SMITH BARNEY INCOME FUNDS
DEF 14A, 1995-07-05
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<PAGE>
 
                           SCHEDULE 14A INFORMATION
               Proxy Statement Pursuant to Section 14(a) of the
                        Securities Exchange Act of 1934


Filed by the Registrant [x]
Filed by a Party other than the Registrant [  ]
Check the appropriate box:

[ ]  Preliminary Proxy Statement
[ ]  Confidential for Use of the Commission Only (as permitted by Rule 14-a-
     6(e)(2))
[x]  Definitive Proxy Statement
[ ]  Definitive Additional Materials
[ ]  Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12

                           SMITH BARNEY INCOME FUNDS
                  (Name of Registrant as Specified In Charter)

Payment of Filing Fee (Check the appropriate box):

[ ]  $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2), or
     Item 22(a)(2) of Schedule 14A.
[ ]  $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
     6(i)(3).
[ ]  Fee computed on table below per Exchange Act Rules 14-a-6(i)(4) 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:
 

[x]  Fee previously paid with preliminary materials.

[ ]  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:
 
<PAGE>
 
[LOGO OF SMITH BARNEY                       [LOGO OF SMITH BARNEY MUTUAL FUNDS
    APPEARS HERE]                                      APPEARS HERE]
                                                                 
                                                              July 5, 1995     
                       
Dear Shareholder:      
   
  AN IMPORTANT NOTICE ABOUT SMITH BARNEY PREMIUM TOTAL RETURN FUND     
   
  We would like to inform you of two proposals concerning Smith Barney Premium
Total Return Fund, a separate investment portfolio of Smith Barney Income
Funds. The Board of Trustees has recently unanimously endorsed these
proposals.     
   
  The Fund's investment adviser is Smith Barney Strategy Advisers Inc. (SBSA),
a wholly owned subsidiary of Smith Barney Mutual Funds Management Inc. The
Fund's current sub-investment adviser is The Boston Company Advisors, Inc.
(Boston Advisors).     
   
  Due to the resignation in April 1995 of the Fund's portfolio manager, Harry
J. Rosenbluth, from Boston Advisors, and his formation, together with other
former officers and employees of Boston Advisors, of a new firm, Boston
Partners Asset Management, L.P. (Boston Partners), the Board has determined to
terminate the Fund's sub-advisory agreement with Boston Advisors. It has also
determined to submit to shareholders of the Fund for their approval a new sub-
advisory agreement with Boston Partners. In conjunction with the proposed
change in sub-advisers, the Board has determined to submit to shareholders
for their approval a new advisory agreement with SBSA.     
   
  If the new sub-advisory agreement with Boston Partners is approved, Mr.
Rosenbluth would continue as portfolio manager of the Fund. In addition, under
the new advisory arrangements, SBSA would provide increased services to the
Fund and would retain a greater portion of its advisory fee. The Board
believes that these actions would provide continuity of management by
investment professionals who are well suited to address the Fund's investment
policies, which should be beneficial to the overall performance of the Fund.
IT IS IMPORTANT TO NOTE THAT THE AGGREGATE COST TO THE FUND FOR ADVISORY
SERVICES UNDER THE NEW AGREEMENTS WOULD BE THE SAME AS THE FEES CURRENTLY PAID
BY THE FUND.     
   
  We will hold a special meeting of shareholders of the Fund on August 10,
1995 to consider these proposals and to transact other Fund business. WE
STRONGLY
    
<PAGE>
 
   
URGE YOU TO PARTICIPATE BY REVIEWING, COMPLETING AND RETURNING YOUR PROXY BY
AUGUST 9, 1995 IN THE POSTAGE-PAID ENVELOPE PROVIDED. For more details about
the proposed transaction, please refer to the enclosed proxy statement.     
   
  We thank you for your timely participation and look forward to serving your
investment needs with Smith Barney Mutual Funds. If you have any questions,
please call your Financial Consultant who will be pleased to assist you.     
                                          
                                       Sincerely,     
                                          
                                       /s/ Heath B. McLendon    
                                          
                                       Heath B. McLendon     
                                          
                                       Chairman of the Board of Smith Barney
                                       Income Funds     
 
 
                                       2
<PAGE>
 
                    SMITH BARNEY PREMIUM TOTAL RETURN FUND
                   A SUB-TRUST OF SMITH BARNEY INCOME FUNDS
                              
                           388 GREENWICH STREET     
                            
                         NEW YORK, NEW YORK 10013     
 
                            ----------------------
 
                   NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
                         
                      TO BE HELD ON AUGUST 10, 1995     
 
                            ----------------------
To the Shareholders of Smith Barney Premium Total Return Fund:
   
  Notice is hereby given that a special meeting of shareholders of Smith
Barney Premium Total Return Fund (the "Fund"), a mutual fund organized as a
sub-trust of Smith Barney Income Funds (the "Trust"), will be held at 388
Greenwich Street, 26th Floor, New York, New York on August 10, 1995 commencing
at 10:00 a.m. for the following purposes:     
     
  1. To approve or disapprove a new investment advisory agreement between
     the Trust, on behalf of the Fund, and Smith Barney Strategy Advisers
     Inc. ("SBSA") (PROPOSAL 1).     
     
  2. To approve or disapprove a sub-investment advisory agreement among the
     Trust, on behalf of the Fund, SBSA, as adviser, and Boston Partners
     Asset Management, L.P., as sub-adviser (PROPOSAL 2).     
 
  3. To transact such other business as may properly come before the meeting
     or any adjournment thereof.
   
  These items are discussed in greater detail in the attached Proxy Statement.
The close of business on June 20, 1995 has been fixed as the record date for
the determination of shareholders of the Fund entitled to notice of and to
vote at the meeting and any adjournment thereof.     
 
                                       By Order of the Board of Trustees
                                       Christina T. Sydor
                                       Secretary
   
July 5, 1995     
 
 SHAREHOLDERS OF THE FUND 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
   CUSTODIAN OR ESTATE ACCOUNTS
     (1)John B. Smith, Cust.
            f/b/o John B. Smith, Jr.
            UGMA........................................ John B. Smith
     (2)John B. Smith................................... John B. Smith, Executor
</TABLE>    
<PAGE>
 
                    SMITH BARNEY PREMIUM TOTAL RETURN FUND
                   A SUB-TRUST OF SMITH BARNEY INCOME FUNDS
                             388 GREENWICH STREET
                           NEW YORK, NEW YORK 10013
 
                        SPECIAL MEETING OF SHAREHOLDERS
                         
                      TO BE HELD ON AUGUST 10, 1995     
 
                                PROXY STATEMENT
   
  This Proxy Statement is being solicited by the Board of Trustees (the
"Board") of Smith Barney Income Funds (the "Trust"), for use at the Special
Meeting of Shareholders (the "Meeting") of its sub-trust, Smith Barney Premium
Total Return Fund (the "Fund"), to be held on August 10, 1995 or any
adjournment or adjournments thereof. The Meeting will be held at 388 Greenwich
Street, 26th Floor, New York, New York at the time specified in the Notice of
Special Meeting of Shareholders and proxy card that accompany this 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; Smith Barney Inc. ("Smith
Barney"), the distributor of shares of the Fund; and/or The Shareholder
Services Group, Inc. ("TSSG"), a subsidiary of First Data Corporation and the
transfer agent of the Fund. The Fund has retained Applied Mailing Systems,
Inc. to assist in the solicitation of proxies, at an estimated cost in the
range of $200,000 to $250,000 (depending on the extent of the services
provided). The costs of the proxy solicitation and expenses incurred in
connection with the preparation of this Proxy Statement and its enclosures
will be paid by the Fund.     
   
  Applied Mailing Systems, Inc. may call shareholders to ask if they would be
willing to have their votes recorded by telephone. The telephonic voting
procedure is designed to authenticate the shareholder's identity by asking the
shareholder to provide his social security number, in the case of an
individual, or a taxpayer identification number, in the case of an entity. The
shareholder's telephone vote will be recorded and a confirmation will be sent
to the shareholder to ensure that the vote has been taken in accordance with
the shareholder's instructions. Shareholders voting by telephone may vote for
or against each proposal separately. Although a shareholder's vote may be
taken by telephone, each shareholder will receive a copy of this Proxy
Statement and may vote by mail using the enclosed proxy card. The Fund
believes that this telephonic voting system will comply with Massachusetts
state law and will obtain an opinion of counsel to that effect prior to
implementing such procedures.     
 
  The Trust currently issues four classes of shares of beneficial interest
("Shares") in respect of the Fund, but for purposes of the matters to be
considered
<PAGE>
 
   
at the Meeting, all Shares will be voted as a single class. Each Share is
entitled to one vote and any fractional Share is entitled to a fractional
vote. If the enclosed proxy is properly executed and returned in time to be
voted at the Meeting, the Shares represented thereby will be voted in
accordance with the instructions marked thereon. Unless instructions to the
contrary are marked on the proxy, it will be voted FOR approval of the matters
listed in the accompanying Notice of Special Meeting of Shareholders. Any
shareholder who has given a proxy has the right to revoke it at any time prior
to its exercise either by attending the Meeting and voting his or her Shares
in person or by submitting a letter of revocation or a later-dated proxy to
the Trust at the above address prior to the date of the Meeting. For purposes
of determining the presence of a quorum for transacting business at the
Meeting, abstentions and broker "non-votes" (i.e., proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owner or other persons entitled to vote Shares on a particular
matter with respect to which the brokers or nominees do not have discretionary
power) will be treated as Shares that are present but which have not been
voted. For this reason, abstentions and broker "non-votes" will have the
effect of a "no" vote for purposes of obtaining the requisite approval of the
proposals.     
 
  In the event that a quorum is not present at the Meeting, or in the event
that a quorum is present but sufficient votes to approve any of the proposals
are not received, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors may be
considered: the nature of the proposals that are the subject of the 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 adjournment will require the affirmative vote of a majority of those
Shares represented at the Meeting in person or by proxy. A shareholder vote
may be taken on one or more of the proposals in this Proxy Statement prior to
any adjournment if sufficient votes have been received for approval. Under the
Trust's Master Trust Agreement, a quorum is constituted by the presence in
person or by proxy of the holders of a majority of the outstanding Shares of
the Fund entitled to vote at the Meeting.
   
  The Board has fixed the close of business on June 20, 1995 as the record
date (the "Record Date") for the determination of shareholders of the Fund
entitled to notice of and to vote at the Meeting. On the Record Date,
129,348,032.783 Shares of the Fund were outstanding. As of the Record Date, to
the knowledge of the Trust and the Board, no single shareholder or "group" (as
that term is used in Section 13(d) of the Securities Exchange Act of 1934),
beneficially owned more than 5% of the outstanding Shares of the Fund. As of
the Record Date, the officers and Board members of the Trust beneficially
owned less than 1% of the Shares of the Fund.     
 
                                       2
<PAGE>
 
  As of the Record Date, no shares of Smith Barney Strategy Advisers Inc.
("SBSA") or its ultimate parent corporation, Travelers Group Inc.
("Travelers"), were held by Board members who are not interested persons of
the Trust (as that term is used in the Investment Company Act of 1940, as
amended (the "1940 Act")). In order that your Shares may be represented at the
Meeting, you are requested to:
 
  --indicate your instructions on the enclosed proxy card;
 
  --date and sign the proxy card;
     
  --mail the proxy card promptly in the enclosed envelope, which requires no
    postage if mailed in the continental United States; and     
     
  --allow sufficient time for the proxy card to be received on or before
    5:00 p.m., August 9, 1995.     
 
  As a business trust formed under the laws of the Commonwealth of
Massachusetts, the Trust is not required to hold annual shareholder meetings
but may hold special meetings as required or deemed desirable. As indicated
above, the Meeting is being called to consider new advisory and sub-investment
advisory contracts for the Fund.
 
  The Board recommends affirmative votes on Proposals 1 and 2.
 
PROPOSAL 1
 
  TO APPROVE OR DISAPPROVE A NEW INVESTMENT ADVISORY AGREEMENT BETWEEN SMITH
  BARNEY STRATEGY ADVISERS INC. AND THE TRUST, ON BEHALF OF THE FUND.
   
  The Fund currently is advised by SBSA under an agreement dated July 15, 1994
(the "Current Advisory Agreement"). The Boston Company Advisors, Inc. ("Boston
Advisors") currently acts as sub-adviser to the Fund pursuant to an agreement
with the Fund and SBSA dated July 15, 1994 (the "Current Sub-Advisory
Agreement," and together with the Current Advisory Agreement, the "Current
Agreements"). As described in Proposal 2 below, the Board has unanimously
determined to terminate the Current Sub-Advisory Agreement and, subject to the
approval of the shareholders of the Fund, to enter into a new sub-investment
advisory agreement among the Fund, SBSA, as adviser, and Boston Partners Asset
Management, L.P. ("Boston Partners"), as sub-adviser (the "New Sub-Advisory
Agreement").     
 
  In conjunction with the termination of Boston Advisors as sub-adviser and
for the reasons described below under the caption "Evaluation by the Board and
Reasons for the Proposals," the Board has unanimously determined, subject to
approval by the shareholders of the Fund, to enter into a new investment
advisory
 
                                       3
<PAGE>
 
   
agreement (the "New Advisory Agreement") between the Fund and SBSA. The New
Advisory Agreement and the New Sub-Advisory Agreement are referred to herein
as the "New Agreements." SBSA and the Trust have agreed to terminate the
Current Advisory Agreement, waiving any applicable notice provisions, upon the
shareholders' approval of the New Advisory Agreement. Under the New
Agreements, the Fund would pay advisory fees in an amount equal, in the
aggregate, to the fees paid under the Current Agreements. It is contemplated,
however, that under the new arrangements (1) SBSA will render increased
services to the Fund in the areas of setting overall strategy, security
selection and trading and will retain a higher percentage of the advisory fee
paid by the Fund and (2) a sub-advisory fee will be paid to Boston Partners
rather than Boston Advisors. In addition, the New Advisory Agreement provides
for a term different from that of the Current Advisory Agreement.     
 
  Under the Current Advisory Agreement, the Fund pays SBSA a monthly fee at
the annual rate of 0.55 of 1.00% of the Fund's average daily net assets. In
turn, under the Current Sub-Advisory Agreement, SBSA pays Boston Advisors a
monthly fee at the annual rate of 0.275 of 1.00% of the Fund's average daily
net assets. The Fund pays no fee to Boston Advisors directly. Under the
proposed fee arrangements, the Fund would continue to pay SBSA a monthly fee
at the annual rate of 0.55 of 1.00% of the Fund's average daily net assets,
however, SBSA would pay Boston Partners a monthly fee at the annual rate of
0.10 of 1.00% of the Fund's average daily net assets. The Fund would not pay
any fee directly to Boston Partners. THE AGGREGATE COST TO THE FUND FOR
ADVISORY SERVICES UNDER THE NEW AGREEMENTS WOULD BE THE SAME AS THE FEES
CURRENTLY PAID UNDER THE CURRENT AGREEMENTS.
 
  If approved by shareholders, the New Advisory Agreement will commence upon
obtaining shareholder approval and continue for a two-year period and
automatically thereafter for successive annual periods, provided such
continuance is approved at least annually by (a) a majority of the Board who
are not interested persons of the Trust (as the term is used in the 1940 Act)
and (b) a majority of the full Board of Trustees or a majority of the
outstanding voting securities of the Fund, as defined in the 1940 Act.
 
PROPOSAL 2
     
  TO APPROVE OR DISAPPROVE A SUB-INVESTMENT ADVISORY AGREEMENT AMONG BOSTON
  PARTNERS ASSET MANAGEMENT, L.P., SMITH BARNEY STRATEGY ADVISERS INC. AND
  THE TRUST, ON BEHALF OF THE FUND.     
 
  For the reasons described below under the caption "Evaluation by the Board
and Reasons for the Proposals," the Board has unanimously determined to
 
                                       4
<PAGE>
 
terminate the Current Sub-Advisory Agreement with Boston Advisors and, subject
to the approval of the shareholders of the Fund, to enter into the New Sub-
Advisory Agreement with Boston Partners. Under the proposed arrangement, SBSA
would assume a more active role in the management of the Fund than it
currently provides, as described under Proposal 1 above, and would continue to
provide oversight and coordination with the other components of the Smith
Barney group of funds and assist Boston Partners in providing the day-to-day
support and personnel currently provided by Boston Advisors.
 
  The New Sub-Advisory Agreement is identical to the Current Sub-Advisory
Agreement in all material respects except for (1) the identity of the sub-
adviser being Boston Partners rather than Boston Advisors, (2) the amount of
the sub-advisory fee paid by SBSA and (3) the term of the Agreement. As
described under Proposal 1 above, under the New Sub-Advisory Agreement, SBSA
would pay Boston Partners a monthly fee at the annual rate of 0.10 of 1.00% of
the Fund's average daily net assets. THE FUND WILL NOT PAY ANY FEE DIRECTLY TO
BOSTON PARTNERS.
   
  If approved by shareholders, the New Sub-Advisory Agreement will commence
upon obtaining shareholder approval and continue for a two-year period and
automatically thereafter for successive annual periods, provided such
continuance is approved at least annually by (a) a majority of the Board who
are not interested persons of the Trust (as the term is used in the 1940 Act)
and (b) a majority of the full Board of Trustees or a majority of the
outstanding voting securities of the Fund, as defined in the 1940 Act. During
the period from the termination of the Current Sub-Advisory Agreement
(expected to be on or about August 14, 1995) until shareholder approval is
obtained for the New Sub-Advisory Agreement, Boston Partners will render
services to the Fund under an interim agreement that is identical to the New
Sub-Advisory Agreement, except that it may remain in place only for a period
of 120 days.     
 
                        THE CURRENT INVESTMENT ADVISER
   
  SBSA is a wholly owned subsidiary of Smith Barney Mutual Funds Management
Inc. ("SBMFM"). SBMFM is a wholly owned subsidiary of Smith Barney Holdings
Inc. ("Holdings") which in turn is a wholly owned subsidiary of Travelers.
SBMFM serves as the Fund's administrator and Smith Barney serves as the Fund's
distributor. SBSA, SBMFM, Smith Barney and Travelers are located at 388
Greenwich Street, New York, New York 10013. Exhibit A to this Proxy Statement
provides information regarding other investment companies or series thereof
currently advised by SBSA or SBMFM that have investment objectives similar to,
although their policies, strategies and specific investments may differ from,
those of the Fund.     
   
  During the period from August 1, 1993 to July 14, 1994, Boston Advisors
acted as investment adviser for the Fund and received $8,058,630 in advisory
fees     
 
                                       5
<PAGE>
 
   
from the Fund during that period. For the period from July 15, 1994 to July
31, 1994, the aggregate amount of advisory fees paid to SBSA by the Fund was
$448,300, of which $224,150 was paid to Boston Advisors by SBSA. If the
proposed fee structure had been in effect during that period, SBSA would have
retained aggregate advisory fees equal to $366,791 (64% more than the actual
advisory fees retained).     
   
  During the period from August 1, 1993 to May 8, 1994, Boston Advisors acted
as administrator for the Fund and received $2,307,354 in administration fees
from the Fund during that period. For the period from May 9, 1994 to July 31,
1994, the Fund paid administration fees to SBMFM in the aggregate amount of
$786,075, of which sub-administration fees in the amount of $599,382 were paid
to Boston Advisors by SBMFM. In addition, for the Fund's fiscal year ended
July 31, 1994, the Fund paid service and distribution fees to Smith Barney in
the aggregate amount of $11,322,934.     
 
  The name, address, position with SBSA and principal occupation of each
executive officer and director of SBSA are set forth in the following table.
 
<TABLE>   
<CAPTION>
                                                   PRINCIPAL
 NAME AND ADDRESS*      POSITION WITH SBSA         OCCUPATION
 -----------------      ------------------         ----------
<S>                   <C>                    <C>
Heath B. McLendon**   Chairman of the Board  Managing Director of
                      of Directors and       Smith Barney;
                      President              Chairman of the funds
                                             of the Smith Barney
                                             Group of Funds
Lewis E. Daidone**    Director and Senior    Managing Director of
                      Vice President         Smith Barney; Senior
                                             Vice President and
                                             Treasurer of the
                                             funds of the Smith
                                             Barney Group of Funds
Michael J. Day        Treasurer              Managing Director of
                                             Smith Barney
Christina T. Sydor**  Secretary              Managing Director of
                                             Smith Barney;
                                             Secretary of the
                                             funds of the Smith
                                             Barney Group of Funds
</TABLE>    
- -----------
 * The business address of each person listed above is 388 Greenwich Street,
   New York, New York 10013.
 ** Also an officer of the Fund.
 
                    THE PROPOSED NEW SUB-INVESTMENT ADVISER
 
  Boston Partners is a limited partnership for which Boston Partners, Inc.
(the "General Partner") serves as the general partner. All of the outstanding
shares of
 
                                       6
<PAGE>
 
the General Partner are owned by Mr. Desmond J. Heathwood. Boston Partners and
the General Partner are located at One Financial Center, 43rd Floor, Boston,
Massachusetts 02111.
   
  The name, address, position with Boston Partners and principal occupation of
the General Partner, the executive officers of the General Partner and the key
investment personnel of Boston Partners are set forth in the following table.
    
<TABLE>
<CAPTION>
                           POSITION WITH         PRINCIPAL
    NAME AND ADDRESS      BOSTON PARTNERS        OCCUPATION
    ----------------      ---------------        ----------
<S>                      <C>               <C>
Boston Partners, Inc.... General Partner   General Partner of
  One Financial Center                     Boston Partners
  43rd Floor
  Boston, MA 02111
Desmond J. Heathwood.... Chief Investment  President of the
  One Financial Center   Officer           General Partner
  43rd Floor
  Boston, MA 02111
William J. Kelly........ Chief Financial   Treasurer of the
  One Financial Center   Officer           General Partner
  43rd Floor
  Boston, MA 02111
Wayne J. Archambo....... Portfolio         Member of the
  One Financial Center   Manager           Investment Committee
  43rd Floor                               of Boston Partners
  Boston, MA 02111
William W. Carter, Jr... Portfolio         Member of the
  333 South Grand Avenue Manager           Investment Committee
  Suite 1840                               of Boston Partners
  Los Angeles, CA 90071
Mark E. Donovan......... Portfolio         Member of the
  One Financial Center   Manager           Investment Committee
  43rd Floor                               of Boston Partners
  Boston, MA 02111
Harry J. Rosenbluth..... Portfolio         Member of the
  300 Drakes Landing     Manager           Investment Committee
  Road                                     of Boston Partners
  Suite 270
  Greenbrae, CA 94904
Wayne S. Sharp.......... Portfolio         Member of the
  333 South Grand Avenue Manager           Investment Committee
  Suite 1840                               of Boston Partners
  Los Angeles, CA 90071
</TABLE>
 
                                       7
<PAGE>
 
                  EVALUATION BY THE BOARD AND REASONS FOR THE
                                   PROPOSALS
 
  In April 1995, the Board was informed that fourteen members of the
professional staff of Boston Advisors, including the Fund's former Portfolio
Manager and Investment Officer, Harry Rosenbluth, resigned from Boston
Advisors and formed a new investment management firm, Boston Partners. In
light of these events and as soon thereafter as practicable, the Board held a
meeting via telephone conference on April 28, 1995 to discuss the status of
the Fund's management. At that time, the Board was informed that, on the next
business day, several executive personnel of SBSA would meet with Boston
Advisors in Boston to discuss the future management of the Fund and that, in
the interim, SBSA would closely supervise all portfolio transactions made by
Boston Advisors on behalf of the Fund. Shortly thereafter at a Board meeting
held on May 9, 1995, SBSA reported its findings to the Board for its
consideration. In accordance with their duties on behalf of the Fund's
investment adviser and at the behest of the Board, several executive personnel
of SBSA also visited the facilities of Boston Partners in both Boston and San
Francisco in order to inspect and evaluate its operations. SBSA
representatives informed the Board that Boston Partners was fully operational
and equipped to assume certain investment advisory functions for the Fund.
 
  On June 15, 1995, the Board met in person at a meeting called for the
purpose of considering, among other things, (1) the termination of the Current
Advisory Agreement and the approval of the New Advisory Agreement with SBSA,
(2) termination of the Current Sub-Advisory Agreement with Boston Advisors and
(3) approval of the New Sub-Advisory Agreement with Boston Partners. Although
SBSA recommended that the Board approve these proposals, the Board also
considered various other possible alternatives, including (1) continuation of
the Current Sub-Advisory Agreement with Boston Advisors, (2) termination of
the Current Sub-Advisory Agreement and approval of SBSA's sole management of
the Fund and (3) solicitation of interest by other possible sub-advisers. The
Board received and reviewed materials or discussed various matters regarding
one or more of SBSA, Boston Advisors and Boston Partners, including their
personnel, portfolio managers, analysts, economists and others, methods of
operation, past performance and profitability. After reviewing different
options, the Board has determined that the termination of the Current
Agreements and the approval of the New Agreements are appropriate courses of
action at this time in order to provide the Fund with management by investment
professionals who are well suited to address the Fund's needs with respect to
its particular investment strategies.
 
  The Board considered, among other factors, SBSA's ability to make available
senior personnel known to the Board to work with Boston Partners in areas
relating
 
                                       8
<PAGE>
 
   
to the Fund's unique overall investment strategy, including stock, bond and
option markets outlook, risk analysis, management of the Fund in light of its
dividend payout rate and desire for relative net asset value stability,
security selection and trading. The Board further considered the favorable
past performance of Mr. Rosenbluth and other Boston Partners' personnel in
managing the Fund's assets during their employment with Boston Advisors.
Accordingly, the Board determined that the most desirable course of action is
to enter into a New Sub-Advisory Agreement with Boston Partners, pursuant to
which Mr. Rosenbluth would resume advising the Fund, in order to provide
investment management which should be beneficial to the overall performance of
the Fund.     
 
  The Board considered the fact that, although the aggregate cost to the Fund
for advisory services under the proposed New Agreements would be the same as
the fees paid under the Current Agreements, SBSA would be retaining a greater
portion of its advisory fee. The Board determined that the additional fees
retained by SBSA would compensate SBSA for assuming a more active role in the
investment management of the Fund. The Board further determined that SBSA's
additional participation in the Fund's management would be desirable in light
of the fact that Boston Partners is a newly organized entity with no
experience in the application of mutual fund management support systems,
although its officers and portfolio managers individually have experience
investing mutual fund assets. Although such individuals' portfolio management
experience was attractive to the Board, the Board expects SBSA to compensate
for Boston Partners' lack of tangible experience as an institution in the area
of mutual fund management. The Board considered that SBSA personnel who are
executive officers of the Fund would be expected to assist Mr. Rosenbluth and
other Boston Partners' personnel in determining and evaluating specific
investment strategies, economic conditions and general trends in the markets.
The Board further considered that SBSA personnel may be contacted more often
to provide financial data and other economic and statistical information. The
Board concluded that the Sub-Advisory Agreement with Boston Partners and the
increased involvement of SBSA should provide investment management which will
be beneficial to the Fund's performance, while not affecting the investment
advisory fee currently charged to the Fund.
   
  After a meeting of the full Board, and a meeting of the non-interested
Trustees with their counsel, at which the Trustees carefully evaluated the
foregoing, the Trustees of the Trust who were not interested persons of the
Trust approved, and the Board as a whole, approved (i) the termination of the
Current Agreements, (ii) subject to shareholder approval, the New Advisory
Agreement with SBSA substantially in the form of Exhibit B to this Proxy
Statement, and (iii) subject to shareholder approval, the New Sub-Advisory
Agreement substantially in the form of Exhibit C to this Proxy Statement.     
 
                                       9
<PAGE>
 
                             
                          BROKERAGE ARRANGEMENTS     
   
  In selecting brokers or dealers to execute portfolio transactions on behalf
of the Fund, each of SBSA and Boston Partners (collectively, the "Adviser")
seeks the best overall terms available. In assessing the best overall terms
available for any transaction, the Adviser will consider the factors it deems
relevant, including 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 reasonableness of the commission, if any, for the specific
transaction and on a continuing basis. In addition, the Adviser is authorized,
in selecting brokers or dealers to execute a particular transaction and in
evaluating the best overall terms available, to consider the brokerage and
research services (as those terms are defined in Section 28(e) of the
Securities and Exchange Act of 1934) provided to the Fund and/or other
accounts over which the Adviser or its affiliates exercise investment
discretion. The fees under the Fund's investment advisory agreements will not
be reduced by reason of the Fund's or the Adviser's receiving brokerage and
research services. Research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular issues and industries.
These services are used by the Adviser in connection with all of its
investment activities, and some of the services obtained in connection with
the execution of transactions for the Fund may be used in managing other
investment accounts. Conversely, brokers furnishing these services may be
selected for the execution of transactions for these other accounts, whose
aggregate assets may exceed those of the Fund, and the services furnished by
the brokers may be used by the Adviser in providing investment management for
the Fund. The Board periodically will review the commissions paid by the Fund
to determine if the commissions paid over representative periods of time were
reasonable in relation to the benefits inuring to the Fund. Over-the-counter
purchases and sales by the Fund are transacted directly with principal market
makers except in those cases in which better prices and executions may be
obtained elsewhere.     
 
  During the fiscal year ended July 31, 1994, the Fund incurred $1,767,577 in
brokerage commissions, of which $280,686 (representing 15.88% of the total of
all brokerage commissions paid) was paid to Smith Barney. Such commissions
were paid with respect to 14.92% of the total dollar value of all transactions
involving the payment of brokerage commissions effected during the year.
 
                        CURRENT AND PROPOSED AGREEMENTS
 
CURRENT AGREEMENTS
   
  Current Advisory Agreement with SBSA     
 
  SBSA currently serves as investment adviser to the Fund pursuant to an
advisory agreement dated July 15, 1994 between the Trust, on behalf of the
Fund,
 
                                      10
<PAGE>
 
and SBSA. The Current Advisory Agreement was last submitted to a vote of
shareholders of the Fund on July 15, 1994 in connection with terminating the
then existing investment advisory agreement with Boston Advisors and approving
the Current Advisory Agreement with SBSA (at the same time the Current Sub-
Advisory Agreement with Boston Advisors was approved). Under its terms, SBSA,
subject to the supervision of the Trust's Board of Trustees, manages the
Fund's investments in accordance with the investment objectives and policies
stated in the Fund's Prospectus and the Trust's Statement of Additional
Information. As Adviser, SBSA supervises the sub-investment advisory services
currently rendered by Boston Advisors, evaluates and makes final
determinations with respect to investment strategies for the Fund and provides
the Fund with the benefits of research capabilities of the Smith Barney
organization and provides executive management for the Fund. SBSA receives a
fee that is computed daily and paid monthly at the annual rate of 0.55 of
1.00% of the value of the Fund's average daily net assets.
 
  Under the terms of the Current Advisory Agreement, SBSA bears all expenses
in connection with its performance, including the sub-investment advisory fee
payable to Boston Advisors under the Current Sub-Advisory Agreement. Other
expenses incurred in the operation of the Fund are borne by the Fund,
including: taxes, interest, brokerage fees and commissions, if any;
distribution and shareholder service fees; fees of the Board members who are
not officers, directors, shareholders or employees of Smith Barney, or any of
its affiliates; SEC fees and state blue sky qualification fees; charges of
custodian and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; costs of investor services
(including allocable telephone and personnel expenses); costs of preparation
and printing of prospectuses and statements of additional information for
regulatory purposes and for distribution to shareholders; costs of preparation
and printing of shareholders' reports; costs incurred in connection with
meetings of the shareholders of the Fund and of the officers or Board of the
Trust; and any extraordinary expenses.
   
  Current Sub-Advisory Agreement with Boston Advisors     
   
  Boston Advisors currently serves as sub-investment adviser to the Fund
pursuant to a sub-advisory agreement dated July 15, 1994 among the Trust, on
behalf of the Fund, SBSA, as adviser, and Boston Advisors, as sub-adviser. The
Current Sub-Advisory Agreement was last submitted to a vote of shareholders of
the Fund on July 15, 1994 in connection with terminating the then existing
investment advisory agreement with Boston Advisors and approving the Current
Advisory Agreement with SBSA and the Current Sub-Advisory Agreement with
Boston Advisors.     
 
  Under the terms of the Current Sub-Advisory Agreement, Boston Advisors,
subject to the supervision of the Board and SBSA as investment adviser, makes
 
                                      11
<PAGE>
 
investment decisions for the Fund, places purchase and sale orders for
portfolio transactions and provides analytical and research services to the
Fund. Pursuant to the Agreement, SBSA pays Boston Advisors a sub-investment
advisory fee of 0.275 of 1.00% of the value of the Fund's average daily net
assets.
 
  Pursuant to a letter dated June 15, 1995, the Board has notified Boston
Advisors of its decision to terminate the Current Sub-Advisory Agreement,
effective August 14, 1995.
   
  General Provisions     
 
  If in any fiscal year the aggregate expenses of the Fund (including fees
pursuant to the Current Advisory Agreement and the Current Sub-Advisory
Agreement but excluding interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense limitation
of any state having jurisdiction over the Fund, SBSA will reduce its advisory
fee and Boston Advisors will reduce its sub-investment advisory fee to the
Fund by the proportion of such excess equal to the proportion that the
respective advisory fees bear to the Fund's aggregate fees for investment
advice and administration. This expense reimbursement, if any, is estimated,
reconciled and paid on a monthly basis.
 
  Each Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard for its obligations thereunder,
the investment adviser or sub-investment adviser, as the case may be, shall
not be liable for any act or omission in the course of or in connection with
the rendering of its services thereunder.
 
  Each Agreement will remain in effect pursuant to its terms for an initial
term of two years from its date of execution and thereafter with respect to
the Fund for successive annual periods if and so long as such continuance is
specifically approved annually by (a) the Trust's Board or (b) a majority vote
of the outstanding voting securities of the Fund, provided that in either
event the continuance also is approved by a majority of the Board members who
are not "interested persons" (as defined in the 1940 Act) of any party to the
Agreement, by vote cast in person at a meeting called for the purpose of
voting on approval. Each Agreement is terminable, without penalty, on 60 days'
written notice by the Board or by a majority vote of the outstanding voting
securities of the Fund or on 90 days' written notice by SBSA in the case of
the Current Advisory Agreement and Boston Advisors in the case of the Current
Sub-Advisory Agreement. Each Agreement would terminate automatically in the
event of its assignment (as defined in the 1940 Act).
 
PROPOSED NEW AGREEMENTS
   
  New Advisory Agreement with SBSA     
 
  The New Advisory Agreement contains the same advisory fee as the Current
Advisory Agreement and is identical in all other material respects other than
that it
 
                                      12
<PAGE>
 
   
provides for a term different from that of the Current Advisory Agreement. It
is contemplated that under the new arrangements (1) SBSA will render increased
services to the Fund as described above and will retain a higher percentage of
the advisory fee paid by the Fund and (2) a sub-advisory fee will be paid to
Boston Partners rather than Boston Advisors.     
   
  New Sub-Advisory Agreement with Boston Partners     
 
  The New Sub-Advisory Agreement is identical to the Current Sub-Advisory
Agreement in all material respects except for (1) the identity of the sub-
adviser being Boston Partners rather than Boston Advisors, (2) the amount of
the sub-advisory fee paid by SBSA to Boston Partners and (3) the term of the
Agreement. Under the New Sub-Advisory Agreement, SBSA would pay Boston
Partners a monthly fee at the annual rate of 0.10 of 1.00% of the Fund's
average daily net assets, rather than the 0.275 of 1.00% rate paid to Boston
Advisors under the Current Sub-Advisory Agreement. The Fund will not pay any
fee directly to Boston Partners.
   
  As mentioned above, the Current Sub-Advisory Agreement will terminate as of
August 14, 1995. If shareholder approval of the New Sub-Advisory Agreement is
not obtained prior to that date, Boston Partners will act as sub-adviser to
the Fund pursuant to an interim agreement which will be substantially
identical to the form of sub-investment advisory agreement attached as Exhibit
C to this Proxy Statement, other than its term. Boston Partners will serve as
sub-investment adviser pursuant to this interim agreement for 120 days or
until such earlier time as shareholder approval of the New Sub-Advisory
Agreement is received.     
 
                                 REQUIRED VOTE
 
  Approval of the Agreements requires the affirmative vote of a "majority of
the outstanding voting securities" of the Fund. The term "majority of the
outstanding voting securities" of the Fund, as used in this Proxy Statement
and defined in the 1940 Act, 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 are present in person or by proxy at the
Meeting; or (2) more than 50% of the outstanding securities of the Fund.
 
                      SUBMISSION OF SHAREHOLDER PROPOSALS
 
  The Trust is not generally required to hold annual or special shareholders'
meetings. Shareholders wishing to submit proposals for inclusion in a proxy
statement for a subsequent shareholders' meeting should send their written
proposals to the Secretary of the Trust at the address set forth on the cover
of this
 
                                      13
<PAGE>
 
   
proxy statement. Shareholder proposals for inclusion in the Trust's proxy
statement for any subsequent meeting must be received by the Trust within a
reasonable period of time prior to any such meeting.     
 
                                 ANNUAL REPORT
 
  The Fund will furnish, without charge, a copy of its most recent Annual
Report dated July 31, 1994 and its most recent Semi-Annual Report dated
January 31, 1995, upon request to the Fund at 388 Greenwich Street, New York,
New York 10013, (800) 224-7523, or by contacting a Smith Barney Financial
Consultant.
 
                   OTHER MATTERS TO COME BEFORE THE MEETING
 
  The Board does not intend to present any other business at the Meeting nor
is it aware that any shareholder intends to do so. If, however, any other
matters are properly brought before the Meeting, the persons named in the
accompanying proxy card(s) will vote thereon in accordance with their
judgment.
   
July 5, 1995     
 
 IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO
 NOT EXPECT TO ATTEND THE MEETING ARE THEREFORE URGED TO COMPLETE, SIGN,
 DATE AND RETURN THE PROXY AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE
 PAID ENVELOPE.
 
                                      14
<PAGE>
 
                                                                     
                                                                  EXHIBIT A     
             
          NAMES OF INVESTMENT COMPANIES SERVICED BY SBSA OR SBMFM     
             
          WITH INVESTMENT OBJECTIVES SIMILAR TO THOSE OF THE FUND     
 
<TABLE>   
<CAPTION>
                                       NET ASSETS   ANNUAL RATE OF ADVISORY FEE
                                         AS OF       EXPRESSED AS A PERCENTAGE
                                        MAY 31,          OF AVERAGE DAILY
                FUND                      1995              NET ASSETS
                ----                 -------------- ---------------------------
<S>                                  <C>            <C>
Smith Barney Growth and
  Income Fund....................... $  195,850,000             .45%
Smith Barney Funds--
  Income and Growth Portfolio....... $  701,240,000             .58%*
Smith Barney Telecommunications
  Trust Income Fund................. $   64,498,482             .55%
Smith Barney Utilities Fund......... $1,840,159,000             .45%
Smith Barney Funds--
  Utility Portfolio................. $   82,684,000             .60%*
</TABLE>    
- -----------
   
* Includes compensation for administrative services provided to the Fund.     
 
                                      A-1
<PAGE>
 
                                                                    
                                                                 EXHIBIT B     
 
                                    FORM OF
                              ADVISORY AGREEMENT
 
                           SMITH BARNEY INCOME FUNDS
 
                   (SMITH BARNEY PREMIUM TOTAL RETURN FUND)
 
                                                                         , 1995
 
Smith Barney Strategy Advisers Inc.
388 Greenwich Street
New York, New York 10013
 
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"), confirms its agreement with Smith Barney Strategy
Advisers Inc. (the "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 Company (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 Adviser. The
Company agrees to provide copies of all amendments to the Prospectus, the
Statement and the Master Trust Agreement to the Adviser on an on-going basis.
The Company desires to employ and hereby appoints the Adviser to act as the
Fund's investment adviser. The Adviser accepts the appointment and agrees to
furnish the services for the compensation set forth below.
 
2. SERVICES AS INVESTMENT ADVISER
 
  Subject to the supervision, direction and approval of the Board of the
Company, the 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
 
                                      B-1
<PAGE>
 
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 Adviser will conduct a continual program of investment,
evaluation and, if appropriate, sale and reinvestment of the Fund's assets.
The Adviser may, with the approval of the Board and the shareholders of the
Fund (to the extent required by applicable law), from time to time, sub-
contract with one or more sub-investment advisers to provide some or all of
the services required under this agreement.
 
3. BROKERAGE
 
  In selecting brokers or dealers to execute transactions on behalf of the
Fund, the Adviser will seek the best overall terms available. In assessing the
best overall terms available for any transaction, the 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 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 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 Adviser or its affiliates exercise
investment discretion.
 
4. INFORMATION PROVIDED TO THE COMPANY
 
  The Adviser will keep the Company informed of developments materially
affecting the Fund's portfolio, and will, on its own initiative, furnish the
Company from time to time with whatever information the Adviser believes is
appropriate for this purpose.
 
5. STANDARD OF CARE
 
  The Adviser shall exercise its best judgment in rendering the services
listed in paragraphs 2 and 3 above. The Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Company 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
Adviser against any liability to the Company or the shareholders of the Fund
to which the 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 Adviser's reckless disregard of its obligations
and duties under this Agreement.
 
                                      B-2
<PAGE>
 
6. COMPENSATION
 
  In consideration of the services rendered pursuant to this Agreement, the
Fund will pay the Adviser on the first business day of each month a fee for
the previous month at the annual rate of 0.55 of 1.00% of the Fund's average
daily net assets. 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 a 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 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 Adviser will bear all expenses in connection with the performance of its
services under this Agreement and will pay to any sub-investment adviser or
advisers retained by the Adviser to provide advisory services to the Fund (a
"Sub-Adviser") the fees required to be paid to each Sub-Adviser. The Fund will
bear certain other expenses to be incurred in its operation, including, but
not limited to, investment advisory and administration fees, other than those
payable to a Sub-Adviser or any additional or substitute sub-investment
adviser; 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 sub-investment advisory and
administration agreements, but excluding interest, taxes, brokerage and
extraordinary expenses) exceed the expense limitation of any state having
jurisdiction over the Fund, the Adviser will reduce its fee to the Fund 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 Adviser now acts, will continue to act and
may act in the future as investment adviser to fiduciary and other managed
 
                                      B-3
<PAGE>
 
accounts, and as investment adviser to other investment companies, and the
Company has no objection to the Adviser's so acting, provided that whenever
the Fund and one or more other investment companies advised by the 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 Fund recognizes that in some cases this procedure may
adversely affect the size of the position obtainable or disposable for the
Fund. In addition, the Fund understands that the persons employed by the
Adviser to assist in the performance of the 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 Adviser or any affiliate of the 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    , 1995 (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
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 and the 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 Company, as provided in the Master Trust Agreement. 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, are
signed by
 
                                      B-4
<PAGE>
 
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 Company as provided in the Master
Trust Agreement.
 
  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 SMITH BARNEY PREMIUM
                                            TOTAL RETURN FUND
 
                                          By: _________________________________
                                            Name:
                                            Title:
 
Accepted:
 
SMITH BARNEY STRATEGY ADVISERS INC.
 
______________________________________
Name:
Title:
 
                                      B-5
<PAGE>
 
                                                                    
                                                                 EXHIBIT C     
 
                                    FORM OF
                       SUB-INVESTMENT ADVISORY AGREEMENT
 
                           SMITH BARNEY INCOME FUNDS
 
                   (SMITH BARNEY PREMIUM TOTAL RETURN FUND)
 
                                                                         , 1995
 
Boston Partners Asset Management, L.P.
One Financial Center
43rd Floor
Boston, Massachusetts 02111
 
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 Smith Barney Strategy Advisers Inc. (the
"Adviser"), each confirms its agreement with Boston Partners Asset Management,
L.P. (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 Company (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 ongoing
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
 
                                      C-1
<PAGE>
 
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
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.
 
                                      C-2
<PAGE>
 
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 the annual rate of 0.10 of 1.00% of the Fund's
average daily net assets. 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 a 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 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) exceed the
expense limitation 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
 
                                      C-3
<PAGE>
 
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       , 1995 (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
 
                                      C-4
<PAGE>
 
them personally, but shall bind only the assets and property of the Fund as
provided in the Master Trust Agreement.
 
  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 SMITH BARNEY PREMIUM
                                            TOTAL RETURN FUND
 
                                          By: _________________________________
                                            Name:
                                            Title:
 
                                          SMITH BARNEY STRATEGY ADVISERS INC.
 
                                          By: _________________________________
                                            Name:
                                            Title:
 
Accepted:
 
BOSTON PARTNERS ASSET MANAGEMENT,
  L.P.
 
By: BOSTON PARTNERS, INC.,
  General Partner
 
By: __________________________________
  Name:
  Title:
 
                                      C-5
<PAGE>
 
                          VOTE THIS PROXY CARD TODAY!
                                               ------
                        YOUR PROMPT RESPONSE WILL SAVE
                      THE EXPENSE OF ADDITIONAL MAILINGS

                 (Please Detach at Perforation Before Mailing)

- --------------------------------------------------------------------------------

SMITH BARNEY PREMIUM TOTAL            PROXY SOLICITED BY THE BOARD OF TRUSTEES
RETURN FUND, (A SUB-TRUST OF 
SMITH BARNEY INCOME FUNDS)

The undersigned holder of shares of Smith Barney Premium Total Return Fund (the
"Fund"), hereby appoints Heath B. McLendon, Christina T. Sydor and Robert A. 
Vegliante, attorneys and proxies for the undersigned, 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, New York, New York on August 10, 1995
at 10:00 A.M. and any adjournment or adjournments thereof. The undersigned 
hereby acknowledges receipt of the Notice of Special Meeting and Proxy Statement
dated July 5, 1995 and hereby instructs said attorneys and proxies to vote said
shares as indicated herein. In their discretion, the proxies are authorized to
vote upon such other business as may properly come before the Special Meeting. A
majority of the proxies present and voting 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.




                        (CONTINUED ON THE REVERSE SIDE)
           PLEASE DO NOT FORGET TO SIGN ON THE REVERSE SIDE OF CARD.
 



<PAGE>
 
                          VOTE THIS PROXY CARD TODAY!
                        YOUR PROMPT RESPONSE WILL SAVE
                      THE EXPENSE OF ADDITIONAL MAILINGS


                 (Please Detach at Perforation Before Mailing)

- --------------------------------------------------------------------------------
This proxy, if properly executed, will be voted in the manner directed by the 
undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR 
THE PROPOSALS. Please indicate your vote by filling in the appropriate box 
below, as shown, using blue or black ink or dark pencil, do not use red ink. [X]

1.  To approve a new Investment Advisory Agreement between Smith Barney Income
    Funds, on behalf of Smith Barney Premium Total Return Fund, and Smith Barney
    Strategy Advisers Inc.

                   FOR            AGAINST            ABSTAIN

                   [_]              [_]                [_]

2.  To approve a new Sub-Investment Advisory Agreement among Smith Barney
    Income Funds, on behalf of Smith Barney Premium Total Return Fund, Smith
    Barney Strategy Advisers Inc., as adviser, and Boston Partners Asset
    Management, L.P., as sub-adviser.

                   FOR            AGAINST            ABSTAIN

                   [_]              [_]                [_]


                         PLEASE SIGN, DATE AND RETURN
                       PROMPTLY IN THE ENCLOSED ENVELOPE

    DATE:______________________________, 1995

    NOTE: 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)

    



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