Municipal
High Income
Fund Inc.
[GRAPHIC OMITTED]
Annual
Report
[CLIP ART]
October
31, 1998
<PAGE>
===================================[CLIP ART]===================================
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, 1998. During the one-year
period covered by this report, the Fund paid income dividends totaling $0.62.
The table below shows the annualized distribution rates and twelve-month total
returns based on the Fund's October 31, 1998 net asset value ("NAV") and its New
York Stock Exchange ("NYSE") closing price.
Price Annualized Twelve-Month
Per Share Distribution Total Return
----------- -------------- -----------
$9.77 (NAV) 6.26% 6.75%
$10.125 (NYSE) 6.04% 9.34%
In comparison, its Lipper Analytical Services, Inc. ("Lipper") peer group
had an average of 7.27% for the same period. (Lipper is a major fund tracking
organization.)
Market and Economic Overview
With stock market volatility on the rise and anxiety about the global
economy increasing in early fall, the Federal Reserve Board ("Fed") changed its
monetary policy from one of vigilance against inflation to one of combating
deflation. (Deflation is when prices actually fall. Deflation should not be
confused with disinflation. Disinflation is the slowing down of the rate at
which prices increase.) The Federal Open Market Committee, the committee that
sets interest rates and credit policies for the Federal Reserve System, lowered
the federal-funds rate 25 basis points on September 29, 1998. (A basis point is
a means of expressing yield as a percentage. Each basis point is 1/100 of 1%.
The federal-funds rate is an overnight bank lending rate that is a benchmark for
other short-term interest rates.) On October 15, 1998, the Fed took the
unexpected action of cutting the federal-funds rate again by another 25 basis
points. This second Fed rate cut came as a surprise to many investment
professionals.*
The changes in the capital markets after the Fed's latest interest rate
cut have been significant. The prices of many U.S. stocks have gone up and
liquidity in many sectors of the bond market has improved dramatically. As
investors turned away from U.S. Treasuries, which are the most liquid and least
risky of all bonds, their yields went back up sharply. For example, the yield on
the 30-year Treasury increased by more than 65 basis points from October 5, 1998
- ----------
* The Fed reduced the federal-funds rate for the third time in seven weeks
on November 17, 1998, after this letter was written.
1
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through November 6, 1998. And just as other types of bonds had underperformed as
U.S. Treasury rates declined, they outperformed as Treasury rates rebounded.
Moreover, the bond market has weakened in recent weeks due to unsold dealer
positions and ongoing U.S. Treasury bond auctions. Both the tax-exempt and
corporate bond markets are also facing the same challenges such as heavy supply
and high dealer inventories.
Investment Strategy
The Fund's investment objective is to provide high levels of tax-exempt
current income. In pursuit of this objective, the Fund remains broadly
diversified across a number of investment sectors that we believe offer high
yield potential as well as relative price stability.
As of October 31, 1998, roughly 43% 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.) The
Fund's largest holdings were in industrial development revenue bonds (22.5%),
hospital bonds (18.9%) and transportation bonds (13.9%).
Municipal Bond Market Outlook
The municipal bond market has continued to benefit from the U.S. economy's
persistent strength. However, the volume of new municipal issues remains heavy
as attractive low interest rates continue to provide an incentive for state and
local governments to refinance older, high interest rate debt.
On the other hand, demand for tax-exempt income remains modest. Given this
strong supply and modest demand, it is not surprising that municipal bonds are
inexpensive by historical standards. At current yield levels, we believe
municipal bonds are attractive.
With respect to the recent November elections, potential municipal bond
issuance of more than $25 billion was approved by voters nationwide,
specifically new issues for schools, transportation, parks and open spaces. Yet
we are not alarmed by this new supply in the market because it will be spread
out over a period of years.
Going forward, we are optimistic about the attractiveness of the
tax-exempt bond market. We expect that the Fed will lower interest rates at
least one more time in 1998, and if the U.S. economy remains sluggish, we
believe that the Fed will lower rates again in the first half of 1999. We expect
a moderately expanding U.S. economy while the Fed continues to monitor the U.S.
economy closely for signs of either inflationary or deflationary pressures.
2
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===================================[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
November 13, 1998
3
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===================================[CLIP ART]===================================
- --------------------------------------------------------------------------------
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 investments put 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 25. 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 on the date 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
October 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 ............................................ $ 244,375
1,000,000 Baa3* Alabama State IDA, Solid Waste Disposal,
6.450% due 12/1/23 (b) ......................................... 1,077,500
4,000,000 BBB- Butler, AL IDR, Waste Disposal, 8.000% due 9/1/28 (b)(c) .......... 4,595,000
1,000,000 CCC Mobile, AL IDR, 6.950% due 1/1/20 ................................. 530,000
1,000,000 NR West Jefferson, AL Amusement & Public Park Authority
Revenue, (Visionland Project), 8.000% due 12/1/26 .............. 1,070,000
-------------
7,516,875
-------------
Arizona--2.3%
Coconino County, AZ PCR, Nevada Power Co.:
1,000,000 BBB- Series B, 5.800% due 11/1/32 (b) ............................... 1,018,750
1,500,000 BBB++ Series E, 5.350% due 10/1/22 ................................... 1,500,000
2,000,000 BBB- Gila County, AZ IDA Revenue, ASARCO Inc.,
5.550% due 1/1/27 .............................................. 2,012,500
-------------
4,531,250
-------------
California--1.0%
2,000,000 NR Los Angeles County, CA Regional Airport Authority,
Continental Airlines, Inc., 9.000% due 8/1/17 (b)(c) ........... 2,060,640
-------------
Colorado--2.5%
2,000,000 NR Colorado Health Facilities Authority Revenue,
(Beth Israel at Shalom Park Project),
7.250% due 12/15/25 ............................................ 2,092,500
Denver, CO Airport, Series A:
1,505,000 BBB+ 8.500% due 11/15/23 (b) ........................................ 1,647,975
1,175,000 BBB+ 8.000% due 11/15/25 (b) ........................................ 1,291,031
-------------
5,031,506
-------------
Connecticut--1.7%
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 ............... 1,635,000
-------------
3,489,281
-------------
Florida--2.6%
875,000 NR Homestead, FL IDR, (Project A), 7.950% due 11/1/18 ................ 942,812
1,970,000 NR Jacksonville, FL Health Facilities Authority Revenue,
9.125% due 10/15/19 ............................................ 2,021,929
2,000,000 BBB- Martin County, FL IDR, (Indiantown Cogeneration Project A),
7.875% due 12/15/25 (b) ........................................ 2,307,500
-------------
5,272,241
-------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (Continued)
October 31, 1998
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
================================================================================================================
<S> <C> <C> <C>
Georgia--2.1%
$ 3,000,000 NR Forsyth County, GA Hospital Authority Revenue, (Baptist
Health Care System Project), 6.375% due 10/1/28 ................ $ 2,970,000
1,000,000 NR Walton County, GA IDA, (Walton Project),
8.500% due 9/1/07 .............................................. 1,141,250
-------------
4,111,250
-------------
Illinois--3.6%
6,750,000 AAA Chicago, IL Board of Education, (School
Reform Project), Series B-1, FGIC-Insured, zero
coupon bond to yield
5.220% due 12/1/31 ............................................. 1,231,875
2,500,000 BB East Chicago, IL IDA Revenue, (Inland Steel Co., Project 10),
6.800% due 6/1/13 .............................................. 2,603,125
1,500,000 A+ Illinois Housing Development Authority, Series 5,
6.750% due 9/1/23 .............................................. 1,635,000
730,000 NR Loves Park, IL First Mortgage Revenue, (Hoosier Care Project),
Series A, 9.750% due 8/1/19 .................................... 765,850
955,000 NR Sterling, IL First Mortgage Revenue, (Hoosier Care Project),
Series A, 9.750% due 8/1/19 .................................... 998,844
-------------
7,234,694
-------------
Indiana--4.2%
1,000,000 B+ Indiana State Development Finance Authority, PCR,
(Inland Steel Co., Project No. 13),
7.250% due 11/1/11 (b) ......................................... 1,080,000
2,000,000 BBB- Indiana State Environmental Development Finance Authority,
(USX Corp. Project), 6.250% due 7/15/30 ........................ 2,155,000
4,750,000 Baa2* Indianapolis, IN Airport Authority, United Airlines,
6.500% due 11/15/31 (b)(c) ..................................... 5,106,250
-------------
8,341,250
-------------
Kentucky--2.0%
1,230,000 NR Jefferson County, KY Health Facilities Authority, Dates
Beverly Enterprises, 10.125% due 5/1/08 ........................ 1,291,709
1,500,000 BBB- Kenton County, KY Airport Board, (Delta Airlines Project),
7.500% due 2/1/20 (b) .......................................... 1,640,625
1,000,000 A Pendleton County, KY Multi-Lease Revenue, Series A,
6.500% due 3/1/19 .............................................. 1,092,500
-------------
4,024,834
-------------
Louisiana--5.1%
1,200,000 A3* Lake Charles, LA Harbor & Terminal District Port Facilities
Revenue, (Trunkline LNG Co. Project),
7.750% due 8/15/22 ............................................. 1,368,000
Port New Orleans, LA IDR:
Avondale Industries, Inc. Project:
1,600,000 NR 8.250% due 6/1/04 ............................................ 1,804,000
3,000,000 NR 8.500% due 6/1/14 ............................................ 3,446,250
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (Continued)
October 31, 1998
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
================================================================================================================
<S> <C> <C> <C>
Louisiana--5.1% (continued)
$ 1,000,000 B+ Continental Grain Co. Project, 7.500% due 7/1/13 (c) ........... $ 1,065,000
2,400,000 BB+ West Feliciana Parish, LA PCR, 8.000% due 12/1/24 ................. 2,536,464
-------------
10,219,714
-------------
Maine--0.1%
Maine State Housing Authority Mortgage Purchases:
65,000 AA Series C-2, 7.000% due 11/15/32 (b) ............................ 70,037
20,000 AA Series D-1, 8.300% due 11/15/28 (b) ............................ 20,405
-------------
90,442
-------------
Massachusetts--6.4%
Commonwealth of Massachusetts Industrial Finance Agency,
(S.E. Mass Project):
1,700,000 NR Series A, 9.000% due 7/1/15 .................................. 1,899,750
5,895,000 NR Series B, 9.250% due 7/1/15 (b)(c) ........................... 6,609,769
Massachusetts State Industrial Finance Agency:
2,000,000 NR Assisted Living Facility Revenue, (Marina Bay LLC Project),
7.500% due 12/1/27 (b) ....................................... 2,075,000
2,250,000 NR Chestnut Knoll Project, Series A, 5.500% due 2/15/18 ........... 2,185,313
-------------
12,769,832
-------------
Michigan--3.4%
2,000,000 BB- Detroit, MI Local Development Finance Authority, Series A,
5.500% due 5/1/21 .............................................. 1,972,500
2,000,000 Ba3* Garden City, MI Hospital Finance Authority, Hospital
Revenue, Garden City Hospital Obligation, Group A,
5.625% due 9/1/10 .............................................. 1,990,000
2,000,000 NR Michigan State Strategic Fund, Resource Recovery Limited
Obligation Revenue, Central Wayne Energy Recovery,
Series A, 6.900% due 7/1/19 (b) ................................ 2,027,500
695,000 BBB+ Western Townships, MI Utility Revenue, Sewage System,
(Subject to Crossover Refunding 11/1/99 @ 102),
8.300% due 1/1/19 .............................................. 712,667
-------------
6,702,667
-------------
Minnesota--1.0%
1,795,000 AA+ Minnesota HFA, Single-Family, Series H, 6.700% due 1/1/18 ......... 1,934,113
-------------
Mississippi--3.5%
3,300,000 Ba1* Claiborne County, MS PCR, Series C, 9.875% due 12/1/14 ............ 3,412,134
3,500,000 BBB- Mississippi Business Finance Corp., MS PCR, (System
Energy Resource Inc. Project), 5.875% due 4/1/22 ............... 3,500,000
-------------
6,912,134
-------------
Montana--2.2%
4,530,000 NR Montana State Board Investment Resource Recovery
Revenue, (Yellowstone Energy LP Project),
7.000% due 12/31/19 (b) ........................................ 4,371,450
-------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (Continued)
October 31, 1998
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
================================================================================================================
<S> <C> <C> <C>
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 .............. $ 1,063,750
500,000 BB- New Hampshire State Business Finance Authority, PCR,
(Public Service Co.), Series D, 6.000% due 5/1/21 (b) .......... 510,000
-------------
1,573,750
-------------
New Jersey--5.0%
3,000,000 Baa2* Camden County, NJ Improvement Authority Revenue, Health Care
Redevelopment Project, (Cooper Health), 5.875% due 2/15/15 ..... 3,142,500
2,200,000 NR New Jersey Educational Facilities, Fairleigh Dickinson
University, Series C, 6.625% due 7/1/23 ........................ 2,293,500
New Jersey Health Care Facilities:
1,885,000 Ba1* Palisades Medical Center, Finance Authority Revenue,
7.600% due 7/1/21 ............................................ 2,024,019
1,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27 .................. 1,061,250
1,500,000 B1* Zurbrugg Memorial Hospital, Series C, 8.500% due 7/1/12 ........ 1,490,625
-------------
10,011,894
-------------
New Mexico--0.5%
945,000 AAA New Mexico Mortgage Finance Authority, Single-Family
Mortgage Program, Series B, FHA-Insured,
8.300% due 3/1/20 (b) .......................................... 1,044,225
-------------
New York--4.4%
1,640,000 NR Monroe County, NY Industrial Development Agency Revenue,
(Empire Sports Project), Series A, 6.250% due 3/1/28 ........... 1,642,050
1,500,000 NR New York City, NY IDA, Civil Facility Revenue,
7.500% due 8/1/26 .............................................. 1,578,750
400,000 A-1+ New York City, NY, Subseries A-7, 3.750% due 8/1/21 (d) ........... 400,000
1,950,000 A- New York State Energy, Research & Development Authority,
Electric Facility Revenue, LILCO, 7.150% due 12/1/20 (b) ....... 2,137,688
2,750,000 NR Port Authority of NY & NJ, Special Obligation Revenue,
6.750% due 10/1/19 (b) ......................................... 3,073,125
-------------
8,831,613
-------------
North Carolina--4.1%
1,750,000 A Martin County, NC Industrial Facilities PCR,
6.800% due 5/1/24 (b) .......................................... 1,953,435
2,300,000 Baa1* North Carolina Eastern Municipal Power Agency,
Power Systems Revenue, Series B, 7.000% due 1/1/08 ............. 2,722,625
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
800,000 Baa1* North Carolina Medical Care Community Hospital Revenue,
Halifax Regional Medical Center, 5.000% due 8/15/24 ............ 760,000
1,310,000 A- North Carolina Municipal Power Agency No. 1, Catawaba
Electric Revenue, 6.250% due 1/1/17 ............................ 1,393,513
-------------
8,271,373
-------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (Continued)
October 31, 1998
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
================================================================================================================
<S> <C> <C> <C>
Ohio--5.7%
Cleveland, OH Airport Special Revenue, (Continental Airlines
Inc. Project):
$ 1,000,000 NR 9.000% due 12/1/19 (b) ....................................... $ 1,080,100
2,000,000 Ba2* 5.375% due 9/15/27 (b) ....................................... 1,902,500
1,000,000 NR Cuyahoga County, OH Health Care Facilities, Judson
Retirement Community, Series A, 7.250% due 11/15/18 ............ 1,076,250
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 .............................................. 563,231
1,035,000 Aaa* 8.100% due 7/1/18, (Pre-Refunded--Escrowed with U.S.
government securities to 7/1/06 Call @ 102) .................. 1,323,506
1,250,000 NR Ohio State Solid Waste Revenue, 9.000% due 6/1/21 (b) ............. 1,392,188
1,000,000 Baa3* Ohio Water Development Authority, PCR, Series A,
8.100% due 10/1/23 (b) ......................................... 1,055,000
-------------
11,467,775
-------------
Oklahoma--0.3%
3,000,000 Aaa* Oklahoma Housing Finance Agency, Single-Family Revenue,
Collateralized Mortgage, Series D-1, zero coupon bond
to yield 5.400% due 3/1/29 ..................................... 596,250
-------------
Pennsylvania--14.3%
2,200,000 B+ Allegheny County, PA IDA, Special Facilities Revenue, Series B,
(U.S. Air Project), 8.500% due 3/1/21 (b) ...................... 2,439,250
Beaver County, PA IDA, PCR:
2,000,000 BB+ 7.625% due 5/1/20 .............................................. 2,285,000
2,500,000 BB+ 7.625% due 5/1/25 .............................................. 2,856,250
1,500,000 NR Dauphin County, PA General Authority, Hotel & Conference
Center, Hyatt Regency, 6.200% due 1/1/29 ....................... 1,481,250
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 (e) ................... 1,608,000
3,000,000 BBB+ Lebanon County, PA Samaritan House, Series B,
(Pre-Refunded--Escrowed with U.S. government securities
to 11/1/99 Call @ 102), 8.250% due 11/1/18 (e) ................. 3,209,460
2,500,000 A- Luzerne County, PA IDA, 7.125% due 12/1/22 (b) .................... 2,762,500
550,000 NR Northumberland County, PA IDA Revenue, 6.875% due 2/1/03 .......... 562,216
1,500,000 AA+ Pennsylvania HFA, Series C, 6.900% due 4/1/25 (b) ................. 1,621,875
1,920,000 BBB Philadelphia, PA Gas Revenue, Series B,
6.400% due 11/15/16 ............................................ 2,025,600
1,000,000 NR Philadelphia, PA IDR, Host Marriott,
7.750% due 12/1/17 (b) ......................................... 1,115,000
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (Continued)
October 31, 1998
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
================================================================================================================
<S> <C> <C> <C>
Pennsylvania--14.3% (continued)
Scranton-Lackawanna, PA Health & Welfare Authority Revenue,
(Moses Taylor Hospital Project):
$ 1,905,000 BBB- 6.150% due 7/1/14 ............................................ $ 2,038,350
3,050,000 BBB- 6.250% due 7/1/20 ............................................ 3,244,438
1,250,000 AAA Sharon, PA Regional Health Systems, (Project B),
6.875% due 12/1/22 ............................................. 1,417,188
-------------
28,666,377
-------------
South Carolina--2.0%
860,000 NR Florence County, SC IDR, 7.375% due 2/1/07 ........................ 924,500
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 .............................................. 2,350,000
800,000 NR McCormick County, SC COP, 9.750% due 7/1/09 ....................... 810,352
-------------
4,084,852
-------------
South Dakota--1.0%
Oglala Sioux Tribe, SD Pine Ridge County, Revenue Bonds:
70,000 NR 7.000% due 7/1/99 .............................................. 70,460
1,865,000 NR 7.500% due 7/1/13 .............................................. 1,911,625
-------------
1,982,085
-------------
Tennessee--0.4%
750,000 AAA Knox County, TN Health, Education & Housing, FSA-Insured,
7.125% due 1/1/30 .............................................. 837,188
-------------
Texas--9.4%
1,350,000 BBB Alliance, TX Airport Authority Inc., (Federal Express Corp.
Project), 6.375% due 4/1/21 (b) ................................ 1,456,313
2,000,000 BBB+ Brazos River, TX PCR, (Collateral-Texas Utilities Electric Co.,
Project A), 8.250% due 1/1/19 (b) .............................. 2,052,080
835,000 A2* El Paso, TX Housing Finance Corp., Single-Family
Mortgage Revenue, 8.750% due 10/1/11 ........................... 905,975
2,000,000 B1* El Paso, TX International Airport Revenue Bonds, (Marriott
Corp. Project), 7.750% due 3/1/12 .............................. 2,135,000
Houston, TX Airport Systems Revenue Special Facilities,
Continental Airlines Inc.:
1,050,000 Ba1* Series B, 6.125% due 7/15/27 (b) ............................. 1,082,812
3,000,000 Ba1* Series C, 6.125% due 7/15/27 (b) ............................. 3,093,750
1,000,000 AAA Matagorda County, TX Navigation District No. 1, PCR,
(Houston Lighting & Power Co. Project),
MBIA-Insured, 6.100% due 7/1/28 ................................ 1,050,000
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 (f) ....................................... 1,389,919
135,000 AA 7.940% due 5/15/08, (Pre-Refunded--Escrowed with
U.S. government securities to 5/15/02 Call @ 102) (e)(f) ... 150,525
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (Continued)
October 31, 1998
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating Security Value
================================================================================================================
<S> <C> <C> <C>
Texas--9.4% (continued)
Northgate Crossing, TX Municipals Utilities:
$ 1,000,000 NR District 1, GO, 8.875% due 12/1/13 ............................. $ 1,007,500
1,000,000 NR District 2, Special Tax, 8.875% due 12/1/13 .................... 1,007,500
3,435,000 BB Sam Rayburn, TX Municipal Power Supply System Revenue
Refunding, Series A, 6.250% due 10/1/17 ........................ 3,486,525
-------------
18,817,899
-------------
Utah--2.0%
1,720,000 NR Hurricane, UT Health Facilities Development Revenue,
(Mission Health Services Project), 10.500% due 7/1/20 .......... 1,881,250
2,000,000 NR Utah State Housing Finance Agency Revenue, Series A,
6.875% due 7/1/27 .............................................. 2,087,500
-------------
3,968,750
-------------
Vermont--1.1%
2,060,000 A1* Vermont Housing Finance Agency, Home Mortgage, Series B,
8.100% due 6/1/22 (b) .......................................... 2,123,819
-------------
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 .............................................. 1,854,075
-------------
TOTAL INVESTMENTS--100%
(Cost--$188,226,807**) ............................................ $ 199,950,818
=============
</TABLE>
- ----------
(a) All ratings are by Standard & Poor's Ratings Service ("Standard &
Poor's"), except those which are 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").
(b) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(c) Security segregated by Custodian for open purchase commitments.
(d) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
(e) Pre-Refunded bonds are escrowed with U.S. government securities and are
considered by the Manager to be triple-A rated even if the issuer has not
applied for new ratings.
(f) 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.
Summary of Municipal Bonds by Combined Ratings
October 31,1998
================================================================================
- --------------------------------------------------------------------------------
Standard & Percent of
Moody's and/or Poor's Total Investments
- --------------------------------------------------------------------------------
Aaa AAA 3.9%
Aa AA 2.6
A A 8.2
Baa BBB 28.4*
Ba BB 14.8
B B 4.1
Caa CCC 0.3
NR NR 37.7
-----
100.0%
=====
- --------------------------------------------------------------------------------
* 0.8% was rated by Fitch IBCA, Inc.
12
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Bond Ratings (unaudited)
================================================================================
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 to a debt obligation. 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 issues only in
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher rated categories.
BB, B -- Bonds rated "BB" and "B" are regarded, on balance, as
and CCC predominantly speculative 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.
Bond Ratings (unaudited)(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.
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
October 31, 1998
================================================================================
ASSETS:
Investments, at value (Cost--$188,226,807) ................ $ 199,950,818
Cash ...................................................... 97,825
Interest receivable ....................................... 4,378,348
Receivable for securities sold ............................ 245,109
-------------
Total Assets .............................................. 204,672,100
-------------
LIABILITIES:
Payable for securities purchased .......................... 6,456,817
Investment advisory fees payable .......................... 67,565
Administration fees payable ............................... 33,522
Accrued expenses .......................................... 170,122
-------------
Total Liabilities ......................................... 6,728,026
-------------
Total Net Assets .............................................. $ 197,944,074
=============
NET ASSETS:
Par value of capital shares ............................... $ 202,586
Capital paid in excess of par value ....................... 188,107,418
Overdistributed net investment income ..................... (16,922)
Accumulated net realized loss from security transactions .. (2,073,019)
Net unrealized appreciation of investments ................ 11,724,011
-------------
Total Net Assets .............................................. $ 197,944,074
=============
Shares Outstanding ............................................ 20,258,640
-------------
Net Asset Value ............................................... $ 9.77
-------------
See Notes to Financial Statements.
16
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Statement of Operations
For the Year Ended October 31, 1998
================================================================================
INVESTMENT INCOME:
Interest ................................................. $ 13,432,644
-------------
EXPENSES:
Investment advisory fees (Note 3) ........................ 786,802
Administration fees (Note 3) ............................. 393,401
Shareholder communications ............................... 117,652
Directors' fees .......................................... 42,883
Audit and legal .......................................... 40,456
Registration fees ........................................ 24,333
Shareholder and system servicing fees .................... 22,983
Pricing service fees ..................................... 14,960
Custody .................................................. 9,835
Other .................................................... 4,082
-------------
Total Expenses ........................................... 1,457,387
-------------
Net Investment Income ........................................ 11,975,257
-------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 4):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales .................................. 112,979,742
Cost of securities sold .............................. 111,510,580
-------------
Net Realized Gain ........................................ 1,469,162
-------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year .................................... 12,531,523
End of year .......................................... 11,724,011
-------------
Decrease in Net Unrealized Appreciation .................. (807,512)
-------------
Net Gain on Investments ...................................... 661,650
-------------
Increase in Net Assets From Operations ....................... $ 12,636,907
=============
See Notes to Financial Statements.
17
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Statements of Changes in Net Assets
For the Years Ended October 31,
================================================================================
1998 1997
---- ----
OPERATIONS:
Net investment income .................... $ 11,975,257 $ 12,082,608
Net realized gain (loss) ................. 1,469,162 (399,613)
Increase (decrease) in net unrealized
appreciation of investments ............ (807,512) 5,290,943
------------- -------------
Increase in Net Assets From Operations ... 12,636,907 16,973,938
------------- -------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 2):
Net investment income .................... (12,128,877) (12,281,068)
In excess of net investment income ....... (287,412) --
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders .......... (12,416,289) (12,281,068)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends .............. 3,590,163 2,136,996
------------- -------------
Increase in Net Assets From
Fund Share Transactions ................ 3,590,163 2,136,996
------------- -------------
Increase in Net Assets ....................... 3,810,781 6,829,866
NET ASSETS:
Beginning of Year ........................ 194,133,293 187,303,427
------------- -------------
End of Year* ............................. $ 197,944,074 $ 194,133,293
============= =============
*Includes undistributed (overdistributed)
net investment income of: ................ $ (16,922) $ 136,698
============= =============
See Notes to Financial Statements.
18
<PAGE>
[CLIP ART] 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; (h) the character of
income and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
October 31, 1998, reclassifications were made to the Fund's capital accounts to
reflect permanent book/tax differences and income and gains available for
distributions under income tax regulations. Accordingly, a portion of
accumulated net investment income amounting to $287,412 was reclassified to
paid-in capital. Net realized gains and net assets were not affected by this
change; and (i) 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 (continued)
================================================================================
All officers and one Director of the Fund are employees of Salomon Smith
Barney Inc., another subsidiary of SSBH.
4. Investments
During the year ended October 31, 1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $120,387,212
- --------------------------------------------------------------------------------
Sales 112,979,742
================================================================================
At October 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $12,466,054
Gross unrealized depreciation (742,043)
- --------------------------------------------------------------------------------
Net unrealized appreciation $11,724,011
================================================================================
5. Capital Shares
At October 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 year were as follows:
Year Ended Year Ended
October 31, 1998 October 31, 1997
------------------ -------------------
Shares Amount Shares Amount
================================================================================
Shares issued on reinvestment 373,334 $3,590,163 225,424 $2,136,996
================================================================================
6. Capital Loss Carryforwards
At October 31, 1998, the Fund had, for Federal income tax purposes,
approximately $2,072,000 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 $1,197,000 $ 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 year ended October 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year ..................... $ 9.76 $ 9.53 $ 9.51 $ 8.98 $ 9.72
------------ ------------ ------------ ------------ ------------
Income (Loss) From Operations:
Net investment income ................. 0.60 0.61 0.63 0.64 0.65
Net realized and unrealized gain (loss) 0.03 0.24 -- 0.54 (0.72)
------------ ------------ ------------ ------------ ------------
Total Income (Loss) From Operations ..... 0.63 0.85 0.63 1.18 (0.07)
------------ ------------ ------------ ------------ ------------
Less Distributions From:
Net investment income ................. (0.61) (0.62) (0.61) (0.65) (0.65)
In excess of net investment income .... (0.01) -- -- -- --
Net realized gains .................... -- -- -- -- (0.02)
------------ ------------ ------------ ------------ ------------
Total Distributions ..................... (0.62) (0.62) (0.61) (0.65) (0.67)
------------ ------------ ------------ ------------ ------------
Net Asset Value,
End of Year ........................... $ 9.77 $ 9.76 $ 9.53 $ 9.51 $ 8.98
============ ============ ============ ============ ============
Total Return, Based on
Market Value .......................... 9.34% 17.22% 10.22% 14.17% (10.11)%
------------ ------------ ------------ ------------ ------------
Total Return, Based on
Net Asset Value ....................... 6.75% 9.41% 7.39% 14.00% (0.54)%
------------ ------------ ------------ ------------ ------------
Net Assets,End of Year (000s) ........... $ 197,944 $ 194,133 $ 187,303 $ 187,048 $ 176,379
------------ ------------ ------------ ------------ ------------
Ratios to Average Net Assets:
Expenses ............................. 0.74% 0.74% 0.77% 0.84% 0.84%
Net investment income ................ 6.07 6.38 6.65 6.87 6.98
Portfolio Turnover Rate ................. 57% 35% 17% 18% 17%
Market Value, End of Period ............. $ 10.125 $ 9.875 $ 9.000 $ 9.000 $ 8.250
</TABLE>
21
<PAGE>
[CLIP ART] 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, 1998, 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 four-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 the year 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, 1998, 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, 1998, 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 four-year period then ended, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
December 8, 1998
23
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Financial Data Per Share of Common Stock (unaudited)
================================================================================
Record Payable NYSE Net Asset Dividend Reinvestment
Date Date Closing Price* Value* Paid Price
------ ------- ------------- ------ ------- ------
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
8/25/98 8/28/98 9.875 9.81 0.0510 9.61
9/22/98 9/25/98 9.813 9.83 0.0510 9.63
10/27/98 10/30/98 10.000 9.76 0.0510 9.57
*As of record date.
23
<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>
1/31/97 $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
10/31/98 3,350,658 0.17 2,991,461 0.15 (477,395) (0.02) 2,514,066 0.12
</TABLE>
24
<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
25
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited) (continued)
================================================================================
issues the remaining shares. To the extent First Data is unable to stop open
market purchases and cause the Fund to issue the remaining shares, the average
per share price paid by First Data may exceed 98% of the net asset value per
share of the Common Stock, resulting in the acquisition of fewer shares of
Common Stock than if the dividend or capital gains distribution had been paid in
Common Stock issued by the Fund at 98% of the net asset value per share. First
Data will begin to purchase Common Stock on the open market as soon as
practicable after the payment date of the dividend or capital gains
distribution, but in no event shall such purchases continue later than 30 days
after that date, except when necessary to comply with applicable provisions of
the Federal securities laws.
First Data maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. The automatic reinvestment
of dividends and capital gains distributions will not relieve Plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Common Stock in the account of each Plan participant will be held
by First Data in uncertificated form in the name of the Plan participant.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. First Data's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
Fund. No brokerage charges shall apply with respect to shares of Common Stock
issued directly by the Fund under the Plan. Each Plan participant will, however,
bear a pro-rata share of brokerage commissions incurred with respect to any open
market purchases made under the Plan.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data or the Fund on at least 30 days' written notice to Plan
participants. All correspondence 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 October 31,
1998, the Fund has not repurchased any shares.
26
<PAGE>
[CLIP ART] Municipal High Income Fund Inc.
Tax Information (unaudited)
================================================================================
For Federal tax purposes the Fund hereby designates for the fiscal year
ended October 31, 1998:
o 100.00% of the dividends paid by the Fund from net investment income
as tax exempt for regular Federal income tax purposes.
27
<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
28
<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
FD01049 12/98
