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[CLIP ART] [CLIP ART]
Municipal
High Income
Fund Inc.
Quarterly
Report
[CLIP ART]
July 31,
2002
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================================== [CLIP ART] ==================================
Municipal High Income Fund Inc.
Dear Shareholder:
Enclosed herein is the quarterly report for the Municipal High Income Fund
Inc. ("Fund") for the nine months ended July 31, 2002. In this report, we
summarize what we believe to be the period's prevailing economic and market
conditions and outline our investment strategy. A detailed summary of the Fund's
performance can be found in the appropriate sections that follow. We hope you
find this report useful and informative.
Performance Update
During the nine months ended July 31, 2002, the Fund distributed income
dividends to shareholders totaling $0.43 per share. The table below details the
annualized distribution rate and the nine-month total return for the Fund based
on its July 31, 2002 net asset value ("NAV") per share and the New York Stock
Exchange ("NYSE") closing price.(1)
Price Annualized Nine-Month
Per Share Distribution Rate(2) Total Return(2)
------------ -------------------- ---------------
$8.44 (NAV) 6.61% 2.59%
$8.16 (NYSE) 6.84% (0.47)%
----------
(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 price,
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 price noted in this
report. The annualized distribution rate assumes a current monthly income
dividend rate of $0.0465 for 12 months. This rate is as of July 31, 2002
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 price 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.
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================================== [CLIP ART] ==================================
During the nine months ended July 31, 2002, the Fund generated a total
return based on NAV of 2.59%. In comparison, the Fund's Lipper Inc. ("Lipper")
peer group of high-yield municipal debt closed-end funds returned 2.94% based on
NAV for the same period.(3)
Investment Strategy
The Fund seeks to maximize current income exempt from federal income
tax(4) by investing, under normal market conditions, at least 80% of the value
of its net assets, plus any borrowings for investment purposes, in
intermediate-term and long-term municipal securities.(5)
Economic and Market Overview
The U.S. campaign against terrorism, mixed economic signals as well as a
multitude of high profile U.S. corporate scandals resulted in heightened
investor apprehension and extended stock market volatility. As a result, the
U.S. Treasury market directly benefited from this volatility as investors sought
a "safe haven." Municipal bond prices also fared well in this environment.
However, total returns for municipal bonds lagged U.S. Treasuries during the
second half of 2001 as a heavy calendar of tax-exempt new issues prevented
municipal prices from keeping pace with their taxable counterparts. State and
local governments combined to issue large amounts of municipal debt to fund new
projects and refinance outstanding issues during the period.
Total returns in the high yield segment of the municipal market were also
significantly below those on better quality paper as the "flight to quality"
placed a great deal of emphasis on high grade debt with shorter maturities. This
trend caused the yield curve(6) to steepen (yields on short-term paper declined
far more dramatically than yields on long-term bonds) and credit quality spreads
(the difference in yield between higher quality and lower quality bonds) to
widen. One part of the market that was particularly hard hit, as a direct result
of the September 11th terrorist attacks was special airport facilities
financings for airlines. However, our expectation of a
----------
(3) Source: Lipper Inc. Average annual total returns are based on nine-month
period as of July 31, 2002, calculated among 12 funds in the closed-end
high-yield municipal debt fund category, as defined by Lipper Inc., with
reinvestment of dividends and capital gains, excluding sales charges.
(4) Certain investors may be subject to the Federal Alternative Minimum Tax
("AMT"), and state and local taxes may apply. Capital gains, if any, are
fully taxable.
(5) The Fund's investments are subject to interest rate and credit risks.
Portfolio holdings may include lower-quality securities that present
greater risk of loss of principal and interest than higher-rated
securities. Investments in high-yield securities commonly known as "junk
bonds" involve a greater risk of loss than an investment in
investment-grade securities and are considered speculative.
(6) The yield curve is the graphical depiction of the relationship between the
yield on bonds of the same credits quality but different maturities.
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gradually improving economy may alleviate credit quality concerns, which we
anticipate may enhance the relative performance prospects of high yield
municipals.
The new calendar year commenced with a decline in short-term rates due to
seasonal technical factors arising from the "January effect." The January effect
describes a temporary increase in the demand for money-market instruments caused
by an influx of cash from maturing bonds and coupon interest chasing a dearth of
supply.
A significant rise in yields occurred during March, as a shift in
monetary-policy sentiment coupled with positive economic data roiled the money
markets. However at the conclusion of the March, May and June Federal Open
Market Committee ("FOMC")(7) meetings, the U.S. Federal Reserve Board ("Fed")
held the federal funds rate ("fed funds rate")(8) steady. As the bond market
continued its rise, tax-free instruments continued to look attractive.
Treasury yields were lower at the end of the reporting period than they
were at the end of the first quarter due to continued weakness in the U.S.
equities market as well as geopolitical concerns. The equities market stabilized
during the first quarter of 2002 as the result of positive growth in Gross
Domestic Product ("GDP"),(9) but subsequently suffered through one of the worst
quarters in recent history during the second quarter. The U.S. Treasury market
continued to experience large inflows as a result of equity market uncertainty.
Market and Economic Outlook
Although the economy may struggle for another quarter or so, we believe it
is on the road to recovery and should gain momentum by late 2002. We also expect
inflation to remain subdued. Therefore, we believe the FOMC will not raise the
fed funds rate through the end of the calendar year. While we have some concerns
about an improving economy putting pressure on bonds, we anticipate that fixed
income markets should perform well as long as geopolitical risk is high and
corporate malaise continues.
We feel one obstacle to this recovery could be lingering skepticism among
some investors about truthfulness in corporate accounting practices. However, we
also feel corporate profits could improve enough by late 2002 and early 2003 to
exceed investor expectations.
----------
(7) The FOMC is a policy-making body of the Federal Reserve System responsible
for the formulation of a policy designed to promote economic growth, full
employment, stable prices, and a sustainable pattern of international
trade and payments.
(8) The fed funds rate is the interest rate that banks with excess reserves at
a Federal Reserve district bank charge other banks that need overnight
loans. The fed funds rate often points to the direction of U.S. interest
rates.
(9) GDP is a market value of goods and services produced by labor and property
in a given country.
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Municipal-bond market pundits are predicting a record year for new-issue
financing, as state and local governments are expected to take advantage of a
renewed low interest-rate environment. This large amount of supply may keep
price levels low, a point which could help municipal bonds offer competitive
returns versus many other securities in the fixed-income market.
We continue to pay close attention to credit quality, as many states and
municipalities face future budget challenges caused by a depressed stock market
and shrinking tax revenues. In our opinion this weaker revenue picture may have
credit rating implications for many states, especially states that rely heavily
on capital gains taxes as a source of income.
In closing, thank you for investing in the Municipal High Income Fund Inc.
We look forward to continuing to help you meet your investment objectives.
Sincerely,
/s/ Heath B. McLendon /s/ Peter M. Coffey
Heath B. McLendon Peter M. Coffey
Chairman Vice President and
Investment Officer
August 27, 2002
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 July 31, 2002 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 may reinvest their dividends in an effort to
take advantage of what can be one of the most effective wealth-building tools
available today? When the Fund achieves its objectives, systematic investments
by shareholders put time to work for them 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 27. 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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[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
July 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================
Alabama -- 4.0%
$ 4,000,000 BBB- Butler, AL IDB, Solid Waste Disposal Revenue, (James River
Corp. Project), 8.000% due 9/1/28 (b) ..................... $ 4,190,680
615,000 NR Capstone Improvement District of Brookwood, AL, Series A,
7.700% due 8/15/23 ........................................ 586,163
1,000,000 CCC Mobile, AL IDB, Solid Waste Disposal Revenue, (Mobile
Energy Services Co. Project), 6.950% due 1/1/20 (c) ....... 10,000
1,000,000 NR Rainbow City, AL Special Health Care Facility Financing
Authority, Series A, 8.250% due 1/1/31 .................... 1,026,540
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 ........................................ 1,227,520
------------
7,040,903
------------
Alaska -- 0.6%
1,055,000 NR Alaska Industrial Development & Export Authority Revenue,
Williams Lynxs Alaska Cargoport, 8.125% due 5/1/31 (b) .... 1,105,672
------------
Arizona -- 3.1%
1,500,000 NR Casa Grande, AZ IDA Hospital Revenue, Casa Grande Regional
Medical Center, Series A, 7.625% due 12/1/29 .............. 1,578,360
1,750,000 CCC Gila County, AZ IDA Revenue, ASARCO Inc.,
5.550% due 1/1/27 ......................................... 437,500
Maricopa, AZ IDA, MFH Revenue:
490,000 NR Avalon Apartments Project, Series C, 10.000% due 4/1/30 ... 489,990
1,000,000 NR Gran Victoria Housing LLC Project, Series B,
10.000% due 5/1/31 ...................................... 1,040,370
1,830,000 NR Phoenix, AZ IDA, MFH Revenue, (Ventana Palms
Apartments Project), Series B, 8.000% due 10/1/34 ......... 1,855,712
------------
5,401,932
------------
California -- 2.0%
1,500,000 NR Barona, CA Band of Mission Indians, GO, 8.250% due 12/1/20 .. 1,604,985
1,865,000 Ba3* Vallejo, CA COP, Touro University, 7.375% due 6/1/29 ........ 1,917,108
------------
3,522,093
------------
Colorado -- 0.6%
1,000,000 NR Highline Business Improvement District, Littleton CO, GO,
Series B, 8.750% due 12/15/19 ............................. 1,066,460
------------
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 .................. 1,766,924
See Notes to Financial Statements.
6
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================
Connecticut -- 1.9% (continued)
$ 1,435,000 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 ......................................... $ 1,539,425
------------
3,306,349
------------
Delaware -- 0.5%
1,000,000 NR Sussex County, DE Assisted Living Facilities Revenue,
(Heritage at Milford Project), 7.250% due 7/1/29 .......... 851,880
------------
District of Columbia -- 0.6%
1,000,000 AA District of Columbia, Tobacco Settlement Financing Corp.,
Asset-Backed Bonds, 6.750% due 5/15/40 .................... 1,019,200
------------
Florida -- 7.6%
Capital Projects Finance Authority, FL:
2,000,000 NR Continuing Care Retirement, Glenridge on Palmer Ranch,
Series A, 8.000% due 6/1/32 ............................. 1,994,000
2,000,000 NR Student Housing Revenue, Florida University,
Series A, 7.850% due 8/15/31 ............................ 2,045,800
1,000,000 NR Century Parc Community Development District, FL
Special Assessment, 7.000% due 11/1/31 .................... 1,012,770
2,750,000 NR Hillsborough County, FL IDA Revenue, (Lakeshore Villas
Project), Series A, 6.750% due 7/1/29 ..................... 2,293,748
875,000 NR Homestead, FL IDR, Community Rehabilitation Providers
Program, Series A, 7.950% due 11/1/18 ..................... 907,419
2,000,000 BBB++ Martin County, FL IDA, IDR, (Indiantown Cogeneration
Project), Series A, 7.875% due 12/15/25 (b) ............... 2,068,320
1,000,000 NR Orange County, FL Health Facilities Authority Revenue,
First Mortgage, (GF/Orlando Inc. Project),
9.000% due 7/1/31 ......................................... 1,023,540
2,000,000 NR Reunion East Community Development District, FL Special
Assessment, Series A, 7.375% due 5/1/33 ................... 1,999,660
------------
13,345,257
------------
Georgia -- 4.9%
Atlanta, GA:
1,000,000 AAA Airport Revenue, Series B, 5.625% due 1/1/30 (b) .......... 1,030,500
2,500,000 NR Tax Allocation, (Atlantic Station Project),
7.900% due 12/1/24 ...................................... 2,507,725
1,000,000 NR Urban Residential Finance Authority, MFH Revenue,
Park Place Apartments, Series A, 6.750% due 3/1/31 ...... 950,450
2,000,000 NR Clayton County, GA Development Authority Revenue,
First Mortgage, Senior Care Group Inc., (Bayberry
Project), Series A, 6.750% due 7/1/29 (c) ................. 440,000
See Notes to Financial Statements.
7
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================
Georgia -- 4.9% (continued)
$ 500,000 NR Fulton County, GA Residential Care Facilities, Senior Lien,
Series A, 7.000% due 7/1/29 ............................... $ 452,115
1,000,000 NR Gainesville & Hall County, GA Development Authority Revenue,
Senior Living Facility, Lanier Village Estates, Series C,
7.250% due 11/15/29 ....................................... 1,019,430
1,435,000 NR Savannah, GA EDA Revenue, Marshview Inn, Series A,
7.125% due 7/1/29 ......................................... 1,007,198
1,000,000 NR Walton County, GA IDA, IDR, (Walton Manufacturing Co.
Project), 8.500% due 9/1/07 ............................... 1,090,570
------------
8,497,988
------------
Illinois -- 2.1%
2,000,000 AAA Chicago, IL GO, Neighborhoods Alive 21 Program,
FGIC-Insured, 5.500% due 1/1/31 ........................... 2,065,080
2,500,000 AAA Illinois Sports Facilities Authority Revenue,
5.539% due 6/15/30 ........................................ 1,638,175
------------
3,703,255
------------
Indiana -- 1.6%
2,500,000 B- East Chicago, IN PCR, (Inland Steel Co. Project No. 10)
6.800% due 6/1/13 ......................................... 1,500,000
1,000,000 CCC Indiana State Development Finance Authority, PCR, (Inland
Steel Co. Project No. 13), 7.250% due 11/1/11 (b) ......... 380,000
975,000 NR Indianapolis, IN MFH Revenue, (Lake Nora Fox Club
Project), Series B, 7.500% due 10/1/29 .................... 956,036
------------
2,836,036
------------
Kentucky -- 0.8%
1,500,000 BB Kenton County, KY Airport Board Revenue, (Delta Airlines
Project), Series A, 7.500% due 2/1/20 (b) ................. 1,377,375
------------
Louisiana -- 6.2%
1,200,000 A3* Lake Charles, LA Harbor & Terminal District, Port Facilities
Revenue, (Trunkline LNG Co. Project), 7.750% due 8/15/22 .. 1,244,220
2,000,000 NR Louisiana Local Government Environmental Facilities,
Community Development Authority Revenue, St. James
Place, Series A, 8.000% due 11/1/25 ....................... 2,083,000
3,000,000 NR Louisiana Public Facilities Authority Hospital Revenue,
(Lake Charles Memorial Hospital Project), 8.625%
due 12/1/30 ............................................... 2,697,450
Port of New Orleans, LA IDR:
Avondale Industries, Inc. Project:
645,000 NR 8.250% due 6/1/04 ....................................... 677,901
2,845,000 NR 8.500% due 6/1/14 ....................................... 3,059,769
1,000,000 BB- Continental Grain Co. Project, 7.500% due 7/1/13 .......... 1,034,240
------------
10,796,580
------------
See Notes to Financial Statements.
8
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================
Maine -- 0.0%
$ 15,000 AA+ Maine State Housing Authority, Mortgage Purchase Revenue,
Series C-2, 7.000% due 11/15/32 (b) ....................... $ 15,648
------------
Maryland -- 1.7%
3,000,000 NR Maryland State Economic Development Corp. Revenue,
Chesapeake Bay, Series A, 7.730% due 12/1/27 .............. 3,013,320
------------
Massachusetts -- 5.4%
970,000 NR Boston, MA IDA Financing Revenue, (Roundhouse Hospitality
LLC Project), 7.875% due 3/1/25 (b) ....................... 976,053
Massachusetts State Development Finance Agency Revenue:
1,000,000 NR Alliance Health Care Facility, Series A,
7.100% due 7/1/32 ....................................... 1,005,790
1,000,000 NR Briarwood, Series B, 8.250% due 12/1/30 ................... 1,044,750
Massachusetts State Health & Education Facilities Authority
Revenue:
1,000,000 AAA Beth Israel Deaconess Medical Center, Series G-4,
AMBAC-Insured, Variable Rate INFLOS,
10.977% due 7/1/25 (d) ................................ 1,043,020
1,000,000 BBB Caritas Christi Obligation, Series B,
6.750% due 7/1/16 ..................................... 1,083,490
1,060,000 Ba2* Saint Memorial Medical Center, Series A,
6.000% due 10/1/23 .................................... 959,989
1,145,000 AA Massachusetts State HFA, Single-Family Housing Revenue,
Series 38, 7.200% due 12/1/26 (b) ......................... 1,197,063
2,000,000 NR Massachusetts State Industrial Finance Agency Revenue,
Assisted Living Facility, (Marina Bay LLC Project),
7.500% due 12/1/27 (b) .................................... 2,054,380
------------
9,364,535
------------
Michigan -- 1.9%
Garden City, MI Hospital Finance Authority, Hospital
Revenue, Garden City Hospital Obligation Group, Series A:
2,000,000 B1* 5.625% due 9/1/10 ....................................... 1,648,420
1,000,000 B1* 5.750% due 9/1/17 ....................................... 718,370
2,000,000 NR Michigan State Strategic Fund, Resource Recovery Limited
Obligation Revenue, Central Wayne Energy Recovery L.P.,
Series A, 6.900% due 7/1/19 (b) ........................... 1,000,000
------------
3,366,790
------------
Minnesota -- 2.5%
1,000,000 NR Minneapolis & St. Paul MN, Metropolitan Airports Community
Special Facility Revenue, (Northwest Airlines Project),
Series A, 7.000% due 4/1/25 (b) ........................... 895,990
See Notes to Financial Statements.
9
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================
Minnesota -- 2.5% (continued)
$ 2,000,000 NR Sartell, MN Health Care & Housing Facilities Revenue,
(Foundation for Healthcare Project), Series A,
6.500% due 9/1/16 ......................................... $ 1,892,460
1,935,000 Ba2* St. Paul, MN Housing & Redevelopment Authority Hospital
Revenue, (Healtheast Project), Series A,
6.625% due 11/1/17 ........................................ 1,635,152
------------
4,423,602
------------
Montana -- 2.4%
4,525,000 NR Montana State Board of Investment Resource Recovery
Revenue, (Yellowstone Energy L.P. Project),
7.000% due 12/31/19 (b) ................................... 4,178,928
------------
New Jersey -- 5.7%
3,000,000 B1* Camden County, NJ Improvement Authority Revenue, (Health
Care Redevelopment Project - Cooper Health System),
5.875% due 2/15/15 ........................................ 2,355,000
New Jersey EDA, Series A:
1,000,000 NR Healthcare Facility Revenue, (Sayreville Senior Living
Project), 6.375% due 4/1/29 ............................. 420,000
850,000 NR Presbyterian Home at Montgomery Inc., First Mortgage, ..... 856,562
Series A, 6.375% due 11/1/31
1,000,000 NR Retirement Community Revenue, 8.250% due 11/15/30 ......... 1,081,710
New Jersey Health Care Facilities Financing Authority Revenue:
2,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27 ............. 2,028,880
3,000,000 BBB- Trinitas Hospital Obligation Group, 7.500% due 7/1/30 ..... 3,286,650
------------
10,028,802
------------
New Mexico -- 0.2%
300,000 AAA New Mexico Mortgage Finance Authority, Single-Family
Mortgage Program, Series B, FHA-Insured,
8.300% due 3/1/20 (b) ..................................... 310,890
------------
New York -- 5.1%
700,000 NR Brookhaven, NY IDA, Civic Facility Revenue, Memorial Hospital
Medical Center, Series A, 8.250% due 11/15/30 ............. 744,065
Monroe County, NY IDA:
1,900,000 NR Empire Sports Project, Series A, 6.250% due 3/1/28 ........ 1,147,885
1,000,000 NR Woodland Village Project, 8.550% due 11/15/32 ............. 1,057,960
New York City, NY IDA, Civic Facility Revenue:
1,380,000 NR Community Residence for the Developmentally Disabled,
7.500% due 8/1/26 ....................................... 1,443,922
1,335,000 NR Special Needs Facility Pooled Program, Series A-1,
8.125% due 7/1/19 ....................................... 1,425,153
See Notes to Financial Statements.
10
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================
New York -- 5.1% (continued)
Suffolk County, NY IDA Civic Facility Revenue, Southampton
Hospital Association:
$ 1,000,000 NR Series A, 7.250% due 1/1/20 ............................. $ 1,004,630
1,000,000 NR Series A, 7.750% due 1/1/22 ............................. 994,930
1,000,000 NR Series B, 7.625% due 1/1/30 ............................. 1,023,100
------------
8,841,645
------------
North Carolina -- 1.5%
1,000,000 NR Charlotte, NC Special Facilities Revenue, Charlotte/Douglas
International Airport, 5.600% due 7/1/27 (b) .............. 482,520
North Carolina Medical Care Commission, Health Care
Facilities Revenue, First Mortgage, (De Paul Community
Facilities Project):
1,240,000 NR 6.125% due 1/1/28 ....................................... 1,103,860
1,000,000 NR 7.625% due 11/1/29 ...................................... 1,019,380
------------
2,605,760
------------
Ohio -- 3.1%
1,500,000 BBB Cuyahoga County, OH Hospital Facilities Revenue,
(Canton Inc. Project), 7.500% due 1/1/30 .................. 1,633,470
Montgomery County, OH Health Systems Revenue, Series B-1,
(Escrowed with state & local government securities to
7/1/06 Call @ 102):
1,035,000 AAA Pre-Refunded, 8.100% due 7/1/18 ......................... 1,259,015
420,000 AAA Un-Refunded, 8.100% due 7/1/18 .......................... 488,813
2,000,000 BBB- Ohio State Air Quality Development Authority, Revenue
Refunding, Cleveland Pollution Control, Series A,
6.000% due 12/1/13 ........................................ 2,025,780
1,250,000 NR Ohio State Solid Waste Revenue, Republic Engineered
Steels Inc., 9.000% due 6/1/21 (b)(c) ..................... 15,625
------------
5,422,703
------------
Oklahoma -- 0.9%
2,000,000 B2* Oklahoma Development Finance Authority Revenue, Hillcrest
Healthcare System, Series A, 5.625% due 8/15/29 ........... 1,477,460
------------
Pennsylvania -- 13.2%
2,200,000 CCC+ Allegheny County, PA IDA, Airport Special Facilities
Revenue, (USAir Inc. Project), Series B, 8.500%
due 3/1/21 (b) ............................................ 1,199,176
Beaver County, PA IDA, PCR:
1,500,000 BBB Cleveland Electric Illuminating Co. Project,
7.625% due 5/1/25 ....................................... 1,613,640
2,000,000 BBB Toledo Edison Co. Project, 7.625% due 5/1/20 .............. 2,151,520
3,000,000 NR Dauphin County, PA General Authority Revenue, Hotel &
Conference Center-Hyatt Regency, 6.200% due 1/1/29 ........ 2,669,970
See Notes to Financial Statements.
11
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================
Pennsylvania -- 13.2% (continued)
$ 1,400,000 A-1+ Geisinger Authority, PA, Health System Revenue,
1.100% due 8/1/28 (e) ..................................... $ 1,400,000
2,500,000 A3* Luzerne County, PA IDA, Exempt Facilities Revenue,
(Pennsylvania Gas & Water Co. Project), Series B,
7.125% due 12/1/22 (b) .................................... 2,572,575
2,640,000 NR Montgomery County, PA Higher Education & Health
Authority Revenue, Temple Continuing Care Center,
6.625% due 7/1/19 ......................................... 2,406,360
135,000 NR Northumberland County, PA IDA, IDR, (Beverly Enterprises
Inc. Project), 6.875% due 2/1/03 .......................... 136,374
1,000,000 NR Philadelphia, PA Authority for IDR, (Host Marriott L.P.
Project), Remarketed 10/31/95, 7.750% due 12/1/17 ......... 1,040,130
Scranton-Lackawanna, PA Health & Welfare Authority Revenue:
500,000 BB+++ Allied Services Rehab Hospitals Project, Series A,
7.600% due 7/15/20 ...................................... 506,050
Moses Taylor Hospital Project:
1,240,000 BBB- 6.150% due 7/1/14 ....................................... 1,141,618
3,050,000 BBB- 6.250% due 7/1/20 ....................................... 2,666,585
1,500,000 NR Waterlefe Community Development District, FL Golf Course
Revenue, 8.125% due 10/1/25 ............................... 1,530,180
2,000,000 NR Westmoreland County, PA IDA, Healthcare Facilities,
Redstone Highlands Health, Series B, 8.125% due 11/15/30 .. 2,090,340
------------
23,124,518
------------
South Carolina -- 3.4%
Connector 2000 Association Inc., SC Toll Road Revenue:
Capital Appreciation, Series B:
3,100,000 BBB- Zero coupon bond to yield 9.124% due 1/1/27 ............. 346,766
7,750,000 BBB- Zero coupon bond to yield 10.659% due 1/1/34 ............ 462,520
2,000,000 BBB- Southern Connector Project, Series A, 5.375% due 1/1/38 ... 1,396,500
435,000 NR Florence County, SC IDR, Stone Container Corp.,
7.375% due 2/1/07 ......................................... 441,073
595,000 NR McCormick County, SC COP, 9.750% due 7/1/09 ................. 598,796
2,650,000 NR Tobacco Settlement Revenue Management Authority, SC,
Variable Rate INFLOS, 10.293% due 5/15/28 (d) ............. 2,637,386
------------
5,883,041
------------
South Dakota -- 0.9%
1,575,000 NR Oglala Sioux Tribe, SD Pine Ridge County, Revenue Bonds,
7.500% due 7/1/13 ......................................... 1,580,749
------------
Tennessee -- 1.1%
1,915,000 NR Shelby County, TN Health, Educational & Housing Facilities
Board Revenue, MFH, (Hedgerow Apartments Project),
6.875% due 7/1/36 ......................................... 1,850,330
------------
See Notes to Financial Statements.
12
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================
Texas -- 7.4%
Bexar County, TX Housing Financial Corp, MFH:
$ 1,000,000 NR Continental Lady Ester, Series A, 6.875% due 6/1/29 ....... $ 968,400
1,185,000 Baa3* Nob Hill Apartments, Series B, 8.500% due 6/1/31 .......... 1,180,947
250,000 Baa3* Waters at Northern Hills, Series C, 7.750% due 8/1/36 ..... 247,337
2,000,000 Ba2* El Paso, TX International Airport Revenue, Special
Facilities, (Marriott Corp. Project), 7.750% due 3/1/12 ... 2,033,960
2,750,000 B+ Houston, TX Airport Systems Revenue, Special Facilities,
Continental Airlines Inc., Series C, 6.125%
due 7/15/27 (b) ......................................... 2,100,670
Houston, TX Hotel Occupancy, Tax & Special Revenue,
Capital Appreciation, Series B, AMBAC-Insured:
3,000,000 AAA Zero coupon bond to yield 5.515% due 9/1/32 ............. 555,090
1,000,000 AAA Zero coupon bond to yield 5.516% due 9/1/33 ............. 174,940
2,710,000 AAA Houston, TX Water and Sewer System Revenue, Capital
Appreciation, Jr. Lien, Series A, zero coupon bond to
yield 5.560% due 12/1/23 .................................. 839,910
1,000,000 CCC++ Northgate Crossing, TX, Municipal Utility, District
No. 1, GO, 8.875% due 12/1/13 ............................. 1,037,770
1,405,000 BBB- Sam Rayburn, TX Municipal Power Agency, Series A,
6.750% due 10/1/14 ........................................ 1,444,747
995,000 Baa3* Texas State Affordable Housing Corp. MFH Revenue,
HIC Arborstone/Baybrook, Series C, 7.250% due 11/1/31 ..... 958,464
1,405,000 A3* Travis County, TX Housing Finance Authority, MFH Revenue,
(Lakeview Apartments Project), Series A,
6.375% due 1/1/34 ......................................... 1,416,788
------------
12,959,023
------------
Utah -- 1.8%
1,615,000 NR Hurricane, UT Health Facilities Development Revenue,
(Mission Health Services Project), 10.500% due 7/1/20 ..... 1,130,500
2,000,000 NR Utah State HFA Revenue, (RHA Community Services
of Utah Inc. Project), Series A, 6.875% due 7/1/27 ........ 1,963,620
------------
3,094,120
------------
Virginia -- 1.8%
590,000 NR Alexandria, VA Redevelopment & Housing Authority,
MFH Revenue, (Parkwood Court Apartments Project)
Series C, 8.125% due 4/1/30 ............................... 606,549
1,000,000 NR Fairfax County, VA EDA Revenue, Retirement Community,
Greenspring Village Inc., Series A, 7.500% due 10/1/29 .... 1,090,660
23,400,000 BBB- Pocahontas Parkway Association, VA Toll Road Revenue,
Capital Appreciation, Series B, zero coupon
bond to yield 8.822% due 8/15/34 .......................... 1,469,988
------------
3,167,197
------------
See Notes to Financial Statements.
13
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
July 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================
West Virginia -- 0.6%
$ 1,000,000 NR West Virginia EDA, Commercial Development Revenue,
(Stonewall Jackson Project), Series B, 8.000% due 4/1/30 .. $ 983,550
------------
Wisconsin -- 2.9%
Badger Tobacco Asset Securitization Corp., WI:
2,000,000 A1* Asset-Backed Bonds, 6.375% due 6/1/32. .................... 1,961,860
2,000,000 NR Rite-PA 1046, Variable Rate INFLOS, 9.523%
due 12/1/06 (d) ......................................... 1,932,280
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 ............ 1,150,500
------------
5,044,640
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $188,062,834**) .................................... $174,608,231
============
----------
(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
and those which are identified by a double dagger (++), are rated by Fitch
IBCA, Duff & Phelps.
(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) Inverse floating rate security-coupon varies inversely with level of
short-term tax exempt interest rates.
(e) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
** 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
[CLIP ART] Municipal High Income Fund Inc.
Summary of Municipal Bonds by Combined Ratings
July 31, 2002 (unaudited)
================================================================================
--------------------------------------------------------------------------------
Standard & Percent of
Moody's and/or Poor's Total Investments
--------------------------------------------------------------------------------
Aaa AAA 6.1%
Aa AA 1.3
A A 4.1
Baa BBB 16.8*
Ba BB 5.4**
B B 5.6
Caa CCC 1.8***
VMIG1 A-1 0.8
NR NR 58.1
-----
100.0%
=====
* 0.7% was rated by Fitch IBCA, Duff &Phelps.
** 0.5% was rated by Fitch IBCA, Duff &Phelps.
*** 0.3% was rated by Fitch IBCA, Duff & Phelps.
15
[CLIP ART] 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", "B", "CCC" and "CC" 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 ("Moody's") -- Numerical modifiers 1, 2 and 3 may be
applied to each generic rating from "Aa" to "Ca," 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
[CLIP ART] Municipal High Income Fund Inc.
Bond Ratings (unaudited) (continued)
Baa -- Bonds rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate thereby
not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over many long period
of time may be small.
Caa -- Bonds that are rated "Caa" are of poor standing. These issues may
be in default, or there may be present elements of danger with
respect to principal or interest.
Ca -- Bonds rated "Ca" represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
Fitch IBCA, Duff & Phelps ("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.
BB -- Bonds rated BB by Fitch carry the possibility of credit risk
developing, particularly as the result of adverse economic change
over time. Business or financial alternatives may, however, be
available to allow financial commitments to be met. Securities
rated in this category are not considered by Fitch to be
investment grade.
CCC, -- Default on bonds rated "CCC", "CC" and "C" by Fitch is a real
CC and 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.
VMIG 1 -- Moody's highest rating for issues having a demand feature -- VRDO.
17
[CLIP ART] Municipal High Income Fund Inc.
Security Descriptions (unaudited)
================================================================================
ABAG -- Association of Bay Area Governments
AIG -- American International Guaranty
AMBAC -- American Municipal Bond
Assurance Corporation
BAN -- Bond Anticipation Notes
BIG -- Bond Investors Guaranty
CGIC -- Capital Guaranty Insurance Company
CHFCLI -- California Health Facility
Construction Loan Insurance
CONNIE -- College Construction Loan
LEE 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/Agency
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
MFH -- Multi-Family Housing
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
[CLIP ART] Municipal High Income Fund Inc.
Statement of Assets and Liabilities (unaudited)
July 31, 2002
================================================================================
ASSETS:
Investments, at value (Cost -- $188,062,834) .............. $ 174,608,231
Interest receivable ....................................... 2,644,089
Receivable for securities sold ............................ 1,877,647
-------------
Total Assets .............................................. 179,129,967
-------------
LIABILITIES:
Payable for securities purchased .......................... 2,002,868
Payable to bank ........................................... 703,640
Dividends payable ......................................... 159,111
Investment advisory fee payable ........................... 67,226
Administration fee payable ................................ 33,352
Accrued expenses .......................................... 101,052
-------------
Total Liabilities ......................................... 3,067,249
-------------
Total Net Assets ............................................. $ 176,062,718
=============
NET ASSETS:
Par value of capital shares ............................... $ 208,582
Capital paid in excess of par value ....................... 193,377,737
Undistributed net investment income ....................... 486,911
Accumulated net realized loss from security transactions .. (4,555,909)
Net unrealized depreciation of investments ................ (13,454,603)
-------------
Total Net Assets ............................................. $ 176,062,718
=============
Shares Outstanding ........................................... 20,858,205
-------------
Net Asset Value .............................................. $ 8.44
-------------
See Notes to Financial Statements.
19
[CLIP ART] Municipal High Income Fund Inc.
Statement of Operations (unaudited)
For the Nine Months Ended July 31, 2002
================================================================================
INVESTMENT INCOME:
Interest ................................................. $ 10,105,551
------------
EXPENSES:
Investment advisory fee (Note 3) ......................... 525,237
Administration fee (Note 3) .............................. 262,618
Shareholder communications ............................... 136,773
Audit and legal .......................................... 37,947
Shareholder and system servicing fees .................... 35,570
Directors' fees .......................................... 26,754
Pricing service fees ..................................... 12,285
Custody .................................................. 6,552
Other .................................................... 6,741
------------
Total Expenses ........................................... 1,050,477
------------
Net Investment Income ....................................... 9,055,074
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 4):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales ................................... 49,204,453
Cost of securities sold ............................... 49,420,725
------------
Net Realized Loss ........................................ (216,272)
------------
Increase in Net Unrealized Depreciation (Note 1) ......... (4,593,177)
------------
Net Loss on Investments ..................................... (4,809,449)
------------
Increase in Net Assets From Operations ...................... $ 4,245,625
============
See Notes to Financial Statements.
20
[CLIP ART] Municipal High Income Fund Inc.
Statements of Changes in Net Assets
For the Nine Months Ended July 31, 2002 (unaudited)
and the Year Ended October 31, 2001
================================================================================
2002 2001
---- ----
Operations:
Net investment income ............................ $ 9,055,074 $ 12,153,225
Net realized loss ................................ (216,272) (733,106)
Increase in net unrealized depreciation .......... (4,593,177) (3,386,185)
------------- -------------
Increase in Net Assets
From Operations ................................ 4,245,625 8,033,934
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
Net investment income ............................ (8,991,607) (11,958,713)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders .................. (8,991,607) (11,958,713)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net asset value of shares issued for
reinvestment of dividends ...................... 1,241,152 2,166,492
------------- -------------
Increase in Net Assets From
Fund Share Transactions ........................ 1,241,152 2,166,492
------------- -------------
Decrease in Net Assets .............................. (3,504,830) (1,758,287)
NET ASSETS:
Beginning of period .............................. 179,567,548 181,325,835
------------- -------------
End of period* ................................... $ 176,062,718 $ 179,567,548
============= =============
* Includes undistributed net investment income of ... $ 486,911 $ 298,182
============= =============
See Notes to Financial Statements.
21
[CLIP ART] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited)
================================================================================
1. Significant Accounting Policies
Municipal High Income Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities are
valued at the mean between the bid and asked prices provided by an independent
pricing service. 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 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 accounting
principles generally accepted in the United States of America; 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 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. The
revised Guide requires the Fund to amortize premium and accrete all discounts on
all fixed-income securities. The Fund adopted this requirement November 1, 2001.
This change does not affect the Fund's net asset value, but does change the
classification of certain amounts in the statement of operations. For the nine
months ended July 31, 2002, interest income increased by $56,335, net realized
loss increased by $6,257 and the change in net unrealized depreciation of
investments increased by $50,078. In addition, the Fund recorded adjustments to
increase the cost of securities and increase undistributed net investment income
by $125,262 to reflect the cumulative effect of this change up to the date of
the adoption.
22
[CLIP ART] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited) (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
Smith Barney Fund Management LLC ("SBFM"), a subsidiary of Salomon Smith
Barney Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc.
("Citigroup"), acts as investment adviser to the Fund. The Fund pays SBFM an
advisory fee calculated at an annual rate of 0.40% of the average daily net
assets. SBFM 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 two Directors of the Fund are employees of Citigroup or
its affiliates.
4. Investments
During the nine months ended July 31, 2002, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
Purchases .......................................... $50,117,112
===========
Sales .............................................. $49,204,453
===========
At July 31, 2002, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
Gross unrealized appreciation .......................... $ 4,708,071
Gross unrealized depreciation .......................... (18,162,674)
------------
Net unrealized depreciation ............................ $(13,454,603)
============
23
[CLIP ART] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited) (continued)
================================================================================
5. Capital Loss Carryforwards
At October 31, 2001, the Fund had, for Federal income tax purposes,
approximately $4,340,000 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 2007 2008 2009
---------- -------- -------- -------- -------- -------- --------
Carryforward amounts ......... $1,198,000 $270,000 $205,000 $400,000 $786,000 $748,000 $733,000
6. Capital Shares
At July 31, 2002, the Fund had 500,000,000 shares of capital stock
authorized with a par value of $0.01 per share. Capital stock transactions were
as follows:
Nine Months Ended Year Ended
July 31, 2002 October 31, 2001
--------------------- ---------------------
Shares Amount Shares Amount
-------- ---------- -------- ----------
Shares issued on reinvestment ..... 150,097 $1,241,152 235,025 $2,166,492
======== ========== ======== ==========
24
[CLIP ART] Municipal High Income Fund Inc.
Financial Highlights
================================================================================
For a share of capital stock outstanding throughout each year ended October 31,
unless otherwise noted:
2002(1) 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------- --------
Net Asset Value,
Beginning of Period .......... $ 8.67 $ 8.86 $ 9.00 $ 9.77 $ 9.76 $ 9.53
-------- -------- -------- -------- -------- --------
Income (Loss) From
Operations:
Net investment income(2) ..... 0.44 0.59 0.60 0.58 0.60 0.61
Net realized and unrealized
gain (loss)(2) ............. (0.24) (0.20) (0.16) (0.76) 0.03 0.24
-------- -------- -------- -------- -------- --------
Total Income (Loss) From
Operations ................... 0.20 0.39 0.44 (0.18) 0.63 0.85
-------- -------- -------- -------- -------- --------
Less Distributions From:
Net investment income ........ (0.43) (0.58) (0.58) (0.59) (0.61) (0.62)
In excess of net investment
income ..................... -- -- -- -- (0.01) --
Total Distributions ............ (0.43) (0.58) (0.58) (0.59) (0.62) (0.62)
-------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period ................ $ 8.44 $ 8.67 $ 8.86 $ 9.00 $ 9.77 $ 9.76
======== ======== ======== ======== ======== ========
Total Return, Based on
Market Value ................. (0.47)%++ 13.85% 9.39% (15.76)% 9.34% 17.22%
======== ======== ======== ======== ======== ========
Total Return, Based on
Net Asset Value .............. 2.59%++ 4.77% 5.97% (1.79)% 6.75% 9.41%
======== ======== ======== ======== ======== ========
Net Assets,
End of Period (000s) ......... $176,063 $179,568 $181,326 $184,085 $197,944 $194,133
======== ======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses ..................... 0.80%+ 0.82% 0.71% 0.73% 0.74% 0.74%
Net investment income(2) ..... 6.89+ 6.74 6.72 6.08 6.07 6.38
Portfolio Turnover Rate ........ 29% 15% 27% 27% 57% 35%
Market Value,
End of Period ................ $ 8.160 $ 8.640 $ 8.125 $ 8.000 $ 10.125 $ 9.875
(1) For the nine months ended July 31, 2002 (unaudited).
(2) Without the adoption of the change in the accounting method discussed in
Note 1 to the financial statements, for the nine months ended July 31,
2002, those amounts would have been $0.43, $0.23 and 6.85% for net
investment income, net realized and unrealized loss and the annualized
ratio of net investment income to average net assets, respectively. Per
share, ratios and supplemental data for the periods prior to November 1,
2001 have not been restated to reflect this change in presentation.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
25
[CLIP ART] Municipal High Income Fund Inc.
Financial Data Per Share of Common Stock (unaudited)
================================================================================
Dividend
Record Payable NYSE Net Asset Dividend Reinvestment
Date Date Closing Price* Value* Paid Price
------ ------- ------------- ------ -------- -------
11/22/99 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
11/20/00 11/24/00 8.060 8.25 0.0485 7.96
12/26/00 12/29/00 8.0625 8.81 0.0485 8.49
1/23/01 1/26/01 8.8125 8.79 0.0485 8.61
2/20/01 2/23/01 8.740 8.77 0.0485 8.60
3/27/01 3/30/01 8.380 8.77 0.0485 8.57
4/24/01 4/27/01 8.680 8.67 0.0485 8.50
5/22/01 5/25/01 8.620 8.69 0.0485 8.52
6/26/01 6/29/01 8.630 8.71 0.0485 8.54
7/24/01 7/27/01 8.570 8.75 0.0485 8.57
8/28/01 8/31/01 8.890 8.83 0.0485 8.65
9/25/01 9/28/01 8.300 8.71 0.0485 8.54
10/23/01 10/26/01 8.630 8.70 0.0485 8.53
11/27/01 11/30/01 8.500 8.59 0.0485 8.42
12/24/01 12/28/01 7.890 8.42 0.0485 8.16
1/22/02 1/25/02 8.300 8.45 0.0485 8.28
2/19/02 2/22/02 8.350 8.40 0.0485 8.23
3/19/02 3/22/02 8.160 8.34 0.0485 8.11
4/23/02 4/26/02 8.070 8.36 0.0485 8.18
5/28/02 5/31/02 8.120 8.36 0.0485 8.19
6/25/02 6/28/02 8.160 8.43 0.0465 8.25
7/23/02 7/26/02 8.070 8.46 0.0465 8.22
----------
* As of record date.
26
[CLIP ART] Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited)
================================================================================
The Fund's policy, which may be changed by the Fund's Board of Directors,
is generally to make monthly distributions of substantially all its net
investment income (i.e., income other than net realized capital gains) to the
holders of the Fund's common stock. From time to time, when the Fund makes a
substantial capital gains distribution, it may do so in lieu of paying its
regular monthly dividend, net income of the Fund consists of all interest income
accrued on portfolio assets less all expenses of the Fund. Expenses of the Fund
are accrued each day. Net realized capital gains, if any, will be distributed to
the shareholders at least once a year.
Under the Fund's Dividend Reinvestment Plan ("Plan"), a shareholder whose
common stock is registered in his or her own name will have all distributions
reinvested automatically by 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
27
[CLIP ART] 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 in uncertificated form in the name of the Plan participant.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. 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 July 31,
2002, the Fund has not repurchased any shares.
27
[CLIP ART] Municipal High Income Fund Inc.
Management of the Fund
================================================================================
Directors
Allan J. Bloostein
Dwight B. Crane
Paolo M. Cucchi
Robert A. Frankel
R. Jay Gerken
Paul Hardin
William R. Hutchinson
Heath B. McLendon, Chairman
George M. Pavia
Charles F. Barber, Emeritus
Officers
Heath B. McLendon
President and
Chief Executive Officer
R. Jay Gerken
Executive Vice President
Lewis E. Daidone
Senior Vice President and
Chief Administrative Officer
Richard L. Peteka
Chief Financial Officer
and Treasurer
Peter M. Coffey
Vice President and
Investment Officer
Michael J. Maher
Investment Officer
Kaprel Ozsolak
Controller
Christina T. Sydor
Secretary
Investment Adviser and Administrator
Smith Barney Fund Management LLC
333 West 34th Street
New York, New York 10001
Transfer Agent
PFPC Global Fund Services
P.O. Box 8030
Boston, Massachusetts 02266-8030
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
[CLIP ART]
This report is intended only for shareholders of Municipal High Income Fund Inc.
It is not a Prospectus, circular or representation intended for use in the
purchase or sale of shares of the Fund or of any securities mentioned in this
report.
Municipal High Income Fund Inc.
125 Broad Street
10th Floor, MF-2
New York, NY 10004
FD01013 9/02 02-3772