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Municipal
High Income
Fund Inc.
Quarterly
Report
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July
31, 1999
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Municipal High Income Fund Inc.
Dear Shareholder:
We are pleased to provide the third quarter report for the Municipal High
Income Fund Inc. ("Fund") for the nine months ended July 31, 1999. During the
nine-month period covered by this report, the Fund paid income dividends
totaling $0.44 per share and posted a total return of 1.24% based on net asset
value ("NAV"). In comparison, its Lipper, Inc. peer group had an average of
negative 0.62% for the same period. (Lipper is a major fund-tracking
organization.) In addition, the Fund generated a total return of a negative
8.80% based on its market value. The table below shows the annualized
distribution rate and nine-month total return based on the Fund's July 31, 1999
NAV and its New York Stock Exchange ("NYSE") closing price.
Price Annualized Nine-Month
Per Share Distribution Rate* Total Return
- -------------- ------------------ ------------
$9.44 (NAV) 6.17% 1.24%
$8.813 (NYSE) 6.60% (8.80)%
Market and Economic Overview
Fixed income markets are returning to `normal' in the aftermath of forced
liquidations by major hedge funds and negatively impacted global markets in late
1998. The return to normalcy was evident by mid-August, with municipal
securities yielding roughly 87% of similar maturity Treasuries - just slightly
above average under normal market conditions. Following these forced
liquidations, the long bond has exceeded the 6% mark, and municipal securities
have been trading at low valuations relative to governments. As a result of last
year's crisis (and ensuing credit crunch), the spread between the yields on
municipal securities and Treasuries widened.
The robust state of the U.S. economy contributed to the second highest
municipal securities issuance volume in history in 1998. The ability of the
market to absorb such volume indicates the steady demand for tax-exempt
investments and reflects investor confidence.
The municipal bond market has come under considerable pressure in recent
weeks. Yields on long-term municipals are up 30-40 basis points since the third
week in July, substantially more than the increase in Treasury yields over the
same period. This increase has occurred in spite of an inflation outlook that is
well within the Federal Reserve Board's ("Fed") ability to control, in our
opinion. The upward pressure on municipal yields appears to result largely from
two factors: 1) the lack of demand for municipal bonds by the traditional
institutional sectors that have supported the municipal market, and 2)
additional pressures resulting from the pre-Y2K avalanche of issues in the
taxable market, which has attracted institutional investors who would otherwise
buy municipals.
- -----------
* The distribution rate assumes a current monthly income dividend rate of
$0.0485 per share for twelve months.
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Yields have rebounded sharply, up nearly 3 1/44 of 1% since the beginning
of 1999. The slope of the municipal yield curve has remained extremely steep,
with 20-year municipals yielding roughly 120 basis points more than 1-year
paper. In the Treasury market, the difference between 1-year and 30-year bond
yields is only 80 basis points.
Investment Strategy
The Fund's investment objective is to provide high levels of tax-exempt
current income. In pursuit of this objective, the Fund continues to focus on
higher coupon bonds in order to maintain an attractive level of current income.
As previously noted, the Fund seeks maximum current income that is exempt
from regular federal income taxes by investing primarily in intermediate- and
long-term municipal bonds and municipal leases, rated A, Baa or Ba by Moody's
Investors Service, Inc. or by Standard & Poor's Ratings Service. Please note
that a portion of the income from this Fund may be subject to the Alternative
Minimum Tax ("AMT"). (Standard & Poor's Ratings Service and Moody's Investors
Service, Inc. are two major credit reporting and bond-rating agencies.)
Preferred sectors in the Fund include hospitals, transportation,
industrial development revenues, life care (retirement) facilities, and
low-income/multi-family housing. These issues tend to represent opportunities
for higher yield at good relative values.
Our overall view is one of cautious optimism. We plan to pursue a
reasonably defensive stance, but may slightly extend maturities on a portion of
our assets. We remain confident that we can achieve a high level of tax-exempt
income, consistent with prudent investing and assessment of credits. Yields on
municipal securities have risen quite substantially, and the long end of the
yield curve continues to favor this asset class. The Fund tends to contain bonds
which are priced to be called prior to maturity, so they consequently have a
shorter life than most of the funds in their peer group. We intend to sell off
some shorter maturity assets and, in today's attractive rate environment, take a
somewhat more positive stance.
We believe that the recent rise in interest rates has created buying
opportunities. Current market conditions should provide a supportive backdrop
for municipals for the remainder of 1999.
Fed actions to control a potentially overly exuberant economy have helped
to stabilize markets and have proved beneficial, as we have been able to obtain
higher yields on lower-rated securities.
Municipal Bond Market Outlook
Going forward, we remain positive on the prospects for the municipal bond
market. We expect a moderately expanding U.S. economy with the Fed maintaining
its vigilance against higher inflationary pressure. We believe that many
municipal bond investors are concentrating on
2
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long-term opportunities rather than short-term events. Therefore, we are still
bullish on the long-term prospects for municipal bonds. Looking ahead, we
believe that the U.S. economy should remain strong in the coming months with
muted inflationary pressures. Recent economic conditions have created
opportunities for municipal securities to catch up with Treasuries, and we
continue to see good value at the long end of the market. This scenario, under
present economic conditions, creates compelling opportunities in fixed income
investments, specifically municipal securities.
With long-term municipal bond yields in 53 1/44% range and inflation under
control, "real" inflation-adjusted yields on longer intermediate and long-term
municipals are quite attractive. Following the Fed's August 24 quarter point
short-term interest rate increase, we do not anticipate further policy change
for the remainder of 1999 amid optimism that the Fed has acted sufficiently to
curb inflationary pressures. The rate increase was justified in a statement
released by the Fed, citing very tight labor markets, normally functioning
financial markets and firmer foreign economies. The intended effect of the rate
increase is to slow the economy just a bit to relieve inflationary pressures
from tight labor markets. Higher interest rates should, over time, raise the
costs of spending and investing for both consumers and businesses, forcing them
to cut back and alleviate the strain on the labor market.
As quality spreads narrow, pricing in the Fed rate increase, we expect
continued strong economic growth, benign inflation and tight labor markets.
While we believe municipal securities have good value relative to inflation, we
expect some upward pressure until markets stabilize with regard to inflation and
vigilant Fed actions.
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/ Peter M. Coffey
Heath B. McLendon Peter M. Coffey
Chairman Vice President and
Investment Officer
August 26, 1999
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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 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 Investor Services Group, Inc. at (800)
331-1710.
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[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 1999
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
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Alabama -- 3.9%
$ 125,000 Aaa* Alabama HFA, Single-Family Housing Revenue,
10.500% due 12/1/02......................... $ 131,562
1,000,000 Baa3* Alabama State IDA, Solid Waste Disposal
Revenue, Pine City Fiber Co., Remarketed
1/2/97, 6.450% due 12/1/23 (b).............. 1,035,000
4,000,000 BBB Butler, AL IDB, Solid Waste Disposal Revenue,
(James River Corp. Project), 8.000% due
9/1/28 (b)(c)............................... 4,480,000
1,000,000 CCC Mobile, AL IDB, Solid Waste Disposal Revenue,
(Mobile Energy Services Co. Project), 6.950%
due 1/1/20.................................. 530,000
1,000,000 AAA West Jefferson, AL Amusement & Public Park
Authority Revenue, (Visionland Project),
(Pre-Refunded -- Escrowed with U.S.
government securities to 12/1/06 Call @
102), 8.000% due 12/1/26.................... 1,220,000
------------
7,396,562
------------
Arizona -- 1.0%
2,000,000 BBB- Gila County, AZ IDA Revenue, ASARCO Inc.,
5.550% due 1/1/27........................... 1,870,000
------------
Colorado -- 2.6%
2,000,000 NR Colorado Health Facilities Authority Revenue,
(Beth Israel at Shalom Park Project), 7.250%
due 12/15/25................................ 2,067,500
Denver, CO City & County Airport Revenue,
Series A:
1,505,000 BBB+ 8.500% due 11/15/23 (b)..................... 1,599,062
1,175,000 BBB+ 8.000% due 11/15/25 (b)..................... 1,248,437
------------
4,914,999
------------
Connecticut -- 1.8%
Connecticut State Development Authority:
1,735,000 NR Aquarium Project Revenue, (Mystic Marinelife
Aquarium Project), Series A, 7.000% due
12/1/27..................................... 1,810,906
1,500,000 NR Health Care Revenue, (Independent Living
Project), (Pre-Refunded -- Escrowed with
state & local government securities to
7/1/03 Call @ 102), Series B, 8.000%
due 7/1/17................................ 1,700,625
------------
3,511,531
------------
District of Columbia -- 1.5%
3,000,000 Baa3* District of Columbia, Series A, 5.250% due
6/1/27...................................... 2,808,750
------------
Florida -- 5.2%
200,000 A-1+ Dade County, FL IDA, Exempt Facilities
Revenue, Florida Power & Light Co., 3.400%
due 6/1/21 (d).............................. 200,000
2,000,000 NR Florida Housing Finance Corp., Multi-Family
Housing Revenue, (Whistlers Cove Apartment
Project), 6.500% due 1/1/39 (b)............. 1,905,000
2,750,000 NR Hillsborough County, FL IDA Revenue,
(Lakeshore Villas Project), Sr. Series A,
6.750% due 7/1/29........................... 2,746,562
875,000 NR Homestead, FL IDR, Community Rehabilitation
Providers Program, Series A, 7.950% due
11/1/18..................................... 927,500
See Notes to Financial Statements.
5
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[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 1999
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
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Florida -- 5.2% (continued)
$ 1,970,000 NR Jacksonville, FL Health Facilities Authority
Revenue, Mental Health Center of
Jacksonville, 9.125% due 10/15/19........... $ 2,003,588
2,000,000 BBB- Martin County, FL IDA, IDR, (Indiantown
Cogeneration Project), Series A, 7.875%
due 12/15/25 (b)............................ 2,080,000
------------
9,862,650
------------
Georgia -- 3.9%
1,500,000 NR Atlanta, GA Urban Residential Finance
Authority, Multi-Family Housing Revenue,
Park Place Apartments, Series A, 6.750%
due 3/1/31.................................. 1,507,500
2,000,000 NR Clayton County, GA Development Authority
Revenue, Senior Care Group Inc., (Bayberry
Project), Series A, 6.750% due 7/1/29....... 1,957,500
3,000,000 NR Forsyth County, GA Hospital Authority,
Revenue Anticipation Certificates, (Baptist
Health Care System Project), 6.375% due
10/1/28..................................... 2,940,000
1,000,000 NR Walton County, GA IDA, IDR, (Walton
Manufacturing Co. Project), 8.500% due
9/1/07...................................... 1,113,750
------------
7,518,750
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Illinois -- 2.4%
6,750,000 AAA Chicago, IL Board of Education, Capital
Appreciation GO, (School Reform Project),
Series B-1, FGIC-Insured, zero coupon bond
to yield 5.220% due 12/1/31................. 1,088,437
2,000,000 A- Illinois Development Finance Authority,
Hospital Revenue, Adventist Health
System/Sunbelt Obligation Group, 5.500%
due 11/15/29................................ 1,837,500
1,500,000 A+ Illinois Housing Development Authority,
Multi-Family Housing Program, Series 5,
6.750% due 9/1/23........................... 1,606,875
------------
4,532,812
------------
Indiana -- 5.5%
2,500,000 BB East Chicago, IN PCR, (Inland Steel Co.
Project No. 10), 6.800% due 6/1/13.......... 2,512,500
Indiana State Development Finance Authority:
2,000,000 Baa2* Environmental Revenue, (USX Corp. Project),
6.250% due 7/15/30........................ 2,072,500
1,000,000 B+ PCR, (Inland Steel Co. Project No. 13),
7.250% due 11/1/11 (b).................... 1,031,250
4,750,000 Baa2* Indianapolis, IN Airport Authority Revenue,
(United Airlines Inc. Project), Series A,
6.500% due 11/15/31 (b)..................... 4,969,687
------------
10,585,937
------------
See Notes to Financial Statements.
6
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[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 1999
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
- --------------------------------------------------------------------------------
Kentucky -- 1.4%
$ 1,500,000 BBB- Kenton County, KY Airport Board Revenue,
(Delta Airlines Project), Series A, 7.500%
due 2/1/20 (b).............................. $ 1,606,875
1,000,000 A Pendleton County, KY Multi-County Lease
Revenue, (Kentucky Association of Counties
Leasing Trust Program), Series A, 6.500%
due 3/1/19.................................. 1,061,250
------------
2,668,125
------------
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................ 1,333,500
Port New Orleans, LA IDR:
Avondale Industries, Inc. Project:
1,400,000 NR 8.250% due 6/1/04......................... 1,527,750
3,000,000 NR 8.500% due 6/1/14......................... 3,337,500
1,000,000 CC Continental Grain Co. Project, 7.500% due
7/1/13.................................... 997,500
2,400,000 BB+ West Feliciana Parish, LA PCR, (Gulf States
Utilities Co. Project), 8.000% due 12/1/24.. 2,470,512
------------
9,666,762
------------
Maine -- 0.0%
Maine State Housing Authority, Mortgage
Purchase Revenue:
35,000 AA Series C-2, 7.000% due 11/15/32 (b)......... 36,575
20,000 AA Series D-1, 8.300% due 11/15/28 (b)......... 20,249
------------
56,824
------------
Maryland -- 0.8%
1,500,000 Baa3* Maryland State Economic Development Corp.,
Student Housing Revenue, Collegiate Housing
Foundation, Series A, 5.750% due 6/1/19..... 1,473,750
------------
Massachusetts -- 7.0%
1,000,000 BBB Massachusetts State Health & Educational
Facilities Authority Revenue, Caritas
Christi Obligation Group, Series A, 5.625%
due 7/1/20.................................. 946,250
Massachusetts State Industrial Finance Agency
Revenue:
2,000,000 NR Assisted Living Facility, (Marina Bay LLC
Project), 7.500% due 12/1/27 (b).......... 2,122,500
2,250,000 NR Chestnut Knoll Project, Series A, 5.500%
due 2/15/18............................... 2,109,375
Resource Recovery, (SEMASS Partnership
Project):
1,700,000 NR Series A, 9.000% due 7/1/15............... 1,867,875
5,840,000 NR Series B, 9.250% due 7/1/15 (b)........... 6,431,300
------------
13,477,300
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See Notes to Financial Statements.
7
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[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 1999
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
- --------------------------------------------------------------------------------
Michigan -- 3.5%
$ 2,000,000 BB- Detroit, MI Local Development Finance
Authority, Tax Increment, Series A, 5.500%
due 5/1/21.................................. $ 1,907,500
Garden City, MI Hospital Finance Authority,
Hospital Revenue, Garden City Hospital
Obligation Group, Series A:
2,000,000 NR 5.625% due 9/1/10......................... 1,947,500
1,000,000 NR 5.750% due 9/1/17......................... 966,250
2,000,000 NR Michigan State Strategic Fund, Resource
Recovery Limited Obligation Revenue, Central
Wayne Energy Recovery LP, Series A, 6.900%
due 7/1/19 (b).............................. 1,975,000
------------
6,796,250
------------
Minnesota -- 0.8%
1,535,000 AA+ Minnesota State HFA, Single-Family Mortgage
Revenue, Series H, 6.700% due 1/1/18........ 1,623,263
------------
Montana -- 2.4%
4,530,000 NR Montana State Board of Investment Resource
Recovery Revenue, (Yellowstone Energy LP
Project), 7.000% due 12/31/19 (b)........... 4,563,975
------------
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.................. 1,017,500
500,000 BBB- New Hampshire State Business Finance
Authority, PCR, (Public Service Co. of New
Hampshire), Series D, Remarketed 5/1/98,
6.000% due 5/1/21 (b)....................... 495,625
------------
1,513,125
------------
New Jersey -- 5.1%
3,000,000 B1* Camden County, NJ Improvement Authority
Revenue, (Health Care Redevelopment
Project-- Cooper Health System), 5.875%
due 2/15/15................................. 2,403,750
1,000,000 BBB- Hudson County, NJ Improvement Authority,
Solid Waste System Revenue, Series 1, 6.000%
due 1/1/29.................................. 1,005,000
1,000,000 NR New Jersey EDA, Healthcare Facility Revenue,
(Sayreville Senior Living Project), Series A,
6.375% due 4/1/29........................... 958,750
New Jersey Health Care Facilities Financing
Authority Revenue:
Palisades Medical Center Obligation Group:
735,000 Baa3* 7.600% due 7/1/21......................... 776,344
1,150,000 Aaa* 7.600% due 7/1/21, (Pre-Refunded --
Escrowed with U.S. government securities
to 7/1/02 Call @ 102)................... 1,273,625
1,000,000 NR Raritan Bay Medical Center, 7.250% due
7/1/27.................................... 1,007,500
2,200,000 NR New Jersey State Educational Facilities
Authority Revenue, Fairleigh Dickinson
University, Series C, 6.625% due 7/1/23..... 2,268,750
------------
9,693,719
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See Notes to Financial Statements.
8
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[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 1999
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
- --------------------------------------------------------------------------------
New Mexico -- 0.4%
$ 775,000 AAA New Mexico Mortgage Finance Authority, Single-
Family Mortgage Program, Series B, FHA-
Insured, 8.300% due 3/1/20 (b).............. $ 826,344
------------
New York -- 5.7%
1,900,000 NR Monroe County, NY IDR Agency, (Empire Sports
Project), Series A, 6.250% due 3/1/28....... 1,833,500
1,500,000 NR New York City, NY IDA, Civic Facility Revenue,
7.500% due 8/1/26........................... 1,582,500
New York State Energy, Research & Development
Authority, Electric Facility Revenue, LILCO,
Series A:
520,000 Aaa* 7.150% due 12/1/20 (b).................... 564,850
1,430,000 A- 7.150% due 12/1/20, (Pre-Refunded --
Escrowed with U.S. government securities
to 6/15/02 Call @ 102) (b)(e)........... 1,558,700
2,750,000 NR Port Authority of NY & NJ, Special Obligation
Revenue, Fifth Installment, (KIAC Partners
Project), Series 4, 6.750% due 10/1/19 (b).. 2,959,688
2,500,000 NR Suffolk County, NY Industrial Development
Agency, IDR, Nissequogue Cogeneration
Partners Facility, 5.500% due 1/1/23 (b).... 2,378,125
------------
10,877,363
------------
North Carolina -- 4.1%
1,750,000 A Martin County, NC Industrial Facilities & PCR
Financing Authority, Solid Waste Disposal,
(Weyerhaeuser Co. Project), 6.800% due
5/1/24 (b).................................. 1,896,563
2,300,000 BBB North Carolina Eastern Municipal Power Agency,
Power Systems Revenue, Series B, 7.000%
due 1/1/08.................................. 2,504,125
North Carolina Medical Care Commission:
1,440,000 NR Health Care Facilities Revenue, First
Mortgage, De Paul Community Facilities,
6.125% due 1/1/28.......................... 1,422,000
800,000 Baa1* Hospital Revenue, Halifax Regional Medical
Center Inc., 5.000% due 8/15/24........... 701,000
1,310,000 BBB+ North Carolina Municipal Power Agency No. 1,
Catawaba Electric Revenue, 6.250% due 1/1/17 1,337,838
------------
7,861,526
------------
Ohio -- 3.3%
1,000,000 NR Cleveland, OH Airport Special Revenue,
(Continental Airlines Inc. Project), 9.000%
due 12/1/19 (b)............................. 1,036,760
1,000,000 NR Cuyahoga County, OH Health Care Facilities
Revenue, Judson Retirement Community, Series
A, 7.250% due 11/15/18...................... 1,056,250
Montgomery County, OH Health Systems Revenue,
Series B-1:
465,000 BBB 8.100% due 7/1/18........................... 535,331
1,035,000 AAA 8.100% due 7/1/18, (Pre-Refunded -- Escrowed
with state & local government securities
to 7/1/06 Call @ 102)..................... 1,254,938
See Notes to Financial Statements.
9
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[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 1999
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
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Ohio -- 3.3% (continued)
$ 1,250,000 NR Ohio State Solid Waste Revenue, Republic
Engineered Steels Inc., 9.000% due
6/1/21 (b).................................. $ 1,362,500
1,000,000 Baa3* Ohio State Water Development Authority, PCR,
(Ohio Edison Project), Series A, 8.100% due
10/1/23 (b)................................. 1,030,780
------------
6,276,559
------------
Oregon -- 1.0%
2,000,000 NR Washington County, OR Housing Authority
Revenue, Affordable Housing Pool, Series A,
6.125% due 7/1/29........................... 1,942,500
------------
Pennsylvania -- 13.7%
2,200,000 B+ Allegheny County, PA IDA, Airport Special
Facilities Revenue, (USAir Inc. Project),
Series B, 8.500% due 3/1/21 (b)............. 2,373,250
Beaver County, PA IDA, PCR:
2,500,000 BB+ Cleveland Electric Illuminating Co. Project,
7.625% due 5/1/25......................... 2,787,500
2,000,000 BB+ Toledo Edison Co. Project, 7.625% due 5/1/20 2,230,000
3,000,000 NR Dauphin County, PA General Authority Revenue,
Hotel & Conference Center, Hyatt Regency,
6.200% due 1/1/29........................... 2,951,250
3,000,000 BBB+ Lebanon County, PA Good Samaritan Hospital
Authority Revenue, (Pre-Refunded -- Escrowed
with G.E. Capital Corp. medium-term notes to
11/1/99 Call @ 102), Series B, 8.250% due
11/1/18..................................... 3,093,870
2,500,000 A- Luzerne County, PA IDA, Exempt Facilities
Revenue, (Pennsylvania Gas & Water Co.
Project), Series B, 7.125% due 12/1/22 (b).. 2,690,625
460,000 NR Northumberland County, PA IDA, IDR, (Beverly
Enterprises Inc. Project), 6.875% due 2/1/03 465,750
1,500,000 AA+ Pennsylvania HFA, Single-Family Mortgage
Revenue, Series 40, 6.900% due 4/1/25 (b)... 1,588,125
1,000,000 NR Philadelphia, PA Authority for Industrial
Development Revenue, (Host Marriott LP
Project), Remarketed 10/31/95, 7.750% due
12/1/17 (b)................................. 1,091,250
1,920,000 BBB Philadelphia, PA Municipal Authority, Lease
Revenue, Series B, 6.400% due 11/15/16...... 1,987,200
Scranton-Lackawanna, PA Health & Welfare
Authority Revenue, (Moses Taylor Hospital
Project):
1,905,000 BBB- 6.150% due 7/1/14......................... 1,874,044
3,050,000 BBB- 6.250% due 7/1/20......................... 3,011,875
------------
26,144,739
------------
Puerto Rico -- 0.9%
1,750,000 BBB- Puerto Rico Industrial Tourist Educational,
Medical & Environmental Control Facilities,
(Mennonite General Hospital Project),
Series A, 5.625% due 7/1/27................. 1,675,625
------------
See Notes to Financial Statements.
10
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[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 1999
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
- --------------------------------------------------------------------------------
South Carolina -- 2.0%
$ 2,500,000 BBB- Connector 2,000 Association Inc., SC Toll
Road Revenue, (Southern Connector Project),
Series A, 5.375% due 1/1/38................. $ 2,212,500
775,000 NR Florence County, SC IDR, Stone Container
Corp., 7.375% due 2/1/07.................... 818,594
755,000 NR McCormick County, SC COP, 9.750% due 7/1/09... 760,557
------------
3,791,651
------------
South Dakota -- 1.0%
1,865,000 NR Oglala Sioux Tribe, SD Pine Ridge County,
Revenue Bonds, 7.500% due 7/1/13............ 1,890,644
------------
Tennessee -- 1.2%
750,000 AAA Knox County, TN Multi-Family Housing Mortgage
Revenue, SCA Tax Exempt Trust, Knox Health,
Education & Housing Development Board,
Series A-10, FSA-Insured, 7.125% due 1/1/30. 814,688
1,415,000 NR Shelby County, TN Health, Educational &
Housing Facilities Board Revenue,
Multi-Family Housing (Hedgerow Apartments),
6.875% due 7/1/36........................... 1,409,694
------------
2,224,382
------------
Texas -- 9.1%
1,350,000 BBB Alliance Airport Authority Inc., TX Special
Facilities Revenue, (Federal Express Corp.
Project), 6.375% due 4/1/21 (b)............. 1,409,062
705,000 A2* El Paso, TX Housing Finance Corp., Single-Family
Mortgage Revenue, Series A, FHA/VA-Insured,
8.750% due 10/1/11.......................... 749,062
2,000,000 B1* El Paso, TX International Airport Revenue,
Special Facilities, (Marriott Corp. Project),
7.750% due 3/1/12........................... 2,102,500
Houston, TX Airport Systems Revenue, Special
Facilities, Continental Airlines Inc.:
1,050,000 Ba1* Series B, 6.125% due 7/15/27 (b).......... 1,061,812
3,000,000 Ba1* Series C, 6.125% due 7/15/27 (b).......... 3,033,750
Matagorda County, TX Navigation District No. 1:
1,000,000 AAA PCR, (Central Power & Light Co. Project),
MBIA-Insured, 6.100% due 7/1/28........... 1,033,150
1,000,000 BBB+ Reliant Energy Project, Series B, 5.950%
due 5/1/30 (b)............................ 998,750
North Central, TX Health Facility Development
Corp. Revenue, Baylor Health Care Systems,
Series B, Variable Rate INFLOS:
1,265,000 AA 7.600% due 5/15/08 (f).................... 1,353,550
135,000 AA 7.600% due 5/15/08, (Pre-Refunded --
Escrowed with state and local government
securities to 5/15/02 Call @ 102) (f)... 145,463
Northgate Crossing, TX Municipal Utility:
1,000,000 CCC++ District No. 1, GO, 8.875% due 12/1/13...... 1,001,250
1,000,000 CCC++ District No. 2, Special Tax Revenue, 8.875%
due 12/1/13............................... 1,001,250
3,435,000 BB Sam Rayburn, TX Municipal Power Supply System
Revenue Refunding, Series A, 6.250% due
10/1/17..................................... 3,482,231
------------
17,371,830
------------
See Notes to Financial Statements.
11
<PAGE>
[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 1999
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
- --------------------------------------------------------------------------------
Utah -- 2.0%
$ 1,705,000 NR Hurricane, UT Health Facilities Development
Revenue, (Mission Health Services Project),
10.500% due 7/1/20.......................... $ 1,812,279
2,000,000 NR Utah State HFA Revenue, (RHA Community
Services of Utah Inc. Project), Series A,
6.875% due 7/1/27........................... 2,045,000
------------
3,857,279
------------
Wisconsin -- 0.9%
1,770,000 NR Wisconsin State Health & Educational
Facilities Authority Revenue, (Benchmark
Healthcare of Green Bay Inc. Project),
Series A, 7.750% due 5/1/27................. 1,816,463
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $185,539,882**)...................... $191,091,989
============
- ------------
(a) All ratings are by Standard & Poor's Ratings Service, except those which
are identified by an asterisk (*) are rated by Moody's Investors Service,
Inc., or those which are identified by a double dagger (++) are rated by
Fitch IBCA, Inc.
(b) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(c) Security is segregated by Custodian for open market 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 escrowed with U.S. government securities are considered
by the investment advisor to be triple-A rated even if 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 14 through 16 for bond ratings and certain security
descriptions.
See Notes to Financial Statements.
12
<PAGE>
[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Summary of Municipal Bonds by Combined Ratings
July 31, 1999 (unaudited)
================================================================================
- --------------------------------------------------------------------------------
Standard & Percent of
Moody's and/or Poor's Total Investments
- --------------------------------------------------------------------------------
Aaa AAA 4.3%
Aa AA 2.5
A A 6.7
Baa BBB 27.1
Ba BB 10.2
B B 4.1
Caa CCC 1.3*
Ca CC 0.5
P-1 A-1 0.1
NR NR 43.2
-----
100.0%
=====
- --------------------------------------------------------------------------------
* 1.0% was rated by Fitch IBCA, Inc.
13
<PAGE>
[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Bond Ratings (unaudited)
================================================================================
The definitions of the applicable ratings symbols are set forth below:
Standard & Poor's Ratings Service ("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 Investors Service, Inc. ("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.
14
<PAGE>
[GRAPHIC OMITTED] 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 IBCA, Inc. ("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.
CCC, CC, -- Default on bonds rated "CCC", "CC", and "C" by Fitch is a real
C possibility. The capacity to meet financial commitments depends
solely on a sustained, favorable business and economic environment.
Default of some kind on bonds rated "CC" appears probable, a "C"
rating indicates imminent default.
NR -- Indicates that the bond is not rated by Standard & Poor's, Moody's
or Fitch.
Short-Term Bond 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.
15
<PAGE>
[GRAPHIC OMITTED] 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
16
<PAGE>
[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Statement of Assets and Liabilities (unaudited)
July 31, 1999
================================================================================
ASSETS:
Investments, at value (Cost -- $185,539,882) ................ $191,091,989
Receivable for securities sold .............................. 1,750,538
Interest receivable ......................................... 2,693,019
------------
Total Assets ................................................ 195,535,546
------------
LIABILITIES:
Payable for securities purchased ............................ 1,415,811
Payable to bank ............................................. 593,884
Dividends payable ........................................... 262,588
Investment advisory fees payable ............................ 65,863
Administration fees payable ................................. 32,671
Accrued expenses ............................................ 169,510
------------
Total Liabilities ........................................... 2,540,327
------------
Total Net Assets ............................................... $192,995,219
============
NET ASSETS:
Par value of capital shares ................................. $ 204,551
Capital paid in excess of par value ......................... 189,974,124
Overdistributed net investment income ....................... (106,799)
Accumulated net realized loss from security transactions .... (2,628,764)
Net unrealized appreciation of investments .................. 5,552,107
------------
Total Net Assets ............................................... $192,995,219
============
Shares Outstanding ............................................. 20,455,083
------------
Net Asset Value ................................................ $9.44
------------
See Notes to Financial Statements.
17
<PAGE>
[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Statement of Operations (unaudited)
For the Nine Months Ended July 31, 1999
================================================================================
INVESTMENT INCOME:
Interest ................................................... $ 9,960,849
------------
EXPENSES:
Investment advisory fees (Note 3) .......................... 588,125
Administration fees (Note 3) ............................... 294,063
Shareholder communications ................................. 95,648
Audit and legal ............................................ 38,846
Directors' fees ............................................ 32,162
Registration fees .......................................... 18,250
Shareholder and system servicing fees ...................... 17,237
Pricing service fees ....................................... 11,220
Custody .................................................... 7,352
Other ...................................................... 5,225
------------
Total Expenses ............................................. 1,108,128
------------
Net Investment Income ......................................... 8,852,721
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 4):
Realized Gain (Loss) From Security Transactions
(excluding short-term securities):
Proceeds from sales ...................................... 36,168,426
Cost of securities sold .................................. 36,724,171
------------
Net Realized Loss .......................................... (555,745)
------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period ...................................... 11,724,011
End of period ............................................ 5,552,107
------------
Decrease in Net Unrealized Appreciation .................... (6,171,904)
------------
Net Loss on Investments ....................................... (6,727,649)
------------
Increase in Net Assets From Operations ........................ $ 2,125,072
============
See Notes to Financial Statements.
18
<PAGE>
[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Statements of Changes in Net Assets
For the Nine Months Ended July 31, 1999 (unaudited)
and the Year Ended October 31, 1998
================================================================================
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
OPERATIONS:
Net investment income ............................. $ 8,852,721 $ 11,975,257
Net realized gain (loss) .......................... (555,745) 1,469,162
Decrease in net unrealized appreciation ........... (6,171,904) (807,512)
------------ ------------
Increase in Net Assets From Operations ............ 2,125,072 12,636,907
------------ ------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 2):
Net investment income ............................. (8,942,598) (12,128,877)
In excess of net investment income ................ -- (287,412)
------------ ------------
Decrease in Net Assets From
Distributions to Shareholders ................... (8,942,598) (12,416,289)
------------ ------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends ....................... 1,868,671 3,590,163
------------ ------------
Increase in Net Assets From
Fund Share Transactions ......................... 1,868,671 3,590,163
------------ ------------
Increase (Decrease) in Net Assets .................... (4,948,855) 3,810,781
NET ASSETS:
Beginning of period ............................... 197,944,074 194,133,293
------------ ------------
End of period* .................................... $192,995,219 $197,944,074
============ ============
* Includes overdistributed net investment income of:.. $ (106,799) $ (16,922)
============ ============
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
[GRAPHIC OMITTED] 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; (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
SSBC Fund Management Inc., ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), acts as investment adviser to the Fund. The Fund pays
SSBC an advisory fee calculated at an annual rate of 0.40% of the average daily
net assets. SSBC 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.
20
<PAGE>
[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited) (continued)
================================================================================
All officers and one Director of the Fund are employees of Salomon Smith
Barney Inc., another subsidiary of SSBH.
4. Investments
During the nine months ended July 31, 1999, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
Purchases......................................................... $34,173,220
===========
Sales............................................................. $36,168,426
===========
At July 31, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
Gross unrealized appreciation..................................... $ 8,026,007
Gross unrealized depreciation..................................... (2,473,900)
-----------
Net unrealized appreciation....................................... $ 5,552,107
===========
5. Capital Shares
At July 31, 1999, 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, 1999 October 31, 1998
------------------- -------------------
Shares Amount Shares Amount
------ -------- ------ --------
Shares issued on reinvestment 196,443 $1,868,671 373,334 $3,590,163
======= ========== ======= ==========
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
================================================================================
21
<PAGE>
[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Financial Highlights (unaudited)
================================================================================
For a share of capital stock outstanding throughout each year ended October 31,
except where noted:
<TABLE>
<CAPTION>
1999(1) 1998 1997 1996 1995 1994
------- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period......... $9.77 $9.76 $9.53 $9.51 $8.98 $9.72
-------- -------- -------- -------- -------- --------
Income (Loss) From
Operations:
Net investment income. 0.44 0.60 0.61 0.63 0.64 0.65
Net realized and unrealized
gain (loss)............... (0.33) 0.03 0.24 -- 0.54 (0.72)
-------- -------- -------- -------- -------- --------
Total Income (Loss) From
Operations.................. 0.11 0.63 0.85 0.63 1.18 (0.07)
-------- -------- -------- -------- -------- --------
Less Distributions From:
Net investment income....... (0.44) (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........... (0.44) (0.62) (0.62) (0.61) (0.65) (0.67)
-------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period............... $9.44 $9.77 $9.76 $9.53 $9.51 $8.98
-------- -------- -------- -------- -------- --------
Total Return, Based on
Market Value................ (8.80)%++ 9.34% 17.22% 10.22% 14.17% (10.11)%
-------- -------- -------- -------- -------- --------
Total Return, Based on
Net Asset Value............. 1.24%++ 6.75% 9.41% 7.39% 14.00% (0.54)%
-------- -------- -------- -------- -------- --------
Net Assets,
End of Period (000s)........ $192,995 $197,944 $194,133 $187,303 $187,048 $176,379
======== ======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses................... 0.75%+ 0.74% 0.74% 0.77% 0.84% 0.84%
Net investment income 6.02+ 6.07 6.38 6.65 6.87 6.98
Portfolio Turnover Rate....... 18% 57% 35% 17% 18% 17%
Market Value, End of Period... $8.813 $10.125 $9.875 $9.000 $9.000 $8.250
</TABLE>
- ----------
(1) For the nine months ended July 31, 1999 (unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
22
<PAGE>
[GRAPHIC OMITTED] 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
------ ------- ------------- ------ -------- -----
11/25/96 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
11/23/98 11/27/98 10.188 9.72 0.0510 9.68
12/21/98 12/24/98 10.000 9.71 0.0485 9.52
1/26/99 1/29/99 9.625 9.73 0.0485 9.53
2/23/99 2/26/99 9.625 9.71 0.0485 9.52
3/23/99 3/26/99 9.750 9.67 0.0485 9.48
4/27/99 4/30/99 9.563 9.64 0.0485 9.45
5/25/99 5/28/99 9.250 9.58 0.0485 9.35
6/22/99 6/25/99 9.000 9.46 0.0485 9.08
7/27/99 7/30/99 8.938 9.46 0.0485 8.84
- ----------
*As of record date.
23
<PAGE>
[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Quarterly Results of Operations (unaudited)
================================================================================
<TABLE>
<CAPTION>
Net Increase
Net Net Realized (Decrease)
Investment Investment and Unrealized in Net Assets
Income Income Gain (Loss) 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
1/31/99 3,334,071 0.16 2,963,369 0.15 (585,286) (0.03) 2,378,083 0.12
4/30/99 3,361,488 0.16 2,990,635 0.15 (2,036,950) (0.10) 953,685 0.05
7/31/99 3,265,290 0.16 2,898,717 0.14 (4,105,413) (0.20) (1,206,696) (0.06)
</TABLE>
24
<PAGE>
[GRAPHIC OMITTED] 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 ("NAV") per share on the determination date (generally, the record date
for the distribution), participants will be issued shares of common stock valued
at the greater of (1) 98% of the NAV or (2) 95% of the market price. To the
extent that the Fund issues shares to participants in the Plan at a discount to
NAV, 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 NAV per share of the common stock at the time of valuation
(which is the close of business on the determination date) 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 what the NAV per share of the common
stock was at the valuation time, 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 the greater of
(1) 98% of the NAV per share as of the valuation time, or (2) 95% of the then
current market price. 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
25
<PAGE>
[GRAPHIC OMITTED] Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited) (continued)
================================================================================
the Fund issues the remaining shares. To the extent First Data is unable to stop
open market purchases and cause the Fund to issue the remaining shares, the
average per share price paid by First Data may exceed 98% of the NAV per share
of the common stock. 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 an 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 actually 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 9699, Providence, RI
02940-9699 or by telephone at 1-800-451-2010.
----------
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,
1999, the Fund has not repurchased any shares.
26
<PAGE>
[GRAPHIC OMITTED] 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
Peter M. Coffey
Vice President and
Investment Officer
Michael J. Maher
Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Adviser and Administrator
SSBC Fund Management Inc.
388 Greenwich Street
New York, New York 10013
Transfer Agent
First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
Custodian
PNC Bank, N.A.
17th and Chestnut Street
Philadelphia, Pennsylvania 19103
27
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[GRAPHIC OMITTED]
This report is intended only for shareholders of Municipal High Income Fund Inc.
It is not a Prospectus, circular or representation intended for use in the
purchase or sale of shares of the Fund or of any securities mentioned in this
report.
Municipal High Income Fund Inc.
388 Greenwich Street
New York, NY10013
(212) 723-9218
FD01013 9/99
