Municipal
High Income
Fund Inc.
[GRAPHIC OMITTED]
Quarterly
Report
[CLIP ART]
July
31, 1998
<PAGE>
===================================[CLIP ART]===================================
Municipal High Income Fund Inc.
Dear Shareholder:
We are pleased to provide the quarterly report for the Municipal High
Income Fund, Inc. for the nine months ended July 31, 1998. Over the nine-month
period covered by this report, the Fund paid income dividends totaling $0.47 per
share. The table below shows the annualized distribution rates and nine-month
total returns based on the Fund's July 31, 1998 net asset value ("NAV") per
share and its New York Stock Exchange ("NYSE") closing price.
Price Annualized Nine-Month
Per Share Distribution Rates Total Returns
----------- ------------------ -------------
$9.80 (NAV) 6.24% 5.39%
$9.75 (NYSE) 6.28% 3.63%
In comparison, the Fund's Lipper Analytical Services, Inc. peer group
returned an average of 5.30% for the same period. (Lipper Analytical Services,
Inc. is an independent fund tracking organization.)
Market and Economic Overview
Interest rates continued to decline overall 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 Federal Reserve Board ("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.) However, the persistent strength of the U.S. economy heightened fears
among many investors that the Fed would raise short-term interest rates.
Since the end of October, the dominant theme in the financial markets
continues to be the Asian financial crisis and the extent of the impact it will
have on the U.S. economy and key emerging markets. In addition, Russia is now in
difficulty as its political and financial infrastructure has not been able to
keep pace with the State's rapid conversion to a capitalistic economy. Moreover,
we expect at least a modest dampening effect on growth for the rest of the year,
with inflation continuing to trend lower in spite of wage pressures resulting
from an extremely tight U.S. labor market. Yet the ultimate effect of the
worsening Asian crisis is still unknown. In comparison to the international bond
markets and in light of events in Asia and Russia, we think that many U.S. bonds
represent good value based on current market conditions.
1
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Investment Strategy
The Fund's investment objective is to provide high levels of tax-exempt
current income. In pursuit of this objective, 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.
As of July 31, 1998, just over 45% of the Fund's holdings were rated
investment grade. (Investment-grade bonds are those rated in one of the four
highest ratings categories by any nationally recognized statistical rating
organization, or determined by the manager to be of equivalent quality.)
Municipal Bond Market Outlook
Municipal bond refinancings in the first half of 1998 totaled about $42
billion, or more than twice as much as the first half of 1997. Moreover, total
municipal bond issuance is up roughly 50%, to $146 billion. Many state and local
governments are taking advantage of low interest rates and increased tax revenue
from a strengthening economy to issue new bonds.
Until recently, municipal bond supply outstripped demand and helped push
up yields, which move in the opposite direction of their prices. There has been
some indication that investor appetite for municipal bonds has been increasing
in recent weeks. Insurance companies were among the largest buyers of these
bonds, but we believe that more and more individual investors are beginning to
recognize the attractive investment opportunities that exist in tax-free
municipal bonds.
Going forward, we remain positive on the prospects for the municipal bond
market. High quality, long-term municipal bonds, which usually yield 80% of U.S.
Treasury bonds, are now yielding as much as 95%. Municipal bonds are generally
considered attractive when they yield at least 85% of long-term U.S. Treasury
bonds because of their tax advantage. With market volatility on the rise,
municipal bonds may present a safe haven for investors. Moreover, we believe
that a prudent mix of both high-quality and high-yield municipal bonds can offer
investors both total return opportunities and a competitive income stream.
We expect a moderately expanding U.S. economy with the Fed maintaining its
vigilance against higher inflationary pressure. However, as previously noted, we
think that inflation should remain subdued despite rising wage pressures from a
tight U.S. labor market. Therefore, our outlook for municipal bonds for the rest
of the year remains bright.
2
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<PAGE>
===================================[CLIP ART]===================================
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
August 24, 1998
3
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===================================[CLIP ART]===================================
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Take Advantage of the Fund's Dividend Reinvestment Plan!
Did you know that Fund investors who reinvest their dividends are taking
advantage of one of the most effective wealth-building tools available today?
Systematic investing puts time to work for you through the strength of
compounding.
As an investor in the Fund, you can participate in its Dividend Reinvestment
Plan ("Plan"), a convenient, simple and efficient way to reinvest your dividends
and capital gains, if any, in additional shares of the Fund. A more complete
description of the Plan begins on page 24. Below is a short summary of how the
Plan works.
Plan Summary
If you are a Plan participant who has not elected to receive your dividends in
the form of a cash payment, then your dividend and capital gain distributions
will be reinvested automatically in additional shares of the Fund.
The number of common stock shares in the Fund you will receive in lieu of a cash
dividend is determined in the following manner. If the market price of the
common stock is equal to or higher than 98% of the 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.
If 98% of the NAV per share at the time of valuation is greater than the market
price of the common stock, or if the Fund declares a dividend or capital gains
distribution payable only in cash, the Fund will buy common stock for your
account in the open market or on the New York Stock Exchange.
If the Fund begins to purchase additional shares in the open market and the
market price of the shares subsequently rises above 98% of the NAV before the
purchases are completed, the Fund will attempt to cancel any remaining orders
and issue the remaining dividend or distribution in shares at 98% of the Fund's
NAV per share. In that case, the number of Fund shares you receive 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 find out more detailed information about the Plan and about how you can
participate, please call First Data Investors Services Group, Inc. at (800)
331-1710.
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4
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<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 1998
<TABLE>
<CAPTION>
===============================================================================================================
Face
Amount Rating Security Value
===============================================================================================================
<S> <C> <C> <C>
Alabama -- 3.8%
$ 230,000 Aaa* Alabama HFA, Single-Family Mortgage Revenue,
10.500% due 12/1/02 .............................................. $ 244,950
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) ........... 4,605,000
1,000,000 CCC Mobile, AL IDR, 6.950% due 1/1/20 .................................. 510,000
1,000,000 NR West Jefferson, AL Amusement & Public Park Authority
Revenue, (Visionland Project), 8.000% due 12/1/26 ................ 1,075,000
------------
7,524,950
------------
Arizona -- 2.3%
Coconino County, AZ PCR, Nevada Power Co.:
1,000,000 BBB- Series B, 5.800% due 11/1/32 (a) ................................. 1,012,500
1,500,000 BBB++ Series E, 5.350% due 10/1/22 ..................................... 1,494,375
2,000,000 BBB Gila County, AZ IDA Revenue, ASARCO Inc.,
5.550% due 1/1/27 ................................................ 2,027,500
------------
4,534,375
------------
California -- 2.2%
2,000,000 NR Los Angeles County, CA Regional Airport Authority,
Continental Airlines, Inc., 9.000% due 8/1/17 (a)(b) ............. 2,082,240
2,000,000 BBB- Sacramento, CA Cogeneration Authority, Electric Revenue,
6.500% due 7/1/14 ................................................ 2,185,000
------------
4,267,240
------------
Colorado -- 2.6%
2,000,000 NR Colorado Health Facilities Authority Revenue, (Beth Israel
at Shalom Park Project), 7.250% due 12/15/25 ..................... 2,085,000
Denver, CO Airport, Series A:
1,505,000 Baa1* 8.500% due 11/15/23 (a) .......................................... 1,659,262
1,175,000 Baa1* 8.000% due 11/15/25 (a) .......................................... 1,296,906
------------
5,041,168
------------
Connecticut -- 1.8%
Connecticut State Development Authority:
1,735,000 NR Aquarium Project Revenue, Mystic Marinelife Aquarium,
7.000% due 12/1/27 ............................................. 1,854,281
1,500,000 NR Health Care Revenue, Series B, 8.000% due 7/1/17 ................. 1,638,750
------------
3,493,031
------------
Florida -- 2.7%
875,000 NR Homestead, FL IDR, (Project A), 7.950% due 11/1/18 ................. 945,000
2,005,000 NR Jacksonville, FL Health Facilities Authority Revenue,
9.125% due 10/15/19 .............................................. 2,050,032
2,000,000 BBB- Martin County, FL IDR, (Indiantown Cogeneration Project A),
7.875% due 12/15/25 (a) .......................................... 2,320,000
------------
5,315,032
------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 1998
<TABLE>
<CAPTION>
===============================================================================================================
Face
Amount Rating Security Value
===============================================================================================================
<S> <C> <C> <C>
Georgia -- 1.6%
$2,000,000 BBB- Fulton County, GA Development Authority, Special
Facilities Revenue, (Delta Airlines Inc. Project),
5.450% due 5/1/23 (a) ............................................ $ 1,977,500
1,000,000 NR Walton County, GA IDA, (Walton Project), 8.500% due 9/1/07 ......... 1,143,750
------------
3,121,250
------------
Illinois -- 3.1%
2,500,000 BB- East Chicago, IL IDA Revenue, (Inland Steel Co.,
Project 10), 6.800% due 6/1/13 ................................... 2,706,250
1,500,000 A+ Illinois Housing Development Authority, Series 5,
6.750% due 9/1/23 ................................................ 1,629,375
730,000 NR Loves Park, IL First Mortgage Revenue, (Hoosier Care Project),
Series A, 9.750% due 8/1/19 ...................................... 770,457
955,000 NR Sterling, IL First Mortgage Revenue, (Hoosier Care Project),
Series A, 9.750% due 8/1/19 ...................................... 1,004,077
------------
6,110,159
------------
Indiana -- 4.3%
2,000,000 BBB- Indiana State Environmental Development Finance Authority,
(USX Corp. Project), 6.250% due 7/15/30 .......................... 2,137,500
1,000,000 Ba3* Indiana State IDA Finance Authority, PCR, (Inland Steel Co.,
Project No. 13), 7.250% due 11/1/11 (a) .......................... 1,108,750
4,750,000 Baa2* Indianapolis, IN Airport Authority, United Airlines,
6.500% due 11/15/31 (a)(b) ....................................... 5,147,812
------------
8,394,062
------------
Kentucky -- 2.1%
1,230,000 NR Jefferson County, KY Health Facilities Authority, Dates
Beverly Enterprises, 10.125% due 5/1/08 .......................... 1,303,825
1,500,000 BBB- Kenton County, KY Airport Board, (Delta Airlines Project),
7.500% due 2/1/20 (a) ............................................ 1,653,750
1,000,000 A Pendleton County, KY Multi-Lease Revenue, Series A,
6.500% due 3/1/19 ................................................ 1,093,750
------------
4,051,325
------------
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 ......... 1,375,500
Port New Orleans, LA IDR:
Avondale Industries, Inc. Project:
1,600,000 NR 8.250% due 6/1/04 .............................................. 1,812,000
3,000,000 NR 8.500% due 6/1/14 .............................................. 3,457,500
1,000,000 BB Continental Grain Co. Project, 7.500% due 7/1/13 (b) ............. 1,106,250
2,400,000 BB+ West Feliciana Parish, LA PCR, 8.000% due 12/1/24 .................. 2,550,000
------------
10,301,250
------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 1998
<TABLE>
<CAPTION>
===============================================================================================================
Face
Amount Rating Security Value
===============================================================================================================
<S> <C> <C> <C>
Maine -- 0.2%
Maine State Housing Authority Mortgage Purchases:
$ 280,000 AA Series C-2, 7.000% due 11/15/32 (a) .............................. $ 303,100
20,000 AA Series D-1, 8.300% due 11/15/28 (a) .............................. 20,453
------------
323,553
------------
Massachusetts -- 7.5%
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 ............. 2,016,300
Commonwealth of Massachusetts Industrial Finance Agency,
(S.E. Mass Project):
1,700,000 NR Series A, 9.000% due 7/1/15 .................................... 1,912,500
5,895,000 NR Series B, 9.250% due 7/1/15 (a) ................................ 6,653,981
Massachusetts State Industrial Finance Agency:
2,000,000 NR Assisted Living Facility Revenue, (Marina Bay LLC Project),
7.500% due 12/1/27 (a) ......................................... 2,077,500
2,250,000 NR Chestnut Knoll Project, Series A, 5.500% due 2/15/18 ............. 2,185,312
------------
14,845,593
------------
Michigan -- 2.4%
2,000,000 Ba3* Garden City, MI Hospital Finance Authority, Hospital
Revenue, Garden City Hospital Obligation, Group A,
5.625% due 9/1/10 ................................................ 1,987,500
2,000,000 NR Michigan State Strategic Fund, Resource Recovery Limited
Obligation Revenue, Central Wayne Energy Rec., Series A,
6.900% due 7/1/19 (a) ............................................ 2,025,000
695,000 BBB+ Western Townships, MI Utility Revenue, Sewage System,
(Subject to Crossover Refunding 11/1/99 @ 102),
8.300% due 1/1/19 ................................................ 716,969
------------
4,729,469
------------
Minnesota -- 1.0%
1,890,000 AA+ Minnesota HFA, Single-Family, Series H, 6.700% due 1/1/18 .......... 2,045,925
------------
Mississippi -- 1.8%
3,300,000 Ba1* Claiborne County, MS PCR, Series C, 9.875% due 12/1/14 ............. 3,450,744
------------
Montana -- 2.3%
4,530,000 NR Montana State Board Investment Resource Recovery Revenue,
(Yellowstone Energy LP Project), 7.000% due 12/31/19 (a) ......... 4,597,950
------------
New Hampshire -- 0.8%
1,000,000 BBB- New Hampshire Higher Educational & Health Facilities Authority
Revenue, New Hampshire College, 6.375% due 1/1/27 ................ 1,053,750
500,000 BB- New Hampshire State Business Finance Authority, PCR,
(Public Service Co.), Series D, 6.000% due 5/1/21 (a) ............ 509,375
------------
1,563,125
------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 1998
<TABLE>
<CAPTION>
===============================================================================================================
Face
Amount Rating Security Value
===============================================================================================================
<S> <C> <C> <C>
New Jersey -- 5.1%
$3,000,000 Baa2* Camden County, NJ Improvement Authority Revenue,
Health Care Redevelopment Project, (Cooper Health),
5.875% due 2/15/15 ............................................... $ 3,116,250
2,200,000 NR New Jersey Educational Facilities, Fairleigh Dickinson
University, Series C, 6.625% due 7/1/23 .......................... 2,288,000
New Jersey Health Care Facilities:
1,885,000 Ba1* Palisades Medical Center, Finance Authority Revenue,
7.600% due 7/1/21 .............................................. 2,028,731
1,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27 .................... 1,096,250
1,500,000 BBB- Zurbrugg Memorial Hospital, Series C, 8.500% due 7/1/12 ............ 1,500,000
------------
10,029,231
------------
New Mexico -- 0.6%
1,090,000 AAA New Mexico Mortgage Finance Authority, Single-Family
Mortgage Program, Series B, FHA-Insured,
8.300% due 3/1/20 (a) ............................................ 1,208,537
------------
New York -- 3.5%
45,000 A3* New York City, NY GO, Series F, (Pre-Refunded-- Escrowed
with U.S. government securities to 2/15/05 Call @ 101),
6.625% due 2/15/25 (c) ........................................... 51,244
1,500,000 NR New York City, NY IDA, Civil Facility Revenue,
7.500% due 8/1/26 ................................................ 1,578,750
1,950,000 BB+ New York State Energy, Research & Development Authority,
Electric Facility Revenue, LILCO,
7.150% due 12/1/20 (a) ........................................... 2,130,375
2,750,000 NR Port Authority of NY & NJ, Special Obligation Revenue,
6.750% due 10/1/19 (a) ........................................... 3,049,063
------------
6,809,432
------------
North Carolina -- 3.8%
1,750,000 A Martin County, NC Industrial Facilities PCR,
6.800% due 5/1/24 (a) ............................................ 1,949,062
2,300,000 Baa1* North Carolina Eastern Municipal Power Agency,
Power Systems Revenue, Series B, 7.000% due 1/1/08 ............... 2,653,625
1,440,000 NR North Carolina Medical Care Community Health Care
Facilities, First Mortgage, De Paul Community Facilities,
6.125% due 1/1/28 ................................................ 1,441,800
1,310,000 A- North Carolina Municipal Power Agency No. 1, Catawaba
Electric Revenue, 6.250% due 1/1/17 .............................. 1,390,238
------------
7,434,725
------------
Ohio -- 5.9%
Cleveland, OH Airport Special Revenue, (Continental Airlines
Inc. Project):
1,000,000 NR 9.000% due 12/1/19 (a) ......................................... 1,083,750
2,000,000 Ba2* 5.375% due 9/15/27 (a) ......................................... 1,945,000
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 1998
<TABLE>
<CAPTION>
===============================================================================================================
Face
Amount Rating Security Value
===============================================================================================================
<S> <C> <C> <C>
Ohio -- 5.9% (continued)
$1,000,000 NR Cuyahoga County, OH Health Care Facilities, Judson
Retirement Community, Series A, 7.250% due 11/15/18 .............. $ 1,077,500
3,000,000 BBB Dayton, OH Special Facilities Revenue, Emergency Air Freight,
Series A, 5.625% due 2/1/18 ...................................... 3,075,000
Montgomery County, OH Health Systems Revenue, Series B1:
465,000 A2* 8.100% due 7/1/18 ................................................ 561,487
1,035,000 Aaa* 8.100% due 7/1/18, (Pre-Refunded-- Escrowed with U.S.
government securities to 7/1/06 Call @ 102) ................... 1,302,806
1,250,000 NR Ohio State Solid Waste Revenue, 9.000% due 6/1/21 (a) .............. 1,395,313
1,000,000 Baa3* Ohio Water Development Authority, PCR, Series A,
8.100% due 10/1/23 (a) .......................................... 1,060,000
------------
11,500,856
------------
Pennsylvania -- 15.5%
2,200,000 B- Allegheny County, PA IDA, Special Facilities Revenue,
Series B, (U.S. Air Project), 8.500% due 3/1/21 (a) .............. 2,455,750
Beaver County, PA IDA, PCR:
2,000,000 BB+ 7.625% due 5/1/20 ................................................ 2,270,000
2,500,000 BB+ 7.625% due 5/1/25 ................................................ 2,837,500
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) ..................... 1,622,850
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) ................... 3,217,500
2,500,000 A- Luzerne County, PA IDA, 7.125% due 12/1/22 (a) ..................... 2,759,375
550,000 NR Northumberland County, PA IDA Revenue, 6.875% due 2/1/03 ........... 563,706
1,500,000 AA+ Pennsylvania HFA, Series C, 6.900% due 4/1/25 (a) .................. 1,629,375
3,250,000 AAA Philadelphia, PA Authority for Industrial Development Airport
Revenue, (Philadelphia Airport Systems Project), Series A,
FGIC-Insured, 5.125% due 7/1/28 (a) .............................. 3,160,625
1,935,000 BBB Philadelphia, PA Gas Revenue, Series B,
6.400% due 11/15/16 .............................................. 2,041,425
1,000,000 NR Philadelphia, PA IDR, Host Marriott,
7.750% due 12/1/17 (a) ........................................... 1,117,500
Scranton-Lackawanna, PA Health & Welfare Authority Revenue,
(Moses Taylor Hospital Project):
1,905,000 BBB- 6.150% due 7/1/14 .............................................. 2,033,588
3,050,000 BBB- 6.250% due 7/1/20 .............................................. 3,259,688
1,250,000 BBB+ Sharon, PA Regional Health Systems, (Project B),
6.875% due 12/1/22 ............................................... 1,406,250
------------
30,375,132
------------
South Carolina -- 2.1%
860,000 NR Florence County, SC IDR, 7.375% due 2/1/07 ......................... 933,100
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 1998
<TABLE>
<CAPTION>
===============================================================================================================
Face
Amount Rating Security Value
===============================================================================================================
<S> <C> <C> <C>
South Carolina-- 2.1% (continued)
$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 ................................................ $ 2,325,000
800,000 NR McCormick County, SC COP, 9.750% due 7/1/09 ........................ 814,448
------------
4,072,548
------------
South Dakota -- 1.0%
Oglala Sioux Tribe, SD Pine Ridge County, Revenue Bonds:
70,000 NR 7.000% due 7/1/99 ................................................ 70,627
1,865,000 NR 7.500% due 7/1/13 ................................................ 1,916,288
------------
1,986,915
------------
Tennessee -- 0.4%
750,000 AAA Knox County, TN Health, Education & Housing, FSA-Insured,
7.125% due 1/1/30 ................................................ 835,313
------------
Texas -- 9.7%
1,350,000 BBB Alliance, TX Airport Authority Inc., (Federal Express Corp.
Project), 6.375% due 4/1/21 (a) .................................. 1,461,375
2,000,000 BBB+ Brazos River, TX PCR, (Collateral-Texas Utilities Electric Co.,
Project A), 8.250% due 1/1/19 (a) ................................ 2,070,020
915,000 A2* El Paso, TX Housing Finance Corp., Single-Family
Mortgage Revenue, 8.750% due 10/1/11 ............................. 987,056
2,000,000 B1* El Paso, TX International Airport Revenue Bonds, (Marriott
Corp. Project), 7.750% due 3/1/12 ................................ 2,142,500
Houston, TX Airport Systems Revenue Special Facilities,
Continental Airlines Inc.:
1,050,000 Ba1* Series B, 6.125% due 7/15/27 (a) ............................... 1,089,375
3,000,000 Ba1* Series C, 6.125% due 7/15/27 (a) ............................... 3,112,500
1,000,000 AAA Matagorda County, TX Navigation District No. 1, PCR,
(Houston Lighting & Power Company Project),
MBIA-Insured, 6.100% due 7/1/28 .................................. 1,046,250
North Central, TX Health Facilities Development Project,
Hospital Revenue Bonds, Baylor Health Care Systems,
Series B, Variable Rate INFLOS:
1,265,000 AA 7.940% due 5/15/08 (d) ......................................... 1,385,175
135,000 AA 7.940% due 5/15/08, (Pre-Refunded -- Escrowed
with U.S. government securities to 5/15/02
Call @ 102) (c)(d) ........................................... 150,356
Northgate Crossing, TX Municipals Utilities:
1,000,000 NR District 1, GO, 8.875% due 12/1/13 ............................... 1,008,750
1,000,000 NR District 2, Special Tax, 8.875% due 12/1/13 ...................... 1,008,750
3,435,000 BB Sam Rayburn, TX Municipal Power Supply System Revenue
Refunding, Series A, 6.250% due 10/1/17 .......................... 3,486,525
------------
18,948,632
------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 1998
<TABLE>
<CAPTION>
===============================================================================================================
Face
Amount Rating Security Value
===============================================================================================================
<S> <C> <C> <C>
Utah -- 2.0%
$1,720,000 NR Hurricane, UT Health Facilities Development Revenue,
(Mission Health Services Project), 10.500% due 7/1/20 ............ $ 1,896,300
2,000,000 NR Utah State Housing Finance Agency Revenue, Series A,
6.875% due 7/1/27 ................................................ 2,092,500
------------
3,988,800
------------
Vermont -- 1.1%
2,060,000 A1* Vermont Housing Finance Agency, Home Mortgage, Series B,
8.100% due 6/1/22 (a) ............................................ 2,130,988
------------
West Virginia -- 0.6%
Marion County, WV Solid Waste Disposal Facilities Revenue,
Adirondack Recycling:
1,056,146 NR Series A, 8.000% due 12/1/25 ................................... 1,056,146
148,574 NR Series B, 10.000% due 12/1/25 .................................. 148,574
------------
1,204,720
------------
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 ................................................ 1,862,925
------------
TOTAL INVESTMENTS -- 100%
(Cost-- $183,313,850**) ............................................ $196,098,955
============
</TABLE>
(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) 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.
(d) Residual interest bonds-coupon varies inversely with level of short-term
tax-exempt interest rates.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 13 through 15 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements.
11
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 1998
================================================================================
- --------------------------------------------------------------------------------
Standard & Percent of
Moody's and/or Poor's Total Investments
- --------------------------------------------------------------------------------
Aaa AAA 5.0%
Aa AA 2.8
A A 7.1
Baa BBB 30.4*
Ba BB 16.5
B B 2.3
Caa CCC 0.3
NR NR 35.6
-----
100.0%
=====
- --------------------------------------------------------------------------------
* 0.8% was rated by Fitch IBCA, Inc.
12
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 1998
================================================================================
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except that those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("Moody's"), or those which are identified by a double dagger (++)
are rated by Fitch IBCA, Inc. ("Fitch"). 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 differ 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 and 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 outweighed by
large uncertainties or major risk exposures 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.
13
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 1998
================================================================================
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.
Fitch -- Rating may be modified by the addition of a plus (+) sign or minus (-)
to show relative standings with the major ratings categories.
BBB -- Bonds rated "BBB" by Fitch currently have a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
impair this capacity. This is the lowest investment grade category
assigned by Fitch.
NR -- Indicates that the bond is not rated by Standard & Poor's, Moody's
or Fitch.
Short-Term Security Ratings (unaudited)
================================================================================
A-1 -- Standard & Poor's highest commercial paper and variable-rate
demand obligation (VRDO) rating indicating that the degree of safety
regarding timely payment is either overwhelming or very strong;
those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign.
14
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Security Descriptions (unaudited)
================================================================================
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
PSFG -- Permanent School Fund Guaranty
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
15
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Statement of Assets and Liabilities (unaudited)
July 31, 1998
================================================================================
ASSETS:
Investments, at value (Cost-- $183,313,850) ............... $ 196,098,955
Interest receivable ....................................... 2,755,884
Receivable for securities sold ............................ 40,438
-------------
Total Assets .............................................. 198,895,277
-------------
LIABILITIES:
Payable to bank ........................................... 1,057,638
Investment advisory fees payable .......................... 69,386
Administration fees payable ............................... 34,432
Accrued expenses .......................................... 142,642
-------------
Total Liabilities ......................................... 1,304,098
-------------
Total Net Assets ............................................. $ 197,591,179
=============
NET ASSETS:
Par value of capital shares ............................... $ 201,620
Capital paid in excess of par value ....................... 187,467,243
Overdistributed net investment income ..................... (206,071)
Accumulated net realized loss from security transactions .. (2,656,718)
Net unrealized appreciation of investments ................ 12,785,105
-------------
Total Net Assets ............................................. $ 197,591,179
=============
Shares Outstanding ........................................... 20,161,955
-------------
Net Asset Value .............................................. $ 9.80
-------------
See Notes to Financial Statements.
16
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Statement of Operations (unaudited)
For the Nine Months Ended July 31, 1998
================================================================================
INVESTMENT INCOME:
Interest .................................................... $10,081,986
-----------
EXPENSES:
Investment advisory fees (Note 3) ........................... 588,856
Administration fees (Note 3) ................................ 294,428
Shareholder communications .................................. 93,719
Director's fees ............................................. 32,162
Audit and legal ............................................. 31,657
Registration fees ........................................... 18,250
Shareholder and system servicing fees ....................... 17,237
Pricing service fees ........................................ 11,220
Custody ..................................................... 7,361
Other ....................................................... 3,300
-----------
Total Expenses .............................................. 1,098,190
-----------
Net Investment Income .......................................... 8,983,796
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 4):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales ....................................... 97,533,006
Cost of securities sold ................................... 96,647,543
-----------
Net Realized Gain ........................................... 885,463
-----------
Change in Net Unrealized Appreciation of Investments:
Beginning of period ....................................... 12,531,523
End of period ............................................. 12,785,105
-----------
Increase in Net Unrealized Appreciation ..................... 253,582
-----------
Net Gain on Investments ........................................ 1,139,045
-----------
Increase in Net Assets From Operations ......................... $10,122,841
===========
See Notes to Financial Statements.
17
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Statements of Changes in Net Assets
For the Nine Months Ended July 31, 1998 (unaudited)
and the Year Ended October 31, 1997
================================================================================
1998 1997
---- ----
Operations:
Net investment income ..................... $ 8,983,796 $ 12,082,608
Net realized gain (loss) .................. 885,463 (399,613)
Increase in net unrealized appreciation ... 253,582 5,290,943
------------- -------------
Increase in Net Assets From Operations .... 10,122,841 16,973,938
------------- -------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 2):
Net investment income ..................... (9,326,565) (12,281,068)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders ........... (9,326,565) (12,281,068)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends ............... 2,661,610 2,136,996
------------- -------------
Increase in Net Assets From
Fund Share Transactions ................. 2,661,610 2,136,996
------------- -------------
Increase in Net Assets ....................... 3,457,886 6,829,866
NET ASSETS:
Beginning of period ....................... 194,133,293 187,303,427
------------- -------------
End of period* ............................ $ 197,591,179 $ 194,133,293
============= =============
*Includes undistributed (overdistributed)
net investment income of: .................. $ (206,071) $ 136,698
============= =============
See Notes to Financial Statements.
18
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited)
================================================================================
1. Significant Accounting Policies
Municipal High Income Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities are
valued at the mean between the bid and 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, 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"), 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.
19
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited) (continued)
================================================================================
4. Investments
During the nine months ended July 31, 1998, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $101,004,631
- --------------------------------------------------------------------------------
Sales 97,533,006
================================================================================
At July 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $13,434,241
Gross unrealized depreciation (649,136)
- --------------------------------------------------------------------------------
Net unrealized appreciation $12,785,105
================================================================================
5. Capital Shares
At July 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:
Nine Months Ended Year Ended
July 31, 1998 October 31, 1997
-------------------- --------------------
Shares Amount Shares Amount
================================================================================
Shares issued on reinvestment 276,649 $2,661,610 225,424 $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
================================================================================
20
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Financial Highlights
================================================================================
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 ..... 0.45 0.61 0.63 0.64 0.65 0.67
Net realized and unrealized
gain (loss) ............... 0.06 0.24 -- 0.54 (0.72) 0.23
---------- ---------- ---------- ---------- ---------- ----------
Total Income (Loss) From
Operations ................ 0.51 0.85 0.63 1.18 (0.07) 0.90
---------- ---------- ---------- ---------- ---------- ----------
Less Distributions From:
Net investment income ..... (0.47) (0.62) (0.61) (0.65) (0.65) (0.67)
Net realized gains ........ -- -- -- -- (0.02) --
---------- ---------- ---------- ---------- ---------- ----------
Total Distributions ......... (0.47) (0.62) (0.61) (0.65) (0.67) (0.67)
---------- ---------- ---------- ---------- ---------- ----------
Net Asset Value,
End of Period ............. $ 9.80 $ 9.76 $ 9.53 $ 9.51 $ 8.98 $ 9.72
---------- ---------- ---------- ---------- ---------- ----------
Total Return, Based on
Market Value .............. 3.63%++ 17.22% 10.22% 14.17% (10.11)% 17.76%
---------- ---------- ---------- ---------- ---------- ----------
Total Return, Based on
Net Asset Value ........... 5.39%++ 9.41% 7.39% 14.00% (0.54)% 9.87%
---------- ---------- ---------- ---------- ---------- ----------
Net Assets,
End of Period (000s) ...... $ 197,591 $ 194,133 $ 187,303 $ 187,048 $ 176,379 $ 188,294
========== ========== ========== ========== ========== ==========
Ratios to Average Net Assets:
Expenses ................. 0.75%+ 0.74% 0.77% 0.84% 0.84% 0.87%
Net investment income .... 6.10+ 6.38 6.65 6.87 6.98 6.89
Portfolio Turnover Rate ..... 49% 35% 17% 18% 17% 13%
Market Value, End of Period . $ 9.750 $ 9.875 $ 9.000 $ 9.000 $ 8.250 $ 9.875
</TABLE>
(1) For the nine months ended July 31, 1998 (unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
21
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Financial Data Per Share of Common Stock (unaudited)
================================================================================
Dividend
Record Payable NYSE Net Asset Dividend Reinvestment
Date Date Closing Price* Value* Paid Price
------ ------- ------------- ------ ------- ------
11/20/95 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
2/24/98 2/27/98 10.063 9.86 0.0520 9.66
3/24/98 3/27/98 9.813 9.83 0.0520 9.63
4/21/98 4/24/98 9.563 9.80 0.0520 9.58
5/26/98 5/29/98 9.375 9.80 0.0520 9.52
6/23/98 6/26/98 9.750 9.83 0.0510 9.63
7/28/98 7/31/98 9.750 9.80 0.0510 9.60
*As of record date.
22
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Quarterly Results of Operations (unaudited)
================================================================================
<TABLE>
<CAPTION>
Net Realized Net Increase
Net and Unrealized (Decrease)
Investment Investment Gain (Loss) in Net Assets
Income Income on Investments From Operations
----------------- ----------------- ----------------- ------------------
Quarter Per Per Per Per
Ended Total Share Total Share Total Share Total Share
- -------- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1/31/96 $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
1/31/98 3,350,456 0.17 2,981,194 0.15 2,552,783 0.13 5,533,977 0.28
4/30/98 3,347,620 0.17 2,986,264 0.15 (1,600,055) (0.08) 1,386,209 0.07
7/31/98 3,383,910 0.17 3,016,338 0.15 186,317 0.01 3,202,655 0.16
</TABLE>
23
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited)
================================================================================
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 distributions 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 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
24
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited) (continued)
================================================================================
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 concerning 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.
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. This change is reflected in the description above.
----------
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 July 31,
1998, the Fund has not repurchased any shares.
25
<PAGE>
[CLIP ART] 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
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
26
<PAGE>
[CLIP ART]
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
FD01013 9/98
