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[CLIP ART] [CLIP ART]
Municipal
High Income
Fund Inc.
Quarterly
Report
[CLIP ART]
January 31,
2003
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Municipal High Income Fund Inc.
================================================================================
LETTER FROM THE CHAIRMAN
[PHOTO OMITTED]
R. JAY GERKEN
Chairman, President
and Chief Executive Officer
Dear Shareholder,
We are pleased to provide you with this quarterly report for the Municipal
High Income Fund Inc. ("Fund") for the three months ended January 31, 2003. In
this report, the Fund's Manager summarizes the factors that affected the Fund's
performance during the period, including the period's prevailing economic and
market conditions.
As portfolio manager Peter Coffey explains in his commentary, mounting
concerns regarding tensions in Iraq in the midst of lackluster economic results
exerted pressure on the municipal high-yield market over the period, as
investors gravitated toward higher-rated bond issues. In his commentary, Peter
explains some of the key sectors where the Fund maintained exposure, his
strategy for helping to reduce volatility, and his outlook for the economy.
Going forward, Peter believes that as the economy improves and the credit
profiles of municipal bond issuers strengthens, the prospects for the high-yield
municipal bond market will likewise prove more favorable. However, Peter
emphasizes that the Fund's performance will be predicated upon the results of
specific securities selection, which is why we believe professional portfolio
management is so important, particularly in this arena.
A detailed summary of the Fund's performance can be found in the
appropriate sections that follow. I hope you find this report to be useful and
informative and I look forward to bringing you future reports on the Fund's
progress.
Sincerely,
/s/ R. Jay Gerken
R. Jay Gerken
Chairman, President and
Chief Executive Officer
February 20, 2003
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Municipal High Income Fund Inc.
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MANAGER OVERVIEW
[PHOTO OMITTED]
PETER M. COFFEY
Vice President and
Investment Officer
Performance Review(1)
During the three months ended January 31, 2003, the Fund distributed
income dividends to shareholders totaling $0.14 per share. The table below shows
the annualized distribution yield and three-month total return based on the
Fund's January 31, 2003 net asset value ("NAV") per share and its New York Stock
Exchange ("NYSE") closing price.(2)
Based on NAV, the Fund underperformed its benchmark Lipper peer group of
closed-end high-yield municipal debt funds, which returned 1.27% for the same
period.(3)
Total Return for
Price Annualized the Three-Month
Per Share Distribution Yield(4) Period(4)
---------- --------------------- ----------------
$8.02 (NAV) 6.96% 0.14%
$7.54 (NYSE) 7.40% 0.03%
----------
(1) Past performance is not indicative of future results.
(2) 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 result (total net assets) by the total number of the common shares
outstanding. The NAV fluctuates with changes in the market prices of
securities in which the Fund has invested. However, the price at which an
investor may buy or sell shares of the Fund is at the Fund's market price
as determined by supply of and demand for the Fund's common shares.
(3) Lipper is a major independent mutual fund tracking organization. Average
annual returns are based on the three-month period ended January 31, 2003,
calculated among 12 funds in the closed-end high-yield municipal debt
funds category with reinvestment of dividends and capital gains excluding
sales charges.
(4) 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 yield 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 yield assumes a current monthly income
dividend rate of $0.0465 for twelve months. This rate is as of January 31,
2003 and is subject to change. The important difference between a total
return and an annualized distribution yield 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 yield 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.
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Factors Influencing Performance
When the period began in November, the weak economic climate resulted in
lower tax receipts for many municipalities. These concerns also exerted pressure
on the high-yield municipal bond market. As the period advanced, record supplies
of new municipal bonds came to market as municipalities took advantage of the
historically low interest rate environment by issuing new debt as lower, more
cost-effective rates. While this was good news for municipalities' balance
sheets, the hefty supply of new issues being absorbed into the market weighed on
municipal bond prices.
In terms of sectors, the market for special airport facilities bonds
issued by airlines continued to experience pressures and remained under severe
pressure as United Airlines followed US Airways Group in filing for bankruptcy
protection. Furthermore, as other major airlines continued to report mounting
losses attributable to a significant drop in air travel and extraordinary
security costs, concerns surfaced that other airlines, particularly American
Airlines, might also be forced into bankruptcy. The outlook for airlines will be
challenging as they take draconian cost-cutting measures in an attempt to stay
out of bankruptcy court.
Other market sectors that came under pressure in the weak economic
environment including industrial development, life care retirement communities
and toll roads. These sectors have experienced higher incidents of severe
deterioration in credit quality or default on bond payments, which, as a result,
caused bond prices to drop considerably in these sectors. On a positive note,
the Fund benefited from its exposure to municipal bonds in the hospital sector,
which generated favorable results.
Fed Rate Reduction
On November 6th, the Federal Reserve ("Fed")(i) cut short-term interest
rates to stimulate economic activity. (When rates drop consumers tend to borrow
and subsequently spend more). Prior to this rate reduction, bond prices advanced
somewhat under the assumption that in a lower rate environment, new bonds would
be issued at lower yields, making the older higher-yielding bonds worth more in
the market. (Conversely, bond prices tend to drop when rates are expected to
rise). This caused worries that the Fed may be concerned about something more
than the "soft spot" in the economy and possible conflicts with Iraq that it
cited in its post-meeting statement. That month, the high-yield market
significantly improved and continued to perform better through the end of the
reporting period. During its more recent two-day meeting held on January 28 and
29, 2003, however, the Fed opted not to reduce its rate target. It stated at
this time that rising oil prices and geopolitical risks had restrained spending
and hiring by businesses, noting "as those risks lift, as most analysts expect,
the accommodative stance of monetary policy, coupled with ongoing growth in
productivity, will provide support to an improving economic climate over time."
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To help reduce market volatility, the Fund maintained a short position in
U.S. Treasury note futures as a hedge against the possibility of rising interest
rates in an improving economy. Our goal was to use futures to help offset a
portion of the increased market sensitivity of the Fund in a low-rate
environment. Going forward, we plan to continue to use futures when we deem it
to be appropriate as we keep a close eye on the global economy and the financial
markets.
The Fiscal Factor
We believe states' biggest challenge in fiscal year 2003 will be to adjust
spending in order to continue to balance their budgets. Although many
municipalities have been faced with budgetary challenges in the face of
decreased tax receipts, when choosing municipal bond investment candidates in
the Fund, we focus on searching for bonds issued by municipalities that we feel
are prudently balancing their budgets for the longer haul--those governments
that are reducing their expenses to meet their revenue streams rather than those
that are merely issuing additional debt.
Looking ahead, we expect economic growth to remain sluggish over at least
the next few months. Given the mounting concerns about tensions in Iraq and the
potential consequences of war upon inflation and the economy, we think the Fed
is likely to continue holding short-term interest rates at current low levels
until there is solid evidence the economy is on sound footing for sustainable
growth.
We believe that fiscal policies, such as taxation measures implemented by
Congress and the Bush Administration, will play a more significant role in the
future direction of the economy. Looking toward the later part of this year, we
believe that the combination of measures taken by the Fed and Capitol Hill will
contribute toward an improved economic environment. This may lead toward higher
interest rates, which would exert some pressure on bond prices. While this would
also influence the performance of high-yield bonds, the high-yield market is
more dependent on the actual perceived ability of issuers to service their debt.
A stronger economy should improve revenue streams and alleviate credit-quality
concerns. In such an environment, investors may demand less of a yield premium
on lower-quality issues relative to higher-rated issues, which could improve
relative performance of such issues.
Market Outlook Ahead
Given the supply pressures in the municipal markets, municipal securities
have not appreciated as much as taxable high-yield corporate debt issues have.
Furthermore, the consensus view that while the volume of new municipal bond
issues projected to come to market this year is likely to be strong, it should
be less than last year's record volume. Therefore, based upon current levels, we
believe that municipal bonds are favorably priced relative to their taxable
counterparts and may prove to be more resilient than taxable issues
(particularly higher-grade issues in terms of interest rate risk) in a rising
rate environment. Unlike taxable corporate bonds, interest on municipal bonds is
not taxable at the federal level. We believe this added potential tax
savings(ii) makes municipal bond investing an even more compelling alternative
to Treasuries at this time.
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While we feel an improving economy should provide a better operating
environment for high-yield issuers, security selection will continue to be the
key factor in determining the Fund's performance. With this in mind, we intend
to increase our efforts to exercise care in credit selection. We believe that
the high-yield municipal market can continue to provide after tax income streams
well above other market alternatives.
Looking for Additional Information?
The Municipal High Income Fund Inc. is traded under the symbol "MHF."
Daily closing prices are available online under symbol XMHFX and in most
newspapers under the New York Stock Exchange listings. Barron's and The Wall
Street Journal's Monday editions carry closed-end fund tables that provide
weekly net asset value per share information. In addition, the Fund issues a
quarterly allocation press release that can be found on most major financial web
sites.
Thank you for your investment in the Municipal High Income Fund Inc. We
look forward to continuing to help you meet your investment objectives.
Sincerely,
/s/ Peter M. Coffey
Peter M. Coffey
Vice President and
Investment Officer
February 20, 2003
The information provided in this letter by the Manager is not intended to be a
forecast of future events, a guarantee of future results or investment advice.
Views expressed may differ from those of the firm as a whole. Portfolio holdings
and breakdowns are as of January 31, 2003 and are subject to change. Please
refer to pages 7 through 15 for a list and percentage breakdown of the Fund's
holdings.
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(i) The Fed is 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.
(ii) Please note a portion of the Fund's income may be subject to the
Alternative Minimum Tax ("AMT"). State and local incomes taxes may apply.
Capital gains, if any, are fully taxable. Please consult your personal tax
adviser.
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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 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, 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 1 (800) 331-1710.
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[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited)
January 31, 2003
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FACE
AMOUNT RATING(a) SECURITY VALUE
===================================================================================================================
Alabama -- 3.7%
$ 4,000,000 BB+ Butler, AL IDB, Solid Waste Disposal Revenue, (James River
Corp. Project), 8.000% due 9/1/28 (b) ............................. $ 3,576,520
615,000 NR Capstone Improvement District of Brookwood, AL Series A,
7.700% due 8/15/23 ................................................ 295,200
1,000,000 CCC Mobile, AL IDB, Solid Waste Disposal Revenue, (Mobile
Energy Services Co. Project), 6.950% due 1/1/20 (c) ............... 8,000
1,000,000 NR Rainbow City, AL Special Health Care Facility Financing
Authority, Series A, 8.250% due 1/1/31 ............................ 1,026,380
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 ................................................ 1,232,360
------------
6,138,460
------------
Alaska -- 0.7%
1,055,000 NR Alaska Industrial Development & Export Authority Revenue,
Williams Lynxs Alaska Cargoport, 8.125% due 5/1/31 (b) ............ 1,094,552
------------
Arizona -- 3.2%
1,500,000 NR Casa Grande, AZ IDA Hospital Revenue, Casa Grande Regional
Medical Center, Series A, 7.625% due 12/1/29 ...................... 1,528,485
1,750,000 Ca* Gila County, AZ IDA Revenue, ASARCO Inc.,
5.550% due 1/1/27 ................................................. 385,000
Maricopa, AZ IDA, MFH Revenue:
490,000 NR Avalon Apartments Project, Series C, 10.000% due 4/1/30 ........... 483,743
962,000 NR Gran Victoria Housing LLC Project, Series B,
10.000% due 5/1/31 (d) .......................................... 983,289
1,820,000 A3* Phoenix, AZ IDA, MFH Revenue, (Ventana Palms
Apartments Project), Series B, 8.000% due 10/1/34 ................. 1,840,020
------------
5,220,537
------------
Arkansas -- 0.4%
600,000 BBB-++ Arkansas State Development Finance Authority Industrial
Facilities Revenue, (Potlatch Corp. Projects), Series A,
7.750% due 8/1/25 (b) ............................................. 596,832
------------
California -- 2.1%
1,500,000 NR Barona, CA Band of Mission Indians, GO,
8.250% due 1/1/20 (d) ............................................. 1,603,680
1,865,000 Ba3* Vallejo, CA COP, Touro University, 7.375% due 6/1/29 ................ 1,915,485
------------
3,519,165
------------
Colorado -- 0.6%
999,000 NR Highline Business Improvement District, Littleton, CO GO,
Series B, 8.750% due 12/15/19 ..................................... 993,775
------------
See Notes to Financial Statements.
7
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
January 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===================================================================================================================
Connecticut -- 2.0%
Connecticut State Development Authority:
$ 1,735,000 NR Aquarium Project Revenue, (Mystic Marinelife Aquarium
Project), Series A, 7.000% due 12/1/27 .......................... $ 1,769,926
1,435,000 NR Health Care Revenue, (Independent Living Project), Series B,
(Pre-Refunded -- Escrowed with state & local government
securities to 7/1/03 Call @ 102), 8.000% due 7/1/17 ............... 1,501,541
------------
3,271,467
------------
Delaware -- 0.5%
1,000,000 NR Sussex County, DE Assisted Living Facilities Revenue,
(Heritage at Milford Project), 7.250% due 7/1/29 .................. 882,380
------------
District of Columbia -- 0.6%
1,000,000 A1* District of Columbia, Tobacco Settlement Financing Corp.,
Asset-Backed Bonds, 6.750% due 5/15/40 ............................ 977,500
------------
Florida -- 9.0%
Capital Projects Finance Authority, FL:
2,000,000 NR Continuing Care Retirement, Glenridge on Palmer Ranch,
Series A, 8.000% due 6/1/32 (d) ................................. 1,931,880
2,000,000 NR Student Housing Revenue, Florida University, Series A,
7.850% due 8/15/31 (d) .......................................... 2,038,620
1,000,000 NR Century Parc Community Development District, FL Special
Assessment, 7.000% due 11/1/31 (d) ................................ 1,019,280
2,750,000 NR Hillsborough County, FL IDA Revenue, (Lakeshore Villas
Project), Series A, 6.750% due 7/1/29 ............................. 2,222,165
875,000 NR Homestead, FL IDR, Community Rehabilitation Providers
Program, Series A, 7.950% due 11/1/18 ............................. 901,994
2,000,000 BBB++ Martin County, FL IDA, IDR, (Indiantown Cogeneration
Project), Series A, 7.875% due 12/15/25 (b)(d) .................... 2,083,100
1,000,000 NR Orange County, FL Health Facilities Authority Revenue,
First Mortgage, (GF/Orlando, Inc. Project),
9.000% due 7/1/31 ................................................. 1,027,690
2,000,000 NR Reunion East Community Development District, FL Special
Assessment, Series A, 7.375% due 5/1/33 ........................... 2,026,160
1,500,000 NR Waterlefe Community Development District, FL Golf Course
Revenue, 8.125% due 10/1/25 ....................................... 1,536,240
------------
14,787,129
------------
Georgia -- 4.7%
1,000,000 AAA Atlanta, GA Airport Revenue, Series B, FGIC-Insured,
5.625% due 1/1/30 (b) ............................................. 1,041,390
2,500,000 NR Atlanta, GA Tax Allocation, (Atlantic Station Project),
7.900% due 12/1/24 (d) ............................................ 2,515,300
1,000,000 NR Atlanta, GA Urban Residential Finance Authority, MFH Revenue,
Park Place Apartments, Series A, 6.750% due 3/1/31 ................ 946,120
See Notes to Financial Statements.
8
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
January 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===================================================================================================================
Georgia -- 4.7% (continued)
$ 500,000 NR Fulton County, GA Residential Care Facilities, Sr. Lien,
Series A, 7.000% due 7/1/29 ....................................... $ 421,505
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 ............................................... 1,019,320
1,435,000 NR Savannah, GA EDA Revenue, Marshview Inn, Series A,
7.125% due 7/1/29 ................................................. 789,250
1,000,000 NR Walton County, GA IDA, IDR, (Walton Manufacturing Co.
Project), 8.500% due 9/1/07 ....................................... 901,150
------------
7,634,035
------------
Illinois -- 1.3%
2,000,000 AAA Chicago, IL GO, Neighborhoods Alive 21 Program,
FGIC-Insured, 5.500% due 1/1/31 ................................... 2,088,420
------------
Indiana -- 1.7%
2,500,000 B- East Chicago, IN PCR, (Inland Steel Co. Project No. 10),
6.800% due 6/1/13 ................................................. 1,575,000
1,000,000 CCC Indiana State Development Finance Authority, PCR, (Inland
Steel Co. Project No. 13), 7.250% due 11/1/11 (b) ................. 325,000
975,000 NR Indianapolis, IN MFH Revenue, (Lake Nora Fox Club Project),
Series B, 7.500% due 10/1/29 ...................................... 941,168
------------
2,841,168
------------
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) ......................... 1,289,790
------------
Louisiana -- 6.6%
1,200,000 Baa2* Lake Charles, LA Harbor & Terminal District, Port Facilities
Revenue, (Trunkline LNG Co. Project),
7.750% due 8/15/22 ................................................ 1,251,480
2,000,000 NR Louisiana Local Government Environmental Facilities,
Community Development Authority Revenue, St. James
Place, Series A, 8.000% due 11/1/25 ............................... 2,034,740
2,975,000 NR Louisiana Public Facilities Authority Hospital Revenue, (Lake
Charles Memorial Hospital Project), 8.625% due 12/1/30 ............ 2,678,660
Port of New Orleans, LA IDR:
Avondale Industries, Inc. Project:
645,000 NR ETM with U.S. government securities
8.250% due 6/1/04 (e) ........................................... 679,907
2,845,000 NR Pre-Refunded -- Escrowed with U.S. government
securities to 6/1/01 Call @103,
8.500% due 6/1/14 (d)(e) .......................................... 3,162,132
1,000,000 BB- Continental Grain Co. Project, 7.500% due 7/1/13 .................. 1,026,730
------------
10,833,649
------------
See Notes to Financial Statements.
9
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
January 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===================================================================================================================
Maryland -- 1.7%
$ 3,000,000 NR Maryland State Economic Development Corp. Revenue,
Chesapeake Bay, Series A, 7.730% due 12/1/27 (d) .................. $ 2,808,900
------------
Massachusetts -- 5.7%
Boston, MA IDA Financing Revenue:
750,000 NR Crosstown Center Project, 8.000% due 9/1/35 (b) ................... 742,215
970,000 NR Roundhouse Hospitality LLC Project,
7.875% due 3/1/25 (b) ........................................... 978,963
Massachusetts State Development Finance Agency Revenue:
1,000,000 NR Alliance Health Care Facility, Series A, 7.100% due 7/1/32 ........ 1,005,550
1,000,000 NR Briarwood, Series B, 8.250% due 12/1/30 ........................... 1,043,810
Massachusetts State Health & Education Facilities
Authority Revenue:
1,000,000 AAA Beth Israel Deaconess Medical Center, Series G-4,
AMBAC-Insured, Variable Rate INFLOS,
10.245% due 7/1/25 (f) ........................................ 1,045,160
1,000,000 BBB Caritas Christi Obligation, Series B, 6.750% due 7/1/16 1,081,460
400,000 Ba2* Saint Memorial Medical Center, Series A,
6.000% due 10/1/23 ............................................ 357,808
1,030,000 AA Massachusetts State HFA, Single-Family Housing Revenue,
Series 38, 7.200% due 12/1/26 (b) ................................. 1,072,549
1,965,000 NR Massachusetts State Industrial Finance Agency Revenue,
Assisted Living Facility, (Marina Bay LLC Project),
7.500% due 12/1/27 (b) ............................................ 1,951,559
------------
9,279,074
------------
Michigan -- 1.8%
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 ............................................... 1,677,620
1,000,000 B1* 5.750% due 9/1/17 ............................................... 748,340
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)(c) ................................ 500,000
------------
2,925,960
------------
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) ................................... 755,600
1,725,000 NR Sartell, MN Health Care & Housing Facilities Revenue,
(Foundation for Healthcare Project), Series A,
6.500% due 9/1/16 ................................................. 1,657,380
See Notes to Financial Statements.
10
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
January 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===================================================================================================================
Minnesota -- 2.5% (continued)
$ 1,865,000 Ba2* St. Paul, MN Housing & Redevelopment Authority
Hospital Revenue, (Healtheast Project), Series A,
6.625% due 11/1/17 ................................................ $ 1,601,830
------------
4,014,810
------------
Missouri -- 0.1%
250,000 NR St. Joseph, MO IDA, (Living Community of St. Joseph Project),
7.000% due 8/15/32 ................................................ 246,312
------------
Montana -- 2.3%
4,520,000 NR Montana State Board of Investment Resource Recovery
Revenue, (Yellowstone Energy L.P. Project),
7.000% due 12/31/19 (b)(d) ........................................ 3,741,792
------------
New Jersey -- 4.7%
New Jersey EDA, Series A:
1,000,000 NR Healthcare Facility Revenue, (Sayreville Senior Living
Project), 6.375% due 4/1/29 (c) ................................. 420,000
850,000 NR Presbyterian Home at Montgomery Inc., First Mortgage,
Series A, 6.375% due 11/1/31 .................................... 851,726
1,000,000 NR Retirement Community Revenue, 8.250% due 11/15/30 ................. 1,079,060
New Jersey Health Care Facilities Financing Authority Revenue:
2,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27 (d) ................. 2,026,160
3,000,000 BBB- Trinitas Hospital Obligation Group, 7.500% due 7/1/30 (d) ......... 3,275,610
------------
7,652,556
------------
New Mexico -- 0.2%
240,000 AAA New Mexico Mortgage Finance Authority, Single-Family
Mortgage Program, Series B, FHA-Insured,
8.300% due 3/1/20 (b) ............................................. 248,594
------------
New York -- 5.4 %
700,000 NR Brookhaven, NY IDA, Civic Facility Revenue, Memorial Hospital
Medical Center, Series A, 8.250% due 11/15/30 ..................... 742,819
Monroe County, NY IDA:
1,900,000 NR Empire Sports Project, Series A, 6.250% due 3/1/28 ................ 1,156,188
1,000,000 NR Woodland Village Project, 8.550% due 11/15/32 ..................... 1,056,750
New York City, NY IDA, Civic Facility Revenue:
1,380,000 NR Community Residence for the Developmentally Disabled,
7.500% due 8/1/26 ............................................... 1,440,265
1,335,000 NR Special Needs Facility Pooled Program, Series A-1,
8.125% due 7/1/19 ............................................... 1,421,935
See Notes to Financial Statements.
11
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
January 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===================================================================================================================
New York -- 5.4 % (continued)
Suffolk County, NY IDA Civic Facility Revenue, Southampton
Hospital Association:
Series A:
$ 1,000,000 NR 7.250% due 1/1/20 ............................................. $ 1,005,100
990,000 NR 7.750% due 1/1/22 ............................................. 986,000
1,000,000 NR Series B, 7.625% due 1/1/30 ..................................... 1,016,330
------------
8,825,387
------------
North Carolina -- 1.6%
1,000,000 NR Charlotte, NC Special Facilities Revenue, Charlotte/Douglas
International Airport, 5.600% due 7/1/27 (b)(c) ................... 569,520
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 ............................................... 1,106,179
995,000 NR 7.625% due 11/1/29 .............................................. 1,014,174
------------
2,689,873
------------
Ohio -- 3.3%
1,500,000 BBB Cuyahoga County, OH Hospital Facilities Revenue,
(Canton Inc. Project), 7.500% due 1/1/30 .......................... 1,648,170
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 ................................. 1,263,476
420,000 AAA Unrefunded Balance, 8.100% due 7/1/18 ........................... 485,885
2,000,000 BBB- Ohio State Air Quality Development Authority Revenue
Refunding, Cleveland Pollution Control, Series A,
6.000% due 12/1/13 ................................................ 2,057,580
1,250,000 NR Ohio State Solid Waste Revenue, Republic Engineered
Steels Inc., 9.000% due 6/1/21 (b)(c) ............................. 0
------------
5,455,111
------------
Oklahoma -- 0.9%
2,000,000 B1* Oklahoma Development Finance Authority Revenue,
Hillcrest Healthcare System, Series A, 5.625% due 8/15/29 ......... 1,461,500
------------
Pennsylvania -- 11.8%
2,200,000 C* Allegheny County, PA IDA, Airport Special Facilities Revenue,
(USAir Inc. Project), Series B, 8.500% due 3/1/21 (b)(c) .......... 770,000
Beaver County, PA IDA, PCR:
1,500,000 BBB Cleveland Electric Illuminating Co. Project,
7.625% due 5/1/25 ............................................... 1,619,655
2,000,000 BBB Toledo Edison Co. Project, 7.625% due 5/1/20 ...................... 2,159,540
See Notes to Financial Statements.
12
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
January 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===================================================================================================================
Pennsylvania -- 11.8% (continued)
$ 1,000,000 NR Cumberland County, PA Municipal Authority Retirement
Community Revenue, (Wesley Affiliated Services Inc.
Project), Series A, 7.250% due 1/1/35 ............................. $ 981,620
3,000,000 NR Dauphin County, PA General Authority Revenue, Hotel &
Conference Center - Hyatt Regency, 6.200% due 1/1/29 .............. 2,477,700
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) ............................................ 2,555,250
2,640,000 NR Montgomery County, PA Higher Education & Health Authority
Revenue, Temple Continuing Care Center,
6.625% due 7/1/19 (d) ............................................. 1,320,000
Northumberland County, PA IDA:
135,000 NR Beverly Enterprises Inc. Project, 6.875% due 2/1/03 ............... 135,000
1,000,000 NR NHS Youth Services Inc. Project, Series A,
7.500% due 2/15/29 .............................................. 977,620
1,000,000 NR Philadelphia, PA Authority for IDR, (Host Marriott L.P. Project),
Remarketed 10/31/95, 7.750% due 12/1/17 1,036,890
Scranton-Lackawanna, PA Health & Welfare Authority
Revenue:
500,000 BB+++ Allied Services Rehabilitation Hospital, Series A,
7.600% due 7/15/20 .............................................. 505,370
Moses Taylor Hospital Project:
1,115,000 BB+ 6.150% due 7/1/14 ............................................... 730,169
3,050,000 BB+ 6.250% due 7/1/20 ............................................... 1,901,919
2,000,000 NR Westmoreland County, PA IDA, Healthcare Facilities, Redstone
Highlands Health, Series B, 8.125% due 11/15/30 ................... 2,088,380
------------
19,259,113
------------
Rhode Island -- 1.4%
2,500,000 NR Tobacco Settlement Financing Corp. Revenue, Variable Rate
INFLOS, 9.641% due 6/1/08 (f) ..................................... 2,318,475
------------
South Carolina -- 2.4%
Connector 2000 Association Inc., SC Toll Road Revenue:
Capital Appreciation, Series B:
3,100,000 B- Zero coupon bond to yield 9.127% due 1/1/27 ..................... 122,047
7,750,000 B- Zero coupon bond to yield 10.585% due 1/1/34 .................... 118,343
2,000,000 B- Southern Connector Project, Series A, 5.375% due 1/1/38 ........... 839,980
435,000 NR Florence County, SC IDR, Stone Container Corp.,
7.375% due 2/1/07 ................................................ 437,288
595,000 NR McCormick County, SC COP, 9.750% due 7/1/09 ......................... 598,933
2,000,000 NR Tobacco Settlement Revenue Management Authority, SC,
Variable Rate INFLOS, 10.719% due 5/15/28 (f) ..................... 1,825,280
------------
3,941,871
------------
See Notes to Financial Statements.
13
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
January 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===================================================================================================================
South Dakota -- 0.9%
$ 1,515,000 NR Oglala Sioux Tribe, SD Pine Ridge County, Revenue Bonds,
7.500% due 7/1/13 ................................................. $ 1,520,833
------------
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 ................................................. 1,841,177
------------
Texas -- 8.1%
Bexar County, TX Housing Financial Corp., MFH:
1,000,000 NR Continental Lady Ester, Series A, 6.875% due 6/1/29 ............... 960,260
1,185,000 Baa3* Nob Hill Apartments, Series B, 8.500% due 6/1/31 .................. 1,175,958
245,000 Baa3* Waters at Northern Hills, Series C, 7.750% due 8/1/36 ............. 241,259
2,000,000 Ba3* El Paso, TX International Airport Revenue, Special Facilities,
(Marriott Corp. Project), 7.750% due 3/1/12 ....................... 2,024,920
2,000,000 Ba2* Gulf Coast, TX IDA, Solid Waste Disposal Revenue,
(CITGO Petroleum Corp. Project), 7.500% due 5/1/25 (b) ............ 1,978,140
2,750,000 B+ Houston, TX Airport Systems Revenue, Special Facilities,
Continental Airlines Inc., Series C, 6.125% due 7/15/27 (b) ....... 1,682,753
Houston, TX Hotel Occupancy, Tax & Special Revenue, Capital
Appreciation, Series B, AMBAC-Insured:
3,000,000 AAA Zero coupon bond to yield 5.605% due 9/1/32 ..................... 597,780
1,000,000 AAA Zero coupon bond to yield 5.606% due 9/1/33 ..................... 188,680
1,000,000 CCC++ Northgate Crossing, TX, Municipal Utility, District No. 1, GO,
8.875% due 12/1/13 ................................................ 1,037,450
990,000 Baa3* Texas State Affordable Housing Corp., MFH Revenue,
HIC Arborstone Baybrook, Series C, 7.250% due 11/1/31 ............. 962,854
1,405,000 Baa2* Travis County, TX HFA, MFH Revenue, (Lakeview Apartments
Project), Series A, 6.375% due 1/1/34 (d) ......................... 1,359,843
1,000,000 NR Willacy County, TX (Public Facility Corp. Project) Revenue,
Series A-1, 8.250% due 12/1/23 .................................... 984,200
------------
13,194,097
------------
Utah -- 1.9%
1,615,000 NR Hurricane, UT Health Facilities Development Revenue,
(Mission Health Services Project), 10.500% due 7/1/20 (c) ......... 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 ................ 1,963,880
------------
3,094,380
------------
See Notes to Financial Statements.
14
[CLIP ART] Municipal High Income Fund Inc.
Schedule of Investments (unaudited) (continued)
January 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===================================================================================================================
Virginia -- 1.9%
$ 555,000 A3* Alexandria, VA Redevelopment & Housing Authority,
MFH Revenue, (Parkwood Court Apartments Project),
Series C, 8.125% due 4/1/30 ....................................... $ 568,559
1,000,000 NR Fairfax County, VA EDA Revenue, Retirement Community,
Greenspring Village Inc., Series A, 7.500% due 10/1/29 ............ 1,076,400
23,400,000 BBB-++ Pocahontas Parkway Association, VA Toll Road Revenue,
Capital Appreciation, Series B, zero coupon bond to yield
8.740% due 8/15/34 ................................................ 1,385,280
------------
3,030,239
------------
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 .......... 989,020
------------
Wisconsin -- 1.8%
2,000,000 NR Badger Tobacco Asset Securitization Corp., WI Rite-PA 1046,
Variable Rate INFLOS, 7.199% due 12/1/06 (f) ...................... 1,837,480
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
------------
2,987,980
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $182,865,195**) .......................................... $163,695,913
============
----------
(a) All ratings are by Standard & Poor's Ratings Service, except for 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 Ratings.
(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) All or a portion of this security has been segregated for open futures
contracts commitments.
(e) Pre-Refunded bonds escrowed with U.S. government securities and bonds
escrowed to maturity with U.S. government securities are considered by the
investment adviser to be triple-A rated even if the issuer has not applied
for new ratings.
(f) Inverse floating rate security -- coupon varies inversely with level of
short-term tax exempt interest rates.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 17 through 19 for definitions of ratings and certain security
descriptions.
See Notes to Financial Statements.
15
[CLIP ART] Municipal High Income Fund Inc.
Summary of Municipal Bonds by Combined Ratings
January 31, 2003 (unaudited)
================================================================================
--------------------------------------------------------------------------------
Standard & Percent of
Moody's and/or Poor's Total Investments
--------------------------------------------------------------------------------
Aaa AAA 5.0%
Aa AA 0.7
A A 3.6
Baa BBB 12.8*
Ba BB 10.3**
B B 5.0
Caa CCC 0.8***
Ca CC 0.2
C C 0.5
NR NR 61.1
-----
100.0%
=====
* 2.5% was rated by Fitch Ratings.
** 0.3% was rated by Fitch Ratings.
*** 0.6% was rated by Fitch Ratings.
16
[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
"CCC" may be modified by the addition of a plus (+) or a minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differ from the highest rated issue only in a
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB, B, -- Bonds rated "BB", "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 "Caa," 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.
17
[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.
C -- Bonds rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Fitch Ratings ("Fitch") -- Ratings from "BBB" to "CCC" may be modified by the
addition of a plus (+) or a minus (-) sign 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.
18
[CLIP ART] Municipal High Income Fund Inc.
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.
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
19
[CLIP ART] Municipal High Income Fund Inc.
Statement of Assets and Liabilities (unaudited)
January 31, 2003
================================================================================
ASSETS:
Investments, at value (Cost -- $182,865,195) ................... $ 163,695,913
Interest receivable ............................................ 2,794,003
Receivable for securities sold ................................. 2,615,840
-------------
Total Assets ................................................... 169,105,756
-------------
LIABILITIES:
Payable to bank ................................................ 1,054,596
Dividends payable .............................................. 191,532
Payable to broker -- variation margin .......................... 117,187
Investment advisory fee payable ................................ 64,343
Administration fee payable ..................................... 31,911
Accrued expenses ............................................... 129,930
-------------
Total Liabilities .............................................. 1,589,499
-------------
Total Net Assets .................................................. $ 167,516,257
=============
NET ASSETS:
Par value of capital shares .................................... $ 208,831
Capital paid in excess of par value ............................ 192,384,932
Undistributed net investment income ............................ 705,560
Accumulated net realized loss from security transactions and
futures contracts ............................................ (5,982,925)
Net unrealized depreciation of investments and futures contracts (19,800,141)
-------------
Total Net Assets .................................................. $ 167,516,257
=============
Shares Outstanding ................................................ 20,883,100
-------------
Net Asset Value ................................................... $8.02
-------------
See Notes to Financial Statements.
20
[CLIP ART] Municipal High Income Fund Inc.
Statement of Operations (unaudited)
For the Three Months Ended January 31, 2003
================================================================================
INVESTMENT INCOME:
Interest ................................................... $ 3,477,006
------------
EXPENSES:
Investment advisory fee (Note 3) ........................... 174,788
Administration fee (Note 3) ................................ 87,394
Shareholder servicing fees ................................. 23,970
Audit and legal ............................................ 23,500
Directors' fees ............................................ 17,860
Custody .................................................... 13,160
Shareholder communications ................................. 6,580
Other ...................................................... 18,329
------------
Total Expenses ............................................. 365,581
------------
Net Investment Income ......................................... 3,111,425
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 4 AND 5):
Realized Loss From:
Security transactions (excluding short-term securities) .. (2,082,409)
Futures contracts ........................................ (602,108)
------------
Net Realized Loss .......................................... (2,684,517)
------------
Change in Net Unrealized Depreciation of Investments
and Futures Contracts:
Beginning of period ...................................... (19,294,641)
End of period ............................................ (19,800,141)
------------
Increase in Net Unrealized Depreciation .................... (505,500)
------------
Net Loss on Investments and Futures Contracts ................. (3,190,017)
------------
Decrease in Net Assets From Operations ........................ $ (78,592)
============
See Notes to Financial Statements.
21
[CLIP ART] Municipal High Income Fund Inc.
Statements of Changes in Net Assets
For the Three Months Ended January 31, 2003 (unaudited)
and the Year Ended Ocotber 31, 2002
================================================================================
2003 2002
---- ----
OPERATIONS:
Net investment income ......................... $ 3,111,425 $ 11,994,943
Net realized loss ............................. (2,684,517) (164,823)
Increase in net unrealized depreciation ....... (505,500) (10,433,215)
------------- -------------
Increase (Decrease) in Net Assets
From Operations ............................. (78,592) 1,396,905
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
Net investment income ......................... (2,913,192) (11,902,496)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders ............... (2,913,192) (11,902,496)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net asset value of shares issued for
reinvestment of dividends ................... -- 1,446,084
------------- -------------
Increase in Net Assets From
Fund Share Transactions ..................... -- 1,446,084
------------- -------------
Decrease in Net Assets ........................... (2,991,784) (9,059,507)
NET ASSETS:
Beginning of period ........................... 170,508,041 179,567,548
------------- -------------
End of period* ................................ $ 167,516,257 $ 170,508,041
============= =============
* Includes undistributed net investment income of: $ 705,560 $ 507,327
============= =============
See Notes to Financial Statements.
22
[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. At October 31,
2002, reclassifications were made to the Fund's capital accounts to reflect
permanent book/tax differences and income and gains available for distributions
under income tax regulations. Accordingly, a portion of accumulated net realized
loss amounting to $1,197,488 was reclassified to paid-in capital. Net investment
income, net realized gains and net assets were not affected by this adjustment;
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, the Fund invests in high yield instruments that are subject
to certain credit and market risks. The yields of high yield debt obligations
reflect, among other things, perceived credit risk. The Fund's investment in
securities rated below investment grade typically involve risks not associated
with higher rated securities including, among others, greater risk of timely and
ultimate payment of interest and principal, greater market price volatility and
less liquid secondary market trading.
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 Guide 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 effective November 1,
2001 and
23
[CLIP ART] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited) (continued)
================================================================================
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. This change does not affect the
Fund's net asset value, but does change the classification of certain amounts in
the statement of operations.
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., 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 one Director of the Fund are employees of Citigroup or
its affiliates.
4. Investments
During the three months ended January 31, 2003, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
Purchases ....................................................... $4,941,235
==========
Sales ........................................................... $4,341,531
==========
At January 31, 2003, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
Gross unrealized appreciation ................................... $ 4,023,387
Gross unrealized depreciation ................................... (23,192,669)
------------
Net unrealized depreciation ..................................... $(19,169,282)
============
24
[CLIP ART] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited) (continued)
================================================================================
5. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the proceeds from (or cost of) the
closing transactions and the Fund's basis in the contract. The Fund enters into
such contracts to hedge a portion of its portfolio. The Fund bears the market
risk that arises from changes in the value of the financial instruments and
securities indices (futures contracts).
At January 31, 2003, the Fund had the following open futures contracts:
Basis Market Unrealized
# of Contracts Expiration Value Value Loss
=================================================================================================
Contracts to Sell:
U.S. Treasury 20 Year Bond 250 3/03 $27,416,016 $28,046,875 $(630,859)
=================================================================================================
6. Capital Loss Carryforward
At October 31, 2002, the Fund had, for Federal income tax purposes,
approximately $3,744,000 of unused capital loss carryforwards available to
offset future capital gains. To the extent that these carryforward losses are
used to offset capital gains, it is probable that the gains so offset will not
be distributed. The amount and year of expiration for each carryforward loss is
indicated below. Expiration occurs on October 31 of the year indicated:
2003 2004 2005 2007 2008 2009 2010
---- ---- ---- ---- ---- ---- ----
Carryforward amounts .... $270,000 $205,000 $400,000 $786,000 $748,000 $733,000 $602,000
7. Income Tax Information and Distributions to Shareholders
At October 31, 2002, the tax basis components of distributable earnings
were:
Undistributed tax exempt income ............................. $ 339,577
============
Undistributed ordinary income ............................... --
============
Accumulated capital losses .................................. $ (3,743,721)
============
Unrealized depreciation ..................................... $(18,658,518)
============
25
[CLIP ART] Municipal High Income Fund Inc.
Notes to Financial Statements (unaudited) (continued)
================================================================================
The difference between book basis and tax basis unrealized depreciation is
attributable primarily to mark to market losses and remaining AICPA accretion
adjustment.
The tax character of distributions paid during the year ended October 31,
2002 was:
Tax exempt income ............................................. $11,889,314
Ordinary income ............................................... 13,182
Long term capital gains ....................................... --
-----------
Total ......................................................... $11,902,496
===========
8. Capital Shares
At January 31, 2003, 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:
Three Months Ended Year Ended
January 31, 2003 October 31, 2002
-------------------- ---------------------
Shares Amount Shares Amount
-------- -------- -------- ----------
Shares issued on reinvestment .... -- -- 174,992 $1,446,084
======== ======== ======== ==========
26
[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:
2003(1) 2002 2001 2000 1999 1998
------- ---- ---- ---- ---- ----
Net Asset Value,
Beginning of Period ....... $ 8.16 $ 8.67 $ 8.86 $ 9.00 $ 9.77 $ 9.76
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) From
Operations:
Net investment income(2) .. 0.15 0.58 0.59 0.60 0.58 0.60
Net realized and unrealized
gain (loss)(2) .......... (0.15) (0.52) (0.20) (0.16) (0.76) 0.03
---------- ---------- ---------- ---------- ---------- ----------
Total Income (Loss)
From Operations ........... (0.00)* 0.06 0.39 0.44 (0.18) 0.63
---------- ---------- ---------- ---------- ---------- ----------
Less Distributions From:
Net investment income ..... (0.14) (0.57) (0.58) (0.58) (0.59) (0.61)
In excess of net investment
income .................. -- -- -- -- -- (0.01)
---------- ---------- ---------- ---------- ---------- ----------
Total Distributions ......... (0.14) (0.57) (0.58) (0.58) (0.59) (0.62)
---------- ---------- ---------- ---------- ---------- ----------
Net Asset Value,
End of Period ............. $ 8.02 $ 8.16 $ 8.67 $ 8.86 $ 9.00 $ 9.77
========== ========== ========== ========== ========== ==========
Total Return,
Based on Market Value ..... 0.03%++ (4.70)% 13.85% 9.39% (15.76)% 9.34%
========== ========== ========== ========== ========== ==========
Total Return,
Based on Net Asset Value .. 0.14%++ 0.91% 4.77% 5.97% (1.79)% 6.75%
========== ========== ========== ========== ========== ==========
Net Assets,
End of Period (000s) ...... $ 167,516 $ 170,508 $ 179,568 $ 181,326 $ 184,085 $ 197,944
========== ========== ========== ========== ========== ==========
Ratios to Average
Net Assets:
Expenses .................. 0.86%+ 0.80% 0.82% 0.71% 0.73% 0.74%
Net investment income(2) .. 7.30+ 6.84 6.74 6.72 6.08 6.07
Portfolio Turnover Rate ..... 3% 33% 15% 27% 27% 57%
Market Value, End of Period . $ 7.540 $ 7.680 $ 8.640 $ 8.125 $ 8.000 $ 10.125
----------
(1) For the three months ended January 31, 2003 (unaudited).
(2) Without the adoption of the change in the accounting method discussed in
Note 1 to the financial statements, for the year ended October 31, 2002,
the ratio of net investment income to average net assets would have been
6.80%. Per share, ratios and supplemental data for the periods prior to
November 1, 2001 have not been restated to reflect this change in
presentation. In addition, the impact of this change to net investment
income and net realized and unrealized loss was less than $0.01 per share.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total for the year.
+ Annualized.
27
[CLIP ART] Municipal High Income Fund Inc.
Financial Data Per Share of Common Stock (unaudited)
================================================================================
Dividend
Record Payable NYSE Net Asset Dividend Reinvestment
Date Date Closing Price* Value* Paid Price
-------- -------- -------------- --------- -------- ------------
11/20/00 11/24/00 $8.0600 $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 8.7400 8.77 0.0485 8.60
3/27/01 3/30/01 8.3800 8.77 0.0485 8.57
4/24/01 4/27/01 8.6800 8.67 0.0485 8.50
5/22/01 5/25/01 8.6200 8.69 0.0485 8.52
6/26/01 6/29/01 8.6300 8.71 0.0485 8.54
7/24/01 7/27/01 8.5700 8.75 0.0485 8.57
8/28/01 8/31/01 8.8900 8.83 0.0485 8.65
9/25/01 9/28/01 8.3000 8.71 0.0485 8.54
10/23/01 10/26/01 8.6300 8.70 0.0485 8.53
11/27/01 11/30/01 8.5000 8.59 0.0485 8.42
12/24/01 12/28/01 7.8900 8.42 0.0485 8.16
1/22/02 1/25/02 8.3000 8.45 0.0485 8.28
2/19/02 2/22/02 8.3500 8.40 0.0485 8.23
3/19/02 3/22/02 8.1600 8.34 0.0485 8.11
4/23/02 4/26/02 8.0700 8.36 0.0485 8.18
5/28/02 5/31/02 8.1200 8.36 0.0485 8.19
6/25/02 6/28/02 8.1600 8.43 0.0465 8.25
7/23/02 7/26/02 8.0700 8.46 0.0465 8.22
8/27/02 8/30/02 8.1600 8.41 0.0465 8.23
9/24/02 9/27/02 8.3100 8.40 0.0465 8.23
10/22/02 10/25/02 7.6200 8.15 0.0465 7.79
11/25/02 11/29/02 7.2600 8.12 0.0465 7.35
12/23/02 12/27/02 7.3400 8.11 0.0465 7.42
1/28/03 1/31/03 7.3900 8.03 0.0465 7.50
----------
* As of record date.
28
[CLIP ART] Municipal High Income Fund Inc.
Additional Shareholder Information (unaudited)
================================================================================
Result of Annual Meeting of Shareholders
The Annual Meeting of Shareholders of Municipal High Income Fund Inc. was
held on February 24, 2003, for the purpose of considering and voting upon the
election of three Directors, each for a three year term. The following table
provides information concerning the matters voted upon at the Meeting:
1. Election of Directors*
Nominees Votes For Votes Withheld
-------- --------- --------------
Allan J. Bloostein 17,403,355 436,275
R. Jay Gerken 17,459,694 379,936
George M. Pavia 17,447,650 391,980
----------
* The following Directors, representing the balance of the Board of
Directors, continue to serve as Directors: Dwight B. Crane, Paolo M.
Cucchi, Robert A. Frankel, Dr. Paul Hardin and William R. Hutchinson.
29
[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, 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 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
30
[CLIP ART] Municipal High Income Fund Inc.
Dividend Reinvestment Plan (unaudited) (continued)
================================================================================
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 January 31,
2003, the Fund has not repurchased any shares.
31
[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, Chairman
Dr. Paul Hardin
William R. Hutchinson
George M. Pavia
Officers
R. Jay Gerken
President and
Chief Executive Officer
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
399 Park Avenue
New York, New York 10022
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
32
[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
FD01095 3/03
03-4598