[STAR] [STAR]
Municipal
High Income
Fund Inc.
Semi-Annual
Report
[STAR]
April
30, 1997
<PAGE>
<PAGE>
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Municipal High Income Fund Inc.
Dear Shareholder:
We are pleased to provide the semi-annual report for the Municipal High
Income Fund Inc. for the period ended April 30, 1997. Over the six-month period
covered by this report, the Fund paid dividends totaling $0.311 per share and
posted a total return of 3.17% on net asset value (NAV). This compares favorably
with its Lipper Analytical Services, Inc. peer group average of 2.95% for the
same period. (Lipper Analytical Services, Inc. is an independent fund tracking
organization.) In addition, the Fund generated a total return of 6.25% based on
its market value. The table below shows the annualized distribution rates based
on the Fund's April 30, 1997 NAV and its New York Stock Exchange (NYSE) closing
price.
Price Annualized
Per Share Distribution Rate
--------- -----------------
$9.51 (NAV) 6.56%
$9.25 (NYSE) 6.75%
Market and Economic Overview
During the past six months, the U.S. economy has continued to grow
steadily. Although the U.S. unemployment rate is near a thirty-year low and
consumer confidence is the highest it has been in over twenty years, there has
not been a substantial increase in inflationary pressures. Nevertheless, a
steady stream of strong economic reports prompted the Federal Reserve Board
("Fed") to raise the federal funds rate by 25 basis points, or 0.25%, in late
March of this year. (The federal funds rate is the interest rate banks charge
each other for overnight loans and a closely watched indicator of the direction
of interest rates.) The Fed has indicated that it prefers to head off any
possible increase in inflation with a preemptive action rather than wait for any
inflationary pressures to build.
While the Fed action was widely anticipated, the likelihood of a rise in
interest rates added to the significant market volatility that occurred during
this reporting period. The potential tightening of Fed monetary policy raised
investor concerns over the U.S. equity market's ability to sustain the now
seven-year bull market. In our opinion, higher equity market volatility, along
with continued speculation on Fed monetary policy, led many investors to
gravitate toward the relative safety of the bond market.
Traditionally, the tax-exempt bond market has been heavily influenced by
institutional investors such as property and casualty insurance companies. These
investors have tended to buy high-grade, intermediate-maturity bonds. Recently,
the municipal bond market has become
1
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increasingly driven by individual investors who either purchase the bonds
directly or through managed products such as mutual funds. Individual investors
have tended to seek out the longer-maturity, higher-yielding bonds such as the
ones in which the Municipal High Income Fund normally invests. We believe this
shift in tax-exempt investor emphasis has particularly benefited the high-yield
municipal bond market.
Investment Strategy
The Municipal High Income Fund's investment objective is to provide high
levels of tax-exempt current income as consistent with prudent management. In
pursuit of this objective, the Fund continues to focus on higher coupon bonds in
order to maintain an attractive level of dividend income. In addition, we expect
to modestly extend the Fund's call protection during the remainder of 1997.
During the past six months, we have maintained a broad diversification
across a number of investment sectors that we believe offer high yield potential
as well as relative price stability. Going forward, we plan on favoring the
housing sector because we believe it provides attractive yield potential without
significant risk of prepayment given the current interest rate levels. Moreover,
we also favor the airline sector which we believe will benefit from the
continued growth in the U.S. economy. As of April 30, 1997, the majority of the
Fund's assets were allocated among the following sectors: industrial revenue
bonds (25.3%), pollution control bonds (15.6%) and hospital bonds (11.8%).
Municipal Bond Outlook
We expect the U.S. economy to continue along its present path of strong
growth with relatively low inflation. However, the Fed has indicated that they
are prepared to raise interest rates further should the U.S. economy begin to
grow too rapidly. In our view, with little movement on the federal budget before
Congress and no imminent action to adjust the consumer price index (CPI), we
expect that the benchmark 30 year U.S. Treasury bond should remain in its
current trading range of 6.80% to 7.00% in the coming months. Consequently, the
other sectors of the fixed income market should remain range-bound as well.
Moreover, new bond issuance has been down approximately 10% so far this year and
we expect more municipal debt to be retired later this summer. In our opinion,
our expectations for increased demand for tax-exempt bonds combined with light
supply, should help to support municipal bond prices.
2
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In closing, 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 Vice President and
Investment Officer
May 23, 1997
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<PAGE>
Municipal High Income Fund Inc.
[STAR] Schedule of Investments
April 30, 1997 (unaudited)
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
- --------------------------------------------------------------------------------
Alabama -- 4.3%
$ 405,000 Aaa* Alabama HFA, Single-Family Mortgage Revenue,
10.500% due 12/1/02........................... $ 426,769
1,000,000 BBB- Alabama State IDA, Solid Waste Disposal,
6.450% due 12/1/23(a)......................... 1,001,250
4,000,000 BBB- Butler, AL IDR, Waste Disposal,
8.000% due 9/1/28(a).......................... 4,480,000
1,000,000 BBB- Mobile, AL IDR, 6.950% due 1/1/20............... 1,045,000
1,000,000 NR West Jefferson, AL Amusement &
Public Park Authority Revenue,
(Visionland Project), 8.000% due 12/1/26 ..... 975,000
-----------
7,928,019
-----------
Arizona -- 1.9%
Gila County, AZ IDA, PCR, ASARCO Inc.,
Series 1987:
2,700,000 BBB 8.900% due 7/1/06............................. 2,797,794
600,000 BBB 8.900% due 7/1/06............................. 621,732
-----------
3,419,526
-----------
California -- 2.3%
2,000,000 NR Los Angeles County, CA Regional Airport Authority,
Continental Airlines, Inc.,
9.000% due 8/1/17(a).......................... 2,130,000
2,000,000 BBB- Sacramento, CA Cogeneration Authority,
Electric Revenue, 6.500% due 7/1/14........... 2,067,500
-----------
4,197,500
-----------
Colorado -- 3.1%
2,000,000 NR Colorado Health Facilities Authority Revenue,
(Beth Israel at Shalom Park Project),
7.250% due 12/15/25 ......................... 2,042,500
Denver, CO Airport, Series A:
1,650,000 BBB 8.500% due 11/15/23(a)........................ 1,870,688
1,600,000 BBB 8.000% due 11/15/25(a)........................ 1,786,000
-----------
5,699,188
-----------
Connecticut -- 0.9%
1,500,000 NR Connecticut State Development Authority,
Health Care Revenue, Series B,
8.000% due 7/1/17............................. 1,599,375
-----------
Florida -- 3.3%
930,000 NR Homestead, FL IDR, (Project A),
7.950% due 11/1/18 ........................... 946,275
2,035,000 NR Jacksonville, FL Health Facilities
Authority Revenue, 9.125% due 10/15/19........ 2,098,594
2,000,000 BBB- Martin County, FL IDR,
(Indiantown Cogeneration Project A),
7.875% due 12/15/25(a)........................ 2,235,000
See Notes to Financial Statements.
4
<PAGE>
Municipal High Income Fund Inc.
[STAR] Schedule of Investments (continued)
April 30, 1997 (unaudited)
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
- --------------------------------------------------------------------------------
Florida-- 3.3% (continued)
$ 650,000 NR Tampa, FL (Aquarium Inc. Revenue Project),
(Pre-Refunded--Escrowed with U.S. Government
Securities to 5/1/02 Call @ 102), 7.750% due
5/1/27(b) .....................................$ 739,375
------------
6,019,244
------------
Georgia -- 0.6%
1,000,000 NR Walton County, GA IDA, (Walton Project), 8.500%
due 9/1/07..................................... 1,061,250
------------
Illinois -- 6.0%
2,850,000 Baa2* Chicago, IL O'Hare International Airport,
Special Facilities Revenue Bonds, United
Airlines, Series B, 8.950% due 5/1/18(a)....... 3,199,125
2,500,000 BB- East Chicago, IL IDA Revenue,
(Inland Steel Co., Project 10),
6.800% due 6/1/13 ............................ 2,537,500
1,750,000 NR Hanover Park, IL First Mortgage,
(Windsor Manor Project), 9.250% due 12/1/07 ... 1,870,313
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.............................. 799,356
980,000 NR Sterling, IL First Mortgage Revenue,
(Hoosier Care Project),
Series A, 9.750% due 8/1/19 ................... 1,040,025
------------
11,017,569
------------
Indiana -- 4.2%
2,000,000 BBB- Indiana State Environmental Development
Finance Authority, (USX Corp. Project),
6.250% due 7/15/30............................. 1,975,000
1,000,000 Ba3* Indiana State IDA Finance Authority, PCR,
(Inland Steel Co. Project No. 13),
7.250% due 11/1/11(a) ......................... 1,028,750
4,750,000 Baa2* Indianapolis, IN Airport Authority,
6.500% due 11/15/31(a)(c)...................... 4,809,375
------------
7,813,125
------------
Kentucky -- 2.2%
1,290,000 NR Jefferson County, KY Health Facilities
Authority, Dates Beverly Enterprises,
10.125% due 5/1/08............................. 1,394,813
1,500,000 Baa3* Kenton County, KY Airport Board, (Delta Airlines
Project) 7.500% due 2/1/20(a).................. 1,608,750
1,000,000 A Pendleton County, KY Multi-Lease Revenue,
Series A, 6.500% due 3/1/19.................... 1,031,250
------------
4,034,813
------------
Louisiana -- 5.8%
1,200,000 Baa3* Lake Charles, LA Harbor & Terminal District &
Port Facilities Revenue, (Trunkline LNG Co.
Project), 7.750% due 8/15/22................... 1,357,500
See Notes to Financial Statements.
5
<PAGE>
Municipal High Income Fund Inc.
[STAR] Schedule of Investments (continued)
April 30, 1997 (unaudited)
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
- --------------------------------------------------------------------------------
Louisiana -- 5.8% (continued)
Port New Orleans, LA IDR:
Avondale Industries, Inc. Project:
$2,000,000 NR 8.250% due 6/1/04.............................$ 2,267,500
3,000,000 NR 8.500% due 6/1/14............................. 3,453,750
1,000,000 BB Continental Grain Co. Project,
7.500% due 7/1/13.............................. 1,073,750
2,400,000 BB+ West Feliciana Parish, LA PCR,
8.000% due 12/1/24.............................. 2,562,000
------------
10,714,500
------------
Maine -- 0.3%
Maine State Housing Authority Mortgage Purchases:
500,000 AA Series C-2, 7.000% due 11/15/32(a).............. 521,250
20,000 AA Series D-1, 8.300% due 11/15/28(a).............. 20,400
------------
541,650
------------
Massachusetts -- 5.8%
1,880,000 NR Commonwealth of Massachusetts Health &
Educational Facilities Authority Revenue,
North Adams State College, (Pre-Refunded --
Escrowed with U.S. Government Securities to
7/1/99 Call @ 102), 9.625% due 12/1/18(b)....... 2,107,950
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
------------
10,734,775
------------
Michigan -- 0.9%
1,500,000 BBB+ Western Townships, MI Utility Revenue, Sewage
System, (Subject to Crossover Refunding
11/1/99 @ 102), 8.300% due 1/1/19............... 1,578,750
------------
Minnesota -- 1.1%
1,960,000 AA+ Minnesota HFA, Single-Family, Series H, 6.700%
due 1/1/18...................................... 2,053,100
------------
Mississippi -- 2.7%
Claiborne County, MS PCR, Series C:
3,300,000 Ba1* 9.875% due 12/1/14 ............................. 3,605,250
1,500,000 BBB- 6.200% due 2/1/26............................... 1,460,625
------------
5,065,875
------------
Montana -- 0.5%
1,000,000 NR Montana State Board Investment Resource Recovery
Revenue, (Yellowstone Energy LP Project),
7.000% due 12/31/19(a).......................... 945,000
------------
New Hampshire -- 2.0%
New Hampshire State IDA, United Illuminating Co.:
1,000,000 BBB- Series A, 9.375% due 7/1/12(a)................ 1,035,050
2,500,000 BBB- Series B, 10.750% due 10/1/12(a).............. 2,629,175
------------
3,664,225
------------
See Notes to Financial Statements.
6
<PAGE>
Municipal High Income Fund Inc.
[STAR] Schedule of Investments (continued)
April 30, 1997 (unaudited)
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
- --------------------------------------------------------------------------------
New Jersey -- 3.8%
$2,200,000 NR New Jersey Educational Facilities, Fairleigh
Dickinson University, Series C, 6.625% due
7/1/23.........................................$ 2,153,250
New Jersey Health Care Facilities:
1,885,000 Ba1* Palisades Medical Center, Finance Authority
Revenue, 7.600% due 7/1/21 .................. 1,941,550
1,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27.. 1,045,000
1,500,000 Baa* Zurbrugg Memorial Hospital, Series C,
8.500% due 7/1/12............................ 1,536,630
310,000 AAA New Jersey Housing and Mortgage Finance Agency,
Home Buyer Revenue, Series E, MBIA-Insured,
7.650% due 10/1/16............................. 325,113
------------
7,001,543
------------
New Mexico -- 0.8%
1,420,000 AA New Mexico Mortgage Finance Authority,
Single-Family Mortgage Program, Series B,
8.300% due 3/1/20(a)........................... 1,482,125
------------
New York -- 10.1%
New York City, NY COP:
4,715,000 BBB+ Series F, 6.625% due 2/15/25................... 4,826,981
1,000,000 BBB+ Series H, 7.000% due 2/1/21.................... 1,057,500
New York City, NY GO Unlimited:
3,000,000 BBB+ Series D, 6.000% due 2/15/25................... 2,902,500
2,000,000 BBB+ Series H, 6.125% due 8/1/25.................... 1,962,500
1,500,000 NR New York City, NY IDA, Civil Facility Revenue,
7.500% due 8/1/26.............................. 1,492,500
1,500,000 BBB+ New York State Dormitory Authority Revenue,
Mental Health Services Facilities, Series B,
5.500% due 8/15/17............................. 1,402,500
1,950,000 BB+ New York State Energy, Research & Development
Authority, Electric Facility Revenue, Long
Island Lighting Co., 7.150% due 12/1/20(a)..... 2,059,688
2,750,000 NR Port Authority of NY & NJ, Special Obligation
Revenue, 6.750% due 10/1/19(a)................. 2,835,938
------------
18,540,107
------------
North Carolina -- 3.5%
1,750,000 A Martin County, NC Industrial Facilities PCR,
6.800% due 5/1/24(a)........................... 1,881,250
2,300,000 Baa1* North Carolina Eastern Municipal Power Agency,
Power Systems Revenue, Series B, 7.000% due
1/1/08 ........................................ 2,509,875
2,050,000 A North Carolina Municipal Power Agency No. 1,
Catawaba Electric Revenue, 6.250% due
1/1/17......................................... 2,052,563
------------
6,443,688
------------
See Notes to Financial Statements.
7
<PAGE>
Municipal High Income Fund Inc.
[STAR] Schedule of Investments (continued)
April 30, 1997 (unaudited)
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
- --------------------------------------------------------------------------------
Ohio -- 3.3%
$1,000,000 NR Cleveland, OH Airport Special Revenue,
Continental Airlines Inc.,
9.000% due 12/1/19(a)..........................$ 1,082,500
1,000,000 NR Cuyahoga County, OH Health Care Facilities,
Judson Retirement Community, Series A, 7.250%
due 11/15/18................................... 1,010,000
1,500,000 Baa1* Montgomery County, OH Health Systems Revenue,
Series B, 8.100% due 7/1/18 ................... 1,736,250
1,250,000 NR Ohio State Solid Waste Revenue,
9.000% due 6/1/21.............................. 1,254,688
1,000,000 Baa3* Ohio Water Development Authority, PCR, Series A,
8.100% due 10/1/23(a).......................... 1,056,250
------------
6,139,688
------------
Pennsylvania -- 13.7%
2,200,000 B- Allegheny County, PA IDA, Special Facilities
Revenue, Series B, (U.S. Air Project), 8.500%
due 3/1/21(a) ................................. 2,400,750
Beaver County, PA IDA, PCR:
2,000,000 BB 7.625% due 5/1/20.............................. 2,152,500
2,500,000 BB 7.625% due 5/1/25.............................. 2,690,625
1,500,000 NR Delaware County, PA IDA, First Mortgage, White
Horse, (Pre-Refunded -- Escrowed with U.S.
Government Securities to 7/1/99 Call @ 103),
9.700% due 7/1/09(b)........................... 1,695,000
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)..................................... 3,303,750
2,500,000 A3* Luzerne County, PA IDA, 7.125% due 12/1/22(a).... 2,646,875
2,000,000 AAA Montgomery County, PA Higher Education & Health
Authority, (Pre-Refunded -- Escrowed with U.S.
Government Securities to 11/1/99 Call @ 102),
8.375% due 11/1/11(b).......................... 2,212,500
625,000 NR Northumberland County, PA IDA Revenue,
6.875% due 2/1/03.............................. 628,125
1,500,000 AA+ Pennsylvania HFA, Series C,
6.900% due 4/1/25(a)........................... 1,576,875
1,950,000 Baa* Philadelphia, PA Gas Revenue, Series B,
6.400% due 11/15/16............................ 1,984,125
1,000,000 NR Philadelphia, PA IDR, Host Marriott,
7.750% due 12/1/17(a).......................... 1,061,250
1,500,000 BBB- Scranton-Lackawanna, PA Health &
Welfare Authority, Mercy Health Systems,
Series B, 8.500% due 7/1/20.................... 1,627,500
1,250,000 BBB+ Sharon, PA Regional Health Systems, (Project B),
6.875% due 12/1/22............................. 1,273,438
------------
25,253,313
------------
Puerto Rico -- 0.1%
200,000 A Commonwealth of Puerto Rico, GO Bonds,
8.000% due 7/1/08.............................. 211,000
------------
See Notes to Financial Statements.
8
<PAGE>
Municipal High Income Fund Inc.
[STAR] Schedule of Investments (continued)
April 30, 1997 (unaudited)
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
- --------------------------------------------------------------------------------
South Carolina -- 1.0%
$ 945,000 NR Florence County, SC IDR, 7.375% due 2/1/07.......$ 954,450
875,000 NR McCormick County, SC COP, 9.750% due 7/1/09...... 893,961
------------
1,848,411
------------
South Dakota -- 1.1%
Oglala Sioux Tribe, SD Pine Ridge County,
Revenue Bonds:
165,000 NR 7.000% due 7/1/99............................ 166,238
1,865,000 NR 7.500% due 7/1/13............................ 1,890,644
------------
2,056,882
------------
Tennessee -- 0.4%
750,000 AAA Knox County, TN Health, Education & Housing,
FSA-Insured, 7.125% due 1/1/30................. 810,938
------------
Texas -- 10.6%
1,350,000 BBB Alliance, TX Airport Authority Inc.,
(Federal Express Corp. Project),
6.375% due 4/1/21(a)............................ 1,351,687
Brazos River, TX PCR, (Collateral-Texas
Utilities Electric Co., Project A):
1,000,000 BBB+ 9.875% due 10/1/17(a)........................ 1,040,380
2,000,000 BBB+ 8.250% due 1/1/19(a)......................... 2,132,500
1,110,000 A* El Paso, TX Housing Finance Corp., Single-Family
Mortgage Revenue, 8.750% due 10/1/11........... 1,196,025
2,000,000 B El Paso, TX International Airport Revenue Bonds,
(Marriott Corp. Project), 7.750% due 3/1/12.... 2,075,000
1,190,000 NR Harris County, TX Industrial Development Corp.,
IDR, Continental Airlines Inc., 7.950% due
7/1/19(a)...................................... 1,189,952
Matagorda County, TX Navigation District No. 1,
PCR, (Houston Lighting & Power Co. Project):
1,000,000 AAA MBIA-Insured, 6.100% due 7/1/28.............. 1,018,750
1,400,000 A2* Series A, 7.875% due 2/1/19(a) .............. 1,456,812
1,400,000 AA North Central, TX Health Facilities Development
Project, Hospital Revenue Bonds, Baylor Health
Care Systems, Series 1992B, Variable Rate
INFLOS, 6.830% due 5/15/08(d).................. 1,491,000
Northgate Crossing, TX Municipal Utilities:
1,000,000 NR District 1, GO, 8.875% due 12/1/13............. 981,250
1,000,000 NR District 2, Special Tax, 8.875% due 12/1/13.... 981,250
Port Corpus Christi, TX Industrial Development
Corp., Valero Refinancing and Marketing Co.:
2,500,000 BBB- Series A, 10.250% due 6/1/17................. 2,585,800
2,000,000 BBB- Series B, 10.625% due 6/1/08(a).............. 2,069,180
------------
19,569,586
------------
See Notes to Financial Statements.
9
<PAGE>
Municipal High Income Fund Inc.
[STAR] Schedule of Investments (continued)
April 30, 1997 (unaudited)
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
- --------------------------------------------------------------------------------
Utah -- 1.0%
$1,750,000 NR Hurricane, UT Health Facilities Development
Revenue, (Mission Health Services Project),
10.500% due 7/1/20 ............................$ 1,920,620
------------
Vermont -- 1.2%
2,060,000 A1* Vermont Housing Finance Agency, Home Mortgage,
Series B, 8.100% due 6/1/22(a)................. 2,139,825
------------
West Virginia -- 0.7%
2,500,000 NR Marion County, WV County Commission, Solid Waste
Disposal Facility, 7.750% due 12/1/11(a)..... 1,250,000
------------
Wisconsin -- 0.8%
1,500,000 NR Wisconsin State Health & Educational Facilities
Authority Revenue, Benchmark Health Care Green
Bay, 7.750% due 5/1/27......................... 1,470,000
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $175,938,289**).........................$184,225,210
============
(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 with U.S. Government Securities are considered by
manager to be triple-A rated even if issuer has not applied for new
ratings.
(c) Security segregated by Custodian for open market purchase commitment.
(d) Residual interest bonds-coupon varies inversely with level of short-term
tax-exempt interest rates.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 11 through 13 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements.
10
<PAGE>
Municipal High Income Fund Inc.
[STAR] Summary of Municipal Bonds by Combined Ratings
April 30, 1997
================================================================================
- --------------------------------------------------------------------------------
Standard & Percent of
Moody's and/or Poor's Total Investments
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aaa AAA 2.6%
Aa AA 3.9
A A 7.7
Baa BBB 40.1
Ba BB 10.6
B B 2.4
NR NR 32.7
-----
100.0%
=====
- --------------------------------------------------------------------------------
Bond Ratings
================================================================================
All ratings are by Standard & Poor's Rating Service ("Standard & Poor's"),
except that those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings from "AA" to "CCC" 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 -- Bonds rated "BB" and "B" are regarded, on balance, as
and CCC predominantly and CCC 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 exposure to
adverse conditions.
11
<PAGE>
Municipal High Income Fund Inc.
[STAR] Bond Ratings (continued)
================================================================================
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic
rating from "Aa" to "Ba," where 1 is the highest and 3 the lowest
rating within its generic category.
Aaa -- Bonds that are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds that are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large in
"Aaa" securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in "Aaa"
securities.
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.
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.
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.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
12
<PAGE>
Municipal High Income Fund Inc.
[STAR] Security Descriptions
================================================================================
ABAG -- Association of Bay Area Governments
AIG -- American International Guaranty
AMBAC -- American Municipal Bond
Assurance 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
Insurance 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 -- Financing Security Assurance
GIC -- Guaranteed Investment Contract
GNMA -- Government National Mortgage
Association
GO -- General Obligation
HDC -- Housing Development Corporation
HFA -- Housing Finance Authority
IDA -- Industrial Development
Authority
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.
[STAR] Statement of Assets and Liabilities (unaudited)
April 30, 1997
================================================================================
ASSETS:
Investments, at value (Cost -- $175,938,289) ................. $184,225,210
Cash ......................................................... 37,952
Receivable for securities sold ............................... 80,000
Interest receivable .......................................... 4,609,673
------------
Total Assets ................................................. 188,952,835
------------
LIABILITIES:
Payable for securities purchased ............................. 1,472,260
Dividends payable ............................................ 229,713
Investment advisory fees payable ............................. 63,558
Administration fees payable .................................. 31,518
Accrued expenses ............................................. 158,398
------------
Total Liabilities ............................................ 1,955,447
------------
Total Net Assets ............................................... $186,997,388
============
NET ASSETS:
Par value of capital shares .................................. $ 196,599
Capital paid in excess of par value .......................... 182,673,658
Undistributed net investment income .......................... 327,184
Accumulated net realized loss from security transactions ..... (4,486,974)
Net unrealized appreciation of investments ................... 8,286,921
------------
Total Net Assets
(Equivalent to $9.51 a share on 19,659,882 shares of
$0.01 par value outstanding;
500,000,000 shares authorized).............................. $186,997,388
============
See Notes to Financial Statements.
14
<PAGE>
Municipal High Income Fund Inc.
[STAR] Statement of Operations (unaudited)
For the Six Months Ended April 30, 1997
================================================================================
INVESTMENT INCOME:
Interest .................................................... $ 6,818,625
-----------
EXPENSES:
Investment advisory fees (Note 3) ........................... 372,689
Administration fees (Note 3) ................................ 186,344
Shareholder communications .................................. 63,473
Audit and legal ............................................. 29,257
Directors' fees ............................................. 21,324
Registration fees ........................................... 12,100
Shareholder and system servicing fees ....................... 11,428
Pricing service fees ........................................ 7,439
Custody ..................................................... 4,659
Other ....................................................... 3,669
-----------
Total Expenses .............................................. 712,382
-----------
Net Investment Income ......................................... 6,106,243
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 4):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales ....................................... 15,488,778
Cost of securities sold ................................... 16,833,184
-----------
Net Realized Loss ........................................... (1,344,406)
-----------
Change in Net Unrealized Appreciation of Investments:
Beginning of period ....................................... 7,240,580
End of period ............................................. 8,286,921
-----------
Increase in Net Unrealized Appreciation ..................... 1,046,341
-----------
Net Loss on Investments ....................................... (298,065)
-----------
Increase in Net Assets From Operations ........................ $ 5,808,178
===========
See Notes to Financial Statements.
15
<PAGE>
Municipal High Income Fund Inc.
Statements of Changes in Net Assets
[STAR] For the Six Months Ended April 30, 1997 (unaudited)
and the Year Ended October 31, 1996
================================================================================
1997 1996
---- ----
OPERATIONS:
Net investment income ......................... $ 6,106,243 $ 12,398,843
Net realized loss ............................. (1,344,406) (205,983)
Increase in net unrealized appreciation ....... 1,046,341 153,751
------------ ------------
Increase in Net Assets From Operations ........ 5,808,178 12,346,611
------------ ------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 2):
Net investment income ......................... (6,114,217) (12,090,828)
------------ ------------
Decrease in Net Assets From
Distributions to Shareholders ............... (6,114,217) (12,090,828)
------------ ------------
Increase (Decrease) in Net Assets ............... (306,039) 255,783
NET ASSETS:
Beginning of period ........................... 187,303,427 187,047,644
------------ ------------
End of period* ................................ $186,997,388 $187,303,427
============ ============
*Includes undistributed net investment income of: $ 327,184 $ 335,158
============ ============
See Notes to Financial Statements.
16
<PAGE>
Municipal High Income Fund Inc.
[STAR] 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) security 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) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value; (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 an accrual basis; (f)
dividends and distributions 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. Exempt-Interest Dividends and Other Distributions
The Fund intends to satisfy conditions that will enable interest from
municipal securities, which is exempt from Federal income tax and from
designated state income taxes, to retain such tax-exempt status when distributed
to the shareholders of the Fund.
Capital gains distributions, if any, are taxable to shareholders, and are
declared and paid at least annually.
3. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), through its Greenwich Street Advisors division,
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.
17
<PAGE>
Municipal High Income Fund Inc.
[STAR] Notes to Financial Statements (unaudited) (continued)
===============================================================================
4. Investments
For the six months ended April 30, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $17,262,860
- --------------------------------------------------------------------------------
Sales 15,488,778
================================================================================
At April 30, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $9,798,781
Gross unrealized depreciation (1,511,860)
- --------------------------------------------------------------------------------
Gross unrealized appreciation $8,286,921
================================================================================
5. Capital Shares
At April 30, 1997, the Fund had 500,000,000 shares of capital stock
authorized with a par value of $0.01 per share.
6. Capital Loss Carryforwards
At October 31, 1996, the Fund had, for Federal income tax purposes,
approximately $3,142,000 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 carryforwards are indicated
below. Expiration occurs on October 31 of the year indicated:
2002 2003 2004
================================================================================
Carryforward Amounts $2,667,000 $270,000 $205,000
================================================================================
18
<PAGE>
Municipal High Income Fund Inc.
[STAR] Financial Highlights
================================================================================
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
1997(1) 1996 1995 1994 1993 1992
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period............................ $9.53 $9.51 $8.98 $9.72 $9.49 $9.42
-------- -------- -------- -------- -------- -------
Income (Loss) From Operations:
Net investment income................ 0.31 0.63 0.64 0.65 0.67 0.70
Net realized and unrealized
gain (loss) ....................... (0.02) -- 0.54 (0.72) 0.23 0.06
-------- -------- -------- -------- -------- -------
Total Income (Loss) From Operations ... 0.29 0.63 1.18 (0.07) 0.90 0.76
-------- -------- -------- -------- -------- -------
Less Distributions From:
Net investment income................ (0.31) (0.61) (0.65) (0.65) (0.67) (0.69)
Net realized gains................... -- -- -- (0.02) -- --
-------- -------- -------- -------- -------- -------
Total Distributions.................... (0.31) (0.61) (0.65) (0.67) (0.67) (0.69)
-------- -------- -------- -------- -------- -------
Net Asset Value, End of Period ........ $9.51 $9.53 $9.51 $8.98 $9.72 $9.49
-------- -------- -------- -------- -------- -------
Total Return, Based on
Market Value......................... 6.25%++ 10.22% 14.17% (10.11)% 17.76% 3.37%
-------- -------- -------- -------- -------- -------
Total Return, Based on
Net Asset Value...................... 3.17%++ 7.39% 14.00% (0.54)% 9.87% 8.59%
-------- -------- -------- -------- -------- -------
Net Assets, End of Period (000s) ...... $186,997 $187,303 $187,048 $176,379 $188,294 179,104
======== ======== ======== ======== ======== =======
Ratios to Average Net Assets:
Expenses............................. 0.76%+ 0.77% 0.84% 0.84% 0.87% 0.87%
Net investment income................ 6.55+ 6.65 6.87 6.98 6.89 7.31
Portfolio Turnover Rate................ 8% 17% 18% 17% 13% 12%
Market Value, End of Period............ $9.250 $9.000 $9.000 $8.250 $9.875 $9.125
</TABLE>
- --------------------
(1) For the six months ended April 30, 1997 (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.
[STAR] Financial Data Per Share of Common Stock (unaudited)
================================================================================
Dividend
Record Payable NYSE Net Asset Dividend Reinvestment
Date Date Closing Price* Value Paid Price
------ ------- ------------- ------ ------- ------
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
8/27/96 8/30/96 8.875 9.43 0.0510 8.90
9/24/96 9/29/96 8.875 9.44 0.0510 9.00
10/22/96 10/25/96 9.000 9.48 0.0510 9.08
11/25/96 11/29/96 9.125 9.57 0.0510 9.23
12/23/96 12/27/96 9.375 9.55 0.0520 9.30
1/28/97 1/31/97 9.375 9.53 0.0520 9.44
2/25/97 2/28/97 9.375 9.60 0.0520 9.37
3/24/97 3/27/97 9.125 9.52 0.0520 9.27
4/22/97 4/25/97 9.250 9.48 0.0520 9.32
*As of Record Date.
20
<PAGE>
Municipal High Income Fund Inc.
[STAR] Quarterly Results of Operations (unaudited)
================================================================================
<TABLE>
<CAPTION>
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
- -------- ----- ----- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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) (0.07)
7/31/96 3,456,996 0.18 3,142,875 0.16 382,360 0.02 3,525,235 0.18
10/31/96 3,479,645 0.18 3,131,351 0.16 2,132,578 0.11 5,263,929 0.27
1/31/97 3,457,602 0.18 3,095,243 0.16 591,922 0.03 3,687,165 0.19
4/30/97 3,361,023 0.17 3,011,000 0.15 (889,987) (0.05) 2,121,013 0.10
</TABLE>
---------------------------------
21
<PAGE>
Municipal High Income Fund Inc.
[STAR] 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, as soon as practicable after 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.
22
<PAGE>
Municipal High Income Fund Inc.
[STAR] 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.
A current prospectus may be obtained by contacting a Smith Barney Financial
Consultant. 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,
1997, the Fund has not repurchased any shares.
23
<PAGE>
Municipal High Income Fund Inc.
[STAR] Management of the Fund
================================================================================
Directors
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Robert A. Frankel
William R. Hutchinson
Heath B. McLendon, Chairman
Charles F. Barber, Emeritus
Officers
Heath B. McLendon
Chief Executive Officer
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>
<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, NY 10013
(212) 723-9218
FD01139 6/97
