Municipal
High Income
Fund Inc.
Annual
Report
October
31, 1997
<PAGE>
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Municipal High Income Fund Inc.
Dear Shareholder:
We are pleased to provide the annual report for the Municipal High Income
Fund Inc. ("Fund") for the year ended October 31, 1997. Over the one-year period
covered by this report, the Fund paid income dividends totaling $0.623 per share
and posted a total return of 9.41% on net asset value ("NAV"). In comparison,
its Lipper Analytical Services, Inc. ("Lipper") peer group had an average of
9.28% for the same period. (Lipper is a major fund-tracking organization.) In
addition, the Fund generated a total return of 17.22% based on its market value.
The table below shows the annualized distribution rate and twelve month total
return based on the Fund's October 31, 1997 NAV and its New York Stock Exchange
("NYSE") closing price.
Price Annualized Twelve Month
Per Share Distribution Rate Total Return
----------- ----------------- ------------
$9.76 (NAV) 6.38% 9.41%
$9.875 (NYSE) 6.31% 17.22%
We are very pleased to report that shares of the Fund are now trading at a
premium of $0.115 to its NAV of $9.76 as of October 31, 1997. Another extremely
positive Fund development has been its five-star rating overall from
Morningstar, Inc.* as of October 31, 1997.
Market and Economic Overview
The recent turmoil in the international markets have preoccupied many U.S.
investors. We believe one positive outcome that should result from this turmoil
is that the Federal Reserve Board ("Fed") will be very reluctant to raise
interest rates over the next three to six months. If the Fed were to raise
interest rates, it would most likely do so in the first quarter 1998. This would
especially be true if inflationary pressures return in the U.S. through strong
retail sales or large wage increases (both of which have been moderate for most
of 1997), conditions which we do not expect to occur. In our opinion, this is an
opportune time for investors to consider rebalancing their current portfolio's
asset allocation which may be concentrated in stocks.
The tax-exempt bond markets so far in 1997, have experienced its second
largest issuance of municipal bonds ever. At the same time, investor demand has
remained high for municipal bonds. Municipal bonds are commonly measured as a
percentage or ratio of the U.S. Treasury
- ----------
* Morningstar proprietary ratings reflect historical risk-adjusted performance
through 10/31/97. The ratings are subject to change every month. Past
performance is not a guarantee of future results. Morningstar 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 121 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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<PAGE>
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yields, not based on a yield spread. Historically, municipal bonds yield roughly
80% as much as U.S. Treasury securities. Today, because of the large issuance of
municipal bonds, the ratio is approximately 82%. We think municipal bonds are
inexpensive and represent good value. Moreover, because we expect the supply of
municipal bonds to decline in the coming year, this is an extremely opportune
time to invest in municipal bonds.
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.
During the reporting period, we have maintained a broad diversification
across a number of investment sectors that we believe offer high yield potential
as well as relative price stability. We continue to favor housing bonds because
we believe they provide attractive yields. In addition, we do not believe there
is any significant prepayment risk, due to low interest rates. Moreover, we
continue to see good value in health care bonds primarily due to the efficiency
brought about by the massive mergers, consolidations and joint ventures,
particularly in the hospital industry.
Municipal Bond Market Outlook
Going forward, we remain positive on the prospects for the municipal bond
market. In our opinion, the Fed will continue to pursue a wait-and-see approach
in managing inflation, especially in light of recent global market turmoil. We
believe that a moderate U.S. economy with low inflation will continue to be
favorable for intermediate- and long-term municipal bonds. Given our
expectations for a strong municipal bond market and the lofty valuations of the
stock market, we believe it may be appropriate for some investors to consider
reallocating their portfolios and increasing their exposure to 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
November 22, 1997
2
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<PAGE>
Municipal High Income Fund Inc.
Schedule of Investments
October 31, 1997
<TABLE>
<CAPTION>
================================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================
<S> <C> <C> <C>
Alabama -- 4.2%
$ 345,000 Aaa* Alabama HFA, Single-Family Mortgage Revenue,
10.500% due 12/1/02...................................... $ 369,581
1,000,000 BBB- Alabama State IDA, Solid Waste Disposal,
6.450% due 12/1/23 (a)................................... 1,065,000
4,000,000 BBB- Butler, AL IDR, Waste Disposal, 8.000% due
9/1/28 (a)(b) ........................................... 4,560,000
1,000,000 BBB- Mobile, AL IDR, 6.950% due 1/1/20.......................... 1,091,250
1,000,000 NR West Jefferson, AL Amusement & Public Park
Authority Revenue, (Visionland Project),
8.000% due 12/1/26....................................... 1,047,500
------------
8,133,331
------------
Arizona -- 1.8%
3,300,000 BBB Gila County, AZ IDA, PCR, ASARCO Inc.,
Series 1987, 8.900% due 7/1/06........................... 3,414,840
------------
California -- 3.1%
1,750,000 Baa3* California Statewide Community Development Authority,
Lease Revenue, United Airlines, Inc., Series A,
5.700% due 10/1/33 (a)................................... 1,747,812
2,000,000 NR Los Angeles County, CA Regional Airport Authority,
Continental Airlines, Inc., 9.000% due 8/1/17 (a)(b) .... 2,099,980
2,000,000 BBB- Sacramento, CA Cogeneration Authority, Electric Revenue,
6.500% due 7/1/14........................................ 2,165,000
------------
6,012,792
------------
Colorado -- 2.6%
2,000,000 NR Colorado Health Facilities Authority Revenue,
(Beth Israel at Shalom Park Project),
7.250% due 12/15/25...................................... 2,082,500
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).................................. 1,311,594
------------
5,087,219
------------
Connecticut -- 1.8%
Connecticut State Development Authority:
1,735,000 NR Aquarium Project Revenue, Mystic Marinelife Aquarium,
7.000% due 12/1/27..................................... 1,819,581
1,500,000 NR Health Care Revenue, Series B, 8.000% due 7/1/17 ........ 1,635,000
------------
3,454,581
------------
Florida -- 2.7%
875,000 NR Homestead, FL IDR, (Project A), 7.950% due 11/1/18 ........ 911,094
2,005,000 NR Jacksonville, FL Health Facilities Authority Revenue,
9.125% due 10/15/19...................................... 2,067,135
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 1997
<TABLE>
<CAPTION>
================================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================
<S> <C> <C> <C>
Florida -- 2.7% (continued)
$ 2,000,000 BBB- Martin County, FL IDR, (Indiantown Cogeneration
Project A), 7.875% due 12/15/25 (a)...................... $ 2,312,500
------------
5,290,729
------------
Georgia -- 0.6%
1,000,000 NR Walton County, GA IDA, (Walton Project), 8.500%
due 9/1/07............................................... 1,125,000
------------
Illinois -- 4.9%
2,850,000 Baa2* Chicago, IL O'Hare International Airport, Special
Facilities Revenue Bonds, United Airlines, Series B,
8.950% due 5/1/18 (a).................................... 3,224,064
2,500,000 BB- East Chicago, IL IDA Revenue, (Inland Steel Co.,
Project 10), 6.800% due 6/1/13........................... 2,687,500
1,500,000 A+ Illinois Housing Development Authority, Series 5,
6.750% due 9/1/23........................................ 1,621,875
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
------------
9,354,939
------------
Indiana -- 4.3%
2,000,000 BBB- Indiana State Environmental Development Finance Authority,
(USX Corp. Project), 6.250% due 7/15/30.................. 2,097,500
1,000,000 Ba3* Indiana State IDA Finance Authority, PCR, (Inland Steel
Co., Project No. 13), 7.250% due 11/1/11 (a)............. 1,103,750
4,750,000 Baa2* Indianapolis, IN Airport Authority, United Airlines,
6.500% due 11/15/31 (a)(b)............................... 5,088,437
------------
8,289,687
------------
Kentucky -- 2.1%
1,290,000 NR Jefferson County, KY Health Facilities Authority, Dates
Beverly Enterprises, 10.125% due 5/1/08.................. 1,389,975
1,500,000 BBB- Kenton County, KY Airport Board, (Delta Airlines Project),
7.500% due 2/1/20 (a).................................... 1,663,125
1,000,000 A Pendleton County, KY Multi-Lease Revenue, Series A,
6.500% due 3/1/19........................................ 1,087,500
------------
4,140,600
------------
Louisiana -- 5.5%
1,200,000 A3* Lake Charles, LA Harbor & Terminal District Port
Facilities Revenue, (Trunkline LNG Co. Project),
7.750% due 8/15/22....................................... 1,371,000
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 1997
<TABLE>
<CAPTION>
================================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================
<S> <C> <C> <C>
Louisiana -- 5.5% (continued)
Port New Orleans, LA IDR:
Avondale Industries, Inc. Project:
$ 1,800,000 NR 8.250% due 6/1/04...................................... $ 2,036,250
3,000,000 NR 8.500% due 6/1/14...................................... 3,453,750
1,000,000 BB Continental Grain Co. Project, 7.500% due 7/1/13 (b)..... 1,097,500
2,400,000 BB+ West Feliciana Parish, LA PCR, 8.000% due 12/1/24.......... 2,583,000
------------
10,541,500
------------
Maine -- 0.3%
Maine State Housing Authority Mortgage Purchases:
500,000 AA Series C-2, 7.000% due 11/15/32 (a)...................... 538,750
20,000 AA Series D-1, 8.300% due 11/15/28 (a)...................... 20,595
------------
559,345
------------
Massachusetts -- 5.6%
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....................................... 2,082,100
Commonwealth of Massachusetts Industrial Finance Agency,
(S.E. Mass Project):
1,700,000 NR Series A, 9.000% due 7/1/15............................ 1,927,375
5,940,000 NR Series B, 9.250% due 7/1/15(a)......................... 6,756,750
------------
10,766,225
------------
Michigan -- 0.8%
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........................................ 1,573,125
------------
Minnesota -- 1.1%
1,905,000 AA+ Minnesota HFA, Single-Family, Series H, 6.700% due 1/1/18.. 2,055,018
------------
Mississippi -- 2.7%
Claiborne County, MS PCR, Series C:
3,300,000 Ba1* 9.875% due 12/1/14....................................... 3,575,979
1,500,000 BBB- 6.200% due 2/1/26........................................ 1,530,000
------------
5,105,979
------------
Montana -- 0.5%
1,000,000 NR Montana State Board Investment Resource Recovery
Revenue, (Yellowstone Energy LP Project),
7.000% due 12/31/19 (a).................................. 966,250
------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 1997
<TABLE>
<CAPTION>
================================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================
<S> <C> <C> <C>
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........................................ $ 1,021,250
------------
New Jersey -- 5.3%
3,000,000 Baa2* Camden County, NJ Improvement Authority Revenue,
Health Care Redevelopment Project, (Cooper Health),
5.875% due 2/15/15....................................... 3,048,750
2,200,000 NR New Jersey Educational Facilities, Fairleigh Dickinson
University, Series C, 6.625% due 7/1/23.................. 2,233,000
New Jersey Health Care Facilities:
1,885,000 Ba1* Palisades Medical Center, Finance Authority Revenue,
7.600% due 7/1/21...................................... 2,000,456
1,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27............ 1,076,250
1,500,000 BBB- Zurbrugg Memorial Hospital, Series C, 8.500% due 7/1/12.. 1,537,620
310,000 AAA New Jersey Housing and Mortgage Finance Agency,
Home Buyer Revenue, Series E, MBIA-Insured,
7.650% due 10/1/16....................................... 328,213
------------
10,224,289
------------
New Mexico -- 0.7%
1,235,000 AA New Mexico Mortgage Finance Authority, Single-Family
Mortgage Program, Series B, 8.300% due 3/1/20 (a)........ 1,358,500
------------
New York -- 6.7%
New York City, NY GO:
4,715,000 BBB+ Series F, 6.625% due 2/15/25............................. 5,174,713
Unlimited, Series H:
430,000 BBB+ 7.000% due 2/1/21...................................... 469,238
525,000 BBB+ Pre-Refunded--Escrowed with U.S. government
securities to 2/1/02 Call @ 101.5,
7.000% due 2/1/21(c)................................. 585,375
1,500,000 NR New York City, NY IDA, Civil Facility Revenue,
7.500% due 8/1/26........................................ 1,543,125
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)................................... 2,115,750
2,750,000 NR Port Authority of NY & NJ, Special Obligation Revenue,
6.750% due 10/1/19 (a)................................... 2,970,000
------------
12,858,201
------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 1997
<TABLE>
<CAPTION>
================================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================
<S> <C> <C> <C>
North Carolina -- 3.9%
$ 1,750,000 A Martin County, NC Industrial Facilities PCR,
6.800% due 5/1/24 (a).................................... $ 1,938,125
2,300,000 Baa1* North Carolina Eastern Municipal Power Agency,
Power Systems Revenue, Series B, 7.000% due 1/1/08....... 2,630,625
750,000 NR North Carolina Medical Care Community Health Care
Facilities, Deerfield Episcopal, 6.000% due 11/1/27...... 731,250
2,050,000 A- North Carolina Municipal Power Agency No. 1, Catawaba
Electric Revenue, 6.250% due 1/1/17...................... 2,162,750
------------
7,462,750
------------
Ohio -- 3.3%
1,000,000 NR Cleveland, OH Airport Special Revenue,
Continental Airlines Inc., 9.000% due 12/1/19 (a)........ 1,093,750
1,000,000 NR Cuyahoga County, OH Health Care Facilities, Judson
Retirement Community, Series A, 7.250% due 11/15/18...... 1,047,500
1,500,000 Baa1* Montgomery County, OH Health Systems Revenue,
Series B, 8.100% due 7/1/18.............................. 1,781,250
1,250,000 NR Ohio State Solid Waste Revenue, 9.000%, due 6/1/21......... 1,337,500
1,000,000 Baa3* Ohio Water Development Authority, PCR, Series A,
8.100% due 10/1/23 (a)................................... 1,071,250
------------
6,331,250
------------
Pennsylvania -- 15.3%
2,200,000 B- Allegheny County, PA IDA, Special Facilities
Revenue, Series B, (U.S. Air Project), 8.500%
due 3/1/21 (a)........................................... 2,472,250
Beaver County, PA IDA, PCR:
2,000,000 BB+ 7.625% due 5/1/20........................................ 2,277,500
2,500,000 BB+ 7.625% due 5/1/25........................................ 2,846,875
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 (c)............. 1,674,375
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 (c)........... 3,292,500
2,500,000 A- Luzerne County, PA IDA, 7.125% due 12/1/22 (a)............. 2,734,375
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............... 2,200,000
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 1997
<TABLE>
<CAPTION>
================================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================
<S> <C> <C> <C>
Pennsylvania -- 15.3% (continued)
$ 625,000 NR Northumberland County, PA IDA Revenue,
6.875% due 2/1/03........................................ $ 638,281
1,500,000 AA+ Pennsylvania HFA, Series C, 6.900% due 4/1/25 (a).......... 1,623,750
1,950,000 BBB Philadelphia, PA Gas Revenue, Series B,
6.400% due 11/15/16...................................... 2,040,188
1,000,000 NR Philadelphia, PA IDR, Host Marriott,
7.750% due 12/1/17 (a)................................... 1,096,250
Scranton-Lackawanna, PA Health & Welfare Authority
Revenue, (Moses Taylor Hospital Project):
1,905,000 BBB- 6.150% due 7/1/14...................................... 1,993,106
3,050,000 BBB- 6.250% due 7/1/20...................................... 3,194,875
1,250,000 BBB+ Sharon, PA Regional Health Systems, (Project B),
6.875% due 12/1/22....................................... 1,340,625
------------
29,424,950
------------
Puerto Rico -- 0.4%
200,000 A Commonwealth of Puerto Rico, GO Bonds,
8.000% due 7/1/08........................................ 208,644
500,000 A-1+ Puerto Rico Commonwealth Government Development Bank,
3.700% due 12/1/15 (d)................................... 500,000
------------
708,644
------------
South Carolina -- 1.0%
945,000 NR Florence County, SC IDR, 7.375% due 2/1/07................. 1,025,325
840,000 NR McCormick County, SC COP, 9.750% due 7/1/09................ 857,850
------------
1,883,175
------------
South Dakota -- 1.1%
Oglala Sioux Tribe, SD Pine Ridge County, Revenue Bonds:
130,000 NR 7.000% due 7/1/99........................................ 131,625
1,865,000 NR 7.500% due 7/1/13........................................ 1,911,625
------------
2,043,250
------------
Tennessee -- 1.2%
750,000 AAA Knox County, TN Health, Education & Housing, FSA-Insured,
7.125% due 1/1/30........................................ 832,500
1,500,000 A Shelby County, TN Health, Education & Housing Facilities
Board Revenue, 6.000% due 7/1/28......................... 1,509,375
------------
2,341,875
------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 1997
<TABLE>
<CAPTION>
================================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================
<S> <C> <C> <C>
Texas -- 11.3%
$ 1,350,000 BBB Alliance, TX Airport Authority Inc., (Federal
Express Corp. Project), 6.375% due 4/1/21 (a)............ $ 1,441,125
2,000,000 BBB+ Brazos River, TX PCR, (Collateral-Texas Utilities
Electric Co., Project A), 8.250% due 1/1/19 (a).......... 2,117,500
1,040,000 A* El Paso, TX Housing Finance Corp., Single-Family
Mortgage Revenue, 8.750% due 10/1/11..................... 1,131,000
2,000,000 B1* El Paso, TX International Airport Revenue Bonds, (Marriott
Corp. Project), 7.750% due 3/1/12........................ 2,142,500
1,170,000 NR Harris County, TX Industrial Development Corporation, IDR,
Continental Airlines Inc., 7.950% due 7/1/19 (a)......... 1,170,725
Houston, TX Airport Systems Revenue Special Facilities,
Continental Airlines Inc.:
1,050,000 Ba2* Series B, 6.125% due 7/15/27 (a)....................... 1,073,625
3,000,000 Ba2* Series C, 6.125% due 7/15/27 (a)....................... 3,067,500
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........................ 1,038,750
1,400,000 A- Series A, 7.875% due 2/1/19 (a)........................ 1,439,256
1,400,000 AA North Central, TX Health Facilities Development Project,
Hospital Revenue Bonds, Baylor Health Care Systems,
Series 1992B, Variable Rate INFLOS,
7.820% due 5/15/08 (e)................................... 1,519,000
Northgate Crossing, TX Municipals Utilities:
1,000,000 NR District 1, GO, 8.875% due 12/1/13....................... 1,005,000
1,000,000 NR District 2, Special Tax, 8.875% due 12/1/13.............. 1,005,000
3,435,000 BB Sam Rayburn, TX Municipal Power Supply System Revenue
Refunding, Series A, 6.250% due 10/1/17.................. 3,465,056
------------
21,616,037
------------
Utah -- 2.1%
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........................................ 2,052,500
------------
3,961,000
------------
Vermont -- 1.1%
2,060,000 A1* Vermont Housing Finance Agency, Home Mortgage, Series B,
8.100% due 6/1/22 (a).................................... 2,137,744
------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Municipal High Income Fund Inc.
Schedule of Investments
October 31, 1997
<TABLE>
<CAPTION>
================================================================================================
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================
<S> <C> <C> <C>
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)............. $ 1,250,000
------------
Wisconsin -- 0.8%
1,500,000 NR Wisconsin State Health & Educational Facilities Authority
Revenue, Benchmark Health Care Green Bay,
7.750% due 5/1/27........................................ 1,528,125
------------
TOTAL INVESTMENTS --- 100%
(Cost -- $179,490,677**)................................... $192,022,200
============
</TABLE>
(a) Income from these issues is considered a preference item for purposes of
calculating the alternative minimum tax.
(b) Security segregated by Custodian for open market purchase commitment.
(c) Pre-Refunded bonds escrowed by U.S. government securities and bonds
escrowed to maturity with U.S. government securities are considered by
manager to be triple-A rated even if issuer has not applied for new
ratings.
(d) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
(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 11 and 12 for definition of ratings and certain security
descriptions.
----------
Summary of Municipal Bonds by Combined Ratings
October 31, 1997 (unaudited)
- --------------------------------------------------------------------------------
Standard & Percent of
Moody's and/or Poor's Total Investments
- --------------------------------------------------------------------------------
Aaa -- AAA 3.6%
Aa -- AA 3.7
A -- A 9.3
Baa -- BBB 35.0
Ba -- BB 14.5
B -- B 2.4
NR -- NR 31.5
-----
100.0%
=====
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
10
<PAGE>
Municipal High Income Fund Inc.
Bond Ratings
================================================================================
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 predominantly
and CCC speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
represents a lower degree of speculation than "B," and "CCC" the
highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighted
by large uncertainties or major risk exposure to adverse conditions.
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.
11
<PAGE>
Municipal High Income Fund Inc.
Bond Ratings (continued)
================================================================================
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
12
<PAGE>
Municipal High Income Fund Inc.
Statement of Assets and Liabilities
[STAR} October 31, 1997
================================================================================
ASSETS:
Investments, at value (Cost -- $179,490,677) ................ $ 192,022,200
Cash ........................................................ 79,352
Receivable for securities sold .............................. 55,000
Interest receivable ......................................... 4,450,499
-------------
Total Assets ................................................ 196,607,051
-------------
LIABILITIES:
Payable for securities purchased ............................ 2,239,160
Investment advisory fees payable ............................ 67,900
Administration fees payable ................................. 33,689
Accrued expenses ............................................ 133,009
-------------
Total Liabilities ........................................... 2,473,758
-------------
Total Net Assets ............................................... $ 194,133,293
=============
NET ASSETS:
Par value of capital shares ................................. $ 198,853
Capital paid in excess of par value ......................... 184,808,400
Undistributed net investment income ......................... 136,698
Accumulated net realized loss from security transactions .... (3,542,181)
Net unrealized appreciation of investments .................. 12,531,523
-------------
Total Net Assets
(Equivalent to $9.76 a share on 19,885,306 shares of
$0.01 par value outstanding; 500,000,000 shares authorized).. $ 194,133,293
=============
See Notes to Financial Statements.
13
<PAGE>
Municipal High Income Fund Inc.
Statement of Operations
For the Year Ended October 31, 1997
================================================================================
INVESTMENT INCOME:
Interest ................................................... $ 13,493,658
------------
EXPENSES:
Investment advisory fees (Note 3) .......................... 757,896
Administration fees (Note 3) ............................... 378,948
Shareholder communications ................................. 117,998
Audit and legal ............................................ 44,996
Directors' fees ............................................ 43,001
Registration fees .......................................... 24,400
Shareholder and system servicing fees ...................... 19,504
Pricing service fees ....................................... 10,002
Custody .................................................... 9,140
Other ...................................................... 5,165
------------
Total Expenses ............................................. 1,411,050
------------
Net Investment Income ......................................... 12,082,608
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 4):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales ...................................... 65,040,491
Cost of securities sold .................................. 65,440,104
------------
Net Realized Loss .......................................... (399,613)
------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year ........................................ 7,240,580
End of year .............................................. 12,531,523
------------
Increase in Net Unrealized Appreciation .................... 5,290,943
------------
Net Gain on Investments ....................................... 4,891,330
------------
Increase in Net Assets From Operations ........................ $ 16,973,938
============
See Notes to Financial Statements.
14
<PAGE>
Municipal High Income Fund Inc.
Statements of Changes in Net Assets
For the Years Ended October 31,
================================================================================
1997 1996
------ ------
OPERATIONS:
Net investment income ........................ $ 12,082,608 $ 12,398,843
Net realized loss ............................ (399,613) (205,983)
Increase in net unrealized appreciation ...... 5,290,943 153,751
------------- -------------
Increase in Net Assets From Operations ....... 16,973,938 12,346,611
------------- -------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 2):
Net investment income ........................ (12,281,068) (12,090,828)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders ............... (12,281,068) (12,090,828)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends ................... 2,136,996 --
------------- -------------
Increase in Net Assets From
Fund Share Transactions .................... 2,136,996 --
------------- -------------
Increase in Net Assets .......................... 6,829,866 255,783
NET ASSETS:
Beginning of year ............................ 187,303,427 187,047,644
------------- -------------
End of year* ................................. $ 194,133,293 $ 187,303,427
============= ==============
* Includes undistributed net investment income of: $136,698 $335,158
============= ==============
See Notes to Financial Statements.
15
<PAGE>
Municipal High Income Fund Inc.
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
Municipal High Income Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities are
valued at the mean between the bid and asked prices provided by an independent
pricing service; (c) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value; (d)
gains or losses on the sale of securities are calculated by using the specific
identification method; (e) interest income, adjusted for amortization of premium
and accretion of original issue discount, is recorded on an accrual basis; (f)
dividends and distributions to shareholders are recorded on the ex-dividend
date; (g) the Fund intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; and (h) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
2. Exempt-Interest Dividends and Other Distributions
The Fund intends to satisfy conditions that will enable interest from
municipal securities, which is exempt from Federal income tax and from
designated state income taxes, to retain such tax-exempt status when distributed
to the shareholders of the Fund.
Capital gains distributions, if any, are taxable to shareholders, and are
declared and paid at least annually.
3. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), through its Greenwich Street Advisors division,
acts as investment adviser to the Fund. The Fund pays SBMFM an advisory fee
calculated at an annual rate of 0.40% of the average daily net assets. SBMFM
also acts as the administrator of the Fund for which it receives a fee
calculated at an annual rate of 0.20% of the average daily net assets. These
fees are calculated daily and paid monthly.
16
<PAGE>
Municipal High Income Fund Inc.
Notes to Financial Statements (continued)
================================================================================
4. Investments
During the year ended October 31, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $68,984,155
- --------------------------------------------------------------------------------
Sales 65,040,491
================================================================================
At October 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $13,932,598
Gross unrealized depreciation (1,401,075)
- --------------------------------------------------------------------------------
Net unrealized appreciation $12,531,523
================================================================================
5. Capital Shares
At October 31, 1997, 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:
Year Ended
October 31, 1997
-------------------
Shares Amount
================================================================================
Shares issued on reinvestment 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
================================================================================
17
<PAGE>
Municipal High Income Fund Inc.
Financial Highlights
================================================================================
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year............................ $9.53 $9.51 $8.98 $9.72 $9.49
-------- -------- -------- -------- --------
Income (Loss) From Operations:
Net investment income........................ 0.61 0.63 0.64 0.65 0.67
Net realized and unrealized gain (loss)...... 0.24 -- 0.54 (0.72) 0.23
-------- -------- -------- -------- --------
Total Income (Loss) From Operations............. 0.85 0.63 1.18 (0.07) 0.90
-------- -------- -------- -------- --------
Less Distributions From:
Net investment income........................ (0.62) (0.61) (0.65) (0.65) (0.67)
Net realized gains .......................... -- -- -- (0.02) --
-------- -------- -------- -------- --------
Total Distributions............................. (0.62) (0.61) (0.65) (0.67) (0.67)
-------- -------- -------- -------- --------
Net Asset Value, End of Year.................... $9.76 $9.53 $9.51 $8.98 $9.72
-------- -------- -------- -------- --------
Total Return, Based on Market Value............. 17.22% 10.22% 14.17% (10.11)% 17.76%
-------- -------- -------- -------- --------
Total Return, Based on Net Asset Value.......... 9.41% 7.39% 14.00% (0.54)% 9.87%
-------- -------- -------- -------- --------
Net Assets, End of Year (000s) ................. $194,133 $187,303 $187,048 $176,379 $188,294
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses..................................... 0.74% 0.77% 0.84% 0.84% 0.87%
Net investment income........................ 6.38 6.65 6.87 6.98 6.89
Portfolio Turnover Rate ........................ 35% 17% 18% 17% 13%
Market Value, End of Year ...................... $9.875 $9.000 $9.000 $8.250 $9.875
</TABLE>
18
<PAGE>
Municipal High Income Fund Inc.
Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Municipal High Income Fund Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Municipal High Income Fund Inc. as of October
31, 1997, the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended and financial highlights for each of the years in the three-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the years in the two-year period
ended October 31, 1994, were audited by other auditors whose report thereon,
dated December 15, 1994, expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian. As to securities sold or
purchased but not delivered or received, we performed other appropriate auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Municipal High Income Fund Inc. as of October 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and financial highlights for each of
the years in the three-year period then ended, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
December 8, 1997
19
<PAGE>
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
------ --------- -------------- ------ ------- ------
11/20/95 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
* As of record date.
20
<PAGE>
Municipal High Income Fund Inc.
Quarterly Results of Operations (unaudited)
and Tax Information (unaudited)
================================================================================
Quarterly Results of Operations
<TABLE>
<CAPTION>
Net Realized Net Increase
Net and Unrealized (Decrease)
Investment Investment Gain (Loss) in Net Assets
Income Income on Investments From Operations
----------------------- --------------------- ---------------------- -----------------------
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 2,132,578 0.11 5,263,929 0.27
1/31/97 3,457,602 0.18 3,095,243 0.16 591,922 0.03 3,687,165 0.19
4/30/97 3,361,023 0.17 3,011,000 0.15 (889,987) (0.05) 2,121,013 0.10
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
</TABLE>
---------------------
Tax Information
For the year ended October 31, 1997, 100% of the dividends paid by the
Fund from net investment income were tax-exempt for regular Federal income tax
purposes.
21
<PAGE>
Municipal High Income Fund Inc.
Additional Shareholder Information (unaudited)
================================================================================
On February 12, 1997, the annual meeting of the shareholders of the Fund
was held for the purpose of voting on the following matters:
1. To approve or disapprove for the Fund, the election of Allan J.
Bloostein and Martin Brody as Directors; and
2. To approve or disapprove the selection of KPMG Peat Marwick LLP as
the independent auditors for the current fiscal year of the Fund.
The results of the vote on Proposal 1 were as follows:
% of Votes % of
Directors* Votes For Shares Voted Against Shares Voted
================================================================================
Allan J. Bloostein 17,415,298.250 97.994% 356,448.157 2.006%
Martin Brody 17,359,120.960 97.678 412,625.447 2.322
================================================================================
The results of the vote on Proposal 2 were as follows:
% of Votes % of Votes % of
Votes For Shares Voted Against Shares Voted Abstained Shares Voted
================================================================================
17,469,709.410 98.300% 61,352.573 0.345% 240,684.424 1.355%
================================================================================
There were no broker non-votes.
* The following Directors, representing the balance of the Board of
Directors, continue to serve as Directors: Dwight B. Crane, Robert A.
Frankel, William R. Hutchinson and Heath B. McLendon.
22
<PAGE>
Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited)
================================================================================
Under the Fund's Dividend Reinvestment and Cash Purchase Plan ("Plan"), a
shareholder whose Common Stock is registered in his own name will have all
distributions reinvested automatically by 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>
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 October 31,
1997, the Fund has not repurchased any shares.
24
<PAGE>
Municipal High Income Fund Inc.
Management of the Fund
================================================================================
Directors
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Robert A. Frankel
William R. Hutchinson
Heath B. McLendon, Chairman
Charles F. Barber, Emeritus
Officers
Heath B. McLendon
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Lawrence T. McDermott
Vice President and
Investment Officer
Michael J. Maher
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser and Administrator
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
Transfer Agent
First Data Investor Services Group, Inc.
P.O. Box 1376
Boston, Massachusetts 02104
Custodian
PNC Bank, N.A.
17th and Chestnut Street
Philadelphia, Pennsylvania 19103
<PAGE>
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, NY10013
(212) 723-9218
FD01049 12/97
