Municipal
High Income
Fund Inc.
Quarterly
Report
[Star]
January
31, 1996
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Municipal High Income Fund Inc.
Dear Shareholder:
We are pleased to provide you with the quarterly report for the Municipal
High Income Fund Inc. for the three-month period ended January 31, 1996. Over
the past twelve months, the Fund paid dividends totaling $0.642 per share. The
table below shows the annualized distribution rates based on the Fund's January
31, 1996 net asset value (NAV) per share and its New York Stock Exchange (NYSE)
closing price.
Price Annualized
Per Share Distribution Rate
--------- -----------------
$9.61 (NAV) 6.37%
$8.75 (NYSE) 6.99%
Municipal Bond Market Update and Outlook
In recent months, the spread between U.S. Treasuries and municipal bonds
has widened. The widening of this spread is most likely attributed to concerns
about the proposals for a flat tax. Some versions of a flat tax would eliminate
the tax advantages of state and municipal bond interest income. However, supply
factors in the municipal bond market are favorable as the number of new issues
continued to decline and the number of outstanding issues retired through calls
or prerefundings increased.
We believe the municipal bond market will show better relative performance
in 1996. The National Governors' Association recently reported that the fiscal
condition of many states is now the strongest it has been since the late 1980s.
Many of the larger states have shown remarkable improvement in their ability to
service outstanding bonds and support new debt. We expect that many of the new
municipal bond issues that come to market are likely to be of higher credit
quality than in the past.
However, any municipal bond market rally will depend on the final outcome
of the flat tax issue and the success of Washington, D.C. in reaching a
consensus on the federal budget. At this time, we do not think any flat tax
proposals will be taken seriously given the upcoming Presidential election. That
does not mean, however, that the municipal bond market will not worry about such
a prospect, which may act to depress municipal bond prices in 1996. In addition,
federal spending reductions could impact on funding for state and local projects
which, if combined with resistance to higher local taxes that back some
municipal bonds, could affect credit quality or supply.
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We expect the tax-exempt bond market to be less volatile in 1996 than it
was in 1995. We estimate that new municipal bonds worth between $150 and $160
billion will be issued in 1996, which was roughly the same amount that was
issued in 1995. In addition, we believe roughly the same amount of municipal
bonds will be retired in 1996.
We anticipate the municipal bond market in 1996 will be dominated by
institutional investors, with many individual investors remaining concerned
about the flat tax issue during a Presidential election year and taking a
wait-and-see approach. Although we believe the tax-exempt market is currently
attractive regardless of the final outcome of the tax reform debate, this issue
will continue to be an important factor for the market over the next two to
three years.
Fund's Investment Strategy
During the past three months, the Municipal High Income Fund sought to
minimize portfolio volatility by investing in non-callable, high coupon
municipal bonds. The Fund focused on industrial development and pollution
control issues because they offered, in our view, higher-yield potential. The
Fund's average weighted maturity during the period covered by this report was
just below 20 years.
At this time, we would like to thank you for your investment in the
Municipal High Income Fund Inc. and we look forward to continue to serve your
investment needs.
Sincerely,
/s/Heath B. McLendon /s/Lawrence T. McDermott
Heath B. McLendon Lawrence T. McDermott
Chairman and Chief Executive Officer Vice President and Investment Officer
March 15, 1996
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<TABLE>
<CAPTION>
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Municipal High Income Fund Inc.
Schedule of Investments
January 31, 1996 (unaudited)
===============================================================================================
FACE
AMOUNT RATING SECURITY VALUE
===============================================================================================
<C> <C> <S> <C>
Alabama -- 3.3%
$ 545,000 AA- Alabama HFA, Single-Family Mortgage Revenue,
10.500% due 12/1/02................................... $ 585,194
4,000,000 BBB- Butler, AL IDR Waste Disposal, 8.000% due 9/1/28 (a)..... 4,545,000
1,000,000 BBB- Mobile, AL IDR, 6.950% due 1/1/20........................ 1,065,000
----------
6,195,194
----------
Arizona -- 1.9%
Gila County, AZ IDA, PCR, (ASARCO), Series 1987:
2,700,000 BBB 8.900% due 7/1/06..................................... 2,926,125
600,000 BBB 8.900% due 7/1/06..................................... 651,750
----------
3,577,875
----------
California -- 2.3%
2,000,000 NR Los Angeles County, CA Regional Airport Authority,
Continental Airlines, Inc., 9.000% due 8/1/17 (a)..... 2,160,000
2,000,000 BBB- Sacramento, CA Cogeneration Authority, Electric Revenue,
6.500% due 7/1/14..................................... 2,087,500
----------
4,247,500
----------
Colorado -- 3.1%
2,000,000 NR Colorado Health Facilities, Authority Revenue Project, (Beth
Israel at Shalom Park Project), 7.250% due 12/15/25... 2,035,000
Denver, CO Airport, Series A:
1,650,000 BBB 8.500% due 11/15/23 (a)............................... 1,881,000
1,600,000 BBB 8.000% due 11/15/25 (a)............................... 1,796,000
----------
5,712,000
----------
Connecticut -- 0.8%
1,500,000 NR Connecticut State Development Authority, Health Care
Revenue, Series B, 8.000% due 7/1/17.................. 1,546,875
----------
Florida -- 5.9%
980,000 NR Homestead, FL IDR, (Project A), 7.950% due 11/1/18....... 994,700
2,065,000 NR Jacksonville, FL Health Facilities Authority Revenue,
9.125% due 10/15/19................................... 2,157,925
1,000,000 AAA Lady Lake, FL, Industrial Development Project Revenue,
(Sunbelt Utilities Inc. Project), (Pre-Refunded -- Escrowed
with U.S. Government Securities to 7/1/00 @ 102)
9.500% due 7/1/10 (a)(b).............................. 1,232,500
2,000,000 BBB- Martin County, FL IDR, (Indiantown Cogeneration Project-A),
7.875% due 12/15/25 (a)............................... 2,295,000
See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1996 (unaudited)
===============================================================================================
FACE
AMOUNT RATING SECURITY VALUE
===============================================================================================
Florida -- 5.9% (continued)
$ 1,500,000 B+ Ocean Highway & Port Authority, FL PCR, Solid Waste,
9.375% due 11/1/04.................................... $ 1,543,125
985,000 AAA Palm Beach County, FL Health Facilities Authority, Insured
Hospital Revenue, JFK Medical Care, (Pre-Refunded --
Escrowed with U.S. Government Securities to 12/1/98 @ 102)
8.875% due 12/1/18 (b)................................ 1,133,981
1,000,000 NR Sanford Airport Authority, FL IDR, (Central Florida Terminal
Inc., Project-A), 7.750% due 5/1/21 (a)............... 982,500
650,000 NR Tampa, FL (Aquarium Inc. Revenue Project), 7.750% due 5/1/27 681,688
----------
11,021,419
----------
Georgia -- 0.6%
1,000,000 NR Walton County, GA IDA, (Walton Project), 8.500% due 9/1/07 1,085,000
----------
Illinois -- 8.0%
2,945,000 BB Chicago, IL O'Hare International Airport, Special Facilities
Revenue Bonds, UnitedAirlines, Series B,
8.950% due 5/1/18 (a)................................. 3,379,387
Chicago, IL Skyway Toll Bridge:
2,000,000 BBB- 6.500% due 1/1/10..................................... 2,072,500
1,700,000 BBB- 6.750% due 1/1/17..................................... 1,785,000
2,000,000 BB- East Chicago, IL IDA Revenue, Inland Steel Company,
Project 10, 6.800% due 6/1/13......................... 2,027,500
1,835,000 NR Hanover Park, IL First Mortgage, (Windsor Manor Project),
9.250% due 12/1/07.................................... 1,926,750
1,750,000 NR Hennepin, IL IDA Revenue, (Metchem Corp. Project),
10.250% due 1/1/05 (c)................................ 157,500
1,500,000 A+ Illinois Housing Development Authority, Series 5,
6.750% due 9/1/23..................................... 1,582,500
785,000 NR Loves Park, IL First Mortgage Revenue, (Hoosier Care Project),
Series A, 9.750% due 8/1/19........................... 844,856
990,000 NR Sterling, IL First Mortgage Revenue, (Hoosier Care Project),
Series A, 9.750% due 8/1/19........................... 1,058,063
----------
14,834,056
----------
Indiana -- 1.1%
2,000,000 BB Indianapolis,IN Indianapolis Airport Authority,
6.500% due 11/15/31 (a)............................... 2,040,000
----------
Iowa -- 0.7%
1,240,000 NR Marion, IA Multi-Family Revenue, 9.500% due 7/1/18 (a)... 1,253,950
----------
See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1996 (unaudited)
===============================================================================================
FACE
AMOUNT RATING SECURITY VALUE
===============================================================================================
Kentucky -- 2.3%
$ 1,380,000 A1* Jefferson County, KY Health Facilities Authority, Dates Beverly
Enterprises, 10.125% due 5/1/08....................... $ 1,530,075
1,500,000 BB Kenton County, KY Airport Board Delta Airlines,
7.500% due 2/1/20 (a)................................. 1,620,000
1,000,000 A Pendleton County, KY Multi-Lease Revenue, Series A,
6.500% due 3/1/19..................................... 1,056,250
----------
4,206,325
----------
Louisiana -- 7.2%
1,200,000 Baa3* Lake Charles, LA (Harbor & Terminal Project),
7.750% due 8/15/22.................................... 1,363,500
Port of New Orleans, LA IDA Revenue:
Avondale Industries, Inc. Project:
2,000,000 NR 8.250% due 6/1/04.................................... 2,282,500
3,000,000 NR 8.500% due 6/1/14.................................... 3,390,000
1,000,000 BB- Continental Grain Company Project, 7.500% due 7/1/13.. 1,065,000
2,750,000 BBB- St. Charles Parish, LA (Power & Light Co. Project Revenue),
6.380% due 11/1/25 (a)................................ 2,760,313
2,400,000 BB+ West Feliciana Parish, LA PCR, 8.000% due 12/1/24........ 2,607,000
----------
13,468,313
----------
Maine -- 0.6%
Maine State Housing Authority Mortgage Purchases:
500,000 AA- Series C-2, 7.000% due 11/15/32 (a)................... 530,625
585,000 AA- Series D-1, 8.300% due 11/15/28 (a)................... 604,744
----------
1,135,369
----------
Massachusetts -- 5.8%
1,980,000 NR Commonwealth of Massachusetts Health & Educational
Facilities Authority Revenue, North Adams State College,
9.625% due 12/1/18.................................... 2,103,750
Commonwealth of Massachusetts Industrial Finance Agency
(S.E. Mass Project):
1,700,000 NR Series A, 9.000% due 7/1/15.......................... 1,914,625
5,940,000 NR Series B, 9.250% due 7/1/15 (a)...................... 6,712,200
----------
10,730,575
----------
Michigan -- 2.9%
1,000,000 BBB Detroit, MI GO, Series A, 6.800% due 4/1/15.............. 1,068,750
1,855,000 BBB- Greater Detroit, MI Recreation Authority, Series C,
9.250% due 12/13/08................................... 1,919,925
See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1996 (unaudited)
===============================================================================================
FACE
AMOUNT RATING SECURITY VALUE
===============================================================================================
Michigan -- 2.9% (continued)
$ 755,000 BBB- Greater Detroit, MI Resource Recovery Authority Revenue,
Series B, 9.250% due 12/13/08......................... $ 781,425
1,500,000 BBB+ Western Townships, MI Utility Revenue, Sewage System,
8.300% due 1/1/19..................................... 1,636,875
----------
5,406,975
----------
Minnesota -- 1.1%
2,000,000 AA+ Minnesota HFA, Single-Family, Series H, 6.700% due 1/1/18 2,137,500
----------
Mississippi -- 3.3%
3,300,000 NR Claiborne County, MS PCR, Series C, 9.875% due 12/1/14... 3,811,500
2,000,000 AAA Mississippi Hospital Equipment Facilities Authority,
Methodist Hospital, (Pre-Refunded-- Escrowed with U.S.
Government Securities to 5/1/98 @ 103),
9.375% due 5/1/12 (b)................................. 2,285,000
----------
6,096,500
----------
New Hampshire -- 2.1%
New Hampshire State IDA, United Illuminating Company:
1,000,000 BBB- Series A, 9.375% due 7/1/12 (a)....................... 1,078,750
2,500,000 BBB- Series B, 10.750% due 10/1/12 (a)..................... 2,800,000
----------
3,878,750
----------
New Jersey -- 3.1%
1,300,000 NR New Jersey Educational Facilities, Fairleigh Dickinson
University, Series C, 6.625% due 7/1/23............... 1,243,125
New Jersey Health Care Facilities:
1,685,000 Ba* Palisades Medical Center, Finance Authority Revenue,
7.600% due 7/1/21..................................... 1,703,956
1,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27......... 1,022,500
1,500,000 BBB- Zurbrugg Memorial Hospital, Series C, 8.500% due 7/1/12 1,565,625
310,000 AAA New Jersey Housing and Mortgage Finance Agency, Home Buyer
Revenue, Series E, MBIA-Insured, 7.650% due 10/1/16... 330,925
----------
5,866,131
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New Mexico -- 0.9%
1,625,000 AA New Mexico Mortgage Finance Authority, Single-Family
Mortgage Program, Series B, 8.300% due 3/1/20......... 1,736,718
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New York -- 6.5%
1,680,000 NR Babylon, NY IDA, (Recycling Project), Series A,
8.875% due 3/1/11 (c)................................. 672,000
See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1996 (unaudited)
===============================================================================================
FACE
AMOUNT RATING SECURITY VALUE
===============================================================================================
New York -- 6.5% (continued)
$ 1,400,000 A New York City, NY Battery Park Authority Revenue, Series A,
5.800% due 11/1/22.................................... $ 1,414,000
New York City, NY COP:
4,715,000 A- Series F, 6.625% due 2/15/25.......................... 4,921,281
1,000,000 BBB+ Series H, 7.000% due 2/1/21........................... 1,070,000
2,000,000 BBB+ New York City, NY GO Unlimited, Series G, 6.000% due 2/1/11 2,005,000
1,950,000 BB+ New York State Energy, Research & Development Authority,
Electric Facility Revenue, Long Island Lighting Company,
7.150% due 12/1/20 (a)................................ 2,030,437
----------
12,112,718
----------
North Carolina -- 2.4%
1,750,000 A Martin County, NC Industrial Facilities PCR,
6.800% due 5/1/24 (a)................................. 1,883,437
2,300,000 BBB+ North Carolina Eastern Municipal Power Agency,
Power Systems Revenue, Series B, 7.000% due 1/1/08.... 2,576,000
----------
Ohio -- 2.6%
1,000,000 NR Cleveland, OH Airport Special Revenue,
Continental Airlines Inc., 9.000% due 12/1/19 (a)..... 1,057,500
1,000,000 NR Cuyahoga County, OH Health Care Facilities, Judson
Retirement Community, 8.875% due 11/15/19............. 1,076,250
1,500,000 BBB Montgomery County, OH Health Systems Revenue, Series B,
8.100% due 7/1/18..................................... 1,717,500
1,000,000 BB+ Ohio Water Development Authority, PCR, Series A,
8.100% due 10/1/23 (a)................................ 1,081,250
----------
4,932,500
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Pennsylvania -- 13.9%
2,200,000 B- Allegheny County, PA IDA, Special Facilities Revenue,
Series B, (U.S. Air Project), 8.500% due 3/1/21 (a)... 2,381,500
Beaver County, PA IDA, PCR:
2,500,000 BB 7.625% due 5/1/25..................................... 2,678,125
2,000,000 BB 7.625% due 5/1/20..................................... 2,142,500
1,500,000 NR Delaware County, PA IDA, First Mortgage, White Horse,
9.700% due 7/1/09..................................... 1,595,625
3,000,000 AAA Lebanon County, PA Samaritan House, Series B,
(Pre-Refunded -- Escrowed with U.S. Government
Securities to 11/1/99 @ 102), 8.250% due 11/1/18 (b).. 3,480,000
2,500,000 BBB- Luzerne County, PA IDA, 7.125% due 12/1/22 (a)........... 2,665,625
See Notes to Financial Statements.
7
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1996 (unaudited)
===============================================================================================
FACE
AMOUNT RATING SECURITY VALUE
===============================================================================================
Pennsylvania-- 13.9% (continued)
$ 2,000,000 Ba1* Montgomery County, PA Higher Education & Health Authority,
8.375% due 11/1/11.................................... $ 2,165,000
625,000 NR Northumberland County, PA IDA Revenue, 6.875% due 2/1/03. 629,687
1,500,000 AA Pennsylvania HFA, Series C, 6.900% due 4/1/25 (a)........ 1,593,750
1,500,000 NR Philadelphia, PA IDR Host Marriott, 7.750% due 12/1/17(a) 1,546,875
1,970,000 BBB- Philadelphia, PA Gas Revenue, Series B, 6.400% due 11/15/16 2,043,875
1,500,000 BB+ Scranton - Lackawanna, PA Health & Welfare Authority,
Mercy Health Systems, Series B, 8.500% due 7/1/20..... 1,631,250
1,250,000 BBB+ Sharon, PA Regional Health Systems, (Project B),
6.875% due 12/1/22.................................... 1,298,438
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25,852,250
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Puerto Rico -- 0.1%
200,000 A Commonwealth of Puerto Rico GO, 8.000% due 7/1/08........ 220,250
----------
South Carolina -- 0.5%
910,000 NR McCormick County, SC COP, 9.750% due 7/1/09.............. 941,387
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South Dakota -- 1.2%
Oglala Sioux Tribe, SD Pine Ridge County, Revenue Bonds:
260,000 NR 7.000% due 7/1/99..................................... 264,875
1,865,000 NR 7.500% due 7/1/13..................................... 1,916,287
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2,181,162
----------
Tennessee -- 0.4%
750,000 AAA Knox County, TN Health Education & Housing, FSA-Insured,
7.125% due 1/1/30..................................... 826,875
----------
Texas -- 10.7%
600,000 NR Angelina County, TX Jail Facilities Financing Corporation,
Criminal Detention Center, Mortgage Revenue Bonds,
9.750% due 8/1/09 (c)................................. 6,000
955,000 NR Bell County, TX Health Facilities Development Corporation,
(Living Tech, Inc. Project), Series A, 10.500% due 6/15/18 830,850
Brazos River, TX PCR, (Collateral-Texas Utilities Electric
Company, Project A):
1,000,000 BBB 9.875% due 10/1/17................................... 1,093,750
2,000,000 BBB 8.250% due 1/1/19 (a)................................ 2,195,000
1,320,000 A* El Paso, TX Housing Finance Corporation, Single-Family
Mortgage Revenue, 8.750% due 10/1/11.................. 1,442,100
2,000,000 B El Paso, TX International Airport Revenue Bonds, (Marriott
Corporation Project), 7.750% due 3/1/12............... 2,090,000
See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1996 (unaudited)
===============================================================================================
FACE
VALUE RATING SECURITY VALUE
===============================================================================================
Texas -- 10.7% (continued)
$ 1,215,000 NR Harris County, TX Industrial Development Corporation, IDR
Continental Airlines Inc., 7.950% due 7/1/19.......... $ 1,214,806
840,000 NR La Salle County, TX Jail Facilities Financing Corporation,
Criminal Detention Center, Mortgage Revenue Bonds,
9.750% due 8/1/09 (c)................................. 8,400
Matagorda County, TX Navigation District No. 1, PCR,
(Houston Lighting & Power Company Project):
1,000,000 AAA 6.100% due 7/1/28................................... 1,030,000
1,400,000 A Series A, 7.875% due 2/1/19......................... 1,499,750
1,400,000 AA North Central, TX Health Facilities Development Project,
Hospital-- Baylor Health Care Systems, (Project B),
Variable Rate, 6.400% due 5/15/08..................... 1,547,000
Northgate Crossing, TX Municipals Utilities:
1,000,000 NR District 1, GO, 8.875% due 12/1/13.................... 993,750
1,000,000 NR District 2, Special Tax, 8.875% due 12/1/13........... 993,750
570,000 NR Pecos County, TX Jail Facilities Financing Corporation,
Criminal Detention Center, Mortgage Revenue Bonds,
9.750% due 8/1/09 (c)................................. 5,700
Port Corpus Christi, TX Industrial Development Corporation,
Valero Refinancing and Marketing Company:
2,500,000 BBB- Series A, 10.250% due 6/1/17........................ 2,746,875
2,000,000 BBB- Series B, 10.625% due 6/1/08 (a).................... 2,207,500
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19,905,231
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Utah -- 1.1%
1,765,000 NR Hurricane, UT (Health Services Project), 10.500% due 7/1/20 1,967,975
------------
Vermont -- 1.3%
2,365,000 A1* Vermont Housing Finance Agency, Home Mortgage,
Series B, 8.100% due 6/1/22........................... 2,492,119
------------
West Virginia -- 1.2%
2,500,000 NR Marion County, WV County Commission, Solid Waste
Disposal Facility, 7.750% due 12/1/11 (a)............. 2,200,000
------------
TOTAL LONG-TERM MUNICIPAL BONDS -- 98.9%
(Cost-- $175,611,547).................................... 184,268,929
------------
See Notes to Financial Statements.
9
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1996 (unaudited)
===============================================================================================
FACE
VALUE RATING SECURITY VALUE
===============================================================================================
SHORT-TERM INVESTMENTS -- 1.1%
Louisiana -- 1.0%
$ 1,800,000 VMIG1* Louisiana State Recovery, District Sales Tax Revenue,
FGIC-Insured, 3.750% due 7/1/97....................... $ 1,800,000
Massachusetts -- 0.1%
200,000 VMIG1* Commonwealth of Massachusetts, Series B,
3.700% due 12/1/97.................................... 200,000
------------
TOTAL SHORT-TERM MUNICIPAL NOTES
(Cost-- $2,000,000)..................................... 2,000,000
------------
TOTAL INVESTMENTS -- 100%
(Cost-- $177,611,547) (d)............................... $186,268,929
============
</TABLE>
a) Income from these issues is considered a preference item for purposes of
calculating the alternative minimum tax.
b) Pre-Refunded bonds escrowed by U.S. Government Securities and bonds escrowed
to maturity by U.S. Government Securities are considered by manager to be
triple-A rated even if issuer has not applied for new ratings.
c) Security is in default and has been valued by the Fund's Board of Directors
(See Note 4).
d) Aggregate cost for Federal income tax purposes is substantially the same.
See pages 11 and 12 for definition of ratings and certain security
descriptions.
- --------------------------------------------------------------------------------
Summary of Municipal Bonds
by Combined Ratings
January 31, 1996
- --------------------------------------------------------------------------------
Standard & Percent of
Moody's and/or Poor's Total Investments
------- ------ -----------------
Aaa AAA 5.6%
Aa AA 3.8
A A 9.9
Baa BBB 33.0
Ba BB 13.9
B B 3.3
NR NR 30.5
-----
100.0%
=====
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
10
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Municipal High Income Fund Inc.
Bond Ratings and Security Descriptions
================================================================================
BOND RATINGS
- ------------
All ratings are by Standard & Poor's Corporation ("Standard & Poor's"), except
that those identified by an asterisk (*) are rated by Moody's Investors Services
("Moody's"). The definitions of the applicable rating symbols are set forth
below:
Standard & Poor's -- Ratings from "AA" to "BBB" may be modified by the addition
of a plus (+) or a minus (-) sign to show relative standings within the major
rating categories.
AAA -- Bonds rated "AAA"' have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest
and repay principal and differs from the highest rated issue
only in a small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B and CCC -- Bonds rated "BB" and "B" are regarded, on balance, as
predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of
the obligation. "BB" represents a lower degree of speculation
than "B," and "CCC" the highest degree of speculation. While
such bonds will likely have some quality and protective
characteristics, these are outweighted by large uncertainties
or major risk exposurers to adverse conditions.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic
rating from "Aa" to "Baa", where 1 is the highest and 3 the
lowest rating within its generic category.
A -- Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Ba -- Bonds that are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position
characterizes bonds in this class.
Baa -- Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
11
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Municipal High Income Fund Inc.
Ratings and Security Descriptions (continued)
================================================================================
SHORT-TERM SECURITIES RATINGS
- -----------------------------
VMIG1 -- Moody's highest rating for issues having demand feature --
variable-rate demand obligation (VRDO).
SECURITY DESCRIPTIONS
- ---------------------
ABA -- Association of Bay Area Governors
AIG -- American International Guaranty
AMBAC -- AMBAC Indemnity Corporation
BAN -- Bond Anticipation Notes
BIG -- Bond Investors Guaranty
CGIC -- Capital Guaranty Insurance Company
CHFCLI -- California Health Facility Construction Loan Insurance
CONNIE LEE -- College Construction Loan Association
COP -- Certificate of Participation
EDA -- Economic Development Authority
ETM -- Escrowed to Maturity
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FHLMC -- Federal Home Loan Mortgage Corporation
FLAIRS -- Floating Adjustable Interest Rate Securities
FNMA -- Federal National Mortgage Association
FRTC -- Floating Rate Trust Certificates
FSA -- Federal Savings Association
GIC -- Guaranteed Investment Contract
GNMA -- Government National Mortgage Association
GO -- General Obligation
HDC -- Housing Development Corporation
HFA -- Housing Finance Authority
IDA -- Industrial Development Agency
IDB -- Industrial Development Board
IDR -- Industrial Development Revenue
INFLOS -- Inverse Floaters
ISD -- Independent School District
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
MVRICS -- Municipal Variable Rate Inverse Coupon Security
PCR -- Pollution Control Revenue
PSF -- Permanent School Fund
RAN -- Revenue Anticipation Notes
RIBS -- Residual Interest Bonds
RITES -- Residual Interest Tax-Exempt Securities
SYCC -- Structured Yield Curve Certificate
TAN -- Tax Anticipation Notes
TECP -- Tax-Exempt Commercial Paper
TOB -- Tender Option Bonds
TRAN -- Tax and Revenue Anticipation Notes
VA -- Veterans Administration
VRWE -- Variable Rate Wednesday Demand
12
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Municipal High Income Fund Inc.
Statement of Assets and Liabilities (unaudited)
January 31, 1996
================================================================================
ASSETS:
Investments, at value (Cost-- $177,611,547) ............... $ 186,268,929
Interest receivable ....................................... 2,948,579
Receivable for securities sold ............................ 320,519
-------------
Total Assets .............................................. 189,538,027
-------------
LIABILITIES:
Dividends payable ......................................... 245,893
Investment advisory fees payable .......................... 64,111
Payable to bank ........................................... 41,022
Administration fees payable ............................... 32,056
Accrued expenses .......................................... 249,520
Other liabilities ......................................... 14,277
-------------
Total Liabilities ......................................... 646,879
-------------
Total Net Assets .............................................. $ 188,891,148
=============
NET ASSETS:
Par value of capital shares ............................... $ 196,599
Capital paid in excess of par value ....................... 182,673,658
Undistributed net investment income ....................... 49,325
Accumulated net realized loss on security transactions .... (2,685,816)
Net unrealized appreciation of investments ................ 8,657,382
-------------
Total Net Assets
(Equivalent to $9.61 a share on 19,659,882 shares of
$0.01 par value outstanding; 500,000,000 shares authorized) $ 188,891,148
=============
See Notes to Financial Statements.
13
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Municipal High Income Fund Inc.
Statement of Operations (unaudited)
For the Three Months Ended January 31, 1996
================================================================================
INVESTMENT INCOME:
Interest .................................................... $3,487,742
----------
EXPENSES:
Investment advisory fees (Note 2) ........................... 189,818
Administration fees (Note 2) ................................ 94,909
Shareholder communications .................................. 40,000
Audit and legal ............................................. 38,000
Shareholder and system servicing fees ....................... 8,500
Directors' fees ............................................. 7,000
Custody ..................................................... 4,000
Other ....................................................... 16,391
----------
Total Expenses .............................................. 398,618
----------
Net Investment Income ........................................... 3,089,124
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales ....................................... 6,775,818
Cost of securities sold ................................... 6,525,049
----------
Net Realized Gain ........................................... 250,769
----------
Change in Net Unrealized Appreciation of Investments:
Beginning of period ....................................... 7,086,829
End of period ............................................. 8,657,382
----------
Increase in Net Unrealized Appreciation ..................... 1,570,553
----------
Net Gain on Investments ......................................... 1,821,322
----------
Increase in Net Assets From Operations .......................... $4,910,446
==========
See Notes to Financial Statements.
14
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Municipal High Income Fund Inc.
Statements of Changes in Net Assets
For the Three Months Ended January 31, 1996 (unaudited)
and the Year Ended October 31, 1995
================================================================================
1996 1995
----- -----
OPERATIONS:
Net investment income ....................... $ 3,089,124 $ 12,483,459
Net realized gain (loss) .................... 250,769 (269,935)
Increase in net unrealized appreciation
of investments ........................... 1,570,553 11,037,820
------------- -------------
Increase in Net Assets
From Operations .......................... 4,910,446 23,251,344
------------- -------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income ....................... (3,066,942) (12,736,819)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders ............ (3,066,942) (12,736,819)
------------- -------------
FUND SHARE TRANSACTIONS:
Net asset value of shares issued for
reinvestment of dividends (Note 5) ....... -- 154,164
------------- -------------
Increase in Net Assets From
Fund Share Transactions .................. -- 154,164
------------- -------------
Increase in Net Assets .......................... 1,843,504 10,668,689
NET ASSETS:
Beginning of period ......................... 187,047,644 176,378,955
------------- -------------
End of period* .............................. $ 188,891,148 $ 187,047,644
============= =============
*Includes undistributed net investment income of: $ 49,325 $ 27,143
============= =============
See Notes to Financial Statements.
15
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Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited)
================================================================================
1. Significant Accounting Policies
Municipal High Income Fund Inc. ("Fund") a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) securities transactions are accounted for on trade date, (b) securities are
valued at the mean between the bid and asked prices provided by an independent
pricing service; (c) short-term securities and investments maturing within 60
days are valued at cost plus accreted discount, or minus amortized premium, as
applicable; (d) gains or losses on the sale of securities are calculated by
using the specific identification method; (e) interest income, adjusted for
amortization of premium and accretion of original issue discount, is recorded on
the accrual basis; (f) the Fund intends to comply with the applicable provisions
of the Internal Revenue Code of 1986, as amended, pertaining to regulated
investment companies and to make distributions of taxable income sufficient to
relieve it from substantially all Federal income and excise taxes; and (g)
estimates and assumptions are required to be made regarding assets, liabilities
and changes in net assets resulting from operations when financial statements
are prepared. Changes in the economic environment, financial markets and any
other parameters used in determining these estimates could cause actual results
to differ from these amounts.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The Fund
pays SBMFM an advisory fee calculated at an annual rate of 0.40% of the average
daily net assets. SBMFM also acts as the administrator of the Fund for which it
receives a fee calculated at an annual rate of 0.20% of the average daily net
assets. These fees are calculated daily and paid monthly.
3. Securities Transactions
For the three months ended January 31, 1996, cost of purchases and proceeds
from sales of investment securities, excluding short-term investments,
aggregated $5,650,430 and $6,775,818, respectively.
At January 31, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost amounted
to $12,436,116, and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value amounted to
$3,778,734 or a net unrealized appreciation of $8,657,382.
16
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Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited) (continued)
================================================================================
4. Securities Valued by the Fund's Board of Directors
Certain of the Fund's investments are valued at the direction of the Fund's
Board of Directors; these securities are currently in default, and have been
valued in good faith, taking into consideration the appropriate economic,
financial and other pertinent available information pertaining to the defaulted
securities. The table below shows all securities valued by the Fund's Board of
Directors:
<TABLE>
<CAPTION>
Value as a
Acquisition Par Percentage
Security Date Amount Value of Net Assets Cost
-------- ----------- ------- ------- ------------- ----
<S> <C> <C> <C> <C> <C>
Angelina County, TX Jail Facilities
Financing Corporation,
9.750% due 8/1/09 10/11/89 $ 600,000 $ 6,000 0.003% $ 158,755
Babylon, NY IDA, 8.875% due 3/1/11 10/14/91 1,680,000 672,000 0.356 1,663,106
Hennepin, IL IDA, 10.250% due 1/1/05 3/17/89 1,750,000 157,500 0.083 1,750,000
La Salle County, TX Jail Facilities
Financing Corporation,
9.750% due 8/1/09 10/10/89 840,000 8,400 0.004 222,257
Pecos County, TX Jail Facilities
Financing Corporation,
9.750% due 8/1/09 10/10/89 570,000 5,700 0.003 150,780
</TABLE>
5. Fund Shares
At January 31, 1996, 500,000,000 shares of common stock, with a par value of
$0.01 per share, were authorized.
Common stock transactions during the prior fiscal year were as follows:
Year Ended
10/31/95
-------------------
Shares Amount
-------- ---------
Shares issued on reinvestment 17,187 $154,164
======= =========
6. Capital Loss Carryforwards
At October 31, 1995, the Fund had for Federal tax purposes approximately
$2,936,585 of capital loss carryforwards available to offset future capital
gains. To the extent that these capital loss carryforwards are used to offset
capital gains, it is probable that the gains so offset will not be distributed.
The amount and expiration of the carryovers are indicated below:
10/31/02 10/31/03
- --------------------------------------------------------------------------------
Carryover Amount $2,666,650 $269,935
- --------------------------------------------------------------------------------
17
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Municipal High Income Fund Inc.
Financial Highlights
================================================================================
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
1996(1) 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............. $ 9.51 $ 8.98 $ 9.72 $ 9.49 $ 9.42 $ 9.28
-------- -------- -------- -------- -------- --------
Income (Loss) From Operations:
Net investment income ......... 0.16 0.64 0.65 0.67 0.70 0.74
Net realized and unrealized
gain (loss) ................ 0.10 0.54 (0.72) 0.23 0.06 0.15
-------- -------- -------- -------- -------- --------
Total Income (Loss) From Operations 0.26 1.18 (0.07) 0.90 0.76 0.89
-------- -------- -------- -------- -------- --------
Less Distributions From:
Net investment income ......... (0.16) (0.65) (0.65) (0.67) (0.69) (0.75)
Net realized gains ............ -- -- (0.02) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions ............... (0.16) (0.65) (0.67) (0.67) (0.69) (0.75)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period .... $ 9.61 $ 9.51 $ 8.98 $ 9.72 $ 9.49 $ 9.42
-------- -------- -------- -------- -------- --------
Total Return ...................... 2.86%++ 14.00% (11.79)% 17.07% 2.74% 17.88%
-------- -------- -------- -------- -------- --------
Net Assets, End of Period (000s) .. $188,891 $187,048 $176,379 $188,294 $179,104 $173,290
======== ======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses ...................... 0.84%+ 0.84% 0.84% 0.87% 0.87% 0.90%
Net investment income ......... 6.53+ 6.87 6.98 6.89 7.31 7.90
Portfolio Turnover Rate ........... 3% 18% 17% 13% 12% 22%
Market Value at End of Period ..... $ 8.750 $ 9.000 $ 8.250 $ 9.875 $ 9.125 $ 9.500
</TABLE>
- --------------
(1) For the three months ended January 31, 1996 (unaudited).
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
18
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Municipal High Income Fund Inc.
Financial Data Per Share of Common Stock
and Quarterly Results of Operations (unaudited)
================================================================================
Financial Data
Dividend
Record Pay NYSE Net Asset Dividend Reinvestment
Date Date Closing Price* Value Paid Price
------ ------- -------------- --------- -------- -------
5/23/94 5/31/94 $9.000 $9.18 $0.0540 $9.00
6/23/94 6/30/94 9.000 9.23 0.0540 8.98
7/22/94 7/31/94 9.125 9.20 0.0540 9.02
8/24/94 8/31/94 8.750 9.22 0.0540 8.87
9/23/94 9/30/94 8.500 9.13 0.0540 8.66
10/24/94 10/31/94 8.375 9.03 0.0540 8.17
11/22/94 11/30/94 8.125 8.71 0.0540 8.34
12/22/94 12/31/94 8.125 8.84 0.0540 8.29
1/24/95 1/31/95 8.625 8.99 0.0540 8.83
2/21/95 2/28/95 8.750 9.13 0.0540 8.85
3/24/95 3/31/95 8.875 9.25 0.0540 8.94
4/21/95 4/30/95 9.000 9.32 0.0540 8.94
5/25/95 5/31/95 8.875 9.44 0.0540 8.89
6/23/95 6/30/95 8.750 9.44 0.0540 8.97
7/25/95 7/28/95 8.875 9.39 0.0540 8.59
8/22/95 8/25/95 8.875 9.33 0.0540 8.93
9/26/95 9/29/95 8.875 9.43 0.0540 8.94
10/24/95 10/27/95 8.875 9.51 0.0540 8.79
11/20/95 11/24/95 8.125 9.49 0.0540 8.87
12/26/95 12/29/95 8.375 9.58 0.0510 8.60
1/19/96 1/26/96 8.125 9.59 0.0510 8.88
*As of Record Date.
Quarterly Results of Operations
<TABLE>
<CAPTION>
Net Realized Net Increase
Net and Unrealized (Decrease)
Investment Investment Gain (Loss) in Net Assets
Income Income on Investments From Operations
---------------- ---------------- ---------------- ------------------
Per Per Per Per
Quarter Ended Total Share Total Share Total Share Total Share
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 31, 1993.... $3,823,950 $0.20 $3,413,585 $0.18 $2,944,261 $0.16 $6,357,846 $0.34
April 30, 1993...... 3,416,422 0.18 3,042,358 0.16 241,324 0.01 3,283,682 0.17
July 31, 1993....... 3,503,367 0.18 3,094,861 0.16 (691,663) (0.04) 2,403,198 0.12
October 31, 1993.... 3,570,033 0.18 3,158,719 0.17 1,925,858 0.10 5,084,577 0.27
January 31, 1994.... 3,648,178 0.19 3,253,314 0.17 (48,811) -- 3,204,503 0.17
April 30, 1994...... 3,536,568 0.18 3,168,209 0.16 (9,555,061) (0.50) (6,386,852) (0.34)
July 31, 1994....... 3,603,790 0.18 3,191,200 0.16 612,747 0.04 3,803,947 0.20
October 31, 1994.... 3,519,883 0.18 3,164,312 0.16 (5,145,173) (0.26) (1,980,861) (0.10)
January 31, 1995.... 3,524,651 0.18 3,184,522 0.16 1,626,418 0.08 4,810,940 0.24
April 30, 1995...... 3,416,272 0.17 3,017,427 0.16 4,484,698 0.22 7,502,125 0.38
July 31, 1995....... 3,578,666 0.18 3,178,309 0.16 2,188,738 0.11 5,367,047 0.27
October 31, 1995.... 3,496,188 0.18 3,103,201 0.16 2,468,031 0.13 5,571,232 0.29
January 31, 1996.... 3,487,742 0.18 3,089,124 0.16 1,821,322 0.09 4,910,446 0.25
</TABLE>
19
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Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited)
================================================================================
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in his own name will have all
distributions reinvested automatically by the First Data Investor Services
Group, Inc. ("First Data") as agent under the Plan, unless the shareholder
elects to receive cash. Distributions with respect to shares registered in the
name of a broker-dealer or other nominee (that is, in "street name") will be
reinvested by the broker or nominee in additional Common Stock under the Plan,
but only if the service is provided by the broker or nominee, and the broker or
nominee makes an election on behalf of the shareholder to participate in the
Plan. Distributions with respect to Common Stock registered in the name of Smith
Barney will automatically be reinvested by Smith Barney in additional shares
under the Plan unless the shareholder elects to receive distributions in cash. A
shareholder who holds Common Stock registered in the name of a broker or other
nominee may not be able to transfer the Common Stock to another broker or
nominee and continue to participate in the Plan. Investors who own Common Stock
registered in street name should consult their broker or nominee for details
regarding reinvestment.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Fund's Common Stock is equal to or exceeds 98% of net
asset value per share at the time shares are valued for determining the number
of shares equivalent to the cash dividend or capital gains distribution,
participants will be issued shares of Common Stock valued at the greater of (i)
98% of net asset value per share or (ii) 95% of the then current market price.
If 98% of the net asset value per share of Common Stock at the time of valuation
exceeds the market price of the Common Stock, First Data will buy shares of the
Fund's Common Stock on the open market, on the New York Stock Exchange, Inc. or
elsewhere, beginning on the record date of the dividend or distribution, until
it has expended for such purchases all of the cash that would otherwise be
payable to the participants. The number of purchased shares that will then be
credited to the participants' accounts will be based on the average per share
purchase price of the shares so purchased, including brokerage commissions. If
First Data commences purchases in the open market and the market price of the
shares subsequently exceeds 98% of their net asset value before the completion
of the purchases, First Data will attempt to terminate purchases in the open
market and cause the Fund to issue the remaining dividend or distribution in
shares at 98% of the net asset value per share. In this case, the number of
shares of Common Stock received by the participant will be based on the weighted
average of prices paid for shares purchased in the open market and the price at
which the Fund issues the remaining shares.
Plan participants are not subject to any charge for reinvesting dividends
or capital gains distributions. Each participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to First
Data's open market purchases of shares of Common Stock in connection with the
reinvestment of dividends or capital gains distributions. For the three months
ended January 31, 1996, no such brokerage commissions were incurred.
20
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Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited)
(continued)
================================================================================
The automatic reinvestment of dividends and capital gains distributions
will not relieve Plan participants of any income tax that may be payable on the
dividends or capital gains distributions. A participant in the Plan will be
treated for federal income tax purposes as having received, on the dividend
payment date, a dividend or distribution in an amount equal to the cash that the
participant could have received instead of shares of Common Stock.
A shareholder may terminate participation in the Plan at any time by
notifying First Data in writing. A termination will be effective immediately if
notice is received by First Data not less than 10 days before any dividend or
distribution record date. Otherwise, the termination will be effective, and only
with respect to any subsequent dividends or distributions, on the first trading
day after the dividend or distribution has been credited to the participant's
account in additional shares of Common Stock of the Fund. Upon termination
according to a participant's instructions, First Data will either (a) issue
certificates for the whole shares credited to a Plan account and a check
representing any fractional shares or (b) sell the shares in the market. There
will be a $5.00 fee assessed for liquidation service, plus brokerage
commissions, and First Data is authorized to sell a sufficient number of a
participant's shares to cover such amounts.
The Plan is described in more detail on pages 21-23 of the Fund's
Prospectus dated August 23, 1993. Information concerning the Plan may be
obtained from First Data at (800) 331-1710.
21
<PAGE>
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Municipal High Income Fund Inc.
Additional Information (unaudited)
================================================================================
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase at
market prices shares of its common stock in the open market. As of January 31,
1996, the Fund has not repurchased any shares.
22
<PAGE>
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Municipal High Income Fund Inc.
Management of the Fund
================================================================================
Directors
Charles F. Barber
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Robert A. Frankel
William R. Hutchinson
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Lawrence T. McDermott
Vice President and
Investment Officer
Karen Mahoney-Malcolmson
Investment Officer
Michael J. Maher
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser and Administrator
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
Transfer Agent
First Data Investor Services Group, Inc.
P.O. Box 1376
Boston, Massachusetts 02104
Custodian
PNC Bank, N.A.
17th and Chestnut Street
Philadelphia, Pennsylvania 19103
<PAGE>
[Star]
This report is sent to shareholders of Municipal High Income Fund Inc. for their
information. It is not a Prospectus, circular or representation intended for use
in the purchase or sale of shares of the Fund or of any securities mentioned in
this report.
Municipal High Income Fund Inc.
388 Greenwich Street
New York, NY10013
(212) 723-9218
FD01095 3/96
