Municipal
High Income
Fund Inc.
Quarterly
Report
January
31, 1997
<PAGE>
===================================[CLIP ART]===================================
Municipal High Income Fund Inc.
Dear Shareholder:
We are pleased to provide you with the first quarter report for the
Municipal High Income Fund, Inc. for the period ended January 31, 1997. Over the
three-month period covering this report, the Fund paid dividends totaling $0.16
per share. In December 1996, the Fund's monthly dividend was increased from
$0.051 per share to $0.052 per share. The table below shows the annualized
distribution rates and three-month total returns based on the Fund's January 31,
1997 net asset value (NAV) per share and its New York Stock Exchange (NYSE)
closing price.
Price Annualized Three Month
Per Share Distribution Rate Total Return
------- ----------- --------
$9.56 (NAV) 6.53% 1.99%
$9.50 (NYSE) 6.57% 7.32%
The Fund's three month total return on NAV of 1.99% compares favorably to
the average total return of 1.67% posted by closed-end, high yield municipal
bond funds for the same period, as reported by Lipper Analytical Services Inc.,
an independent fund tracking organization.
We are pleased to mention that the Municipal High Income Fund was featured
in Business Week's February 17, 1997 issue. While past performance is not a
guarantee of future results, your Fund, along with 16 other closed-end funds,
earned three upward-pointing arrows, the highest rating for its three-year
risk-adjusted total return*. The ratings are based on data provided by
Morningstar Inc., a major fund tracking organization.
Market and Economic Overview
The fixed income markets began to rally in the fourth quarter of 1996, with
strong performance gains by investment grade and U.S. Treasury bonds. An
apparent slowdown in U.S. economic growth at the onset of the fourth quarter of
1996, combined with favorable inflation data, helped to bolster the fixed income
markets. The bond market rally was also fueled by the Federal Reserve Board's
decision to remain on the sidelines and not raise interest rates. However,
during early December, several factors prevented interest rates from declining
further, with a modest upturn in rates occurring in January of 1997. For
example, Federal Reserve Chairman Alan Greenspan's comments about "irrational
exuberance" in the financial markets caused a widespread but temporary sell-off
in both the equity and bond markets. In addition, conflicting reports of
weakness in the retail sector and stronger-than-expected growth in the
manufacturing and construction sectors in the past several weeks have caused
interest rates to gyrate up and down with increased price volatility in the bond
markets.
- ----------
* 1994-96 pretax return based on appreciation of net asset value plus
reinvestment of dividends and capital gains. Ratings are based on three-year
risk-adjusted performance of the fund's portfolio. A rating is calculated by
subtracting a fund's risk-of-loss factor from total return.
1
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Within the municipal bond market, the major factor that had shaped the
market throughout 1996 - the fear of tax reform-subsided once the November
Presidential election was concluded. Looking ahead into 1997, we believe that
any future tax reform will be modest, and will have little or no effect on the
relative investment merits of municipal bonds. Another factor that continues to
cause investors to place their assets elsewhere is the continuing powerful surge
in the U.S. stock market. With the stock market posting its second straight year
of impressive returns, investors have, in our view, temporarily turned away from
fixed income securities, particularly municipal bonds, in the hopes of
participating in the high-return potential of the U.S. stock market as opposed
to the seemingly modest yields currently offered by municipal bonds. However, we
believe that investors will soon realize the need to rebalance their portfolios
and should begin to refocus on municipal bonds.
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. Over the past quarter, we did not increase our cash
levels when there were fears over the Fed raising interest rates. Instead, we
viewed these "blips" in the market as buying opportunities and stayed invested
in the long end of the yield curve. In addition, as opportunities in the market
arose, we began to extend the call protection of the Fund's portfolio.
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. While we tend to emphasize
higher-yielding issues such as healthcare and industrial development revenue
bonds, we have also increased our focus on housing bonds for several reasons.
First, the current level of interest rates reduces prepayment call risk; second,
we believe the spreads earned on these issues are relatively attractive; and
finally, we believe these issues have limited credit risk.
As of January 31, 1997 the majority of the Fund's assets were allocated
among the following sectors: Industrial development revenue bonds (25.3%),
pollution control revenue bonds (15.7%), hospital bonds (10.2%), and utility
bonds (8.7%). The Fund's average weighted maturity as of January 31, 1997, was
approximately 22 years. As long as interest rates remain at their current
levels, we will maintain the Fund's current average maturity.
Municipal Bond Market Outlook
The U.S. economy turned in a strong performance during the fourth quarter
of 1996, there are few signs that the economy is overheating and generating
upward pressure on inflation. As a result, we believe the Fed will hold
short-term interest rates steady for the foreseeable future and our outlook for
the bond market as a whole remains positive. In our view, steady Fed policy as
2
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===================================[CLIP ART]===================================
well as the proposed reduction in the capital gains tax by Congress and
adjustments to the Consumer Price Index should lead to a more positive view
toward the fixed income markets. There could be some pressure on interest rates
as the end of March approaches, which is the end of the Japanese fiscal year.
There are growing concerns over whether or not the Japanese will begin to
liquidate their investments in U.S. Treasury securities; the Japanese are the
largest foreign holders of U.S. Treasuries and, in our view, the risk of them
taking their money out of the U.S. market seems unlikely.
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 and Vice President and
Chief Executive Officer Investment Officer
February 21, 1997
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<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments
January 31, 1997 (unaudited)
<TABLE>
<CAPTION>
==========================================================================================
FACE
AMOUNT RATING SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
Alabama -- 3.8%
$ 405,000 Aa1* Alabama HFA, Single-Family Mortgage Revenue,
10.500% due 12/1/02 ................................... $ 428,288
1,000,000 BBB- Alabama State IDA, Solid Waste Disposal, 6.450%
due 12/1/23 (a) ....................................... 997,500
4,000,000 BBB- Butler, AL IDR, Waste Disposal, 8.000% due 9/1/28 (a) ... 4,495,000
1,000,000 BBB- Mobile, AL IDR, 6.950% due 1/1/20 ....................... 1,050,000
------------
6,970,788
------------
Arizona -- 1.9%
Gila County, AZ IDA, PCR, ASARCO Inc., Series 1987:
2,700,000 BBB 8.900% due 7/1/06 ..................................... 2,822,013
600,000 Baa2* 8.900% due 7/1/06 ..................................... 627,420
------------
3,449,433
------------
California -- 2.3%
2,000,000 NR Los Angeles County, CA Regional Airport Authority,
Continental Airlines, Inc., 9.000% due 8/1/17 (a) ..... 2,145,000
2,000,000 BBB- Sacramento, CA Cogeneration Authority, Electric Revenue,
6.500% due 7/1/14 ..................................... 2,077,500
------------
4,222,500
------------
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) ............................... 1,891,313
1,600,000 BBB 8.000% due 11/15/25 (a) ............................... 1,804,000
------------
5,737,813
------------
Connecticut -- 0.8%
1,500,000 NR Connecticut State Development Authority, Health Care
Revenue, Series B, 8.000% due 7/1/17 .................. 1,573,125
------------
Florida -- 3.9%
930,000 NR Homestead, FL IDR, (Project A), 7.950% due 11/1/18 ...... 947,438
2,035,000 NR Jacksonville, FL Health Facilities Authority Revenue,
9.125% due 10/15/19 ................................... 2,101,137
2,000,000 BBB- Martin County, FL IDR, (Indiantown Cogeneration Project
A), 7.875% due 12/15/25 (a) ........................... 2,300,000
950,000 BBB 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) ........... 1,048,562
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1997 (unaudited)
<TABLE>
<CAPTION>
==========================================================================================
FACE
AMOUNT RATING SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
Florida -- 3.9% (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) ............................................ $ 753,188
------------
7,150,325
------------
Georgia -- 0.6%
1,000,000 NR Walton County, GA IDA, (Walton Project), 8.500% due
9/1/07 ................................................ 1,062,500
------------
Illinois -- 7.0%
2,900,000 Baa2* Chicago, IL O'Hare International Airport, Special
Facilities Revenue Bonds, United Airlines, Series
B, 8.950% due 5/1/18 (a)............................... 3,277,000
1,700,000 Baa* Chicago, IL Skyway Toll Bridge (Pre-Refunded --
Escrowed with U.S. Government Securities to
1/1/04 Call @ 102), 6.750% due
1/1/17................................................. 1,916,750
2,500,000 BB- East Chicago, IL IDA Revenue, (Inland Steel Company
Project 10), 6.800% due 6/1/13......................... 2,550,000
1,750,000 NR Hanover Park, IL First Mortgage, (Windsor Manor
Project), 9.250% due
12/1/07................................................ 1,831,883
1,500,000 A+ Illinois Housing Development Authority, Series 5,
6.750% due 9/1/23...................................... 1,576,875
755,000 NR Loves Park, IL First Mortgage Revenue, (Hoosier
Care Project), Series A, 9.750% due
8/1/19................................................. 801,243
980,000 NR Sterling, IL First Mortgage Revenue, (Hoosier Care
Project), Series A, 9.750% due
8/1/19................................................. 1,043,700
------------
12,997,451
------------
Indiana -- 4.2%
2,000,000 BBB- Indiana State Environmental Development Finance
Authority, (USX Corp. Project), 6.250% due
7/15/30................................................ 1,992,500
1,000,000 Ba3* Indiana State IDA Finance Authority, PCR, (Inland
Steel Company Project No. 13), 7.250% due 11/1/11(a) 1,046,250
4,750,000 Baa2* Indianapolis, IN Indianapolis Airport Authority,
6.500% due 11/15/31 (a)(c)............................. 4,809,375
------------
7,848,125
------------
Kentucky -- 2.2%
1,320,000 A1* Jefferson County, KY Health Facilities Authority,
Dates Beverly Enterprises, 10.125% due 5/1/08.......... 1,437,150
1,500,000 Baa3* Kenton County, KY Airport Board, (Delta Airlines
Project) 7.500% due 2/1/20 (a)......................... 1,623,750
1,000,000 A Pendleton County, KY Multi-Lease Revenue, Series A,
6.500% due 3/1/19...................................... 1,038,750
------------
4,099,650
------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1997 (unaudited)
<TABLE>
<CAPTION>
==========================================================================================
FACE
AMOUNT RATING SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
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 .................................... $ 1,363,500
Port New Orleans, LA IDR:
Avondale Industries, Inc. Project:
2,000,000 NR 8.250% due 6/1/04...................................... 2,277,500
3,000,000 NR 8.500% due 6/1/14...................................... 3,465,000
1,000,000 BB- Continental Grain Company Project, 7.500% due
7/1/13 ................................................ 1,071,250
2,400,000 BB+ West Feliciana Parish, LA PCR, 8.000% due 12/1/24 ....... 2,577,000
------------
10,754,250
------------
Maine -- 0.4%
Maine State Housing Authority Mortgage Purchases:
500,000 Aa* Series C-2, 7.000% due 11/15/32 (a).................... 523,125
170,000 Aa* Series D-1, 8.300% due 11/15/28 (a).................... 173,825
------------
696,950
------------
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) ................................ 2,147,900
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
------------
10,784,275
------------
Michigan -- 1.5%
1,000,000 BBB Detroit MI GO, Series A, (Pre-Refunded Escrowed
with U.S. Government Securities to 4/1/05 @ 101),
6.800% due 4/1/05 (b).................................. 1,130,000
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................................................. 1,590,000
------------
2,720,000
------------
Minnesota -- 1.1%
1,960,000 AA+ Minnesota HFA, Single-Family, Series H, 6.700% due
1/1/18 ................................................ 2,060,450
------------
Mississippi -- 2.8%
Claiborne County, MS PCR, Series C:
3,300,000 Ba1* 9.875% due 12/1/14..................................... 3,642,375
1,500,000 BBB- 6.200% due 2/1/26...................................... 1,471,875
------------
5,114,250
------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1997 (unaudited)
<TABLE>
<CAPTION>
==========================================================================================
FACE
AMOUNT RATING SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
New Hampshire -- 2.0%
New Hampshire State IDA, United Illuminating Co.:
$1,000,000 BBB- Series A, 9.375% due 7/1/12 (a)........................ $ 1,043,770
2,500,000 BBB- Series B, 10.750% due 10/1/12 (a)...................... 2,663,325
------------
3,707,095
------------
New Jersey -- 3.8%
2,200,000 NR New Jersey Educational Facilities, Fairleigh
Dickinson University, Series C, 6.625% due
7/1/23.................................................. 2,156,000
New Jersey Health Care Facilities:
1,885,000 Ba1* Palisades Medical Center, Finance Authority
Revenue, 7.600% due 7/1/21.............................. 1,943,906
1,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27............. 1,047,500
1,500,000 Baa* Zurbrugg Memorial Hospital, Series C, 8.500% due
7/1/12 ................................................. 1,547,790
310,000 AAA New Jersey Housing and Mortgage Finance Agency,
Home Buyer Revenue, Series E, MBIA-Insured,
7.650% due 10/1/16...................................... 326,275
------------
7,021,471
------------
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) ......................................... 1,489,225
------------
New York -- 9.3%
New York City, NY COP:
4,715,000 BBB+ Series F, 6.625% due 2/15/25............................ 4,838,768
1,000,000 BBB+ Series H, 7.000% due 2/1/21............................. 1,065,000
New York City, NY GO Unlimited:
3,000,000 BBB+ Series D, 6.000% due 2/15/25............................ 2,913,750
2,000,000 BBB+ Series H, 6.125% due 8/1/25............................. 1,975,000
1,500,000 NR New York City, NY IDA, Civil Facility Revenue,
7.500% due 8/1/26....................................... 1,494,375
1,950,000 BB+ New York State Energy, Research & Development
Authority, Electric Facility Revenue, Long Island
Lighting Company, 7.150% due 12/1/20 (a)................ 2,096,250
2,750,000 NR Port Authority of NY & NJ, Special Obligation
Revenue, 6.750% due 10/1/19 (a)......................... 2,822,188
------------
17,205,331
------------
North Carolina -- 3.5%
1,750,000 A Martin County, NC Industrial Facilities PCR,
6.800% due 5/1/24 (a)................................... 1,890,000
2,300,000 BBB North Carolina Eastern Municipal Power Agency,
Power Systems Revenue, Series B, 7.000% due 1/1/08 ..... 2,532,875
2,050,000 A North Carolina Municipal Power Agency No. 1, Catawaba
Electric Revenue, 6.250% due 1/1/17..................... 2,065,375
------------
6,488,250
------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1997 (unaudited)
<TABLE>
<CAPTION>
==========================================================================================
FACE
AMOUNT RATING SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
Ohio -- 3.5%
$1,000,000 NR Cleveland, OH Airport Special Revenue, Continental
Airlines Inc., 9.000% due 12/1/19 (a) .................. $ 1,086,250
1,000,000 NR Cuyahoga County, OH Health Care Facilities, Judson
Retirement Community, Series A, 7.250% due
11/15/18 ............................................... 1,008,750
1,500,000 BBB Montgomery County, OH Health Systems Revenue,
Series B, 8.100% due
7/1/18.................................................. 1,747,500
400,000 AA Ohio State Air Quality Authority, Cincinnati Gas &
Electric, Series A, 3.600% due
9/1/30(d)............................................... 400,000
1,250,000 NR Ohio State Solid Waste Revenue, 9.000%, due 6/1/21 1,275,000
1,000,000 Baa3* Ohio Water Development Authority, PCR, Series A,
8.100% due 10/1/23 (a).................................. 1,061,250
------------
6,578,750
------------
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).............................................. 2,367,750
Beaver County, PA IDA, PCR:
2,000,000 BB 7.625% due 5/1/20....................................... 2,160,000
2,500,000 BB 7.625% due 5/1/25....................................... 2,700,000
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) .................................. 1,726,874
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) ............................................ 3,360,000
2,500,000 A3* Luzerne County, PA IDA, 7.125% due 12/1/22 (a)............ 2,659,375
2,000,000 Ba1* 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) ................................. 2,250,000
625,000 NR Northumberland County, PA IDA Revenue, 6.875% due
2/1/03 ................................................. 629,688
1,500,000 AA+ Pennsylvania HFA, Series C, 6.900% due 4/1/25 (a) ........ 1,582,500
1,950,000 Baa* Philadelphia, PA Gas Revenue, Series B,
6.400% due 11/15/16..................................... 2,001,188
1,000,000 NR Philadelphia, PA IDR, Host Marriott,
7.750% due 12/1/17 (a).................................. 1,062,500
1,500,000 BB+ Scranton-Lackawanna, PA Health & Welfare Authority,
Mercy Health Systems, Series B, 8.500% due 7/1/20....... 1,633,125
1,250,000 BBB+ Sharon, PA Regional Health Systems, (Project B),
6.875% due 12/1/22...................................... 1,278,125
------------
25,411,125
------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1997 (unaudited)
<TABLE>
<CAPTION>
==========================================================================================
FACE
AMOUNT RATING SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
Puerto Rico -- 0.1%
$ 200,000 A Commonwealth of Puerto Rico, GO Bonds,
8.000% due 7/1/08....................................... $ 212,750
------------
South Carolina -- 1.0%
945,000 NR Florence County, SC IDR, 7.375% due 2/1/07............... 988,706
875,000 NR McCormick County, SC COP, 9.750% due 7/1/09............... 896,971
------------
1,885,677
------------
South Dakota -- 1.1%
Oglala Sioux Tribe, SD Pine Ridge County, Revenue Bonds:
165,000 NR 7.000% due 7/1/99....................................... 166,444
1,865,000 NR 7.500% due 7/1/13....................................... 1,892,975
------------
2,059,419
------------
Tennessee -- 0.4%
750,000 AAA Knox County, TN Health, Education & Housing, FSA-Insured,
7.125% due 1/1/30 ...................................... 813,750
------------
Texas -- 10.7%
1,450,000 BBB Alliance, TX Airport Authority Inc., (Federal Express
Corporation Project), 6.375% due 4/1/21 (a)............ 1,459,062
600,000 NR Angelina County, TX Jail Facilities Financing
Corporation, Criminal Detention Center, Mortgage
Revenue Bonds, 9.750% due 8/1/09 (e)(f)................ 6,000
Brazos River, TX PCR, (Collateral-Texas Utilities
Electric Company, Project A):
1,000,000 BBB 9.875% due 10/1/17 (a)............................... 1,051,160
2,000,000 BBB+ 8.250% due 1/1/19 (a)................................ 2,140,000
1,155,000 A* El Paso, TX Housing Finance Corporation, Single-Family
Mortgage Revenue, 8.750% due 10/1/11................... 1,248,844
2,000,000 B El Paso, TX International Airport Revenue Bonds,
(Marriott Corporation Project), 7.750% due 3/1/12...... 2,072,500
1,190,000 NR Harris County, TX Industrial Development Corporation,
IDR, Continental Airlines Inc., 7.950% due 7/1/19 (a).. 1,190,464
840,000 NR La Salle County, TX Jail Facilities Financing
Corporation, Criminal Detention Center, Mortgage
Revenue Bonds, 9.750% due 8/1/09 (e)(f)................ 8,400
Matagorda County, TX Navigation District No. 1, PCR,
(Houston Lighting & Power Company Project):
1,000,000 AAA MBIA-Insured, 6.100% due 7/1/28...................... 1,023,750
1,400,000 A2* Series A, 7.875% due 2/1/19 (a)...................... 1,467,382
1,400,000 AA North Central, TX Health Facilities Development
Project, Hospital Revenue Bonds, Baylor Health
Care Systems, Series 1992B,Variable Rate INFLOS,
7.970% due 5/15/08(g) ................................. 1,508,500
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (continued)
January 31, 1997 (unaudited)
<TABLE>
<CAPTION>
==========================================================================================
FACE
AMOUNT RATING SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
Texas -- 10.7% (continued)
Northgate Crossing, TX Municipals Utilities:
$1,000,000 NR District 1, GO, 8.875% due 12/1/13...................... $ 975,000
1,000,000 NR District 2, Special Tax, 8.875% due 12/1/13............. 975,000
570,000 NR Pecos County, TX Jail Facilities Financing Corporation,
Criminal Detention Center, Mortgage Revenue Bonds,
9.750% due 8/1/09 (e)(f)................................ 5,700
Port Corpus Christi, TX Industrial Development
Corporation, Valero Refinancing and Marketing Company:
2,500,000 BBB- Series A, 10.250% due 6/1/17.......................... 2,618,925
2,000,000 BBB- Series B, 10.625% due 6/1/08 (a)...................... 2,098,180
------------
19,848,867
------------
Utah -- 1.0%
1,750,000 NR Hurricane, UT Health Facilities Development
Revenue, (Mission Health Services Project),
10.500% due 7/1/20 ..................................... 1,927,188
------------
Vermont -- 1.2%
2,060,000 A1* Vermont Housing Finance Agency, Home Mortgage,
Series B, 8.100% due 6/1/22 (a)......................... 2,144,975
------------
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
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $176,063,743**).................................. $185,285,758
============
</TABLE>
a) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
b) Pre-Refunded bond escrowed by U.S. Government securities and bond 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 segregated by Custodian for open market purchase commitment.
d) Variable rate obligation payable at par on demand at any time on more than
seven days notice.
e) Security is in default.
f) Security has been valued by Fund's Board of Directors (See Note 5).
g) Residual interest bond-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>
[CLIP ART] Municipal High Income Fund Inc.
Summary of Municipal Bonds by Combined Ratings
January 31, 1997
================================================================================
- --------------------------------------------------------------------------------
Standard & Percent of
Moody's and/or Poor's Total Investments
- --------------------------------------------------------------------------------
Aaa AAA 1.2%
Aa AA 4.4
A A 8.5
Baa BBB 40.8
Ba BB 12.8
B B 2.4
NR NR 29.9
-----
100.0%
=====
- --------------------------------------------------------------------------------
Bond Ratings
================================================================================
All ratings are by Standard & Poor's Ratings 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 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 exposurers to adverse conditions.
11
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
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>
[CLIP ART] Municipal High Income Fund Inc.
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 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>
[CLIP ART] Municipal High Income Fund Inc.
Statement of Assets and Liabilities (unaudited)
January 31, 1997
================================================================================
ASSETS:
Investments, at value (Cost--$176,063,743) .................. $ 185,285,758
Cash ........................................................ 13,994
Receivable for securities sold .............................. 65,292
Interest receivable ......................................... 3,143,604
-------------
Total Assets ................................................ 188,508,648
-------------
LIABILITIES:
Dividends payable ........................................... 328,445
Investment advisory fees payable ............................ 66,043
Administration fees payable ................................. 32,760
Accrued expenses ............................................ 138,090
-------------
Total Liabilities ........................................... 565,338
-------------
Total Net Assets ............................................... $ 187,943,310
=============
NET ASSETS:
Par value of capital shares ................................. $ 196,599
Capital paid in excess of par value ......................... 182,673,658
Undistributed net investment income ......................... 383,119
Accumulated net realized loss on security transactions ...... (4,532,081)
Net unrealized appreciation of investments .................. 9,222,015
-------------
Total Net Assets
(Equivalent to $9.56 a share on 19,659,882 shares of
$0.01 par value outstanding; 500,000,000 shares authorized) .. $ 187,943,310
=============
See Notes to Financial Statements.
14
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Statement of Operations (unaudited)
For the Three Months Ended January 31, 1997
================================================================================
INVESTMENT INCOME:
Interest ................................................... $ 3,457,602
------------
EXPENSES:
Investment advisory fees (Note 3) .......................... 189,608
Administration fees (Note 3) ............................... 94,804
Shareholder communications ................................. 32,263
Audit and legal ............................................ 14,871
Directors' fees ............................................ 10,839
Registration fees .......................................... 6,150
Shareholder and system servicing fees ...................... 5,809
Pricing service fees ....................................... 3,781
Custody .................................................... 2,369
Other ...................................................... 1,865
------------
Total Expenses ............................................. 362,359
------------
Net Investment Income ......................................... 3,095,243
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 4):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales ...................................... 10,957,831
Cost of securities sold .................................. 12,347,344
------------
Net Realized Loss .......................................... (1,389,513)
------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period ...................................... 7,240,580
End of period ............................................ 9,222,015
------------
Increase in Net Unrealized Appreciation .................... 1,981,435
------------
Net Gain on Investments ....................................... 591,922
------------
Increase in Net Assets From Operations ........................ $ 3,687,165
============
See Notes to Financial Statements.
15
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Statements of Changes in Net Assets
For the Three Months Ended January 31, 1997 (unaudited)
and the Year Ended October 31, 1996
================================================================================
1997 1996
---- ----
OPERATIONS:
Net investment income ........................ $ 3,095,243 $ 12,398,843
Net realized loss ............................ (1,389,513) (205,983)
Increase in net unrealized appreciation ...... 1,981,435 153,751
------------- -------------
Increase in Net Assets From Operations ....... 3,687,165 12,346,611
------------- -------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 2):
Net investment income ........................ (3,047,282) (12,090,828)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders ................. (3,047,282) (12,090,828)
------------- -------------
Increase in Net Assets .......................... 639,883 255,783
NET ASSETS:
Beginning of period .......................... 187,303,427 187,047,644
------------- -------------
End of period* ............................... $ 187,943,310 $ 187,303,427
============= =============
*Includes undistributed net investment income of: $ 383,119 $ 335,158
============= =============
See Notes to Financial Statements.
16
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited)
================================================================================
1. Significant Accounting Policies
Municipal High Income Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) 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 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>
[CLIP ART] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited) (continued)
================================================================================
4. Investments
For the three months ended January 31, 1997, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $12,453,550
- --------------------------------------------------------------------------------
Sales 10,957,831
================================================================================
At January 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $11,213,081 *
Gross unrealized depreciation (1,991,066) *
- --------------------------------------------------------------------------------
Gross unrealized appreciation $ 9,222,015 *
================================================================================
* Substantially the same for Federal income tax purposes.
5. Securities Valued by the Fund's Board of Directors
Some of the Fund's investments are valued at the direction of the Fund's
Board of Directors; these securities have been valued in good faith, taking into
consideration the appropriate economic, financial and other pertinent available
information pertaining to the securities. The table below shows the securities
valued by the Fund's Board of Directors:
<TABLE>
<CAPTION>
Value as a
Acquisition Par 1/31/97 Percentage
Security Date Amount Value of Net Assets Cost
=======================================================================================================
<S> <C> <C> <C> <C> <C>
Angelina County, TX Jail Facilities
Financing Corporation, Criminal
Detention Center, Mortgage
Revenue Bonds, 9.750%
due 8/1/09* 10/11/89 $600,000 $6,000 0.003% $158,755
La Salle County, TX Jail Facilities
Financing Corporation, Criminal
Detention Center, Mortgage
Revenue Bonds, 9.750%
due 8/1/09* 10/10/89 840,000 8,400 0.004 222,257
Pecos County, TX Jail Facilities
Financing Corporation, Criminal
Detention Center, Mortgage
Revenue Bonds, 9.750%
due 8/1/09* 10/10/89 570,000 5,700 0.003 150,780
=======================================================================================================
</TABLE>
* Security is in default.
18
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited) (continued)
================================================================================
6. Capital Shares
At January 31, 1997, the Fund had 500,000,000 shares of capital stock
authorized with a par value of $0.01 per share.
7. 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
================================================================================
19
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
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 ................. 0.16 0.63 0.64 0.65 0.67 0.70
Net realized and unrealized gain (loss) 0.03 -- 0.54 (0.72) 0.23 0.06
--------- --------- --------- --------- --------- ---------
Total Income (Loss) From Operations ..... 0.19 0.63 1.18 (0.07) 0.90 0.76
--------- --------- --------- --------- --------- ---------
Less Distributions From:
Net investment income ................. (0.16) (0.61) (0.65) (0.65) (0.67) (0.69)
Net realized gains .................... -- -- -- (0.02) -- --
--------- --------- --------- --------- --------- ---------
Total Distributions ..................... (0.16) (0.61) (0.65) (0.67) (0.67) (0.69)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period .......... $ 9.56 $ 9.53 $ 9.51 $ 8.98 $ 9.72 $ 9.49
--------- --------- --------- --------- --------- ---------
Total Return, Based on
Market Value .......................... 7.32%++ 10.22% 14.17% (10.11)% 17.76% 3.37%
--------- --------- --------- --------- --------- ---------
Total Return, Based on Net Asset
Value ................................. 1.99%++ 7.39% 14.00% (0.54)% 9.87% 8.59%
--------- --------- --------- --------- --------- ---------
Net Assets, End of Period (000s) ........ $ 187,943 $ 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 ................. 6.53+ 6.65 6.87 6.98 6.89 7.31
Portfolio Turnover Rate ................. 6% 17% 18% 17% 13% 12%
Market Value, End of Period ............. $ 9.500 $ 9.000 $ 9.000 $ 8.250 $ 9.875 $ 9.125
</TABLE>
- ----------
(1) For the three months ended January 31, 1997 (unaudited).
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
20
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
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
*As of Record Date.
21
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
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
</TABLE>
------------------
22
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited)
================================================================================
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in his own name will have all
distributions reinvested automatically by the First Data Investor Services
Group, Inc. ("First Data") as agent under the Plan, unless the shareholder
elects to receive cash. Distributions with respect to shares registered in the
name of a broker-dealer or other nominee (that is, in "street name") will be
reinvested by the broker or nominee in additional Common Stock under the Plan,
but only if the service is provided by the broker or nominee, and the broker or
nominee makes an election on behalf of the shareholder to participate in the
Plan. Distributions with respect to Common Stock registered in the name of Smith
Barney will automatically be reinvested by Smith Barney in additional shares
under the Plan unless the shareholder elects to receive distributions in cash. A
shareholder who holds Common Stock registered in the name of a broker or other
nominee may not be able to transfer the Common Stock to another broker or
nominee and continue to participate in the Plan. Investors who own Common Stock
registered in street name should consult their broker or nominee for details
regarding reinvestment.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Fund's Common Stock is equal to or exceeds 98% of net
asset value per share at the time shares are valued for determining the number
of shares equivalent to the cash dividend or capital gains distribution,
participants will be issued shares of Common Stock valued at the greater of (i)
98% of net asset value per share or (ii) 95% of the then current market price.
If 98% of the net asset value per share of Common Stock at the time of valuation
exceeds the market price of the Common Stock, First Data will buy shares of the
Fund's Common Stock on the open market, on the New York Stock Exchange, Inc. or
elsewhere, 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.
23
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited) (continued)
================================================================================
The automatic reinvestment of dividends and capital gains distributions
will not relieve Plan participants of any income tax that may be payable on the
dividends or capital gains distributions. A participant in the Plan will be
treated for federal income tax purposes as having received, on the dividend
payment date, a dividend or distribution in an amount equal to the cash that the
participant could have received instead of shares of Common Stock.
A shareholder may terminate participation in the Plan at any time by
notifying First Data in writing. A termination will be effective immediately if
notice is received by First Data not less than 10 days before any dividend or
distribution record date. Otherwise, the termination will be effective, and only
with respect to any subsequent dividends or distributions, on the first trading
day after the dividend or distribution has been credited to the participant's
account in additional shares of Common Stock of the Fund. Upon termination
according to a participant's instructions, First Data will either (a) issue
certificates for the whole shares credited to a Plan account and a check
representing any fractional shares or (b) sell the shares in the market. There
will be a $5.00 fee assessed for liquidation service, plus brokerage
commissions, and First Data is authorized to sell a sufficient number of a
participant's shares to cover such amounts.
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 January 31,
1997, the Fund has not repurchased any shares.
24
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Management of the Fund
================================================================================
Directors
Charles F. Barber
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Robert A. Frankel
William R. Hutchinson
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Lawrence T. McDermott
Vice President and
Investment Officer
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
25
<PAGE>
[CLIP ART]
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
FD01095 3/97
