Municipal
High Income
Fund Inc.
Quarterly
Report
[Logo]
July
31, 1996
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Municipal High Income Fund Inc.
Dear Shareholder:
We are pleased to provide you with the third quarter report for the
Municipal High Income Fund, Inc. for the period ended July 31, 1996. The Fund
paid dividends totaling $0.459 per share and had a total return of 4.25% for the
nine months ended July 31, 1996. This compares with the Fund's Lipper peer group
average total return for the same period of 3.92%. The table below shows the
annualized distribution rates based on the Fund's July 31, 1996 net asset value
(NAV) per share and its New York Stock Exchange (NYSE) closing price.
Price Annualized
Per Share Distribution Rate
--------- -----------------
$9.41 (NAV) 6.50%
$8.75 (NYSE) 6.99%
Municipal Bond Market Update
In response to low inflation and very sluggish economic growth, interest
rates declined steadily over the latter part of 1995. However, during the first
half of 1996, rates rose sharply, as U.S. economic reports pointed to much
greater economic growth than was previously expected by many investors. In our
view, there have been several factors effecting volatility in the municipal bond
market, such as a strengthening U.S. economy, which usually increases the risk
of inflation, as well as the possibility of an interest rate hike by the Federal
Reserve Board (the Fed). The continuing rise in the U.S. stock market, as well
as the ongoing debate involving tax reform, have also put pressure on the
municipal bond market, with yields recently reaching their highest levels in
over a year.
Although this has been a challenging period for the fixed income markets,
municipal bonds have outperformed U.S. Treasuries. This can be attributed to the
simple economic theory of supply and demand. In recent months, investors have
been seeking to reinvest proceeds of municipal bonds that have either matured or
been called, back into the municipal bond market. However, at the same time, the
supply of new issues has been far below recent averages, and is very close to
lows for the year. This increased demand combined with light supply, has in some
states, created shortages. Therefore, following supply and demand theory (when
supply is low and demand is high, prices are high), municipal bond prices have
stayed relatively higher, and yields have conversely remained lower, relative to
those of U.S. Treasury securities.
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Toward the end of July, Fed Chairman Alan Greenspan gave his semi-annual
Humphry-Hawkins testimony to Congress. In his testimony, Greenspan cited a
number of reasons why he expects the U.S. economy to slow down, which has
subdued the bond market's concerns over higher interest rates. In addition, the
most recent U.S. employment report has suggested that the U.S. economy is not
expanding as quickly as many bond market investors had earlier expected. As a
result, the municipal bond market rallied, and yields have come down from their
June and July highs.
Fund's Investment Strategy
The Municipal High Income Fund's investment objective is to provide high
levels of tax-exempt current income. In line with this objective, the Fund
continues to focus on higher coupon bonds in order to maintain an attractive
level of dividend income. Although the Fund seeks to invest in those securities
that offer higher coupons, recent purchases have emphasized higher-rated issues.
In our view, higher quality issues represent good value given the fact that
spreads have narrowed considerably between higher and lower-grade issues. The
Fund also seeks to maximize dividend returns through its holdings in premium
bonds, which typically offer higher yields than bonds that trade at or below
par. Because premium bonds tend to be less volatile than par or discounted
bonds, they also offer additional protection against market risk.
During the past three months, and since our last shareholder report, the
Municipal High Income Fund has remained highly diversified among a number of
sectors that we believe offer high yield potential, as well as price stability
during periods of increased volatility. As of July 31, 1996 the majority of the
Fund's assets were allocated among the following sectors: Industrial development
revenue bonds (25%), pollution control revenue bonds (16%), hospital bonds
(14%), and transportation bonds (10%). The Fund's average life as of July 31,
1996 was just over 9 years and the average weighted maturity was 21.5 years.
Municipal Bond Market Outlook
Although rates have come down slightly, over the near term, we believe the
municipal bond market will settle into a narrow trading range, with less
volatility until after the Presidential elections in November. In our view, the
bond market will continue to face pressure resulting from ongoing investor
concerns over possible monetary tightening by the Fed. Although we believe that
an interest rate increase at the next Open Market Committee meeting is unlikely,
the Fed remains committed to fighting inflation, and a more restrictive monetary
policy going forward cannot be completely discounted.
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Another issue that has been hanging over the municipal bond market is tax
reform. In fact, the Republican Presidential nominee, Bob Dole recently
announced a tax reform plan which calls for a 15% reduction in the federal
income tax rate and a reduction in the capital gains tax rate from 28% to 14%.
Dole's plan, however, received little reaction from Wall Street. Regardless of
the final outcome of the tax reform debate, the municipal bond market remains
quite attractive. Moreover, the Municipal High Income Fund is well positioned to
meet the challenges presented by a more volatile market.
Thank you for investing in the Municipal High Income Fund. We look forward
to continuing to help you achieve your financial goals.
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
August 16, 1996
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Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
[Logo] July 31, 1996
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FACE
AMOUNT RATING SECURITY VALUE
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Alabama -- 3.3%
$ 490,000 AA- Alabama HFA, Single-Family Mortgage Revenue,
10.500% due 12/1/02........................... $ 518,175
4,000,000 BBB- Butler, AL IDR, Waste Disposal, 8.000%
due 9/1/28 (a) ............................... 4,405,000
1,000,000 BBB- Mobile, AL IDR, 6.950% due 1/1/20............... 1,032,500
-----------
5,955,675
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Arizona -- 1.9%
Gila County, AZ IDA, PCR, (ASARCO), Series 1987:
2,700,000 BBB 8.900% due 7/1/06............................. 2,865,834
600,000 BBB 8.900% due 7/1/06............................. 637,518
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3,503,352
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California -- 2.3%
2,000,000 NR Los Angeles County, CA Regional Airport Authority,
Continental Airlines, Inc., 9.000%
due 8/1/17 (a) ............................... 2,132,500
2,000,000 BBB- Sacramento, CA Cogeneration Authority, Electric
Revenue, 6.500% due 7/1/14.................... 2,042,500
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4,175,000
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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 .......................... 2,010,000
Denver, CO Airport, Series A:
1,650,000 BBB 8.500% due 11/15/23 (a)....................... 1,887,188
1,600,000 BBB 8.000% due 11/15/25 (a)....................... 1,790,000
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5,687,188
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Connecticut -- 0.8%
1,500,000 NR Connecticut State Development Authority, Health
Care Revenue, Series B, 8.000% due 7/1/17..... 1,541,250
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Florida -- 5.2%
980,000 NR Homestead, FL IDR, (Project A), 7.950%
due 11/1/18 .................................. 984,900
2,065,000 NR Jacksonville, FL Health Facilities Authority
Revenue, 9.125% due 10/15/19.................. 2,129,531
2,000,000 BBB- Martin County, FL IDR, (Indiantown Cogeneration
Project A), 7.875% due 12/15/25 (a)........... 2,240,000
1,500,000 B+ Ocean Highway & Port Authority, FL PCR, Solid
Waste, 9.375% due 11/1/04..................... 1,535,625
See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
[Logo] July 31, 1996
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FACE
AMOUNT RATING SECURITY VALUE
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Florida -- 5.2% (continued)
$ 985,000 NR 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
Call @ 102), 8.875% due 12/1/18 (b)........... $ 1,106,894
1,000,000 NR Sanford Airport Authority, FL IDR, (Central
Florida Terminal Inc. Project A), 7.750%
due 5/1/21 (a) ............................... 935,000
650,000 NR Tampa, FL (Aquarium Inc. Revenue Project),
7.750% due 5/1/27........................... 641,062
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9,573,012
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Georgia -- 0.6%
1,000,000 NR Walton County, GA IDA, (Walton Project), 8.500%
due 9/1/07 ................................... 1,048,750
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Illinois -- 8.1%
2,900,000 BB Chicago, IL O'Hare International Airport, Special
Facilities Revenue Bonds, United Airlines,
Series B, 8.950% due 5/1/18 (a)............... 3,258,875
Chicago, IL Skyway Toll Bridge:
2,000,000 BBB- 6.500% due 1/1/10............................. 2,027,500
1,700,000 BBB- 6.750% due 1/1/17............................. 1,729,750
2,500,000 BB- East Chicago, IL IDA Revenue, Inland Steel
Company, Project 10, 6.800% due 6/1/13........ 2,496,875
1,835,000 NR Hanover Park, IL First Mortgage, (Windsor Manor
Project), 9.250% due 12/1/07.................. 1,903,812
1,750,000 NR Hennepin, IL IDA Revenue, (Metchem Corp.
Project), 10.250% due 1/1/05 (a)(c)........... 30,000
1,500,000 A+ Illinois Housing Development Authority, Series 5,
6.750% due 9/1/23............................. 1,571,250
755,000 NR Loves Park, IL First Mortgage Revenue, (Hoosier
Care Project), Series A, 9.750% due 8/1/19.... 801,244
980,000 NR Sterling, IL First Mortgage Revenue, (Hoosier
Care Project), Series A, 9.750% due 8/1/19 ... 1,040,025
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14,859,331
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Indiana -- 2.6%
4,750,000 BB Indianapolis, IN Airport Authority, 6.500%
due 11/15/31 (a) ............................. 4,672,813
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Kentucky -- 2.2%
1,320,000 A1* Jefferson County, KY Health Facilities Authority,
Dates Beverly Enterprise, 10.125% due 5/1/08.. 1,443,750
1,500,000 BB+ Kenton County, KY Airport Board Delta Airlines,
7.500% due 2/1/20 (a)......................... 1,599,375
1,000,000 A Pendleton County, KY Multi-Lease Revenue,
Series A, 6.500% due 3/1/19................... 1,030,000
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4,073,125
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See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
[Logo] July 31, 1996
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FACE
AMOUNT RATING SECURITY VALUE
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Louisiana -- 5.7%
$ 1,200,000 Baa3* Lake Charles, LA (Harbor & Terminal Project),
7.750% due 8/15/22............................ $ 1,338,000
Port New Orleans, LA IDA Revenue,
Avondale Industries, Inc. Project:
2,000,000 NR 8.250% due 6/1/04........................... 2,212,500
3,000,000 NR 8.500% due 6/1/14........................... 3,292,500
1,000,000 BB- Continental Grain Company Project, 7.500%
due 7/1/13 ................................. 1,032,500
2,400,000 BB+ West Feliciana Parish, LA PCR, 8.000%
due 12/1/24 .................................. 2,553,000
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10,428,500
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Maine -- 0.6%
Maine State Housing Authority Mortgage Purchases:
500,000 AA- Series C-2, 7.000% due 11/15/32 (a)........... 521,250
585,000 AA- Series D-1, 8.300% due 11/15/28 (a)........... 598,163
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1,119,413
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Massachusetts -- 5.9%
1,880,000 NR Commonwealth of Massachusetts Health &
Educational Facilities Authority Revenue,
North Adams State College, 9.625% due 12/1/18. 2,178,450
Commonwealth of Massachusetts Industrial Finance
Agency (S.E. Mass Project):
1,700,000 NR Series A, 9.000% due 7/1/15................. 1,916,750
5,940,000 NR Series B, 9.250% due 7/1/15 (a)............. 6,719,625
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10,814,825
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Michigan -- 1.5%
1,000,000 BBB Detroit MI GO, Series A, 6.800% due 4/1/15...... 1,058,750
1,500,000 BBB+ Western Townships, MI Utility Revenue, Sewage
System, 8.300% due 1/1/19..................... 1,605,000
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2,663,750
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Minnesota -- 1.1%
1,985,000 AA+ Minnesota HFA, Single-Family, Series H,
6.700% due 1/1/18 ............................ 2,091,694
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Mississippi -- 2.8%
Claiborne County, MS PCR, Series C:
3,300,000 NR 9.875% due 12/1/14............................ 3,687,750
1,500,000 BBB- 6.200% due 2/1/26............................. 1,406,250
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5,094,000
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See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
[Logo] July 31, 1996
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FACE
AMOUNT RATING SECURITY VALUE
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New Hampshire -- 2.1%
New Hampshire State IDA, United Illuminating Co.:
$ 1,000,000 BBB- Series A, 9.375% due 7/1/12 (a)............... $ 1,058,290
2,500,000 BBB- Series B, 10.750% due 10/1/12 (a)............. 2,721,875
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3,780,165
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New Jersey -- 3.2%
1,300,000 NR New Jersey Educational Facilities, Fairleigh
Dickinson University, Series C,
6.625% due 7/1/23............................. 1,222,000
New Jersey Health Care Facilities:
1,685,000 Ba1* Palisades Medical Center, Finance Authority
Revenue, 7.600% due 7/1/21................... 1,630,237
1,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27. 1,020,000
1,500,000 BBB- Zurbrugg Memorial Hospital, Series C,
8.500% due 7/1/12 .......................... 1,565,880
310,000 AAA New Jersey Housing and Mortgage Finance Agency,
Home Buyer Revenue, Series E, MBIA-Insured,
7.650% due 10/1/16.............................. 326,663
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5,764,780
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New Mexico -- 0.9%
1,545,000 AA New Mexico Mortgage Finance Authority,
Single-Family Mortgage Program, Series B,
8.300% due 3/1/20 (a) ........................ 1,608,731
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New York -- 7.4%
New York City, NY COP:
4,715,000 BBB+ Series F, 6.625% due 2/15/25.................. 4,803,406
1,000,000 BBB+ Series H, 7.000% due 2/1/21................... 1,036,250
3,000,000 BBB+ New York City, NY GO Unlimited,
Series G, 6.000% due 2/1/11................... 2,925,000
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)................................... 1,928,063
2,750,000 NR Port Authority of NY & NJ, Special Obligation
Revenue, 6.750% due 10/1/19 (a)............... 2,753,437
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13,446,156
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North Carolina -- 3.9%
1,750,000 A Martin County, NC Industrial Facilities PCR,
6.800% due 5/1/24 (a)......................... 1,839,687
2,300,000 BBB+ North Carolina Eastern Municipal Power Agency,
Power Systems Revenue, Series B, 7.000%
due 1/1/08 ................................... 2,492,625
2,750,000 A North Carolina Municipal Power Agency No. 1,
Catawaba Electric Revenue, 6.250% due 1/1/17.. 2,750,000
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7,082,312
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See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
[Logo] July 31, 1996
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FACE
AMOUNT RATING SECURITY VALUE
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Ohio -- 3.4%
$ 1,000,000 NR Cleveland, OH Airport Special Revenue,
Continental Airlines Inc., 9.000% due
12/1/19 (a) .................................. $ 1,040,000
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................... 1,657,500
1,250,000 NR Ohio State Solid Waste Revenue, 9.000%
due 6/1/21 ................................... 1,284,375
1,000,000 BB+ Ohio Water Development Authority, PCR, Series A,
8.100% due 10/1/23 (a)........................ 1,067,500
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6,125,625
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Pennsylvania -- 13.6%
2,200,000 B- Allegheny County, PA IDA, Special Facilities
Revenue, Series B, (U.S. Air Project),
8.500% due 3/1/21 (a)......................... 2,332,000
Beaver County, PA IDA, PCR:
2,500,000 BB 7.625% due 5/1/25............................. 2,521,875
2,000,000 BB 7.625% due 5/1/20............................. 2,017,500
1,500,000 NR Delaware County, PA IDA, First Mortgage, White
Horse, 9.700% due 7/1/09...................... 1,753,125
3,000,000 BBB+ Lebanon County, PA Samaritan House, Series B,
(Pre-Refunded -- Escrowed with U.S. Government
Securities to 11/1/99 Call @ 102),
8.250% due 11/1/18 (b)........................ 3,382,500
2,500,000 BBB- Luzerne County, PA IDA, 7.125% due 12/1/22 (a).. 2,584,375
2,000,000 Ba1* Montgomery County, PA Higher Education & Health
Authority, 8.375% due 11/1/11................. 2,262,500
625,000 NR Northumberland County, PA IDA Revenue, 6.875%
due 2/1/03 ................................... 622,656
1,500,000 AA+ Pennsylvania HFA, Series C, 6.900% due
4/1/25 (a) ................................... 1,578,750
1,000,000 NR Philadelphia, PA IDR, Host Marriott,
7.750% due 12/1/17 (a)........................ 1,048,750
1,970,000 BBB- Philadelphia, PA Gas Revenue, Series B,
6.400% due 11/15/16........................... 1,970,000
1,500,000 BB+ Scranton-Lackawanna, PA Health & Welfare
Authority, Mercy Health Systems, Series B,
8.500% due 7/1/20 ............................ 1,591,875
1,250,000 BBB+ Sharon, PA Regional Health Systems, (Project B),
6.875% due 12/1/22............................ 1,259,375
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24,925,281
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South Carolina -- 1.0%
1,000,000 NR Florence County IDR, 7.375% due 2/1/07.......... 1,023,750
875,000 NR McCormick County, SC COP, 9.750% due 7/1/09..... 893,594
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1,917,344
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See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
[Logo] July 31, 1996
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FACE
AMOUNT RATING SECURITY VALUE
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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............................. $ 260,975
1,865,000 NR 7.500% due 7/1/13............................. 1,876,656
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2,137,631
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Tennessee -- 0.4%
750,000 AAA Knox County, TN Health Education & Housing,
FSA-Insured, 7.125% due 1/1/30................ 812,813
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Texas -- 12.0%
2,750,000 BBB Alliance, TX Airport Authority Inc.,
(Federal Express Corporation Project),
6.375% due 4/1/21 (a)......................... 2,698,438
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
935,000 NR Bell County, TX Health Facilities Development
Corporation, (Living Tech, Inc. Project),
Series A, 10.500% due 6/15/18 ................ 794,750
Brazos River, TX PCR, (Collateral-Texas
Utilities Electric Co., Project A):
1,000,000 BBB 9.875% due 10/1/17 (a)...................... 1,067,500
2,000,000 BBB+ 8.250% due 1/1/19 (a)....................... 2,150,000
1,215,000 A* El Paso, TX Housing Finance Corporation,
Single-Family Mortgage Revenue, 8.750%
due 10/1/11................................... 1,316,756
2,000,000 B El Paso, TX International Airport Revenue Bonds,
(Marriott Corporation Project), 7.750%
due 3/1/12.................................... 2,045,000
1,190,000 NR Harris County, TX Industrial Development
Corporation, IDR Continental Airlines
Inc., 7.950% due 7/1/19....................... 1,152,813
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........................... 1,003,750
1,400,000 A Series A, 7.875% due 2/1/19................. 1,482,250
1,400,000 AA North Central, TX Health Facilities Development
Project, Hospital-Baylor Health Care Systems,
(Project B), Variable Rate, 7.900% due 5/15/08 1,498,000
Northgate Crossing, TX Municipals Utilities:
1,000,000 NR District 1, GO, 8.875% due 12/1/13............ 948,750
1,000,000 NR District 2, Special Tax, 8.875% due 12/1/13... 948,750
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
See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
[Logo] July 31, 1996
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FACE
AMOUNT RATING SECURITY VALUE
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Texas -- 12.0% (continued)
Port Corpus Christi, TX Industrial Development
Corporation, Valero Refinancing and Marketing
Company:
$ 2,500,000 BBB- Series A, 10.250% due 6/1/17................ $ 2,673,125
2,000,000 BBB- Series B, 10.625% due 6/1/08 (a)............ 2,145,480
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21,945,462
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Utah -- 1.1%
1,750,000 NR Hurricane, UT (Health Services Project), 10.500%
due 7/1/20 ................................... 1,922,812
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Vermont -- 1.2%
2,060,000 A1* Vermont Housing Finance Agency, Home Mortgage,
Series B, 8.100% due 6/1/22 (a)............... 2,150,125
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West Virginia -- 0.8%
2,500,000 NR Marion County, WV County Commission, Solid Waste
Disposal Facility, 7.750% due 12/1/11 (a)..... 1,500,000
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Puerto Rico -- 0.1%
200,000 A Commonwealth of PR, GO Bonds, 8.000% due 7/1/08. 215,250
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TOTAL INVESTMENTS -- 100%
(Cost -- $177,526,136**) $182,636,165
============
(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).
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 12 and 13 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Summary of Municipal Bonds by Combined Ratings
[Logo] July 31, 1996
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Standard & Percent of
Moody's and/or Poor's Total Investments
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aaa AAA 1.2%
Aa AA 4.6
A A 8.1
Baa BBB 40.3
Ba BB 9.9
B B 3.2
NR NR 32.7
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100.0%
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Municipal High Income Fund Inc.
Bond Ratings and Security Descriptions
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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.
12
<PAGE>
Municipal High Income Fund Inc.
Bond Ratings and Security Descriptions (continued)
[Logo]
================================================================================
SHORT-TERM SECURITIES RATINGS
VMIG 1 -- Moody's highest rating for issues having demand feature --
variable-rate demand obligation (VRDO).
SECURITY DESCRIPTIONS
ABAG -- 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
13
<PAGE>
Municipal High Income Fund Inc.
Statement of Assets and Liabilities (unaudited)
[Logo] July 31, 1996
================================================================================
ASSETS:
Investments, at value (Cost -- $177,526,136) ............... $ 182,636,165
Receivable for securities sold ............................. 65,375
Interest receivable ........................................ 3,065,550
-------------
Total Assets ............................................... 185,767,090
-------------
LIABILITIES:
Dividends payable .......................................... 268,254
Payable to bank ............................................ 134,659
Investment advisory fees payable ........................... 63,765
Administration fees payable ................................ 31,621
Accrued expenses ........................................... 207,054
Other liabilities .......................................... 14,277
-------------
Total Liabilities .......................................... 719,630
-------------
Total Net Assets .............................................. $ 185,047,460
=============
NET ASSETS:
Par value of capital shares ................................ $ 196,599
Capital paid in excess of par value ........................ 182,673,658
Undistributed net investment income ........................ 211,769
Accumulated net realized loss on security transactions ..... (3,144,595)
Net unrealized appreciation of investments ................. 5,110,029
-------------
Total Net Assets
(Equivalent to $9.41 a share on 19,659,882 shares of
$0.01 par value outstanding; 500,000,000 shares
authorized) .............................................. $ 185,047,460
=============
See Notes to Financial Statements.
14
<PAGE>
Municipal High Income Fund Inc.
Statement of Operations (unaudited)
[Logo] For the Nine Months Ended July 31, 1996
================================================================================
INVESTMENT INCOME:
Interest .................................................. $ 10,349,949
------------
EXPENSES:
Investment advisory fees (Note 2) ......................... 559,414
Administration fees (Note 2) .............................. 279,707
Shareholder communications ................................ 95,826
Audit and legal ........................................... 59,873
Directors' fees ........................................... 26,202
Shareholder and system servicing fees ..................... 18,865
Pricing service fees ...................................... 10,281
Custody ................................................... 6,992
Other ..................................................... 25,297
------------
Total Expenses ............................................ 1,082,457
------------
Net Investment Income ........................................ 9,267,492
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales ..................................... 25,891,225
Cost of securities sold ................................. 26,099,235
------------
Net Realized Loss ......................................... (208,010)
------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period ..................................... 7,086,829
End of period ........................................... 5,110,029
------------
Decrease in Net Unrealized Appreciation ................... (1,976,800)
------------
Net Loss on Investments ...................................... (2,184,810)
------------
Increase in Net Assets From Operations ....................... $ 7,082,682
============
See Notes to Financial Statements.
15
<PAGE>
Municipal High Income Fund Inc.
Statements of Changes in Net Assets
For the Nine Months Ended July 31, 1996 (unaudited)
[Logo] and the Year Ended October 31, 1995
================================================================================
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
OPERATIONS:
Net investment income ............................ $ 9,267,492 $ 12,483,459
Net realized loss ................................ (208,010) (269,935)
Increase (decrease) in net unrealized appreciation (1,976,800) 11,037,820
------------- -------------
Increase in Net Assets From Operations ........... 7,082,682 23,251,344
------------- -------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income ............................ (9,082,866) (12,736,819)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders .................. (9,082,866) (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 (Decrease) in Net Assets ................... (2,000,184) 10,668,689
NET ASSETS:
Beginning of period .............................. 187,047,644 176,378,955
------------- -------------
End of period* ................................... $ 185,047,460 $ 187,047,644
============= =============
*Includes undistributed net investment income of: ... $ 211,769 $ 27,143
============= =============
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited)
[Logo]
================================================================================
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) security transactions are accounted for on trade date; (b) securities are
valued at the mean between the bid and ask prices provided by an independent
pricing service; (c) securities 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)
dividends and distribution to shareholders are recorded on the ex-dividend date;
(g) 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 (h) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
2. Investment Advisory Agreement, Administration Agreement
and Other Transactions
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 nine months ended July 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments, excluding short-term securities,
aggregated $27,238,740 and $25,891,225, respectively.
At July 31, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost amounted
to approximately $9,139,605, and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value amounted
to approximately $4,029,576 or a net unrealized appreciation of $5,110,029.
17
<PAGE>
Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited) (continued)
[Logo]
================================================================================
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, due 8/1/09 10/11/89 $ 600,000 $ 6,000 0.003% $ 158,755
Hennepin, IL IDA, 10.250%
due 1/1/05 3/17/89 1,750,000 30,000 0.016 1,750,000
La Salle County, TX Jail
Facilities Financing
Corporation, 9.750%
due 8/1/09 10/10/89 840,000 8,400 0.005 222,257
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. Capital Shares
At July 31, 1996, the Fund had 500,000,000 shares of capital stock
authorized with a par value of $0.01 per share.
Capital 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 income tax purposes
$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 Amounts $2,666,650 $269,935
- --------------------------------------------------------------------------------
18
<PAGE>
Municipal High Income Fund Inc.
Financial Highlights
[Logo]
================================================================================
<TABLE>
<CAPTION>
For a share of capital stock outstanding throughout each period:
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 ................ 0.47 0.64 0.65 0.67 0.70 0.74
Net realized and unrealized
gain (loss) ........................ (0.11) 0.54 (0.72) 0.23 0.06 0.15
------------ ------------ ------------ ------------ ------------ ------------
Total Income (Loss) From Operations .... 0.36 1.18 (0.07) 0.90 0.76 0.89
------------ ------------ ------------ ------------ ------------ ------------
Less Distributions From:
Net investment income ................ (0.46) (0.65) (0.65) (0.67) (0.69) (0.75)
Net realized gains ................... -- -- (0.02) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions .................... (0.46) (0.65) (0.67) (0.67) (0.69) (0.75)
------------ ------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Period ......... $ 9.41 $ 9.51 $ 8.98 $ 9.72 $ 9.49 $ 9.42
------------ ------------ ------------ ------------ ------------ ------------
Total Return ........................... 4.25%++ 14.00% (11.79)% 17.07% 2.74% 17.88%
------------ ------------ ------------ ------------ ------------ ------------
Net Assets, End of Period (000s) ....... $ 185,047 $ 187,048 $ 176,379 $ 188,294 $ 179,104 $ 173,290
============ ============ ============ ============ ============ ============
Ratios to Average Net Assets:
Expenses ............................. 0.78%+ 0.84% 0.84% 0.87% 0.87% 0.90%
Net investment income ................ 6.65+ 6.87 6.98 6.89 7.31 7.90
Portfolio Turnover Rate ................ 14% 18% 17% 13% 12% 22%
Market Value, End of Period ............ $ 8.750 $ 9.000 $ 8.250 $ 9.875 $ 9.125 $ 9.500
</TABLE>
- --------------
(1) For the nine months ended July 31, 1996 (unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
19
<PAGE>
Municipal High Income Fund Inc.
Financial Data Per Share of Common Stock (unaudited)
[Logo]
================================================================================
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 8.750 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 8.875 9.59 0.0510 8.88
2/20/96 2/23/96 8.750 9.57 0.0510 8.86
3/26/96 3/29/96 8.875 9.43 0.0510 8.86
4/23/96 4/26/96 8.750 9.38 0.0510 8.90
5/31/96 5/31/96 8.875 9.40 0.0510 8.85
6/26/96 6/29/96 8.500 9.33 0.0510 8.79
7/23/96 7/26/96 8.625 9.38 0.0510 8.82
*As of Record Date.
20
<PAGE>
Municipal High Income Fund Inc.
Quarterly Results of Operations (unaudited)
[Logo]
================================================================================
Net Realized Net Increase
Net and Unrealized (Decrease)
Investment Investment Gain (Loss) in Net Assets
Income Income on Investments From Operations
--------------- -------------- --------------- ---------------
Quarter Per Per Per Per
Ended Total Share Total Share Total Share Total Share
- -------- ------ ------ ------ ------ ------ ------ ------ ------
1/31/93 $3,823,950 $0.20 $3,413,585 $0.18 $2,944,261 $0.16 $6,357,846 $0.34
4/30/93 3,416,422 0.18 3,042,358 0.16 241,324 0.01 3,283,682 0.17
7/31/93 3,503,367 0.18 3,094,861 0.16 (691,663 (0.04) 2,403,198 0.12
10/31/93 3,570,033 0.18 3,158,719 0.17 1,925,858 0.10 5,084,577 0.27
1/31/94 3,648,178 0.19 3,253,314 0.17 (48,811) -- 3,204,503 0.17
4/30/94 3,536,568 0.18 3,168,209 0.16 (9,555,061 (0.50)(6,386,852)(0.34)
7/31/94 3,603,790 0.18 3,191,200 0.16 612,747 0.04 3,803,947 0.20
10/31/94 3,519,883 0.18 3,164,312 0.16 (5,145,173)(0.26)(1,980,861)(0.10)
1/31/95 3,524,651 0.18 3,184,522 0.16 1,626,418 0.08 4,810,940 0.24
4/30/95 3,416,272 0.17 3,017,427 0.16 4,484,698 0.22 7,502,125 0.38
7/31/95 3,578,666 0.18 3,178,309 0.16 2,188,738 0.11 5,367,047 0.27
10/31/95 3,496,188 0.18 3,103,201 0.16 2,468,031 0.13 5,571,232 0.29
1/31/96 3,487,742 0.18 3,089,124 0.16 1,821,322 0.09 4,910,446 0.25
4/30/96 3,405,211 0.17 3,035,493 0.15 (4,388,492)(0.22)(1,352,999)(0.06)
7/31/96 3,456,996 0.18 3,142,875 0.16 382,360 0.02 3,525,235 0.17
21
<PAGE>
Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited)
[Logo]
================================================================================
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.
22
<PAGE>
Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited) (continued)
[Logo]
================================================================================
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.
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.
----------
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 April 30,
1996, the Fund has not repurchased any shares.
23
<PAGE>
Municipal High Income Fund Inc.
Management of the Fund
[Logo]
================================================================================
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
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
24
<PAGE>
[Logo]
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
FD01013 9/96
