicitation and the
information to be provided to shareholders with respect to the reasons for the
solicitation. Any such adjournment will require the affirmative vote of a
majority of the Fund's shares present in person or by proxy at the Special
Meeting. The persons named as proxies will vote in favor of such adjournment
those proxies which they are entitled to vote in favor of the proposal and
will vote against any such adjournment those proxies to be voted against the
proposal. For purposes of determining the presence of a quorum for transacting
business at the Special Meeting, abstentions and broker "non-votes" will be
treated as shares that are present but which have not been voted. Broker non-
votes are proxies received from brokers or nominees when the broker or nominee
has neither received instructions from the beneficial owner or other persons
entitled to vote nor has discretionary power to vote on a particular matter.
Accordingly, shareholders are urged to forward their voting instructions
promptly.
There is only one proposal in this Proxy Statement (the "Proposal"), and the
Fund does not anticipate that any other proposals will be presented. However,
should additional proposals be properly presented, a shareholder vote may be
taken on one or more proposals prior to any adjournment if sufficient votes
have been received for approval.
The Proposal requires the affirmative vote of a "majority of the outstanding
voting securities" of the Fund. The term "majority of the outstanding voting
securities" as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), and as used in this Proxy Statement, means: the affirmative vote
of the lesser of (1) 67% of the voting securities of the Fund present at the
meeting if more than 50% of the outstanding shares of the Fund are present in
person or by proxy or (2) more than 50% of the outstanding shares of the Fund.
Abstentions and broker non-votes will have the effect of a "no" vote for the
Proposal, which requires the approval of a specified percentage of the
outstanding shares of the Fund, if such vote is determined on the basis of
obtaining the affirmative vote of more than 50% of the outstanding shares of
the Fund. Abstentions and broker non-votes will not constitute "yes" or "no"
votes, and will be disregarded in determining the voting securities "present"
if such vote is determined on the basis of the affirmative vote of 67% of the
voting securities of the Fund present at the Special Meeting.
The Board of the Trust has fixed the close of business on May 7, 1999 as the
record date (the "Record Date") for the determination of shareholders of the
Fund entitled to notice of and to vote at the Special Meeting. Each share is
entitled to one vote and any fractional share is entitled to a fractional vote
at the Special Meeting.
As of the close of business on the Record Date, 164,036,162.572 shares of
the Fund were issued and outstanding. As of the Record Date, to the best
knowledge of the Board and the Fund, no single shareholder or "group" (as that
term is used in Section 13(d) of the Securities Exchange Act of 1934) owned
beneficially or of record more than 5% of the outstanding shares of the Fund.
As of the Record Date, the officers and Trustees of the Trust beneficially
owned less than 1% of the shares of the Fund.
The Fund provides periodic reports to all of its shareholders which
highlight relevant information, including investment results and a review of
portfolio changes. You may receive an additional copy of the most recent
annual report for the Fund and a copy of any more recent semiannual report,
without charge, by calling the Fund at (800) 451-2010 or by writing to the
Fund, 388 Greenwich Street, New York, New York 10013.
2
<PAGE>
PROPOSAL: APPROVAL OF NEW SUB-INVESTMENT ADVISORY AGREEMENT AMONG THE FUND,
SSBC AND SALOMON BROTHERS ASSET MANAGEMENT INC.
Introduction
The Board of Trustees of the Trust is proposing that shareholders approve a
new Sub-Investment Advisory Agreement (the "Sub-Advisory Agreement") to be
entered into among the Trust (on behalf of the Fund), SSBC and Salomon
Brothers Asset Management Inc. ("SaBAM"), an affiliate of SSBC. SSBC, located
at 388 Greenwich Street, New York, New York 10013, serves as the current
investment adviser and the administrator to the Fund.
SaBAM is registered as an investment adviser with the Securities and
Exchange Commission under the Investment Advisers Act of 1940, as amended, and
is headquartered in New York. As of March 31, 1999, SaBAM had $27.3 billion in
assets under management.
At a meeting of the Board of Trustees of the Trust held on April 15, 1999,
the Trustees approved the new Sub-Advisory Agreement subject to shareholder
approval. The Trustees also approved an interim sub-advisory agreement (the
"Interim Agreement") appointing SaBAM as an interim sub-adviser, and
terminated the sub-advisory agreement (the "Prior Agreement") with Boston
Partners Asset Management, L.P. (the "Prior Sub-Adviser"). The Interim
Agreement commenced on April 26, 1999 and will terminate on the earlier of 120
days or the receipt of shareholder approval of the Sub-Advisory Agreement. If
the 120 days expire without shareholder approval of the Sub-Advisory
Agreement, SSBC, as the Fund's investment adviser, would manage the Fund
without the assistance of a sub-adviser while the Board determines if
additional action would be appropriate. Both the Interim Agreement and the
Sub-Advisory Agreement obligate SaBAM to provide services identical to the
Prior Agreement.
A form of Sub-Advisory Agreement is attached as Exhibit A and is
substantially similar to the Prior Agreement. The Sub-Advisory Agreement
provides that SaBAM's fee will be paid by SSBC in an amount agreed to from
time to time by the parties, but not to exceed the fee paid to SSBC under its
investment advisory agreement with the Fund.
Board Consideration and Recommendation
SSBC regularly reports to the Board of Trustees on the performance of the
Fund. Since 1997, SSBC has expressed concerns to the Trustees relating to the
declining performance of the Fund. For example, for the years ended December
31, 1998 and December 31, 1997, the Fund had a total return of 5.64% and
24.55%, respectively, for Class B shares (without sales charges). During this
time, the U.S. stock market, as measured by the Standard & Poor's 500
Composite Stock Index (the "S&P 500"), had a total return of 28.6% and 33.1%,
respectively. Further, SSBC noted that prior to May 1998, the Fund generally
experienced net sales, but since that time redemptions have exceeded sales.
The amount by which redemptions have exceeded sales has increased
significantly during the first quarter of 1999, which in the Board's
perception reflects shareholder dissatisfaction with the Fund's recent
performance and investment style.
At the March 19, 1999 meeting of the Board of Trustees, SSBC formally stated
to the Trustees that it was considering a proposal to change the Fund's sub-
adviser because of the Fund's recent performance history and the related
increase in shareholder redemptions. Due to these increasing concerns, a
meeting of the Board of Trustees was held on April 15, 1999 to consider SSBC's
proposal that the relationship with the Prior Sub-Adviser be terminated and
that SaBAM be appointed as sub-adviser to the Fund, subject to shareholder
approval. The Board also was asked to consider the Interim Agreement with
SaBAM as described above.
3
<PAGE>
At the April Board meeting, representatives of SSBC and SaBAM met in person
with the Trustees (including the non-interested Trustees) and described the
general terms of the Interim and Sub-Advisory Agreements, the anticipated
benefits for the Fund and SaBAM's proposed services to the Fund. During the
course of their deliberations, the Trustees (including the non-interested
Trustees) considered a variety of factors, including: (i) the nature, quality
and extent of services that the Prior Sub-Adviser had provided and that SaBAM
would provide to the Fund; (ii) the quality of investment personnel of SaBAM;
(iii) the financial resources and management style of SaBAM; (iv) the
investment record of SaBAM in managing similar asset classes; (v) the
experience of SaBAM in the area of fixed-income and equity investments and
(vi) other information to assure that SaBAM could furnish high quality
services to the Fund. The non-interested Trustees also met separately to
review the information provided by SSBC and SaBAM representatives and were
assisted in this review by their independent legal counsel.
After the consideration of the foregoing factors, the Trustees (including
the non-interested Trustees) approved both the Interim and new Sub-Advisory
Agreements for the Fund.
Description of Salomon Brothers Asset Management Inc.
SaBAM provides discretionary and non-discretionary portfolio management
services to a wide variety of individual and institutional accounts,
including, but not limited to, banks or thrift institutions, retirement plans,
pension and profit-sharing trusts, estates, charitable organizations,
corporations, and other business entities, registered investment companies and
unregistered domestic and offshore funds. As of March 31, 1999, SaBAM had
$27.3 billion in assets under management.
SaBAM was organized as a Delaware corporation in 1987 and its principal
business address is 7 World Trade Center, New York, New York 10048. SaBAM is
an indirect wholly-owned subsidiary of Salomon Smith Barney Holdings Inc.
("SSBH"), which is also located at 7 World Trade Center, New York, New York
10048. SSBH is a wholly-owned subsidiary of Citigroup Inc., which is located
at 1 Citicorp Center, 153 East 53rd Street, New York, New York 10028.
The names, titles and principal occupations of the current directors and
executive officers of SaBAM are set forth below. Except as indicated, the
business address of each individual is 7 World Trade Center, New York, New
York 10048.
Ross S. Margolies--The principal occupation of Mr. Margolies is to serve as
a Managing Director and Chief Investment Officer of SaBAM and Salomon Brothers
Inc.
Peter J. Wilby--The principal occupation of Mr. Wilby is to serve as a
Managing Director of SaBAM and Salomon Brothers Inc.
Heath B. McLendon (Chairman of the Trust)--The principal occupation of Mr.
McLendon is to serve as Chairman or Co-Chairman of investment companies
managed by affiliates of Citigroup Inc.; Managing Director of SaBAM; Director
and Chairman of SSBC; and Director of The Travelers Investment Management
Company.
Vilas V. Gadkari--The principal occupation of Mr. Gadkari is to serve as a
Managing Director of SaBAM; Managing Director and Chief Investment Officer of
Salomon Brothers Asset Management Limited; Managing Director of Salomon
Brothers Inc.; and Managing Director of Salomon Brothers International
Limited.
Marcus A. Peckman--The principal occupation of Mr. Peckman is to serve as a
Director and Chief Financial Officer of SaBAM and a Director of Salomon
Brothers Inc.
4
<PAGE>
Jeffrey S. Scott--The principal occupation of Mr. Scott is to serve as Chief
Compliance Officer of SaBAM.
Michael F. Rosenbaum--The principal occupation of Mr. Rosenbaum is to serve
as Chief Legal Officer of SaBAM, Salomon Brothers Asset Management Limited and
Salomon Brothers Asset Management Asia Pacific Limited; Managing Director of
Salomon Smith Barney Inc.; Corporate Secretary of The Travelers Investment
Management Company; and Chief Legal Officer to Travelers Group Inc.
Thomas W. Jasper--The principal occupation of Mr. Jasper is to serve as
Treasurer of SaBAM and Managing Director of Salomon Brothers Inc.
Andrew W. Alter--The principal occupation of Mr. Alter is to serve as
Assistant Secretary of SaBAM and Counsel to Salomon Brothers Inc.
Howard M. Darmstadter--The principal occupation of Mr. Darmstadter is to
serve as Assistant Secretary of SaBAM and Assistant General Counsel of
Travelers Group Inc.
With the exception of Heath B. McLendon, no other officers or Trustees of
the Trust are officers, directors or employees of SaBAM.
Description of Portfolio Management Team
As of April 26, 1999, the senior portfolio manager of the Fund is Ross S.
Margolies, Managing Director and Chief Investment Officer of SaBAM. A team of
investment professionals currently assists Mr. Margolies in the management of
the Fund. If the shareholders approve the Sub-Advisory Agreement, Mr.
Margolies and his team will continue to manage the Fund in accordance with the
Fund's investment objective. The following provides a brief summary of the
business experience and educational background of the SaBAM investment
professionals.
Ross S. Margolies (18 years of experience). Mr. Margolies is Managing
Director and a member of SaBAM's Investment Policy Committee. He joined SaBAM
in June 1992 and is the senior portfolio manager for all SaBAM equity,
convertible and arbitrage portfolios. He is also portfolio manager of the
Salomon Brothers Capital Fund. Prior to 1992, Mr. Margolies was a high yield
bond analyst for non-cyclical consumer products at Lehman Brothers and a
senior credit analyst for an $8 billion high yield portfolio at Prudential
Capital Corp. Mr. Margolies received a BA in economics from Johns Hopkins
University and an MBA in Finance from New York University.
Daniel J. Berkery, CFA (8 years of experience). Mr. Berkery is a Director of
SaBAM. He joined SaBAM in June 1991 and is portfolio manager for convertible
portfolios. He is also a former equity analyst covering the
telecommunications, utilities, and technology industries. Mr. Berkery is a
Chartered Financial Analyst and received a BA in History from Harvard
University.
Robert Donahue (7 years of experience). Mr. Donahue is a Director of SaBAM.
He joined SaBAM in February 1997 and is co-portfolio manager of the Salomon
Brothers Capital Fund and an equity analyst responsible for covering the
media, entertainment and telecommunication industries. Prior to 1997, he
worked as an equity analyst for Gabelli & Company focusing on the media
industry. Mr. Donahue received a BA in History from the University of
Pennsylvania and an MBA in Finance from Columbia Business School.
5
<PAGE>
Ajay Dravid (17 years of experience). Mr. Dravid is a Director of SaBAM. He
joined SaBAM in January 1996 and is portfolio manager of SaBAM's capital
structure and arbitrage portfolios and is a quantitative analyst for SaBAM's
convertible portfolios. Prior to 1996, Mr. Dravid performed asset allocation
research and developed models for trading, risk management and valuation for
Salomon Brothers Inc. He also was an Assistant Professor at The Wharton School
of the University of Pennsylvania teaching options and futures courses. Mr.
Dravid received an MA in Physics from the University of Stony Brook, an MBA in
Finance from the University of Rochester, and a Ph.D in Finance from Stanford
University.
Roger M. Lavan (9 years of experience). Mr. Lavan is a Director of SaBAM. He
joined SaBAM in January of 1996 and is a Chartered Financial Analyst. Mr.
Lavan received a BS in Finance from the State University of New York at
Geneseo and an MBA in Finance from Fordham University.
Maureen J. O'Callaghan (13 years of experience). Ms. O'Callaghan is a
Director of SaBAM. She joined SaBAM in October 1988 and is a senior fixed
income analyst evaluating high yield securities and is responsible for
covering the telecommunications, broadcast media, steel, paper and gaming
industries. Prior to 1988, Ms. O'Callaghan covered retail equity and fixed
income sales for Merrill Lynch & Co. She received a BS and MBA in Finance from
Fordham University.
Beth A. Semmel (17 years of experience). Ms. Semmel is a Managing Director
and a member of SaBAM's Investment Policy Committee. She joined SaBAM in May
1993 and is portfolio manager, senior analyst evaluating high yield
securities, trader for all of SaBAM's high yield portfolios and is responsible
for covering consumer-related industries. Prior to 1993, Ms. Semmel was a high
yield bond analyst for Morgan Stanley Asset Management and an equity analyst
for Kidder Peabody. She is a Chartered Financial Analyst and a member of the
New York City Society of Security Analysts. Ms. Semmel received a BA in Math
and Computer Science from Colgate University.
David A. Torchia (9 years of experience). Mr. Torchia is a Director of
SaBAM. He joined SaBAM in January of 1991. He received a BS in Industrial
Engineering from the University of Pittsburgh and an MBA in Finance from
Lehigh University.
Peter J. Wilby, CFA (16 years of experience). Mr. Wilby is a Managing
Director and a member of SaBAM's Investment Policy Committee. He is also a
member of SSB Citi Asset Management's Executive Committee. Mr. Wilby joined
SaBAM in September 1989 and is the senior portfolio manager responsible for
directing investment policy and strategy for all SaBAM emerging markets debt
and high yield fixed income portfolios. Prior to 1989, he worked as a fixed
income portfolio manager for Prudential Investment Co. specializing in high
yield debt securities and was the Director of the credit research unit
responsible for all corporate and sovereign credit research. Mr. Wilby is a
Chartered Financial Analyst, a member of the Council on Foreign Relations and
received his BA and MBA in Accounting from Pace University.
Randall A. Yuen (7 years of experience). Mr. Yuen is a Director of SaBAM. He
joined SaBAM in January 1998 and is co-manager of the Salomon Brothers Fund
and senior equity analyst responsible for covering the technology industry.
Prior to 1998, he worked as a senior analyst for CIBC Oppenheimer and Hamrecht
& Quist providing research coverage of companies in the computer networking
and telecommunications equipment industries. Mr. Yuen received a BA from the
University of California, Davis.
Description of the Prior Agreement
Under the Prior Agreement, subject to the oversight and review of SSBC and
the Trustees, the Prior Sub-Adviser managed the investment and reinvestment of
the assets of the Fund. Specifically, the Prior Sub-Adviser
6
<PAGE>
determined the investments to be purchased or sold, employed professional
portfolio managers and securities analysts who provided research services to
the Fund, provided SSBC with records concerning its activities which SSBC or
the Trust is required to maintain and rendered regular reports to SSBC and to
officers and Trustees of the Trust.
In return for the services provided, SSBC paid the Prior Sub-Adviser an
annualized advisory fee equal to 0.15% of 1% of the average daily net assets
of the Fund which accrued daily and was paid monthly. For fiscal year 1998,
the Prior Sub-Adviser was paid an aggregate fee of $6,486,957.
Under the Prior Agreement, the Prior Sub-Adviser was responsible for all
expenses incurred by it in the performance of its duties, which did not
include expenses of the Fund, such as brokerage fees and commissions. The
Prior Agreement also provided that in the absence of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the obligations or duties
thereunder on the part of the Prior Sub-Adviser, the Prior Sub-Adviser would
not be liable to SSBC, the Fund or to any shareholder for any error of
judgment or mistake of law or for any loss suffered by the Fund or SSBC in
connection with the matters set forth in the Prior Agreement.
The Prior Agreement could be terminated without penalty upon sixty (60)
days' written notice by the Board of Trustees or by the vote of a majority of
the outstanding voting securities of the Fund, or upon 90 days' written notice
by the Prior Sub-Adviser. Further, the Prior Agreement automatically
terminated in the event of its assignment.
The Prior Sub-Adviser acted as sub-adviser to the Fund from August 16, 1995
to April 26, 1999. The Prior Agreement was last approved by the Board on
August 5, 1998 and by the shareholders of the Fund on August 16, 1995. Notice
of termination of the Prior Agreement was delivered to the Prior Sub- Adviser
on April 16, 1999. SSBC will continue to compensate the Prior Sub- Adviser for
the 60 days following the notice of termination.
The New Sub-Advisory Agreement
The new Sub-Advisory Agreement is substantially similar to the Prior
Agreement. The Sub-Advisory Agreement, however, will identify SaBAM as the new
sub-adviser and will also have new execution and termination dates. Also,
unlike the Prior Agreement, SaBAM's fee will be paid by SSBC in an amount
agreed to from time to time by the parties, but not to exceed the fee paid to
SSBC under its current investment advisory agreement with the Fund.
The new Sub-Advisory Agreement will be dated as of the date of its approval
by the shareholders. The Sub-Advisory Agreement will be in effect for an
initial two-year term ending on the second anniversary of its approval, and
may continue thereafter from year to year only if specifically approved at
least annually by the Board of Trustees or by the vote of "a majority of the
outstanding voting securities" (as defined in the 1940 Act) of the Fund, and,
in either event, the vote of a majority of the non-interested Trustees, cast
in person at a meeting called for such purpose.
Investment Management Policies and Strategies to be Utilized by SaBAM
Strategies
At the Board's Meeting on April 15, 1999, Ross S. Margolies described in
detail the strategies and techniques SaBAM would utilize to seek to achieve
the Fund's investment objective of total return. In general,
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<PAGE>
these strategies and techniques would focus on three goals: (i) to pay monthly
dividends that would seek to generate an initial annual net yield of
approximately 4% for Class A share investors; (ii) to participate to a
significant degree in the long-term appreciation of the S&P 500 on a total
return basis; and (iii) to experience lower volatility than the S&P 500. To
accomplish these goals, SaBAM intends to utilize a diversified group of
strategies that seek to generate both income and equity market participation
for shareholders of the Fund. As discussed below, several of these strategies
will only be utilized if the Sub-Advisory Agreement is approved by
shareholders. SaBAM also may utilize other investment strategies and
techniques that were available to the Prior Sub-Adviser, including, but not
limited to: short sales against the box, when-issued and delayed-delivery
transactions, securities lending, repurchase agreements, money market
instruments and mortgage and asset-backed securities.
SaBAM intends to generate appreciation at a higher than market rate by
allocating a portion of the Fund's assets to equity and equity-related
securities, including, but not limited to, common stocks, convertible
securities and real estate investment trusts (REITs). To generate income and
obtain exposure to the equity market, SaBAM will purchase investment grade and
high yield fixed income securities along with options on securities indices
for the Fund. This combination seeks to produce a pattern of total return that
correlates with the S&P 500. SaBAM may also use options, futures and options
on futures to hedge against adverse changes in the market value of the Fund's
securities.
Differences from Prior Investment Strategies
The Prior Sub-Adviser sought to achieve the Fund's investment objective by
investing primarily in a diversified portfolio of dividend-paying common
stocks. Because the Prior Sub-Adviser sought total return by emphasizing
investments in dividend-paying common stocks, it did not have as much
investment flexibility as other total return funds that pursue their objective
by investing in both income and equity stocks without such an emphasis. Also,
as described below, the Fund was limited in the amount of its assets that
could be invested in fixed income securities (i.e., no more than 10%). SaBAM
proposes to manage the Fund by investing a greater portion of the Fund's
assets in fixed income securities and by employing certain investment
strategies not previously utilized for the Fund. A summary of the investment
strategies proposed by SaBAM are described below.
Changes in Certain Fund Policies
In connection with its decision to appoint SaBAM as interim sub-adviser to
the Fund, and on SaBAM's recommendation, the Trustees approved certain changes
to non-fundamental investment policies of the Fund. Certain of these changes
became effective immediately (the "Interim Changes") and others will become
effective if the Sub-Advisory Agreement is approved by shareholders of the
Fund (the "Additional Changes").
The Interim Changes approved by the Board of Trustees on April 15, 1999,
included an increase from 10% to 35% in the amount of the Fund's assets that
could be invested in: (i) medium, lower-rated or unrated debt securities of
comparable quality; (ii) interest-paying debt securities, such as obligations
issued or guaranteed as to principal and interest by the U.S. government; and
(iii) other securities, including convertible bonds, convertible preferred
stock and warrants. In addition, the Trustees approved the use of futures
contracts and options on futures contracts for (i) bona fide hedging purposes
(as defined by the Commodities Futures Trading Commission); and (ii) non-
hedging purposes provided that the aggregate initial margin and premiums on
such positions do not exceed 5% of the liquidation value of the Fund's assets.
8
<PAGE>
The Board of Trustees also approved Additional Changes to take effect if the
Sub-Advisory Agreement is approved by shareholders. These include the (i)
elimination of any limit on the amount of Fund assets that may be invested in
fixed income or equity securities; (ii) elimination of any limit on the amount
of call or put options on securities or indices that the Fund may purchase or
sell; and (iii) ability to engage in swap transactions relating to indices,
currencies, interest rates, equity and debt interests.
The following generally describes several of the above-mentioned investment
techniques to be utilized by SaBAM and related risks.
Convertible Securities. Convertible securities are fixed-income securities
that may be converted at either a stated price or stated rate into underlying
shares of common stock. Convertible securities have general characteristics
similar to both fixed-income and equity securities. Although to a lesser
extent than with fixed-income securities generally, the market value of
convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition, because
of the conversion feature, the market value of convertible securities tends to
vary with fluctuations in the market value of the underlying common stocks
and, therefore, also will react to variations in the general market for equity
securities. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and thus may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As fixed-income securities, convertible securities are investments that
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may
default on their obligations. A convertible security, in addition to providing
fixed income, offers the potential for capital appreciation through the
conversion feature, which enables the holder to benefit from increases in the
market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because securities prices fluctuate.
REITs. The Fund may invest in real estate investment trusts ("REITs"), which
are pooled investment vehicles that invest primarily in income-producing real
estate or real estate related loans or interests. Like a regulated investment
company such as the Fund, REITs are not taxed on income distributed to
shareholders provided they comply with several requirements of the Internal
Revenue Code of 1986, amended (the "Code"). By investing in a REIT, the Fund
will indirectly bear its proportionate share of any expenses paid by the REIT
in addition to the expenses of the Fund. Investing in REITs involves certain
risks. A REIT may be affected by changes in the value of the underlying
property owned by such REIT or by the quality of any credit extended by the
REIT. REITs are dependent on management skills, are not diversified (except to
the extent the Code requires), and are subject to the risks of financing
projects. REITs are subject to heavy cash flow dependency, default by
borrowers, self-liquidation, the possibilities of failing to qualify for the
exemption from tax for distributed income under the Code and failing to
maintain their exemptions from the 1940 Act. REITs are also subject to
interest rate risks.
Lower Rated Securities. Investments in lower rated and comparable unrated
securities involve greater risk than higher rated securities. Securities which
are rated BBB by Standard & Poor's Rating Service ("S&P") or Baa by Moody's
Investors Service, Inc. ("Moody's") are generally regarded as having adequate
capacity to pay interest and repay principal, but may have some speculative
characteristics. Securities rated below Baa by
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<PAGE>
Moody's or BBB by S&P may have speculative characteristics, including the
possibility of default or bankruptcy of the issuers of such securities, market
price volatility based upon interest rate sensitivity, questionable
creditworthiness and relative illiquidity of the secondary trading market.
Because high yield bonds have been found to be more sensitive to adverse
economic changes or individual corporate developments and less sensitive to
interest rate changes than higher-rated investments, an economic downturn
could disrupt the market for high yield bonds and adversely affect the value
of outstanding bonds and the ability of issuers to repay principal and
interest. In addition, in a declining interest rate market, issuers of high
yield bonds may exercise redemption or call provisions, which may force the
Fund, to the extent it owns such securities, to replace those securities with
lower yielding securities. This could result in a decreased return.
Mortgage and Asset-Backed Securities. The Fund may purchase fixed or
adjustable rate mortgage-backed securities issued by the Government National
Mortgage Association, Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation, and other asset-backed securities, including
securities backed by automobile loans, equipment leases or credit card
receivables. These securities directly or indirectly represent a participation
in, or are secured by and payable from, fixed or adjustable rate mortgage or
other loans which may be secured by real estate or other assets. Unlike
traditional debt instruments, payments on these securities include both
interest and a partial payment of principal. Prepayments of the principal of
underlying loans may shorten the effective maturities of these securities and
may result in the Fund having to reinvest proceeds at a lower interest rate.
The Fund may also purchase collateralized mortgage obligations which are a
type of bond secured by an underlying pool of mortgages or mortgage pass-
through certificates that are structured to direct payments on underlying
collateral to different series or classes of the obligations.
Options. The Fund may engage in transactions in options on securities and
securities indices, including the writing of covered put options and covered
call options, the purchase of put and call options and the entry into closing
transactions. Index options are similar to options on securities except that,
rather than taking or making delivery of securities underlying the options at
a specified price upon exercise, an index option gives the holder the right to
receive cash upon exercise of the option if the level of the index upon which
the option is based is greater, in the case of a call, or less, in the case of
a put, than the exercise price of the option. The purchase of a put option on
a security would be designed to protect against a decline in the market value
of a security held by the Fund. The purchase of a call option on a security
would be intended to protect the Fund against an increase in the price of a
security that it intended to purchase in the future. In the case of either put
or call options that it has purchased, if the option expires without being
sold or exercised, the Fund will experience a loss in the amount of the option
premium plus any related commissions. 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. Prior to their expirations, put and call options may
be sold in closing sale transactions (sales by the Fund prior to the exercise
of options it has purchased) and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the
option plus the related transaction costs.
Swaps. A swap transaction is an agreement between the Fund and a
counterparty to act in accordance with the terms of a swap contract. The Fund
may enter into swap transactions to preserve a return or spread on a
10
<PAGE>
particular investment or portion of its assets, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund may also use these transactions for speculative purposes, such
as to obtain the price performance of a security without actually purchasing
the security in circumstances, for example, where the subject security is
illiquid, is unavailable for direct investment or available only on less
attractive terms. Swaps have risks associated with them including possible
default by the counterparty to the transaction, illiquidity and, where swaps
are used as hedges, the risk that the use of a swap could result in losses
greater than if the swap had not been employed.
Certain Tax and Cost Implications.
In connection with the implementation of these strategies, SaBAM intends to
sell certain portfolio securities held by the Fund. Some of these securities
have appreciated in value and therefore a sale may generate significant
capital gains which would be distributed to shareholders. The majority of such
gains, however, are currently expected to be in the form of long-term capital
gains. Such distributions would be taxable to the shareholders who receive
them. Distributed net short-term capital gains are taxable to recipient
shareholders as ordinary income and long-term capital gains are taxable as
capital gains. Accordingly, the implementation of these new investment
strategies by SaBAM may have adverse tax consequences for shareholders of the
Fund. Despite these potential tax consequences, however, SSBC and SaBAM
believe that the new investment strategies will be beneficial to the Fund and
the shareholders in the long-term. In addition to the tax implication
described above, the Fund is also expected to incur additional costs in the
form of brokerage commissions relating to the implementation of the new
investment strategies.
Other Information
CFBDS, Inc., located at 20 Milk Street, Boston, Massachusetts 02109-5408,
serves as the Fund's principal underwriter pursuant to a written agreement
dated October 8, 1998. Prior to the merger of Travelers Group Inc. and
Citicorp Inc. on October 8, 1999, Salomon Smith Barney served as principal
underwriter to the Fund. For the fiscal year ended December 31, 1998, the Fund
paid $1,102,296 in commissions to Salomon Smith Barney, an "affiliated broker"
of the Fund as defined in Schedule 14A of the Securities Exchange of 1934.
Such amount constituted 28.88% of the Fund's aggregate commissions paid for
that year.
Required Vote
Approval of the Sub-Advisory Agreement requires the affirmative vote of a
"majority of the outstanding voting securities," as defined above, of the
Fund. The Trustees of the Trust, including the non-interested Trustees,
recommend that the shareholders of the Fund vote in favor of this Proposal.
ADDITIONAL INFORMATION
Proposals of Shareholders
The Fund does not hold regular shareholder meetings. Shareholders wishing to
submit proposals for inclusion in a proxy statement for a shareholder meeting
subsequent to the Special Meeting, if any, should send their written proposals
to the Secretary of the Trust at the address set forth on the cover of this
Proxy Statement. Proposal must be received within a reasonable time before the
solicitation of proxies for such meeting. The timely submission of a proposal
does not guarantee its inclusion.
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<PAGE>
Shareholders' Request For Special Meeting
Shareholders holding at least 10% of the Trust's outstanding voting
securities (as defined in the 1940 Act) may require the calling of a meeting
of shareholders for the purpose of voting on the removal of any Trustee of the
Trust. Meetings of shareholders for any other purpose also shall be called by
the Trustees when requested in writing by shareholders holding at least 10% of
the shares then outstanding or, if the Trustees shall fail to call or give
notice of any meeting of shareholders for a period of 30 days after such
application, shareholders holding at least 10% of the shares then outstanding
may call and give notice of such meeting.
Other Matters To Come Before The Special Meeting
The Fund does not intend to present any other business at the Special
Meeting, nor is it aware that any shareholder intends to do so. If, however,
any other matters are properly brought before the Special Meeting, the persons
named in the accompanying proxy card will vote thereon in accordance with
their judgment.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND THE SPECIAL MEETING ARE THEREFORE URGED TO COMPLETE, SIGN,
DATE AND RETURN THE PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-
PAID ENVELOPE.
By order of the Board of Trustees,
Christina T. Sydor
Secretary
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<PAGE>
EXHIBIT A
FORM OF
SUB-INVESTMENT ADVISORY AGREEMENT
SMITH BARNEY INCOME FUNDS
(Smith Barney Premium Total Return Fund)
, 1999
Dear Sirs:
Smith Barney Income Funds (the "Company"), a trust organized under the laws
of the Commonwealth of Massachusetts, on behalf of Smith Barney Premium Total
Return Fund (the "Fund"), and SSBC Fund Management Inc. (the "Adviser") each
confirms its agreement with Salomon Brothers Asset Management Inc. (the "Sub-
Adviser") as follows:
1. Investment Description; Appointment
The Company desires to employ its capital relating to the Fund by investing
and reinvesting in investments of the kind and in accordance with the
investment objective(s), policies and limitations specified in its Master
Trust Agreement, as amended from time to time (the "Master Trust Agreement"),
in the Prospectus relating to the Fund (the "Prospectus") and the Statement of
Additional Information relating to the Fund (the "Statement") filed with the
Securities and Exchange Commission as part of the Company's Registration
Statement on Form N-1A, as amended from time to time, and in the manner and to
the extent as may from time to time be approved by the Board of Trustees of
the Company (the "Board"). Copies of the Prospectus, the Statement and the
Master Trust Agreement have been or will be submitted to the Sub-Adviser. The
Company agrees to provide copies of all amendments to the Prospectus, the
Statement and the Master Trust Agreement to the Sub-Adviser on an on-going
basis. The Company employs the Adviser as the investment adviser to the Fund,
and the Company and the Adviser desire to employ and hereby appoint the Sub-
Adviser to act as the sub-investment adviser to the Fund. The Sub-Adviser
accepts the appointment and agrees to furnish the services for the
compensation set forth below.
2. Services as Sub-Investment Adviser
Subject to the supervision, direction and approval of the Board of the
Company and the Adviser, the Sub-Adviser will: (a) manage the Fund's portfolio
in accordance with the Fund's investment objective(s) and policies as stated
in the Master Trust Agreement, the Prospectus and the Statement; (b) make
investment decisions for the Fund; (c) place purchase and sale orders for
portfolio transactions for the Fund; and (d) employ professional portfolio
managers and securities analysts who provide research services to the Fund. In
providing those services, the Sub-Adviser will conduct a continual program of
investment, evaluation and, if appropriate, sale and reinvestment of the
Fund's assets.
3. Brokerage
In selecting brokers or dealers to execute transactions on behalf of the
Fund, the Sub-Adviser will seek the best overall terms available. In assessing
the best overall terms available for any transaction, the Sub-Adviser will
consider factors it deems relevant, including, but not limited to, the breadth
of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer and the
<PAGE>
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. In selecting brokers or dealers to execute a particular
transaction, and in evaluating the best overall terms available, the Sub-
Adviser is authorized to consider the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Exchange Act of
1934) provided to the Fund and/or other accounts over which the Sub-Adviser or
its affiliates exercise investment discretion.
4. Information Provided to the Company
The Sub-Adviser will keep the Adviser and the Company informed of
developments materially affecting the Fund and will, on its own initiative,
furnish the Adviser and the Company from time to time with whatever
information the Sub-Adviser believes is appropriate for this purpose.
5. Standard of Care
The Sub-Adviser shall exercise its best judgment in rendering the services
listed in paragraphs 2 and 3 above. The Sub-Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund
and the Adviser in connection with the matters to which this Agreement
relates, provided that nothing in this Agreement shall be deemed to protect or
purport to protect the Sub-Adviser against any liability to the Adviser, the
Company or the shareholders of the Fund to which the Sub-Adviser would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or by reason of the
Sub-Adviser's reckless disregard of its obligations and duties under this
Agreement.
6. Compensation
In consideration of the services rendered pursuant to this Agreement, the
Adviser will pay the Sub-Adviser on the first business day of each month a fee
for the previous month at an annual rate based on the Fund's average daily net
assets in an amount agreed to from time to time by the parties to this
Agreement, but not to exceed the fee paid to the Adviser under its investment
advisory agreement with the Fund. The fee for the period from the Effective
Date (defined below) of the Agreement to the end of the month during which the
Effective Date occurs shall be prorated according to the proportion that such
period bears to the full monthly period. Upon any termination of this
Agreement before the end of any month, the fee for such part of that month
shall be prorated according to the proportion that such period bears to the
full monthly period and shall be payable upon the date of termination of this
Agreement. For the purpose of determining fees payable to the Sub-Adviser, the
value of the Fund's net assets shall be computed at the times and in the
manner specified in the Prospectus and/or the Statement.
7. Expenses
The Sub-Adviser will bear all expenses in connection with the performance of
its services under this Agreement. The Fund will bear certain other expenses
to be incurred in its operation, including, but not limited to, investment
advisory fees payable to the Adviser and administration fees; fees for
necessary professional and brokerage services; fees for any pricing service;
the costs of regulatory compliance; and costs associated with maintaining the
Company's legal existence and shareholder relations.
8. Reduction of Fee
If in any fiscal year the aggregate expenses of the Fund (including fees
pursuant to this Agreement and the Fund's investment advisory agreement, but
excluding interest, taxes, brokerage and extraordinary expenses)
2
<PAGE>
exceed the expense limitations of any state having jurisdiction over the Fund,
the Sub-Adviser will reduce its fee by the proportion of such excess expense
equal to the proportion that its fee thereunder bears to the aggregate of fees
paid by the Fund for investment advice and administration in that year, to the
extent required by state law. A fee reduction pursuant to this paragraph 8, if
any, will be estimated, reconciled and paid on a monthly basis.
9. Services to Other Companies or Accounts
The Company understands that the Sub-Adviser now acts, will continue to act
and may act in the future as investment adviser to fiduciary and other managed
accounts, and as investment adviser to other investment companies, and the
Company has no objection to the Sub-Adviser's so acting, provided that
whenever the Fund and one or more other investment companies advised by the
Sub-Adviser have available funds for investment, investments suitable and
appropriate for each will be allocated in accordance with a formula believed
to be equitable to each company. The Company recognizes that in some cases
this procedure may adversely affect the size of the position obtainable for
the Fund. In addition, the Company understands that the persons employed by
the Sub-Adviser to assist in the performance of the Sub-Adviser's duties under
this Agreement will not devote their full time to such service and nothing
contained in this Agreement shall be deemed to limit or restrict the right of
the Sub-Adviser or any affiliate of the Sub-Adviser to engage in and devote
time and attention to other businesses or to render services of whatever kind
or nature.
10. Term of Agreement
This Agreement shall become effective as of , 1999 (the "Effective
Date") and shall continue for an initial two-year term and shall continue
thereafter so long as such continuance is specifically approved at least
annually by (i) the Board of the Company or (ii) a vote of a "majority" (as
that term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Fund's outstanding voting securities, provided that in
either event the continuance is also approved by a majority of the Board who
are not "interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval. This Agreement is terminable, without penalty, on 60
days' written notice, by the Board of the Company or by vote of holders of a
majority of the Fund's shares, or upon 90 days' written notice, by the Sub-
Adviser. This Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act and the rules thereunder).
11. Representation by the Company
The Company represents that a copy of the Master Trust Agreement is on file
with the Secretary of The Commonwealth of Massachusetts and with the Boston
City Clerk.
12. Limitation of Liability
The Company, the Adviser and the Sub-Adviser agree that the obligations of
the Company under this Agreement shall not be binding upon any of the members
of the Board, shareholders, nominees, officers, employees or agents, whether
past, present or future, of the Company, individually, but are binding only
upon the assets and property of the Fund and not upon the assets and property
of any other portfolio of the Company. The execution and delivery of this
Agreement have been authorized by the Board and a majority of the holders of
the Fund's outstanding voting securities, and signed by an authorized officer
of the Company, acting as such, and neither such authorization by such members
of the Board and shareholders nor such execution and delivery by such officer
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the assets and
property of the Fund as provided in the Master Trust Agreement.
3
<PAGE>
If the foregoing is in accordance with your understanding, kindly indicate
your acceptance of this Agreement by signing and returning the enclosed copy
of this Agreement.
Very truly yours,
SMITH BARNEY INCOME FUNDS
on behalf of its
Premium Total Return Fund
By: ______________________________________________
Name:Heath B. McLendon
Title:Chairman of the Board
SSBC FUND MANAGEMENT INC.
By: ______________________________________________
Name:
Title:
Accepted:
SALOMON BROTHERS ASSET
MANAGEMENT INC.
By: _________________________
Name:
Title:
4
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<PAGE>
FORM OF PROXY CARD
SMITH BARNEY INCOME FUNDS--SMITH BARNEY PREMIUM TOTAL RETURN FUND
PROXY SOLICITED BY THE BOARD OF TRUSTEES
SPECIAL MEETING OF SHAREHOLDERS: TO BE HELD ON JUNE 30, 1999 AT 3:00 P.M.
The undersigned holder of shares of the Fund referenced above hereby
appoints Heath B. McLendon, Christina T. Sydor, and Gordon Swartz, attorneys
with full powers of substitution and revocation, to represent the undersigned
and to vote on behalf of the undersigned all shares of the Fund that the
undersigned is entitled to vote at the Special Meeting of Shareholders of the
Fund to be held at the offices of the Fund, 388 Greenwich Street, Conference
Room 26D, New York, New York 10013 at the date and time indicated above and at
any adjournments thereof. The undersigned hereby acknowledges receipt of the
enclosed Notice of Special Meeting and Proxy Statement and hereby instructs said
attorneys and proxies to vote said shares as indicated herein. In their
discretion, the proxies are authorized to vote on such other business as may
properly come before the Special Meeting. A majority of the proxies present and
acting at the Special Meeting in person or by substitute (or, if only one shall
be so present, then that one) shall have and may exercise all of the power and
authority of said proxies hereunder. The undersigned hereby revokes any proxy
previously given.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE
Date: _______________________________ 1999
Please sign in box below
Please sign exactly as your name appears on this Proxy. If joint owners,
EITHER may sign this Proxy. When signing as attorney, executor,
administrator trustee, guardian or corporate officer, please give your full
title:
[______________________________________]
Signature(s) Title(s), if applicable
<PAGE>
NOTE: YOUR PROXY IS NOT VALID UNLESS IT IS SIGNED ON THE REVERSE SIDE
Please vote by filling in the appropriate box below
<TABLE>
<S> <C> <C> <C>
1. To approve or disapprove a new sub-investment advisory agreement among the
Fund, SSBC Fund Management Inc. and Salomon Brothers Asset Management Inc. For Against Abstain
[_] [_] [_]
2. To transact such other business as may properly come before the meeting or
any adjournment thereof.
</TABLE>
I-2
