Municipal
High Income
Fund Inc.
Quarterly
Report
January
31, 1998
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Municipal High Income Fund Inc.
Dear Shareholder:
We are pleased to provide the first quarter report for the Municipal High
Income Fund Inc. ("Fund") for the three months ended January 31, 1998. Over the
period covered by this report, the Fund paid income dividends totaling $0.16 per
share and posted a total return of 2.88% on net asset value ("NAV"). In
comparison, its Lipper Analytical Services, Inc. ("Lipper") peer group had an
average of 3.02% for the same period. (Lipper is an major fund-tracking
organization.) In addition, the Fund generated a total return of 4.20% based on
its market value. The table below shows the annualized distribution rates and
three-month total return based on the Fund's January 31, 1998 NAV and its New
York Stock Exchange ("NYSE") closing price.
Price Annualized Three-Month
Per Share Distribution Total Return
----------- ------------- -----------
$9.88 (NAV) 6.32% 2.88%
$10.125 (NYSE) 6.16% 4.20%
We are very pleased to report that shares of the Fund were trading at a
premium of $0.245 to its NAV of $9.88 as of January 31, 1998. Another extremely
positive Fund development has been its five-star rating overall from
Morningstar, Inc.* as of January 31, 1998.
Market and Economic Overview
Interest rates continued to decline during the course of the reporting
period. However, the bond markets did experience volatility as investors
responded to a conflicting combination of low inflation and falling
unemployment. The persistent strength of the U.S. economy heightened fears among
many investors that the Federal Reserve Board ("Fed") would raise short-term
interest rates. The Fed last raised the federal-funds rate by 0.25% in March
1997, but has since chosen to remain on the sidelines. (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.) Although it did not take
action, the Fed indicated a bias toward tightening monetary policy at each of
its meeting in July, August, September and November.
Since the end of October, the dominant theme in theme in the financial
markets has been the Asian financial crisis and the extent of the impact it will
have on the U.S. economy. We expect at least a modest dampening effect on growth
in the first part of the year with inflation
- ----------
* Morningstar, Inc. proprietary ratings reflect historical risk-adjusted
performance through 1/31/98. The ratings are subject to change every
month. Past performance is not a guarantee of future results. Morningstar,
Inc. ratings are calculated from the Fund's 3- and 5-year returns (with
fee adjustments) in excess of 90-day T-bill returns. The Fund received 5
stars for the overall, 3- and 5-year periods. It was rated among 197 and
137 closed-end municipal bond funds for the 3- and 5-year periods,
respectively. Ten percent of the funds in a rating category receive five
stars.
1
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continuing to trend lower in spite of wage pressures resulting from an extremely
tight labor market. We also expect the Fed to hold short-term rates steady over
the near term.
Investment Strategy
The Fund's investment objective is to provide high levels of tax-exempt
current income. In pursuit of this objective, the Fund continues to focus on
higher coupon bonds in order to maintain an attractive level of current income.
Early in the reporting period we favored select health care issues that
have performed well the past two years, primarily due to the growing health care
needs of an aging population. We have maintained broad diversification across a
number of investment areas that we believe offer high yield potential as well as
relative price stability. In our opinion, the favorable economic conditions and
low interest rates have made select housing bonds attractive. Another area of
emphasis for the Fund has been the airline industry because it offers good
relative value in a growing economy.
As of January 31, 1998, the majority of the Fund's assets were allocated
among the following sectors: industrial revenue bonds (24.9%), hospital bonds
(15.2%), pollution control revenue bonds (11.1%) and utility bonds (10.1%).
Municipal Bond Market Outlook
Moderate economic growth, combined with historically low inflation, should
continue to be favorable for intermediate- and long-term municipal bonds. It is
important to emphasize that the after-tax returns for municipal bonds versus
U.S. Treasurys are still quite attractive. We believe that many municipal bond
individual investors are concentrating on long-term opportunities rather than
short-term events and, therefore, we are still bullish on the long-term
prospects for municipal bonds.
In closing, we thank you for your investment in the Municipal High Income
Fund Inc. We look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Lawrence T. McDermott
Heath B. McLendon Lawrence T. McDermott
Chairman Vice President and
Investment Officer
February 27, 1998
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Take Advantage of the Fund's Dividend Reinvestment Policy!
Did you know that fund investors who reinvest their
dividends are taking advantage of one of the most powerful
wealth-building tools available today? As an investor in
the Municipal High Income Fund, you can participate in the
Fund's Dividend Reinvestment Plan at no charge.
The Dividend Reinvestment Plan offers you a convenient,
simple and efficient way to reinvest your dividends and
capital gains, if any, in additional shares of the
Municipal High Income Fund. In fact, unless you elect to
receive cash, you are automatically enrolled in the Fund's
Dividend Reinvestment Plan if you hold common stock shares
in your own name. If your Municipal High Income Fund
shares are held by a financial institution, you can
contact them directly to find out whether they offer the
Dividend Reinvestment Plan. If the financial institution
does not offer the Plan but you still want to participate,
consider asking that your Fund shares be registered in
your name or transferred to your account.
One great feature of the Fund's Dividend Reinvestment Plan
is that the number of common stock shares you will receive
is determined this way: if the market price of the common
stock is equal or higher than the 98% net asset value
("NAV") per share at the time of valuation, you will be
issued shares for the equivalent of either 98% of the most
recently determined NAV per share or 95% of the market
price, whichever is greater. For more information about
the Plan, please refer to page 23 of this report. Or, to
learn more about the Municipal High Income Fund's Dividend
Reinvestment Plan, you can contact:
First Data Investor Services Group, Inc.
P.O. Box 8030
Boston, MA 02266-8030
Telephone: 1-800-331-1710
Please remember that if your Fund shares are not held in
your name, you should get in touch with your financial
institution directly for more information about the
Dividend Reinvestment Plan.
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Municipal High Income Fund Inc.
[GRAPHIC OMITTED] Schedule of Investments (unaudited)
January 31, 1998
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Alabama -- 4.1%
$ 285,000 Aaa* Alabama HFA, Single-Family Mortgage Revenue,
10.500% due 12/1/02 ........................$ 306,019
1,000,000 BBB- Alabama State IDA, Solid Waste Disposal,
6.450% due 12/1/23 (a) ..................... 1,090,000
4,000,000 BBB- Butler, AL IDR, Waste Disposal,
8.000% due 9/1/28 (a)(b) ................... 4,650,000
1,000,000 BBB- Mobile, AL IDR, 6.950% due 1/1/20 ............. 1,110,000
1,000,000 NR West Jefferson, AL Amusement & Public Park
Authority Revenue, (Visionland Project),
8.000% due 12/1/26 ......................... 1,068,750
-------------
8,224,769
-------------
Arizona -- 2.3%
1,000,000 BBB- Coconino County, AZ PCR, Nevada Power Co.,
Series B, 5.800% due 11/1/32 (a) ........... 1,023,750
2,000,000 BBB Gila County, AZ IDA, Industrial Development
Authority Revenue, Environmental, ASARCO
Inc., 5.550% due 1/1/27 .................... 2,027,500
1,500,000 A-1+ Maricopa County, AZ Pollution Control
Corporate, PCR, Public Service, 3.600%
due 12/1/15 (c) ............................ 1,500,000
-------------
4,551,250
-------------
California -- 2.1%
2,000,000 NR Los Angeles County, CA Regional Airport
Authority, Continental Airlines, Inc.,
9.000% due 8/1/17 (a)(b) ................... 2,082,880
2,000,000 BBB- Sacramento, CA Cogeneration Authority,
Electric Revenue, 6.500% due 7/1/14 ........ 2,205,000
-------------
4,287,880
-------------
Colorado -- 2.6%
2,000,000 NR Colorado Health Facilities Authority Revenue,
(Beth Israel at Shalom Park Project),
7.250% due 12/15/25 ........................ 2,097,500
Denver, CO Airport, Series A:
1,505,000 Baa1* 8.500% due 11/15/23 (a) .................... 1,693,125
1,175,000 Baa1* 8.000% due 11/15/25 (a) .................... 1,316,000
-------------
5,106,625
-------------
Connecticut -- 1.8%
Connecticut State Development Authority:
1,735,000 NR Aquarium Project Revenue, Mystic Marinelife
Aquarium, 7.000% due 12/1/27 ............. 1,860,787
1,500,000 NR Health Care Revenue, Series B, 8.000%
due 7/1/17 ............................... 1,651,875
-------------
3,512,662
-------------
Florida -- 2.7%
875,000 NR Homestead, FL IDR, (Project A), 7.950%
due 11/1/18 ................................ 950,469
2,005,000 NR Jacksonville, FL Health Facilities Authority
Revenue, 9.125% due 10/15/19 ............... 2,065,230
See Notes to Financial Statements.
4
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Municipal High Income Fund Inc.
[GRAPHIC OMITTED] Schedule of Investments (unaudited) (continued)
January 31, 1998
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Florida -- 2.7% (continued)
$2,000,000 BBB- Martin County, FL IDR, (Indiantown Cogeneration
Project A), 7.875% due 12/15/25 (a) ........$ 2,342,500
-------------
5,358,199
-------------
Georgia -- 0.6%
1,000,000 NR Walton County, GA IDA, (Walton Project),
8.500% due 9/1/07 .......................... 1,152,500
-------------
Illinois -- 4.7%
2,850,000 BB+ Chicago, IL O'Hare International Airport,
Special Facilities Revenue Bonds, United
Airlines, Series B, 8.950%
due 5/1/18 (a) ............................. 3,252,562
2,500,000 BB- East Chicago, IL IDA Revenue, (Inland Steel
Co., Project 10), 6.800% due 6/1/13 ........ 2,725,000
1,500,000 A+ Illinois Housing Development Authority,
Series 5, 6.750% due 9/1/23 ................ 1,636,875
740,000 NR Loves Park, IL First Mortgage Revenue,
(Hoosier Care Project), Series A, 9.750%
due 8/1/19 ................................. 790,875
970,000 NR Sterling, IL First Mortgage Revenue, (Hoosier
Care Project), Series A, 9.750%
due 8/1/19 ................................. 1,030,625
-------------
9,435,937
-------------
Indiana -- 4.2%
2,000,000 BBB- Indiana State Environmental Development Finance
Authority, (USX Corp. Project), 6.250%
due 7/15/30 ................................ 2,145,000
1,000,000 Ba3* Indiana State IDA Finance Authority, PCR,
(Inland Steel Co., Project No. 13),
7.250% due 11/1/11 (a) ..................... 1,132,500
4,750,000 Baa2* Indianapolis, IN Airport Authority, United
Airlines, 6.500% due 11/15/31 (a)(b) .......... 5,213,125
-------------
8,490,625
-------------
Kentucky -- 2.1%
1,290,000 NR Jefferson County, KY Health Facilities
Authority, Dates Beverly Enterprises,
10.125% due 5/1/08 ......................... 1,385,137
1,500,000 BBB- Kenton County, KY Airport Board, (Delta
Airlines Project), 7.500% due 2/1/20 (a) ... 1,680,000
1,000,000 A Pendleton County, KY Multi-Lease Revenue,
Series A, 6.500% due 3/1/19 ................ 1,101,250
-------------
4,166,387
-------------
Louisiana -- 5.3%
1,200,000 A3* Lake Charles, LA Harbor & Terminal District
Port Facilities Revenue, (Trunkline LNG
Co. Project), 7.750% due 8/15/22 ........... 1,393,500
See Notes to Financial Statements.
5
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Municipal High Income Fund Inc.
[GRAPHIC OMITTED] Schedule of Investments (unaudited) (continued)
January 31, 1998
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Louisiana -- 5.3% (continued)
Port New Orleans, LA IDR:
Avondale Industries, Inc. Project:
$1,800,000 NR 8.250% due 6/1/04 ........................$ 2,058,750
3,000,000 NR 8.500% due 6/1/14 ........................ 3,491,250
1,000,000 BB Continental Grain Co. Project, 7.500%
due 7/1/13 (b) ........................... 1,115,000
2,400,000 BB+ West Feliciana Parish, LA PCR, 8.000%
due 12/1/24 ................................ 2,598,000
-------------
10,656,500
-------------
Maine -- 0.2%
Maine State Housing Authority Mortgage
Purchases:
280,000 AA Series C-2, 7.000% due 11/15/32 (a) ........ 304,500
20,000 AA Series D-1, 8.300% due 11/15/28 (a) ........ 20,570
-------------
325,070
-------------
Massachusetts -- 6.4%
1,880,000 AAA Commonwealth of Massachusetts Health
& Educational Facilities Authority
Revenue, North Adams Regional
Hospital, (Pre-Refunded -- Escrowed
with U.S. government securities to
7/1/99 Call @ 102), 9.625% due 12/1/18 ..... 2,063,300
Commonwealth of Massachusetts Industrial
Finance Agency, (S.E. Mass Project):
1,700,000 NR Series A, 9.000% due 7/1/15 .............. 1,940,125
5,940,000 NR Series B, 9.250% due 7/1/15 (a) .......... 6,801,300
2,000,000 NR Massachusetts State Industrial Finance Agency,
Assisted Living Facility Revenue, (Marina
Bay LLC Project), 7.500% due 12/1/27 (a) ... 2,022,500
-------------
12,827,225
-------------
Michigan -- 0.4%
695,000 BBB+ Western Townships, MI Utility Revenue, Sewage
System, (Subject to Crossover Refunding
11/1/99 @ 102), 8.300% due 1/1/19 .......... 727,721
-------------
Minnesota -- 1.0%
1,890,000 AA+ Minnesota HFA, Single-Family, Series H,
6.700% due 1/1/18 .......................... 2,055,375
-------------
Mississippi -- 2.5%
Claiborne County, MS PCR, Series C:
3,300,000 Ba1* 9.875% due 12/1/14 ......................... 3,537,105
1,500,000 BBB- 6.200% due 2/1/26 .......................... 1,548,750
-------------
5,085,855
-------------
Montana -- 1.8%
3,530,000 NR Montana State Board Investment Resource
Recovery Revenue, (Yellowstone Energy
LP Project), 7.000% due 12/31/19 (a) ....... 3,543,237
-------------
See Notes to Financial Statements.
6
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Municipal High Income Fund Inc.
[GRAPHIC OMITTED] Schedule of Investments (unaudited) (continued)
January 31, 1998
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FACE
AMOUNT RATING SECURITY VALUE
================================================================================
New Hampshire -- 0.5%
$1,000,000 BBB- New Hampshire Higher Educational & Health
Facilities Authority Revenue, New
Hampshire College, 6.375% due 1/1/27 .......$ 1,061,250
-------------
New Jersey -- 5.0%
3,000,000 Baa2* Camden County, NJ Improvement Authority
Revenue, Health Care Redevelopment
Project, (Cooper Health), 5.875%
due 2/15/15 ................................ 3,123,750
2,200,000 NR New Jersey Educational Facilities, Fairleigh
Dickinson University, Series C, 6.625%
due 7/1/23 ................................. 2,296,250
New Jersey Health Care Facilities:
1,885,000 Ba1* Palisades Medical Center, Finance Authority
Revenue, 7.600% due 7/1/21 ............... 2,019,306
1,000,000 NR Raritan Bay Medical Center, 7.250%
due 7/1/27 ............................... 1,098,750
1,500,000 BBB- Zurbrugg Memorial Hospital, Series C,
8.500% due 7/1/12 ........................ 1,537,575
-------------
10,075,631
-------------
New Mexico -- 0.7%
1,235,000 AAA New Mexico Mortgage Finance Authority,
Single-Family Mortgage Program, Series B,
FHA-Insured, 8.300% due 3/1/20 (a) ......... 1,380,113
-------------
New York -- 6.0%
4,715,000 BBB+ New York City, NY GO, Series F, 6.625%
due 2/15/25 ................................ 5,239,544
1,500,000 NR New York City, NY IDA, Civil Facility Revenue,
7.500% due 8/1/26 .......................... 1,586,250
1,950,000 BB+ New York State Energy, Research & Development
Authority, Electric Facility Revenue, LILCO,
7.150% due 12/1/20 (a) ..................... 2,137,687
2,750,000 NR Port Authority of NY & NJ, Special Obligation
Revenue, 6.750% due 10/1/19 (a) ............ 3,090,313
-------------
12,053,794
-------------
North Carolina -- 4.1%
1,750,000 A Martin County, NC Industrial Facilities PCR,
6.800% due 5/1/24 (a) ...................... 1,964,375
2,300,000 Baa1* North Carolina Eastern Municipal Power Agency,
Power Systems Revenue, Series B, 7.000%
due 1/1/08 ................................. 2,699,625
1,440,000 NR North Carolina Medical Care Community Health
Care Facilities, First Mortgage, De Paul
Community Facilities, 6.125% due 1/1/28 .... 1,445,400
2,050,000 A- North Carolina Municipal Power Agency No. 1,
Catawaba Electric Revenue, 6.250%
due 1/1/17 ................................. 2,188,375
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8,297,775
-------------
Ohio -- 4.8%
1,000,000 NR Cleveland, OH Airport Special Revenue,
Continental Airlines Inc., 9.000% due
12/1/19 (a) ................................ 1,090,000
See Notes to Financial Statements.
7
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Municipal High Income Fund Inc.
[GRAPHIC OMITTED] Schedule of Investments (unaudited) (continued)
January 31, 1998
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Ohio -- 4.8% (continued)
$1,000,000 NR Cuyahoga County, OH Health Care Facilities,
Judson Retirement Community, Series A,
7.250% due 11/15/18 ........................$ 1,067,500
3,000,000 BBB Dayton, Ohio Special Facilities Revenue,
Emergency Air Freight, Series A, 5.625%
due 2/1/18 ................................. 3,097,500
1,500,000 Baa1* Montgomery County, OH Health Systems Revenue,
Series B, 8.100% due 7/1/18 ................ 1,811,250
1,250,000 NR Ohio State Solid Waste Revenue, 9.000% due
6/1/21 (a) ................................. 1,360,937
1,000,000 Baa3* Ohio Water Development Authority, PCR,
Series A, 8.100% due 10/1/23 (a) ........... 1,073,750
-------------
9,500,937
-------------
Pennsylvania -- 14.8%
2,200,000 B- Allegheny County, PA IDA, Special Facilities
Revenue, Series B, (U.S. Air Project),
8.500% due 3/1/21 (a) ...................... 2,480,500
Beaver County, PA IDA, PCR:
2,000,000 BB+ 7.625% due 5/1/20 .......................... 2,295,000
2,500,000 BB+ 7.625% due 5/1/25 .......................... 2,868,750
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 (d) .............. 1,661,250
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 (d) ..................... 3,273,750
2,500,000 A- Luzerne County, PA IDA, 7.125% due
12/1/22 (a) ................................ 2,759,375
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 ............ 2,187,500
550,000 NR Northumberland County, PA IDA Revenue,
6.875% due 2/1/03 .......................... 566,500
1,500,000 AA+ Pennsylvania HFA, Series C, 6.900% due
4/1/25 (a) ................................. 1,638,750
1,935,000 BBB Philadelphia, PA Gas Revenue, Series B,
6.400% due 11/15/16 ........................ 2,058,356
1,000,000 NR Philadelphia, PA IDR, Host Marriott, 7.750%
due 12/1/17 (a) ............................ 1,111,250
Scranton-Lackawanna, PA Health & Welfare
Authority Revenue, (Moses Taylor Hospital
Project):
1,905,000 BBB- 6.150% due 7/1/14 ........................ 2,043,113
3,050,000 BBB- 6.250% due 7/1/20 ........................ 3,274,937
1,250,000 BBB+ Sharon, PA Regional Health Systems,
(Project B), 6.875% due 12/1/22 ............ 1,353,125
-------------
29,572,156
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Puerto Rico -- 0.2%
200,000 A Commonwealth of Puerto Rico, GO Bonds,
(Partially Pre-Refunded -- Escrowed with
U.S. government securities to 7/1/98 Call
@ 102), 8.000% due 7/1/08 .................. 207,142
See Notes to Financial Statements.
8
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Municipal High Income Fund Inc.
[GRAPHIC OMITTED] Schedule of Investments (unaudited) (continued)
January 31, 1998
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Puerto Rico -- 0.2% (continued)
$ 200,000 A-1+ Commonwealth of Puerto Rico, Government
Development Bank, 3.250% due
12/1/15 (c) ................................$ 200,000
-------------
407,142
-------------
South Carolina -- 2.1%
860,000 NR Florence County, SC IDR, 7.375% due 2/1/07 .... 941,700
2,500,000 BBB- Greenville, SC Connector 2,000 Association
Inc., SC Toll Road Revenue, (Southern
Connector Project), Series A, 5.375%
due 1/1/38 ................................. 2,431,250
840,000 NR McCormick County, SC COP, 9.750%
due 7/1/09 ................................. 855,355
-------------
4,228,305
-------------
South Dakota -- 1.0%
Oglala Sioux Tribe, SD Pine Ridge County,
Revenue Bonds:
100,000 NR 7.000% due 7/1/99 ........................ 101,375
1,865,000 NR 7.500% due 7/1/13 ........................ 1,925,613
-------------
2,026,988
-------------
Tennessee -- 0.4%
750,000 AAA Knox County, TN Health, Education & Housing,
FSA-Insured, 7.125% due 1/1/30. ............ 840,938
-------------
Texas -- 10.9%
1,350,000 BBB Alliance, TX Airport Authority Inc.,
(Federal Express Corp. Project), 6.375%
due 4/1/21 (a) ............................. 1,469,812
2,000,000 BBB+ Brazos River, TX PCR, (Collateral-Texas
Utilities Electric Co., Project A), 8.250%
due 1/1/19 (a) ............................. 2,107,440
1,015,000 A2* El Paso, TX Housing Finance Corp.,
Single-Family Mortgage Revenue, 8.750%
due 10/1/11 ................................ 1,105,081
2,000,000 B1* El Paso, TX International Airport Revenue
Bonds, (Marriott Corp. Project), 7.750%
due 3/1/12 ................................. 2,157,500
1,170,000 NR Harris County, TX Industrial Development
Corporation, IDR, Continental Airlines Inc.,
7.950% due 7/1/19 (a) ...................... 1,182,917
Houston, TX Airport Systems Revenue Special
Facilities, Continental Airlines Inc.:
1,050,000 Ba1* Series B, 6.125% due 7/15/27 (a) ......... 1,094,625
3,000,000 Ba1* Series C, 6.125% due 7/15/27 (a) ......... 3,127,500
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 .......... 1,047,500
1,400,000 A- Series A, 7.875% due 2/1/19 (a) .......... 1,429,792
1,400,000 AA North Central, TX Health Facilities Development
Project, Hospital Revenue Bonds, Baylor
Health Care Systems, Series 1992B, Variable
Rate INFLOS, 7.950% due 5/15/08 (e) ........ 1,529,500
See Notes to Financial Statements.
9
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Municipal High Income Fund Inc.
[GRAPHIC OMITTED] Schedule of Investments (unaudited) (continued)
January 31, 1998
================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Texas -- 10.9% (continued)
Northgate Crossing, TX Municipals Utilities:
$1,000,000 NR District 1, GO, 8.875% due 12/1/13 .........$ 1,011,250
1,000,000 NR District 2, Special Tax, 8.875%
due 12/1/13 .............................. 1,011,250
3,435,000 BB Sam Rayburn, TX Municipal Power Supply
System Revenue Refunding, Series A,
6.250% due 10/1/17 ......................... 3,503,700
-------------
21,777,867
-------------
Utah -- 2.0%
1,735,000 NR Hurricane, UT Health Facilities Development
Revenue, (Mission Health Services Project),
10.500% due 7/1/20 ......................... 1,908,500
2,000,000 NR Utah State Housing Finance Agency Revenue,
Series A, 6.875% due 7/1/27 ................ 2,100,000
-------------
4,008,500
-------------
Vermont -- 1.1%
2,060,000 A1* Vermont Housing Finance Agency, Home
Mortgage, Series B, 8.100% due 6/1/22
(a) ........................................ 2,131,503
-------------
West Virginia -- 0.7%
2,500,000 NR Marion County, WV County Commission, Solid
Waste Disposal Facility, 7.750% due 12/1/11
(a)(f) ..................................... 1,400,000
-------------
Wisconsin -- 0.9%
1,770,000 NR Wisconsin State Health & Educational
Facilities Authority Revenue, Benchmark
Health Care Green Bay, 7.750% due 5/1/27 ... 1,860,713
-------------
TOTAL INVESTMENTS -- 100%
(Cost -- $185,365,709**) ......................$200,131,429
=============
(a) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(b) Security segregated by Custodian for open market purchase commitment.
(c) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
(d) Pre-Refunded bonds escrowed with U.S. government securities are considered
by Manager to be triple-A rated even if issuer has not applied for new
ratings.
(e) Residual interest bonds-coupon varies inversely with level of short-term
tax-exempt interest rates.
(f) Security is in default.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 12 through 13 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements
10
<PAGE>
Municipal High Income Fund Inc.
[GRAPHIC OMITTED] Summary of Municipal Bonds by Combined Ratings
January 31, 1998 (unaudited)
================================================================================
- --------------------------------------------------------------------------------
Standard & Percent of
Moody's and/or Poor's Total Investments
- --------------------------------------------------------------------------------
Aaa AAA 3.9%
Aa AA 2.8
A A 8.0
Baa BBB 33.2
Ba BB 15.7
B B 2.3
VMIG 1 A-1+ 0.8
NR NR 33.3
-----
100.0%
=====
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
11
<PAGE>
Municipal High Income Fund Inc.
Bond Ratings
[GRAPHIC OMITTED]
================================================================================
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except 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 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.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating
from "Aa" to "B," where 1 is the highest and 3 the lowest rating within its
generic category.
Aaa -- Bonds 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 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 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.
12
<PAGE>
Municipal High Income Fund Inc.
Bond Ratings (continued)
[GRAPHIC OMITTED]
================================================================================
Baa -- Bonds 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 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.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over many long period of
time may be small.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
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.
[GRAPHIC OMITTED] Statement of Assets and Liabilities (unaudited)
January 31, 1998
================================================================================
ASSETS:
Investments, at value (Cost-- $185,365,709) ................ $ 200,131,429
Receivable for securities sold ............................. 170,292
Interest receivable ........................................ 2,909,530
-------------
Total Assets ............................................... 203,211,251
-------------
LIABILITIES:
Payable for securities purchased ........................... 5,404,608
Investment advisory fees payable ........................... 67,088
Administration fees payable ................................ 33,283
Payable to bank ............................................ 27,987
Accrued expenses ........................................... 131,105
-------------
Total Liabilities .......................................... 5,664,071
-------------
Total Net Assets ............................................. $ 197,547,180
=============
NET ASSETS:
Par value of capital shares ................................ $ 199,880
Capital paid in excess of par value ........................ 185,794,748
Undistributed net investment income ........................ 10,427
Accumulated net realized loss from security transactions ... (3,223,595)
Net unrealized appreciation of investments ................. 14,765,720
-------------
Total Net Assets ............................................. $ 197,547,180
=============
Shares Outstanding ........................................... 19,988,017
-------------
Net Asset Value .............................................. $ 9.88
-------------
See Notes to Financial Statements.
14
<PAGE>
Municipal High Income Fund Inc.
Statement of Operations (unaudited)
For the Three Months Ended January 31, 1998
[GRAPHIC OMITTED]
================================================================================
INVESTMENT INCOME:
Interest ..................................................... $ 3,350,456
-----------
EXPENSES:
Investment advisory fees (Note 3) ............................ 195,221
Administration fees (Note 3) ................................. 97,610
Shareholder communications ................................... 31,912
Audit and legal .............................................. 14,060
Director's fees .............................................. 10,721
Registration fees ............................................ 6,083
Shareholder and system servicing fees ........................ 5,746
Pricing service fees ......................................... 3,740
Custody ...................................................... 2,440
Other ........................................................ 1,729
-----------
Total Expenses ............................................... 369,262
-----------
Net Investment Income .......................................... 2,981,194
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 4):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales ........................................ 30,476,982
Cost of securities sold .................................... 30,158,396
-----------
Net Realized Gain ............................................ 318,586
-----------
Change in Net Unrealized Appreciation of Investments:
Beginning of period ........................................ 12,531,523
End of period .............................................. 14,765,720
-----------
Increase in Net Unrealized Appreciation ...................... 2,234,197
-----------
Net Gain on Investments ........................................ 2,552,783
-----------
Increase in Net Assets From Operations ......................... $ 5,533,977
===========
See Notes to Financial Statements.
15
<PAGE>
Municipal High Income Fund Inc.
Statement of Changes in Net Assets
For the Three Months Ended
[GRAPHIC OMITTED] January 31, 1998
(unaudited) and the Year
Ended October 31, 1997
================================================================================
1998 1997
---- ----
Operations:
Net investment income ...................... $ 2,981,194 $ 12,082,608
Net realized gain/loss from security
transactions ............................... 318,586 (399,613)
Increase in net unrealized appreciation
of investments ............................. 2,234,197 5,290,943
------------- -------------
Increase in Net Assets From Operations ..... 5,533,977 16,973,938
------------- -------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 2):
Net investment income ...................... (3,107,465) (12,281,068)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders .............. (3,107,465) (12,281,068)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends .................. 987,375 2,136,996
------------- -------------
Increase in Net Assets From
Fund Share Transactions .................... 987,375 2,136,996
------------- -------------
Increase in Net Assets ....................... 3,413,887 6,829,866
NET ASSETS:
Beginning of period ........................ 194,133,293 187,303,427
------------- -------------
End of period* ............................. $ 197,547,180 $ 194,133,293
============= =============
*Includes undistributed net
investment income of: .................. $ 10,427 $ 136,698
============= =============
See Notes to Financial Statements.
16
<PAGE>
Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited)
[GRAPHIC OMITTED]
================================================================================
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
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual
Funds Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc.
("SSBH"), acts as investment adviser to the Fund. The Fund pays MMC an advisory
fee calculated at an annual rate of 0.40% of the average daily net assets. MMC
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.
Notes to Financial Statements (unaudited) (continued)
[GRAPHIC OMITTED]
================================================================================
4. Investments
During the three months ended January 31, 1998, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $34,850,115
- --------------------------------------------------------------------------------
Sales 30,476,982
================================================================================
At January 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 16,003,822
Gross unrealized depreciation (1,238,102)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 14,765,720
================================================================================
5. Capital Shares
At January 31, 1998, the Fund had 500,000,000 shares of capital stock
authorized with a par value of $0.01 per share.
Capital stock transactions during the period were as follows:
Three Months Ended Year Ended
January 31, 1998 October 31, 1997
------------------- --------------------
Shares Amount Shares Amount
================================================================================
Shares issued on reinvestment 102,711 $ 987,375 225,424 $2,136,996
================================================================================
6. Capital Loss Carryforwards
At October 31, 1997, the Fund had, for Federal income tax purposes,
approximately $3,542,000 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 2005
================================================================================
Carryforward Amounts $2,667,000 $270,000 $205,000 $400,000
================================================================================
18
<PAGE>
Municipal High Income Fund Inc.
Financial Highlights
[GRAPHIC OMITTED]
================================================================================
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
1998(1) 1997 1996 1995 1994 1993
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................... $9.76 $9.53 $9.51 $8.98 $9.72 $9.49
-------- -------- -------- -------- -------- --------
Income (Loss) From Operations:
Net investment income ................. 0.15 0.61 0.63 0.64 0.65 0.67
Net realized and unrealized gain (loss) 0.13 0.24 -- 0.54 (0.72) 0.23
-------- -------- -------- -------- -------- --------
Total Income (Loss) From Operations ..... 0.28 0.85 0.63 1.18 (0.07) 0.90
-------- -------- -------- -------- -------- --------
Less Distributions From:
Net investment income ................. (0.16) (0.62) (0.61) (0.65) (0.65) (0.67)
Net realized gains .................... -- -- -- -- (0.02) --
-------- -------- -------- -------- -------- --------
Total Distributions ..................... (0.16) (0.62) (0.61) (0.65) (0.67) (0.67)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period .......... $9.88 $9.76 $9.53 $9.51 $8.98 $9.72
-------- -------- -------- -------- -------- --------
Total Return, Based on
Market Value .......................... 4.20%++ 17.22% 10.22% 14.17% (10.11)% 17.76%
-------- -------- -------- -------- -------- --------
Total Return, Based on
Net Asset Value ....................... 2.88%++ 9.41% 7.39% 14.00% (0.54)% 9.87%
-------- -------- -------- -------- -------- --------
Net Assets, End of Period (000s) ........ $197,547 $194,133 $187,303 $187,048 $176,379 $188,294
======== ======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses .............................. 0.76%+ 0.74% 0.77% 0.84% 0.84% 0.87%
Net investment income ................. 6.11+ 6.38 6.65 6.87 6.98 6.89
Portfolio Turnover Rate ................. 16% 35% 17% 18% 17% 13%
Market Value, End of Period ............. $10.125 $9.875 $9.000 $9.000 $8.250 $9.875
</TABLE>
(1) For the three months ended January 31, 1998 (unaudited).
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
19
<PAGE>
Municipal High Income Fund Inc.
Financial Data Per Share of Common Stock (unaudited)
[GRAPHIC OMITTED]
================================================================================
Dividend
Record Payable NYSE Net Asset Dividend Reinvestment
Date Date Closing Price* Value* Paid Price
- -------- -------- -------------- ------ -------- ------------
11/20/95 11/24/95 $8.750 $9.52 $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
5/28/96 5/31/96 8.875 9.40 0.0510 8.85
6/05/96 6/28/96 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 9/27/96 9.000 9.44 0.0510 9.00
10/22/96 10/25/96 9.000 9.49 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 9.56 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
5/27/97 5/30/97 9.125 9.53 0.0520 9.47
6/24/97 6/27/97 9.563 9.62 0.0520 9.43
7/22/97 7/25/97 9.938 9.70 0.0520 9.51
8/26/97 8/29/97 9.500 9.68 0.0520 9.49
9/23/97 9/26/97 9.813 9.72 0.0520 9.53
10/28/97 10/31/97 9.625 9.74 0.0520 9.55
11/24/97 11/28/97 9.938 9.76 0.0520 9.56
12/22/97 12/26/97 10.000 9.83 0.0520 9.63
1/27/98 1/30/98 10.125 9.85 0.0520 9.65
*As of record date.
20
<PAGE>
Municipal High Income Fund Inc.
Quarterly Results of Operations (unaudited)
[GRAPHIC OMITTED]
================================================================================
<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>
1/31/96 $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 2,132,57 80.11 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
7/31/97 3,314,095 0.17 2,960,294 0.15 4,722,973 0.24 7,683,267 0.39
10/31/97 3,360,938 0.17 3,016,071 0.15 466,422 0.02 3,482,493 0.17
1/31/98 3,350,456 0.17 2,981,194 0.15 2,552,783 0.13 5,533,977 0.28
</TABLE>
21
<PAGE>
Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited)
[GRAPHIC OMITTED]
================================================================================
The Fund's Board of Directors recently approved an amendment to the Plan
whereby changes to the Plan may be implemented upon 30 days notice to
shareholders. No substantive changes to the terms of the Plan are contemplated
at this time, and except as previously stated, the terms of the Plan remain the
same.
The Fund's policy, which may be changed by the Fund's Board of Directors,
is generally to make monthly distributions of substantially all its net
investment income (i.e., income other than net realized capital gains) to the
holders of the Fund's Common Stock. From time to time, when the Fund makes a
substantial capital gains distribution, it may do so in lieu of paying its
regular monthly dividend. Net income of the Fund consists of all interest income
accrued on portfolio assets less all expenses of the Fund. Expenses of the Fund
are accrued each day. Net realized capital gains, if any, will be distributed to
the shareholders at least once a year.
Under the Fund's Dividend Reinvestment Plan ("Plan"), a shareholder whose
Common Stock is registered in his or her own name will have all distributions
reinvested automatically by First Data as purchasing 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 shares
under the Plan, unless the service is not provided by the broker or nominee or
the shareholder elects to receive distributions in cash. Investors who own
Common Stock registered in street name should consult their broker-dealers for
details regarding reinvestment. All distribu tions to shareholders who do not
participate in the Plan will be paid by check mailed directly to the record
holder by or under the direction of First Data, as dividend-paying agent.
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 Common Stock is equal to or exceeds 98% of net asset
value per share on the date of valuation, participants will be issued shares of
Common Stock valued at the greater of (1) 98% of the net asset value most
recently determined as provided under "Net Asset Value" or (2) 95% of the market
price. To the extent that the Fund issues shares to participants in the Plan at
a discount to net asset value, the interests of remaining shareholders (i.e.,
those who do not participate in the Plan) in the Fund's net assets will be
proportionately diluted.
If 98% of the net asset value per share of the Common Stock at the time of
valuation exceeds the market price of Common Stock, or if the Fund declares a
dividend or capital gains distribution payable only in cash, First Data will buy
Common Stock in the open market, on the NYSE or elsewhere, for the participants'
accounts. If, following the commencement of the purchases and before First Data
has completed its purchases, the market price exceeds 98% of the net asset value
per share of the Common Stock, First Data will attempt to terminate purchases in
the open market and cause the Fund to issue the remaining portion of the
dividend or distribution by issuing shares
22
<PAGE>
Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited) (continued)
[GRAPHIC OMITTED]
================================================================================
at a price equal to 98% of the net asset value per share. In this case, the
number of shares of Common Stock received by a Plan 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. To the extent First
Data is unable to stop open market purchases and cause the Fund to issue the
remaining shares, the average per share price paid by First Data may exceed 98%
of the net asset value per share of the Common Stock, resulting in the
acquisition of fewer shares of Common Stock than if the dividend or capital
gains distribution had been paid in Common Stock issued by the Fund at 98% of
the net asset value per share. First Data will begin to purchase Common Stock on
the open market as soon as practicable after the payment date of the dividend or
capital gains distribution, but in no event shall such purchases continue later
than 30 days after that date, except when necessary to comply with applicable
provisions of the Federal securities laws.
First Data maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. 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. Common Stock in the account of each Plan participant will be held
by First Data in uncertificated form in the name of the Plan participant.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. First Data's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
Fund. No brokerage charges shall apply with respect to shares of Common Stock
issued directly by the Fund under the Plan. Each Plan participant will, however,
bear a pro-rata share of brokerage commissions incurred with respect to any open
market purchases made under the Plan.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data or the Fund on at least 30 days' written notice to Plan
participants. All correspondence concern ing the Plan should be directed by mail
to First Data Investor Services Group, Inc., P.O. Box 8030, Boston,
Massachusetts 02266-8030 or by telephone at 1-800-331-1710.
------------------------
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,
1998, the Fund has not repurchased any shares.
23
<PAGE>
Municipal High Income Fund Inc.
Management of the Fund
[GRAPHIC OMITTED]
================================================================================
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
President and
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
Mutual Management Corp.
388 Greenwich Street
New York, New York 10013
Transfer Agent
First Data Investor Services Group, Inc.
P.O. Box 8030
Boston, Massachusetts 02266-8030
Custodian
PNC Bank, N.A.
17th and Chestnut Street
Philadelphia, Pennsylvania 19103
24
<PAGE>
[GRAPHIC OMITTED]
This report is intended only for shareholders of Municipal High Income Fund Inc.
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 3/98
