* *
Municipal
High Income
Fund Inc.
[GRAPHIC OMITTED]
Annual
Report
*
October
31, 2000
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Municipal High Income Fund Inc.
Dear Shareholder:
We are pleased to provide the annual report for the Municipal High Income
Fund Inc. ("Fund") for the year ended October 31, 2000. In this report, we
summarize the period's prevailing economic and market conditions and outline our
investment strategy. We hope you find this information to be useful and
informative.
During the past twelve months, the Fund distributed income dividends to
shareholders totaling $0.58 per share. The table below details the annualized
distribution rate and the twelve-month total return for the Fund based on its
October 31, 2000 net asset value ("NAV")(1) per share and the New York Stock
Exchange ("NYSE") closing price.
Price Annualized Twelve-Month
Per Share Distribution Rate(2) Total Return(2)
--------- -------------------- ---------------
$8.86 (NAV) 6.57% 5.97%
$8.125 (NYSE) 7.16% 9.39%
During the period the Fund generated a total return based on NAV of 5.97%.
In comparison, the Fund's Lipper Inc. ("Lipper") peer group of high yield
municipal debt funds returned 3.55% based on NAV for the same period.(3)
----------
(1) The NAV is calculated by subtracting total liabilities from the closing
value of all securities held by the Fund (plus all other assets) and
dividing the results (total net assets) by the total number of shares
outstanding. The NAV fluctuates with changes in the value of the
securities in which the Fund has invested. However, the price at which the
investor may buy or sell shares of the Fund is at their market (NYSE)
price as determined by supply and demand.
(2) Total returns are based on changes in NAV or the market value,
respectively. Total returns assume the reinvestment of all dividends
and/or capital gains distributions in additional shares. Annualized
distribution rate is the Fund's current monthly income dividend rate,
annualized, and then divided by the NAV or the market value noted in this
report. The annualized distribution rate assumes a current monthly income
dividend rate of $0.0485 for twelve months. This rate is as of November
30, 2000 and is subject to change. The important difference between a
total return and an annualized distribution rate is that the total return
takes into consideration a number of factors including the fluctuation of
the NAV or the market value during the period reported. The NAV
fluctuation includes the effects of unrealized appreciation or
depreciation in the Fund. Accordingly, since an annualized distribution
rate only reflects the current monthly income dividend rate annualized, it
should not be used as the sole indicator to judge the return you receive
from your Fund investment. Past performance is not indicative of future
results.
(3) Lipper is a major independent fund-tracking organization.
1
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Investment Strategy
The Fund's investment objective is high current income exempt from federal
income tax.(4) The Fund generally invests in intermediate and long-term
municipal obligations.
Because we think the bond markets are likely to remain volatile in the
near term, we continue to favor a gradual approach into the market. We tend to
emphasize longer and intermediate-term maturities, where most of the benefits of
the steep positive slope of the municipal yield curve(5) can be obtained.
During the period, the Fund's average credit quality remained relatively
high. Although quality spreads during the period have widened due to earnings
pressure, especially in hospital- and healthcare-related sectors, the difference
in yield between the highest-quality issues and medium grade issues has, in our
view, remained relatively modest. We think our proprietary research enables us
to invest in select medium-term credits for which perceived market risk may be
greater than our analysis otherwise indicates. Moreover, while no guarantees can
be made, we think our strategy may have the potential to increase income over
time.
During the period, we took advantage of rising interest rates to generate
additional yield in the Fund's portfolio. We also looked to incorporate
additional call protection(6) into the Fund by selling off some of our higher
coupon bonds with shorter calls,(7) and replacing them with bonds that have
similar high coupon structure, but are not subject to early call.
One of the ways that we manage the Fund is to seek to create a built-in
income stream for the long term. To this end, we have generally focused on
investing in securities with high credit quality and good call protection, as we
believe these securities offer solid long-term values. Moreover, we have a
fairly long weighted-average life(8) in the Fund's portfolio because we believe
that the risk of higher inflation at the present time is negligible. In
addition, we think our greater emphasis on call protection may provide our
shareholders with consistent income if interest rates do in fact go down.
----------
(4) Please note that a portion of the distributions from the Fund may be
subject to the Alternative Minimum Tax ("AMT").
(5) The yield curve is the graphical depiction of the relationship between the
yield on the bonds of the same credit quality but different maturities.
(6) Call protection is the length of time during which a security cannot be
redeemed by the issuer.
(7) Callable bonds are redeemable by the issuer before the scheduled maturity
under specific conditions and at a stated price, which usually begins at a
premium to par and declines annually. Bonds are usually "called" when
interest rates fall so significantly that the issuer can save money by
floating new bonds at lower rates.
(8) Average life is the length of time before the principal of debt issues is
scheduled to be repaid through amortization or sinking fund.
2
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Market Overview and Outlook
As stock market volatility continues, we believe the case for including
bonds as part of a well-diversified portfolio has strengthened. As investors
begin to rethink the returns they can expect from stocks, we believe more and
more investors may consider the potential advantages of bonds, specifically
municipal bonds. Recently, bond investors have had many factors with which to
contend -- strong economic growth, inflation fears, the decline in U.S. Treasury
supply, credit concerns for corporate bonds and potential tax law changes.
Key factors that could ignite inflation and push yields higher for now
appear to be off the radar screen. Growth is slowing, underlying inflation is
low despite rising commodity prices, and higher productivity gains continue to
offset increases in labor costs. In our opinion, the Federal Reserve Board
("Fed") should remain benign in the near-term, but a likely policy direction
going forward may be towards lower short-term interest rates, which should not
slow the economy too much.
In the overall bond market, yield spreads have narrowed and benchmark
yield levels have dropped by nearly a percentage point during the period in
response to evidence that underlying inflation risks may have subsided and
economic growth is slowing down from the rapid 6% annual pace of the past year.
We think there is a good chance that the decline in yields has further to go.
Yet, on the other hand, a host of technical and other considerations may slow
the market or cause yields to rise temporarily, barring a dramatic new sign that
the U.S. economic expansion is slowing below an expected 3% to 4% annual pace.
Our overall outlook for interest rates remains favorable and our
expectations for the municipal bond market is one of cautious optimism. The
municipal bond market continues to be dominated by supply and demand factors
such as lower new issue volume, strong retail demand and very limited
institutional demand.
New issue supply in the municipal bond market continues to trail far
behind levels reached in 1998 and 1999. As of October 31, 2000, new issue supply
was down roughly 17% from 1999 levels. Issuance for new projects is up slightly
but refundings have plummeted, because yields are not low enough to allow
issuers to benefit from a refinancing. Issuance this year should come in at
roughly $185 billion, down from $227 billion in 1999, and supply in future years
should stay in the current range.
Individual investor demand for municipals has remained strong, despite the
recent decrease in yields from early 2000 levels. Given the small size of the
municipal bond market relative to the stock market, even a modest shift of
assets out of stocks and into municipals can create significant amount of new
demand.
3
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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
November 21, 2000
The information provided in this letter represents the opinion of the manager
and is not intended to be a forecast of future events, a guarantee of future
results nor investment advice. Further, there is no assurance that certain
securities will remain in or out of the Fund. Please refer to pages 6 through 14
for a list and percentage breakdown of the Fund's holdings. Also, please note
any discussion of the Fund's holdings is as of October 31, 2000 and is subject
to change.
4
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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 30. 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 PFPC Global Fund Services at (800) 331-1710.
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5
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<PAGE>
* Municipal High Income Fund Inc.
Schedule of Investments
October 31, 2000
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
<S> <C> <C> <C>
Alabama -- 3.7%
$ 55,000 Aaa* Alabama HFA, Single-Family Housing Revenue,
10.500% due 12/1/02 .......................................... $ 56,787
4,000,000 BBB Butler, AL IDB, Solid Waste Disposal Revenue, (James River
Corp. Project), 8.000% due 9/1/28 (b) ........................ 4,320,000
615,000 NR Capstone Improvement District, Brookwood AL,
7.700% due 8/15/23 ........................................... 599,625
1,000,000 CCC Mobile, AL IDB, Solid Waste Disposal Revenue, (Mobile
Energy Services Co. Project), 6.950% due 1/1/20 (c) .......... 380,000
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 ........................................... 1,187,500
----------
6,543,912
----------
Arizona -- 2.7%
1,750,000 BB Gila County, AZ IDA Revenue, ASARCO Inc.,
5.550% due 1/1/27 ............................................ 1,404,375
Maricopa, AZ IDA, Multi-Family Housing Revenue:
500,000 NR Avalon Apartment Projects, Series C, 10.000% due 4/1/30 ...... 510,000
1,000,000 NR Gran Victoria Housing LLC Project, Series B,
10.000% due 5/1/31 ......................................... 1,012,500
1,840,000 NR Phoenix, AZ IDA, Multi-Family Housing Revenue,
(Ventana Palms Apartments Project), Series B,
8.000% due 10/1/34 ........................................... 1,840,000
----------
4,766,875
----------
Arkansas -- 0.6%
1,000,000 BBB- Arkansas State Development Finance Authority,
Hospital Revenue, Washington Regional Medical Center,
7.375% due 2/1/29 ............................................ 1,000,000
----------
California -- 2.0%
1,500,000 NR Barona, CA Band of Mission Indians, 8.250% due 1/1/20 .......... 1,573,125
1,865,000 Ba2* Vallejo, CA Certificates of Participation, Touro University,
7.375% due 6/1/29 ............................................ 1,948,925
----------
3,522,050
----------
Colorado -- 2.4%
2,000,000 NR Colorado Health Facilities Authority Revenue, (Beth Israel
at Shalom Park Project), 7.250% due 12/15/25 ................. 2,007,500
1,175,000 A Denver, CO City & County Airport Revenue,
Series A, 8.000% due 11/15/25 (b)............................. 1,207,054
1,000,000 NR Highline Business Improvement District, Littleton CO,
Series B, 8.750% due 12/15/19................................. 1,015,000
----------
4,229,554
----------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
* Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 2000
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=====================================================================================================
<S> <C> <C> <C>
Connecticut -- 1.9%
Connecticut State Development Authority:
$ 1,735,000 NR Aquarium Project Revenue, (Mystic Marinelife Aquarium
Project), Series A, 7.000% due 12/1/27 ..................... $1,763,194
1,475,000 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 ................................ 1,607,750
----------
3,370,944
----------
Delaware -- 0.5%
1,000,000 NR Sussex County, DE Assisted Living Facility Revenue,
(Heritage at Milford Project), 7.250% due 7/1/29 ............. 923,750
----------
Florida -- 5.2%
2,000,000 NR Capital Projects Finance Authority, Student Housing Revenue,
CAFRA Capital Corp., Series A, 7.850% due 8/15/31 ........... 1,970,000
2,000,000 NR Florida Housing Finance Corp., Multi-Family Housing
Revenue, (Whistlers Cove Apartment Project),
6.500% due 1/1/39 (b) ........................................ 1,897,500
2,750,000 NR Hillsborough County, FL IDA Revenue, (Lakeshore Villas
Project), Series A, 6.750% due 7/1/29 ........................ 2,499,062
875,000 NR Homestead, FL IDR, Community Rehabilitation Providers
Program, Series A, 7.950% due 11/1/18 ........................ 912,187
2,000,000 BBB- Martin County, FL IDA, IDR, (Indiantown Cogeneration
Project), Series A, 7.875% due 12/15/25 (b) .................. 2,040,000
----------
9,318,749
----------
Georgia -- 4.4%
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 ............................................ 1,413,750
2,000,000 NR Clayton County, GA Development Authority Revenue,
Senior Care Group Inc., (Bayberry Project), Series A,
6.750% due 7/1/29 ............................................ 1,752,500
1,000,000 NR Forsyth County, GA Hospital Authority, Revenue Anticipation
Certificates, (Baptist Health Care System Project),
6.375% due 10/1/28 ........................................... 832,500
500,000 NR Fulton County, GA Residential Care Facilities, Sr. Lien,
RHA Assisted Living, Series A, 7.000% due 7/1/29 ............. 418,125
1,000,000 NR Gainesville & Hall County, GA Development Authority Revenue,
Senior Living Facility, Lanier Village, Series C,
7.250% due 11/15/29 .......................................... 967,500
1,435,000 NR Savannah, GA EDA Revenue, Marshview Inn, Series A,
7.125% due 7/1/29 ............................................ 1,332,756
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
* Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 2000
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
===================================================================================================
<S> <C> <C> <C>
Georgia -- 4.4% (continued)
$ 1,000,000 NR Walton County, GA IDA, IDR, (Walton Manufacturing Co.
Project), 8.500% due 9/1/07 ................................. $ 1,071,250
-----------
7,788,381
-----------
Illinois -- 1.5%
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 5.214% due 12/1/31 ................ 1,071,562
2,000,000 A- Illinois Development Finance Authority, Hospital Revenue,
Adventist Health System/Sunbelt Obligation Group,
5.500% due 11/15/29 ......................................... 1,645,000
-----------
2,716,562
-----------
Indiana -- 2.4%
2,500,000 BB East Chicago, IN PCR, (Inland Steel Co. Project No. 10),
6.800% due 6/1/13 ........................................... 2,396,875
1,000,000 B+ Indiana State Development Finance Authority, PCR, (Inland
Steel Co. Project No. 13), 7.250% due 11/1/11 (b) ........... 963,750
1,000,000 NR Indianapolis, IN Multi-Family Revenue, (Lake Nora Fox Club
Project), Series B, 7.500% due 10/1/29 ...................... 978,750
-----------
4,339,375
-----------
Kentucky -- 2.2%
2,310,000 NR Jefferson County, KY Student Housing, Individual Building
Revenue, Collegiate Housing Foundation, Series A,
7.000% due 9/1/19 ........................................... 2,315,775
1,500,000 BBB- Kenton County, KY Airport Board Revenue, (Delta Airlines
Project), Series A, 7.500% due 2/1/20 (b) ................... 1,558,125
-----------
3,873,900
-----------
Louisiana -- 5.7%
1,200,000 A3* Lake Charles, LA Harbor & Terminal District, Port Facilities
Revenue, (Trunkline LNG Co. Project),
7.750% due 8/15/22 .......................................... 1,279,500
2,000,000 NR Louisiana Local Government Environmental Facilities,
Community Development Authority Revenue, St. James
Place, Series A, 8.000% due 11/1/25 ......................... 2,007,500
1,500,000 NR Louisiana Public Facilities Authority, Hospital Revenue, (Lake
Charles Memorial Hospital Project), 8.625% due 12/1/30 ...... 1,479,375
Port of New Orleans, LA IDR:
Avondale Industries, Inc. Project:
1,195,000 NR 8.250% due 6/1/04 ......................................... 1,274,169
2,900,000 NR 8.500% due 6/1/14 ......................................... 3,161,000
1,000,000 BB- Continental Grain Co. Project, 7.500% due 7/1/13 ............ 1,005,000
-----------
10,206,544
-----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
* Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 2000
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=====================================================================================================
<S> <C> <C> <C>
Maine -- 0.0%
Maine State Housing Authority, Mortgage Purchase Revenue:
$ 15,000 AA Series C-2, 7.000% due 11/15/32 (b) ......................... $ 15,600
20,000 AA Series D-1, 8.300% due 11/15/28 (b) ......................... 20,135
-----------
35,735
-----------
Maryland -- 1.7%
3,000,000 NR Maryland State Economic Development Corporate Revenue,
Chesapeake Bay, Series A, 7.730% due 12/1/27 ................ 3,060,000
-----------
Massachusetts -- 9.5%
1,000,000 NR Boston, MA Industrial Development Financing Authority
Revenue, (Roundhouse Hospitality LLC Project),
7.875% due 3/1/25 (b) ....................................... 1,001,250
975,000 NR Massachusetts State Development Finance Agency
Revenue, Alliance Health Care Facility, Series A,
7.100% due 7/1/32 ........................................... 884,813
Massachusetts State Health & Educational Facilities
Authority Revenue:
1,000,000 AAA Beth Israel Deaconess Medical Center, Series G-4,
AMBAC-Insured, Variable Rate INFLOS,
7.407% due 7/1/25 (d) ................................... 1,015,000
1,000,000 BBB Caritas Christi Obligation Group, Series A,
5.625% due 7/1/20 ....................................... 851,250
1,250,000 Ba2* Saint Memorial Medical Center Project, Series A,
6.000% due 10/1/23 ...................................... 965,625
1,840,000 Aa3* Massachusetts State HFA, Single-Family Housing Revenue,
Series 38, 7.200% due 12/1/26 (b) ........................... 1,934,300
Massachusetts State Industrial Finance Agency Revenue:
2,000,000 NR Assisted Living Facility, (Marina Bay LLC Project),
7.500% due 12/1/27 (b) .................................... 1,992,500
500,000 NR Chestnut Knoll Project, Series A,
5.625% due 2/15/25 ........................................ 387,500
Resource Recovery, (SEMASS Partnership Project):
1,700,000 NR Series A, 9.000% due 7/1/15 ............................... 1,786,632
5,740,000 NR Series B, 9.250% due 7/1/15 (b) ........................... 6,037,791
-----------
16,856,661
-----------
Michigan -- 3.5%
2,000,000 BB- Detroit, MI Local Development Finance Authority,
Tax Increment, Series A, 5.500% due 5/1/21 .................. 1,812,500
Garden City, MI Hospital Finance Authority, Hospital
Revenue, Garden City Hospital Obligation Group, Series A:
2,000,000 Ba3* 5.625% due 9/1/10 ......................................... 1,725,000
1,000,000 Ba3* 5.750% due 9/1/17 ......................................... 815,000
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
* Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 2000
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=====================================================================================================
<S> <C> <C> <C>
Michigan -- 3.5% (continued)
$ 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) .............................. $ 1,807,500
-----------
6,160,000
-----------
Minnesota -- 1.0%
2,000,000 NR Sartell, MN Health Care & Housing Facilities Revenue,
(Foundation for Healthcare Project), Series A,
6.500% due 9/1/16 ............................................ 1,802,500
-----------
Montana -- 2.5%
4,530,000 NR Montana State Board of Investment Resource Recovery
Revenue, (Yellowstone Energy LP Project),
7.000% due 12/31/19 (b) ...................................... 4,388,438
-----------
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 ............................................ 960,000
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) ..................... 470,000
-----------
1,430,000
-----------
New Jersey -- 5.9%
3,000,000 B1* Camden County, NJ Improvement Authority Revenue, (Health
Care Redevelopment Project -- Cooper Health System),
5.875% due 2/15/15 ........................................... 2,175,000
New Jersey EDA, Series A:
1,000,000 NR Healthcare Facility Revenue, Sayreville Senior Living Project,
6.375% due 4/1/29 .......................................... 847,500
1,000,000 NR Retirement Community Revenue, Seabrook Village Inc.,
8.250% due 11/15/30 ........................................ 986,250
New Jersey Health Care Facilities Financing Authority Revenue:
735,000 Baa3* Palisades Medical Center Obligation Group, Unrefunded,
7.600% due 7/1/21 .......................................... 739,594
2,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27 ............... 1,790,000
3,000,000 BBB- Trinitas Hospital Obligation Group, 7.500% due 7/1/30 ........ 3,097,500
800,000 NR New Jersey State Educational Facilities Authority Revenue,
Fairleigh Dickinson University, Series C,
6.625% due 7/1/23 ............................................ 803,000
-----------
10,438,844
-----------
New Mexico -- 0.3%
475,000 AAA New Mexico Mortgage Finance Authority, Single-Family
Mortgage Program, Sr. Note, Series B, FHA-Insured,
8.300% due 3/1/20 (b) ........................................ 494,000
-----------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
* Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 2000
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=====================================================================================================
<S> <C> <C> <C>
New York -- 4.2%
Monroe County, NY IDR, Agency:
$ 1,900,000 NR Empire Sports Project, Series A, 6.250% due 3/1/28 ........... $1,610,250
1,000,000 NR Woodland Village Project, 8.550% due 11/15/32 ............... 1,007,500
New York City, NY IDA, Civic Facility Revenue:
1,500,000 NR 7.500% due 8/1/26 ............................................ 1,505,625
1,500,000 NR Series A-1, 8.125% due 7/1/19 ................................ 1,515,000
Suffolk County, NY Industrial Development Agency, Civic
Facility Revenue, Southampton Hospital Association:
1,000,000 NR Series A, 7.250% due 1/1/20 ................................ 933,750
1,000,000 NR Series B, 7.625% due 1/1/30 ................................ 955,000
----------
7,527,125
----------
North Carolina -- 2.8%
2,300,000 NR Charlotte, NC Special Facilities Revenue, Charlotte/Douglas
International Airport, 5.600% due 7/1/27 (b) ................. 1,742,250
North Carolina Medical Care Commission:
Health Care Facilities Revenue, First Mortgage,
(De Paul Community Facilities Project):
1,440,000 NR 6.125% due 1/1/28 ........................................ 1,193,400
1,000,000 NR 7.625% due 11/1/29 ....................................... 968,750
800,000 Baa1* Hospital Revenue, Halifax Regional Medical Center Inc.,
5.000% due 8/15/24 ......................................... 615,000
500,000 BBB- Raleigh Durham, NC Airport Authority Facilities Revenue,
(American Airline Project), 9.400% due 11/1/00 ............... 500,000
----------
5,019,400
----------
Ohio -- 2.1%
1,500,000 BBB Cuyahoga County, OH Hospital Facilities Revenue,
(Canton Inc. Project), 7.500% due 1/1/30 ..................... 1,569,375
1,500,000 AAA Montgomery County, OH Health Systems Revenue, Series B-1,
(Pre-Refunded -- Escrowed with state & local government
securities to 7/1/06 Call @ 102), 8.100% due 7/1/18 .......... 1,755,151
1,250,000 NR Ohio State Solid Waste Revenue, Republic Engineered
Steels Inc., 9.000% due 6/1/21 (b) ........................... 375,000
----------
3,699,526
----------
Oklahoma -- 0.8%
2,000,000 BB+ Oklahoma Development Finance Authority Revenue,
Hillcrest Healthcare System, Series A,
5.625% due 8/15/29 ........................................... 1,395,000
----------
Pennslyvania -- 11.1%
2,200,000 B Allegheny County, PA IDA, Airport Special Facilities Revenue,
(USAir Inc. Project), Series B, 8.500% due 3/1/21 (b) ........ 2,241,250
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
* Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 2000
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=====================================================================================================
<S> <C> <C> <C>
Pennslyvania -- 11.1% (continued)
Beaver County, PA IDA, PCR:
$ 1,500,000 Baa3* Cleveland Electric Illuminating Co. Project,
7.625% due 5/1/25 .......................................... $ 1,591,875
2,000,000 Baa3* Toledo Edison Co. Project, 7.625% due 5/1/20 ................. 2,140,000
3,000,000 NR Dauphin County, PA General Authority Revenue, Hotel &
Conference Center, Hyatt Regency, 6.200% due 1/1/29 .......... 2,752,500
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) ....................................... 2,631,250
2,840,000 NR Montgomery County, PA Higher Education & Health Authority
Revenue, Temple Continuing Care Center,
6.625% due 7/1/19 ............................................ 2,541,800
365,000 NR Northumberland County, PA IDA, IDR, (Beverly Enterprises Inc. ..
Project), 6.875% due 2/1/03 .................................. 364,960
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) ....................................... 1,060,000
Scranton-Lackawanna, PA Health & Welfare Authority Revenue,
(Moses Taylor Hospital Project):
1,905,000 BBB- 6.150% due 7/1/14 .......................................... 1,704,975
3,050,000 BBB- 6.250% due 7/1/20 .......................................... 2,649,688
-----------
19,678,298
-----------
Puerto Rico -- 0.8%
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 ............... 1,432,813
-----------
South Carolina -- 2.3%
Connector 2000 Association Inc., SC Toll Road Revenue,
Sr. Notes:
Capital Appreciation, Series B:
3,100,000 BBB- Zero coupon bond to yield 5.830% due 1/1/27 .............. 453,375
7,750,000 BBB- Zero coupon bond to yield 5.850% due 1/1/34 .............. 678,125
2,000,000 BBB- Southern Connector Project, Series A,
5.375% due 1/1/38 ........................................ 1,517,500
685,000 NR Florence County, SC IDR, Stone Container Corp.,
7.375% due 2/1/07 ............................................ 691,850
705,000 NR McCormick County, SC COP, 9.750% due 7/1/09 .................... 715,462
-----------
4,056,312
-----------
South Dakota -- 1.0%
1,775,000 NR Oglala Sioux Tribe, SD Pine Ridge County, Revenue Bonds,
7.500% due 7/1/13 ............................................ 1,778,461
-----------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
* Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 2000
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=====================================================================================================
<S> <C> <C> <C>
Tennessee -- 0.7%
$ 1,415,000 NR Shelby County, TN Health, Educational & Housing Facilities
Board Revenue, Multi-Family Housing, (Hedgerow
Apartments Project), 6.875% due 7/1/36 ....................... $ 1,328,331
-----------
Texas -- 7.5%
560,000 A2* El Paso, TX Housing Finance Corp., Single-Family Mortgage
Revenue, Series A, FHA/VA-Insured, 8.750% due 10/1/11 ........ 585,021
2,000,000 Ba2* El Paso, TX International Airport Revenue, Special Facilities,
(Marriott Corp. Project), 7.750% due 3/1/12 .................. 2,057,500
3,000,000 Ba1* Houston, TX Airport Systems Revenue, Special Facilities,
Continental Airlines Inc., Series C,
6.125% due 7/15/27 (b) ....................................... 2,658,750
10,000,000 AAA Houston, TX Water & Sewer System Revenue, Capital
Appreciation, Series A, FSA-Insured, zero coupon bond to
yield 5.500% due 12/1/28 ..................................... 1,975,000
Northgate Crossing, TX Municipal Utility:
1,000,000 CCC++ District No. 1, GO, 8.875% due 12/1/13 ....................... 986,250
1,000,000 CCC++ District No. 2, (Pre-Refunded -- Escrowed with U.S.
government securities to 12/1/00 Call @ 100),
8.875% due 12/1/13 (e) ..................................... 1,003,340
Sam Rayburn, TX Municipal Power Agency,
Series A:
2,645,000 BB 6.750% due 10/1/14 ......................................... 2,648,306
1,500,000 BB 6.250% due 10/1/17 ......................................... 1,455,000
-----------
13,369,167
-----------
Utah -- 2.1%
1,675,000 NR Hurricane, UT Health Facilities Development Revenue,
(Mission Health Services Project), 10.500% due 7/1/20 ........ 1,732,201
2,000,000 NR Utah State HFA Revenue, (RHA Community Services
of Utah Inc. Project), Series A, 6.875% due 7/1/27 ........... 1,932,500
-----------
3,664,701
-----------
Virginia -- 2.2%
600,000 NR Alexandria, VA Redevelopment & Housing Authority,
Multi-Family Housing Revenue, (Parkwood Court
Apartments Project), Series C, 8.125% due 4/1/30 ............. 609,000
1,000,000 NR Fairfax County, VA EDA Revenue, Retirement Community,
Greenspring Village Inc., Series A, 7.500% due 10/1/29 ....... 998,750
23,400,000 BBB- Pocahontas Parkway Association, VA Toll Road Revenue,
Capital Appreciation, Sr. Notes, Series B, zero coupon
bond to yield 7.438% due 8/15/34 ............................. 2,252,250
-----------
3,860,000
-----------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
* Municipal High Income Fund Inc.
Schedule of Investments (continued)
October 31, 2000
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
===================================================================================================
<S> <C> <C> <C>
West Virginia -- 0.6%
$ 1,000,000 NR West Virginia Economic Development Authority Revenue,
(Stonewall Jackson Project), Series B,
8.000% due 4/1/30 ......................................... $ 1,007,500
------------
Wisconsin -- 1.4%
Wisconsin State Health & Educational Facilities
Authority Revenue:
1,060,000 BBB+ Aurora Health Care Inc., Series A, 5.600% due 2/15/29 ... 869,200
1,770,000 NR Benchmark Healthcare of Green Bay Inc. Project,
Series A, 7.750% due 5/1/27 ........................... 1,597,425
------------
2,466,625
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $182,900,012**) .................................... $177,550,033
============
</TABLE>
---------
(a) All ratings are by Standard & Poor's Ratings Service, except those
identified by an asterisk (*), which 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 currently in default.
(d) Residual interest bonds-coupon varies inversely with level of short-term
tax-exempt interest rates.
(e) Pre-Refunded bonds escrowed with U.S. government securities and bonds
escrowed to maturity with U.S. government securities are considered by the
manager to be triple-A rated even if the issuer has not applied for new
ratings.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 16 through 18 for definitions of ratings and certain security
descriptions.
See Notes to Financial Statements.
14
<PAGE>
* Municipal High Income Fund Inc.
Summary of Municipal Bonds by Combined Ratings
October 31, 2000 (unaudited)
================================================================================
--------------------------------------------------------------------------------
Standard & Percent of
Moody's and/or Poor's Total Investments
--------------------------------------------------------------------------------
Aaa AAA 4.3%
Aa AA 1.1
A A 4.1
Baa BBB 18.6
Ba BB 12.6
B B 3.0
Caa CCC 1.3*
NR NR 55.0
-----
100.0%
=====
--------------------------------------------------------------------------------
----------
* 1.1% was rated by Fitch IBCA, Inc.
See Notes to Financial Statements.
15
<PAGE>
* 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
"CC" 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
CCC and CC 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 "CC" 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.
16
<PAGE>
* 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") -- Ratings from "BBB" to "C" 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, C -- Default on bonds rated "CCC", "CC", and "C" by Fitch is a real
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.
VMIG 1 -- Moody's highest rating for issues having a demand feature -- VRDO.
17
<PAGE>
* 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 -- College Construction Loan Insurance Association
LEE
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
18
<PAGE>
* Municipal High Income Fund Inc.
Statement of Assets and Liabilities
October 31, 2000
================================================================================
ASSETS:
Investments, at value (Cost -- $182,900,012) ............. $ 177,550,033
Interest receivable ...................................... 4,074,171
Cash ..................................................... 24,010
-------------
Total Assets ............................................. 181,648,214
-------------
LIABILITIES:
Dividends payable ........................................ 197,442
Investment advisory fees payable ......................... 65,575
Administration fees payable .............................. 32,527
Accrued expenses ......................................... 26,835
-------------
Total Liabilities ........................................ 322,379
-------------
Total Net Assets ............................................ $ 181,325,835
=============
NET ASSETS:
Par value of capital shares .............................. $ 204,551
Capital paid in excess of par value ...................... 189,974,124
Undistributed net investment income ...................... 103,670
Accumulated net realized loss from security transactions . (3,606,531)
Net unrealized depreciation of investments ............... (5,349,979)
-------------
Total Net Assets ............................................ $ 181,325,835
=============
Shares Outstanding .......................................... 20,455,083
-------------
Net Asset Value ............................................. $ 8.86
-------------
See Notes to Financial Statements.
19
<PAGE>
* Municipal High Income Fund Inc.
Statement of Operations
For the Year Ended October 31, 2000
================================================================================
INVESTMENT INCOME:
Interest ................................................. $ 13,472,713
------------
EXPENSES:
Investment advisory fees (Note 3) ........................ 725,096
Administration fees (Note 3) ............................. 362,548
Audit and legal .......................................... 58,966
Shareholder communications ............................... 40,346
Shareholder and system servicing fees .................... 34,876
Directors' fees .......................................... 27,354
Pricing service fees ..................................... 15,425
Custody .................................................. 8,550
Other .................................................... 12,041
------------
Total Expenses ........................................... 1,285,202
------------
Net Investment Income ....................................... 12,187,511
------------
REALIZED AND UNREALIZED LOSS ON
INVESTMENTS (NOTE 4):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales .................................... 48,444,675
Cost of securities sold ................................ 49,191,725
------------
Net Realized Loss ........................................ (747,050)
------------
Change in Net Unrealized Depreciation of Investments:
Beginning of year ...................................... (3,055,104)
End of year ............................................ (5,349,979)
------------
Increase in Net Unrealized Depreciation .................. (2,294,875)
------------
Net Loss on Investments ..................................... (3,041,925)
------------
Increase in Net Assets From Operations ...................... $ 9,145,586
============
See Notes to Financial Statements.
20
<PAGE>
* Municipal High Income Fund Inc.
Statements of Changes in Net Assets
For the Years Ended October 31,
================================================================================
2000 1999
---- ----
OPERATIONS:
Net investment income ................. $ 12,187,511 $ 11,804,409
Net realized loss ..................... (747,050) (834,124)
Increase in net unrealized depreciation (2,294,875) (14,779,115)
------------- -------------
Increase (Decrease) in Net Assets
From Operations ..................... 9,145,586 (3,808,830)
------------- -------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 2):
Net investment income ................. (11,904,853) (11,918,813)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders ....... (11,904,853) (11,918,813)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net asset value of shares issued for
reinvestment of dividends ........... -- 1,868,671
------------- -------------
Increase in Net Assets From
Fund Share Transactions ............. -- 1,868,671
------------- -------------
Decrease in Net Assets ................... (2,759,267) (13,858,972)
NET ASSETS:
Beginning of year ..................... 184,085,102 197,944,074
------------- -------------
End of year* .......................... $ 181,325,835 $ 184,085,102
============= =============
* Includes undistributed (overdistributed)
net investment income of ............ $ 103,670 $ (178,988)
============= =============
See Notes to Financial Statements.
21
<PAGE>
* Municipal High Income Fund Inc.
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
Municipal High Income Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities are
valued at the mean between the bid and asked prices provided by an independent
pricing service. Securities with no readily obtainable market quotations are
valued at fair value as determined by an independent pricing service under the
supervision of the Fund's Board of Directors; (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; 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.
In addition, during November 2000 the American Institute of Certified
Public Accountants ("AICPA") issued a revised version of the AICPA Audit and
Accounting Guide for Investment Companies ("Guide"). This revised version is
effective for financial statements issued for fiscal years beginning after
December 15, 2000. One of the new provisions in the Guide requires investment
companies to amortize premiums and accrete discounts on fixed income securities.
The Fund currently does not amortize premiums or accrete discounts in all cases.
Upon adoption, the Fund will be required to record a cumulative effect
adjustment to conform with accounting principles generally accepted in the
United States of America. The effect of this adjustment will be to either
increase or decrease net investment income with an offsetting decrease or
increase to unrealized appreciation (depreciation) of securities. This
adjustment will therefore, have no effect on the net assets of the Fund. At this
time, the Fund has not completed its analysis of the impact of this accounting
change.
22
<PAGE>
* Municipal High Income Fund Inc.
Notes to Financial Statements (continued)
================================================================================
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
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith
Barney Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup
Inc., acts as investment advisor 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.
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, 2000, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
Purchases ....................................................... $53,620,432
===========
Sales ........................................................... $48,444,675
===========
At October 31, 2000, the aggregate gross unrealized appreciation and
depreciation of invest ments for Federal income tax purposes were substantially
as follows:
Gross unrealized appreciation ................................... $ 4,085,867
Gross unrealized depreciation ................................... (9,435,846)
-----------
Net unrealized depreciation ..................................... $(5,349,979)
===========
23
<PAGE>
* Municipal High Income Fund Inc.
Notes to Financial Statements (continued)
================================================================================
5. Capital Loss Carryforwards
At October 31, 2000, the Fund had, for Federal income tax purposes,
approximately $3,606,000 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:
<TABLE>
<CAPTION>
2002 2003 2004 2005 2007 2008
==================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Carryforward Amounts $1,197,000 $ 270,000 $ 205,000 $ 400,000 $ 786,000 $ 748,000
==================================================================================================
</TABLE>
6. Capital Shares
At October 31, 2000, 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:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 2000 October 31, 1999
---------------- ---------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares issued on reinvestment .......... -- -- 196,443 $1,868,671
====== ====== ======= ==========
</TABLE>
24
<PAGE>
* Municipal High Income Fund Inc.
Financial Highlights
================================================================================
For a share of capital stock outstanding throughout each year ended October 31,
except where noted:
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year .......... $ 9.00 $ 9.77 $ 9.76 $ 9.53 $ 9.51
-------- -------- -------- -------- --------
Income (Loss) From Operations:
Net investment income ...... 0.60 0.58 0.60 0.61 0.63
Net realized and
unrealized gain (loss) ... (0.16) (0.76) 0.03 0.24 --
-------- -------- -------- -------- --------
Total Income (Loss)
From Operations ............ 0.44 (0.18) 0.63 0.85 0.63
-------- -------- -------- -------- --------
Less Distributions From:
Net investment income ...... (0.58) (0.59) (0.61) (0.62) (0.61)
In excess of net
investment income ........ -- -- (0.01) -- --
-------- -------- -------- -------- --------
Total Distributions .......... (0.58) (0.59) (0.62) (0.62) (0.61)
-------- -------- -------- -------- --------
Net Asset Value,
End of Year ................ $ 8.86 $ 9.00 $ 9.77 $ 9.76 $ 9.53
-------- -------- -------- -------- --------
Total Return,
Based on Market Value ...... 9.39% (15.76)% 9.34% 17.22% 10.22%
-------- -------- -------- -------- --------
Total Return,
Based on Net Asset Value ... 5.97% (1.79)% 6.75% 9.41% 7.39%
-------- -------- -------- -------- --------
Net Assets,
End of Year (000s) ......... $181,326 $184,085 $197,944 $194,133 $187,303
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses ................... 0.71% 0.73% 0.74% 0.74% 0.77%
Net investment income ...... 6.72 6.08 6.07 6.38 6.65
Portfolio Turnover Rate ...... 27% 27% 57% 35% 17%
Market Value, End of Year .... $ 8.125 $ 8.000 $ 10.125 $ 9.875 $ 9.000
</TABLE>
25
<PAGE>
* Municipal High Income Fund Inc.
Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Municipal High Income Fund Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Municipal High Income Fund Inc. as of October
31, 2000, and 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 five-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.
We conducted o ur audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2000, by correspondence with the custodian.
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, 2000, 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 five-year period then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
New York, New York
December 11, 2000
26
<PAGE>
* Municipal High Income Fund Inc.
Financial Data Per Share of Common Stock (unaudited)
================================================================================
Dividend
Record Payable NYSE Net Asset Dividend Reinvestment
Date Date Closing Price* Value* Paid Price
-------- -------- ------------- --------- --------- ------------
11/23/98 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
8/24/99 8/27/99 8.562 9.27 0.0485 8.79
9/21/99 9/24/99 8.375 9.22 0.0485 8.37
10/26/99 10/29/99 7.625 9.00 0.0485 7.98
11/22/99 11/26/99 7.938 9.03 0.0485 7.74
12/27/99 12/30/99 7.313 8.86 0.0485 7.38
1/25/00 1/28/00 7.750 8.70 0.0485 7.84
2/22/00 2/25/00 7.813 8.65 0.0485 7.66
3/28/00 3/31/00 7.438 8.80 0.0485 7.58
4/25/00 4/28/00 7.625 8.76 0.0485 7.62
5/23/00 5/26/00 7.750 8.60 0.0485 7.75
6/27/00 6/30/00 7.563 8.74 0.0485 7.85
7/25/00 7/28/00 8.094 8.78 0.0485 8.28
8/22/00 8/25/00 8.4375 8.84 0.0485 8.51
9/26/00 9/29/00 8.1875 8.83 0.0485 8.36
10/24/00 10/27/00 8.1250 8.86 0.0485 8.10
----------
* As of record date.
27
<PAGE>
* 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>
1/31/98 $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)
10/31/99 3,269,246 0.16 2,951,688 0.14 (8,885,590) (0.43) (5,933,902) (0.29)
1/31/00 3,388,350 0.17 3,059,977 0.15 (7,328,329) (0.35) (4,268,352) (0.20)
4/30/00 3,238,496 0.16 2,931,920 0.14 1,882,412 0.09 4,814,332 0.23
7/31/00 3,448,458 0.17 3,122,207 0.16 1,208,370 0.05 4,330,577 0.21
10/31/00 3,397,409 0.17 3,073,407 0.15 1,195,622 0.05 4,269,029 0.20
</TABLE>
28
<PAGE>
* Municipal High Income Fund Inc.
Tax Informaton (unaudited)
================================================================================
For Federal tax purposes, the Fund hereby designates for the fiscal year ended
October 31, 2000:
o 99.98% of the dividends paid by the Fund from net investment income
as tax exempt for regular Federal income tax purposes.
29
<PAGE>
* 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 PFPC Global Fund Services ("PFPC"), 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 PFPC, 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, PFPC 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 PFPC has completed its purchases,
the market price exceeds 98% of what the NAV per share of the common stock was
at the valuation time, PFPC 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
30
<PAGE>
* Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited) (continued)
================================================================================
weighted average of prices paid for shares purchased in the open market and the
price at which the Fund issues the remaining shares. To the extent PFPC is
unable to stop open market purchases and cause the Fund to issue the remaining
shares, the average per share price paid by PFPC may exceed 98% of the NAV per
share of the common stock. PFPC 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.
PFPC 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 PFPC 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. PFPC'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 PFPC or the Fund on at least 30 days' written notice to Plan
participants. All correspondence concerning the Plan should be directed by mail
to PFPC Global Fund Services, P.O. Box 8030, Boston, Massachusetts 02266-8030 or
by telephone at 1-800-331-1710.
---------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase at
market prices shares of its common stock in the open market. As of October 31,
2000, the Fund has not repurchased any shares.
31
<PAGE>
* Municipal High Income Fund Inc.
Management of the Fund
================================================================================
Directors
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Robert A. Frankel
William R. Hutchinson
Heath B. McLendon, Chairman
Charles F. Barber, Emeritus
Officers
Heath B. McLendon
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
Anthony Pace
Controller
Christina T. Sydor
Secretary
Investment Advisor and Administrator
SSB Citi Fund Management LLC
388 Greenwich Street
New York, New York 10013
Transfer Agent
PFPC Global Fund Services
P.O. Box 8030
Boston, Massachusetts 02266-8030
Custodian
PFPC Trust Company
8800 Tinicum Blvd.
Third Floor Suite 200
Philadelphia, Pennsylvania 19153
32
<PAGE>
[GRAPHIC OMITTED]
*
This report is intended only for shareholders of Municipal High Income Fund Inc.
It is not a Prospectus, circular or representation intended for use in the
purchase or sale of shares of the Fund or of any securities mentioned in this
report.
Municipal High Income Fund Inc.
7 World Trade Center
New York, NY 10048
(212) 723-9218
FD01049 12/00
