[CLIP ART]
Municipal
High Income
Fund Inc.
[GRAPHIC OMITTED]
Annual
Report
[CLIP ART]
October 31,
2002
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Municipal High Income Fund Inc.
Dear Shareholder:
We are pleased to provide the annual report for Municipal High Income Fund
Inc. ("Fund") for the year ended October 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 to be useful and informative.
Special Notice to Shareholders
Please note that R. Jay Gerken, a managing director of Salomon Smith
Barney, Inc., has been elected Chairman of the Board and Chief Executive Officer
of the Fund replacing Heath B. McLendon, who has been appointed Chairman of
Salomon Smith Barney Inc.'s new Equity Research Policy Committee. On behalf of
all our shareholders and the Fund's Board of Directors, I would like to extend
my deepest gratitude to Heath for his dedication to keeping our shareholders'
needs as the firm's top priority. Previously, Jay managed the Smith Barney
Growth and Income Fund for six years; developed and managed the Smith Barney
Allocation Series Inc. from inception in 1996 through the end of 2001; and was
responsible for the investment design and implementation of Citigroup Asset
Management's college savings programs with the states of Illinois and Colorado.
Performance Review(1)
During the past twelve months, the Fund distributed income dividends to
shareholders totaling $0.57 per share. The table on page 2 details the
annualized distribution yield and the twelve-month total return for the Fund
based on its October 31, 2002 net asset value ("NAV") per share and the New York
Stock Exchange ("NYSE") closing price.(2)
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(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 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 (NYSE) price as
determined by supply of and demand for the Fund's shares.
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1
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Price Annualized Twelve-Month
Per Share Distribution Yield(3) Total Return(3)
------------ --------------------- ---------------
$8.16 (NAV) 6.84% 0.91%
$7.68 (NYSE) 7.27% (4.70)%
The Fund's Lipper Inc. ("Lipper")(4) peer group of high-yield municipal
debt closed-end funds returned 1.81% based on NAV for the year ended October 31,
2002.
Investment Strategy
The Fund's investment objective is to maximize current income exempt from
federal income tax(5) by investing, under normal circumstances, at least 80% of
the value of its net assets, plus any borrowings for investment purposes, in
intermediate-term and long-term municipal securities.
Portfolio Manager Market Review and Outlook
The past year has been characterized by slow economic growth,
disappointing corporate earnings and increased corporate governance concerns.
Weaker economic reports in the latter part of the period raised fears of a
"double-dip" recession, with many market participants calling for the U.S.
Federal Reserve Board ("Fed") to further reduce short-term interest rates in
order to add more stimulus to the economy. Heightened geo-political risk and the
potential for war in Iraq also weighed on the markets. Against this backdrop,
equity markets plummeted, while the fixed-income markets staged a strong move
that drove U.S. Treasury and municipal yields to four decade lows. After
rallying for six months, municipal and other fixed income markets sold off
sharply during October in response to a rebound in equity prices. After
exhibiting extraordinary volatility for a couple of weeks in the middle of the
month, the municipal debt market began showing signs of stabilizing at the new
higher yield levels by the end of the reporting period.
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(3) 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 12 months. This rate is as of October 31,
2002 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.
(4) Lipper is an independent mutual fund tracking organization. Average annual
returns are based on the twelve-month period ended October 31, 2002,
calculated among 12 funds in the high-yield municipal debt closed-end
funds category.
(5) Please note a portion of the Fund's income may be subject to the
Alternative Minimum Tax ("AMT"). Capital gains, if any, are fully taxable.
Please consult your personal tax adviser.
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2
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In our opinion, due to different supply and demand characteristics,
municipal securities did not quite keep up with U.S. Treasury returns. U.S.
Treasury markets not only benefited from core reallocation trends out of
equities by large institutional investors, but also from very strong demand from
mortgage market investors who needed to lengthen the duration(6) of their
holdings to offset the acceleration in prepayments as rates declined.
In the municipal market, lower rates fueled record high year-to-date new
issue volume as many issuers took advantage of this opportunity to refinance.
The municipal market also saw a sizeable increase in the volume of tobacco
settlement asset securitization deals as many states and counties resorted to
this form of financing to plug budget gaps arising from the weak economy.
Despite strong demand, we believe this abundance of supply left many municipal
securities at or near record cheap levels relative to U.S. Treasuries.
Specifically, at the end of the period, we saw that municipal security yields(7)
were over 90% of the yield available on comparable maturity U.S. Treasuries
across the yield curve(8) and by one measure, the Bond Buyer 25-Revenue Bond
Index,(9) yields on long-term municipal securities were actually greater than
the yield on 30-year U.S. Treasuries. Normally, the added value of tax-exemption
allows municipals to trade at lower levels than comparable maturity treasuries.
The decline in rates also steepened the yield curve drastically. The yield on
tax-free money funds was, in our opinion, exceptionally low, forcing investors
who wanted a reasonable return to extend into longer maturities. Most of this
demand was concentrated in the intermediate maturity range.
The high yield segment of the municipal market did not participate in the
rally enjoyed by higher rated issues. In our view, credit spreads(10) widened
dramatically as the weak economy heightened concerns over the creditworthiness
of these issues, more than offsetting the overall decline in yields on
investment grade bonds. In October, the Lehman Brothers Non-Investment
----------
(6) Duration is a common gauge of the price sensitivity of a fixed income
asset or portfolio to a change in interest rates.
(7) Municipal security yields as defined by the Bond Buyer's Municipal Bond
Index, an index of yields for AA-rated and A-rated municipal bonds that is
widely used by dealers to evaluate yields on new municipal bond issues.
The index is published in The Bond Buyer, a daily publication specializing
in fixed-income securities.
(8) The yield curve is the graphical depiction of the relationship between the
yield on bonds of the same credit quality but different maturities.
(9) The Bond Buyer 25-Revenue Bond Index is the average yield on 25 revenue
bonds rated "A1" by Moody's Investors Service, which is a nationally
recognized agency. The Bond Buyer is a daily publication specializing in
fixed-income securities. Please note that an investor cannot invest
directly in an index.
(10) A credit spread is the difference in yield between securities of different
credit quality within the same asset class and maturity range.
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Grade (High Yield) Municipal Index ("Lehman High Yield Index")(11) recorded its
worst monthly return (negative 3.16%) since its inception in January of 1996.
This index has underperformed the broad based investment-grade Lehman Brothers
Municipal Bond Index(12) for seven consecutive months and the spread between the
two indices increased to its highest recorded level of 435 basis points.(13)
According to Lehman,(14) the performance of the Lehman High Yield Index was
particularly hard hit by plummeting prices of special airport facilities bonds
issued by airlines. After US Airways Group, Inc. filed for bankruptcy protection
and the other major airlines continued reporting mounting losses in the wake of
greatly reduced air travel and extraordinary security costs, the market
reflected fears that some or all of the other airlines might also be forced into
bankruptcy. According to Lehman, municipal bonds backed by airlines experienced
price declines in a range of 7% to as much as 44%. The future will continue to
be difficult for the airlines as they take draconian cost cutting measures in an
attempt to stay out of bankruptcy court. Ultimately, we expect most, if not all
of them, to remain viable, albeit with the help of government loan guarantees
and possible government assumption of greatly increased security costs. Other
market sectors that came under pressure in the weak economic environment
included industrial development, life care retirement communities and toll
roads. These sectors have experienced higher incidences of severe credit quality
deterioration or default resulting in substantial price declines.
Looking ahead, we expect economic growth to remain sluggish over at least
the next few months. On November 6th, the Fed surprised most market participants
with a 50 basis point cut in the federal funds rate ("fed funds rate")(15)
instead of a widely expected 25 basis point reduction. This gave rise to worries
that the Fed may be concerned about something more than the "soft spot" in the
economy and possible conflicts with Iraq cited in their post-meeting statement.
The markets responded with more turmoil as bonds and equities faltered.
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. In the long run, we feel the additional stimulus
provided by the Fed and the Republican victory at the polls may be beneficial to
the business climate and the economy. We also feel an improving economy
----------
(11) The Lehman High Yield Index includes issues which have a maximum credit
rating of BA1, are issued as part of a deal of at least $20 million, have
an amount outstanding of at least $3 million, have a maturity of at least
one year, and have been issued after December 31, 1990. Please note that
an investor cannot invest directly in an index.
(12) The Lehman Brothers Municipal Bond Index is a broad measure of the
municipal bond market with maturities of at least one year. Please note
that an investor cannot invest directly in an index.
(13) A basis point is one one-hundredth (1/100 or 0.01) of one percent.
(14) Lehman Brothers Municipal Market Commentary, November 2002.
(15) 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.
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4
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should provide a better operating environment for high yield issuers.
Performance, however, will rest on the merits of the credits we hold and select
for new commitments. 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 more information?
Municipal High Income Fund Inc. is traded on the New York Stock Exchange
under the symbol "MHF." Daily closing prices are available online under symbol
"MHF" 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 investing in Municipal High Income Fund Inc. We look forward
to continuing to help you meet your investment objectives.
Sincerely,
/s/ R. Jay Gerken /s/ Peter M. Coffey
R. Jay Gerken Peter M. Coffey
Chairman Vice President and
Investment Officer
November 25, 2002
The information provided in this letter by the portfolio manager
represents the opinion of the portfolio manager and is not intended to be a
forecast of future events, a guarantee of future results or investment advice.
Views expressed are those of the portfolio manager and may differ from those of
other portfolio managers or of the firm as a whole. Furthermore, there is no
assurance that certain securities will remain in or out of the Fund or that the
percentage of the Fund's assets in various sectors will remain the same. Please
refer to pages 7 through 15 for a list and percentage breakdown of the Fund's
holdings. Also, please note that any discussion of the Fund's holdings, the
Fund's performance and the portfolio manager's views are as of October 31, 2002
and are subject to change.
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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 32. 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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6
Municipal High Income Fund Inc.
Schedule of Investments
[CLIP ART] October 31, 2002
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FACE
AMOUNT RATING(a) SECURITY VALUE
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Alabama -- 3.8%
$ 4,000,000 BB+ Butler, AL IDB, Solid Waste Disposal Revenue, (James River
Corp. Project), 8.000% due 9/1/28 (b)(c) .................... $ 3,600,520
615,000 NR Capstone Improvement District of Brookwood, AL Series A,
7.700% due 8/15/23 .......................................... 369,000
1,000,000 CCC Mobile, AL IDB, Solid Waste Disposal Revenue, (Mobile
Energy Services Co. Project), 6.950% due 1/1/20 (d) ......... 10,200
1,000,000 NR Rainbow City, AL Special Health Care Facility Financing
Authority, Series A, 8.250% due 1/1/31 ...................... 1,019,770
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 .......................................... 1,225,350
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6,224,840
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Alaska -- 0.7%
1,055,000 NR Alaska Industrial Development & Export Authority Revenue,
Williams Lynxs Alaska Cargoport, 8.125% due 5/1/31 (b) ...... 1,091,208
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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 ................ 1,402,005
1,750,000 Ca* 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 ..... 487,364
1,000,000 NR Gran Victoria Housing LLC Project, Series B,
10.000% due 5/1/31 ........................................ 1,021,100
1,820,000 A3* Phoenix, AZ IDA, MFH Revenue, (Ventana Palms
Apartments Project), Series B, 8.000% due 10/1/34 ........... 1,837,053
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5,185,022
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California -- 2.1%
1,500,000 NR Barona, CA Band of Mission Indians, GO,
8.250% due 1/1/20 ........................................... 1,599,570
1,865,000 Ba3* Vallejo, CA COP, Touro University, 7.375% due 6/1/29 .......... 1,919,160
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3,518,730
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Colorado -- 0.6%
1,000,000 NR Highline Business Improvement District, Littleton, CO GO,
Series B, 8.750% due 12/15/19 ............................... 988,680
------------
See Notes to Financial Statements.
7
Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2002
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FACE
AMOUNT RATING(a) SECURITY VALUE
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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 .................... $ 1,763,228
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 ......................................... 1,518,043
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3,281,271
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Delaware -- 0.5%
1,000,000 NR Sussex County, DE Assisted Living Facilities Revenue,
(Heritage at Milford Project), 7.250% due 7/1/29 ............ 830,900
------------
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 ...................... 1,016,810
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Florida -- 8.9%
Capital Projects Finance Authority, FL:
2,000,000 NR Continuing Care Retirement, Glenridge on Palmer Ranch,
Series A, 8.000% due 6/1/32 ............................... 1,910,820
2,000,000 NR Student Housing Revenue, Florida University, Series A,
7.850% due 8/15/31 ........................................ 2,034,520
1,000,000 NR Century Parc Community Development District, FL Special
Assessment, 7.000% due 11/1/31 .............................. 1,009,330
2,750,000 NR Hillsborough County, FL IDA Revenue, (Lakeshore Villas
Project), Series A, 6.750% due 7/1/29 ....................... 2,235,200
875,000 NR Homestead, FL IDR, Community Rehabilitation Providers
Program, Series A, 7.950% due 11/1/18 ....................... 904,251
2,000,000 BBB++ Martin County, FL IDA, IDR, (Indiantown Cogeneration
Project), Series A, 7.875% due 12/15/25 (b) ................. 2,057,060
1,000,000 NR Orange County, FL Health Facilities Authority Revenue, First
Mortgage, (GF/Orlando, Inc. Project), 9.000% due 7/1/31 ..... 1,007,950
2,000,000 NR Reunion East Community Development District, FL Special
Assessment, Series A, 7.375% due 5/1/33 ..................... 2,009,380
1,500,000 NR Waterlefe Community Development District, FL Golf Course
Revenue, 8.125% due 10/1/25 ................................. 1,526,115
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14,694,626
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Georgia -- 5.0%
1,000,000 AAA Atlanta, GA Airport Revenue, Series B, FGIC-Insured,
5.625% due 1/1/30 (b) ....................................... 1,032,780
2,500,000 NR Atlanta, GA Tax Allocation, (Atlantic Station Project),
7.900% due 12/1/24 .......................................... 2,504,550
See Notes to Financial Statements.
8
Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2002
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FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
Georgia -- 5.0% (continued)
$ 1,000,000 NR Atlanta, GA Urban Residential Finance Authority, MFH Revenue,
Park Place Apartments, Series A, 6.750% due 3/1/31 .......... $ 942,470
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 (d) ............................. 440,000
500,000 NR Fulton County, GA Residential Care Facilities, Senior Lien,
Series A, 7.000% due 7/1/29 ................................. 440,205
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 ......................................... 1,013,160
1,435,000 NR Savannah, GA EDA Revenue, Marshview Inn, Series A,
7.125% due 7/1/29 ........................................... 985,515
1,000,000 NR Walton County, GA IDA, IDR, (Walton Manufacturing Co.
Project), 8.500% due 9/1/07 ................................. 894,220
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8,252,900
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Illinois -- 1.3%
2,000,000 AAA Chicago, IL GO, Neighborhoods Alive 21 Program,
FGIC-Insured, 5.500% due 1/1/31 ............................. 2,089,300
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Indiana -- 1.7%
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) ........... 350,000
975,000 NR Indianapolis, IN MFH Revenue, (Lake Nora Fox Club Project),
Series B, 7.500% due 10/1/29 ................................ 949,650
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2,799,650
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Kentucky -- 0.7%
1,500,000 BB Kenton County, KY Airport Board Revenue, (Delta Airlines
Project), Series A, 7.500% due 2/1/20 (b) ................... 1,150,215
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Louisiana -- 6.6%
1,200,000 A3* Lake Charles, LA Harbor & Terminal District, Port Facilities
Revenue, (Trunkline LNG Co. Project), 7.750% due 8/15/22 .... 1,241,400
2,000,000 NR Louisiana Local Government Environmental Facilities,
Community Development Authority Revenue, St. James
Place, Series A, 8.000% due 11/1/25 (c) ..................... 2,069,800
3,000,000 NR Louisiana Public Facilities Authority Hospital Revenue, (Lake
Charles Memorial Hospital Project), 8.625% due 12/1/30 (c) .. 2,674,770
See Notes to Financial Statements.
9
Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2002
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FACE
AMOUNT RATING(a) SECURITY VALUE
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Louisiana -- 6.6% (continued)
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) ................................... $ 687,641
2,845,000 NR Pre-Refunded -- Escrowed with U.S. government securities
to 6/1/01 Call @ 103, 8.500% due 6/1/14 (e) ............. 3,190,838
1,000,000 BB- Continental Grain Co. Project, 7.500% due 7/1/13 ............ 1,030,390
------------
10,894,839
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Maine -- 0.0%
15,000 AA+ Maine State Housing Authority, Mortgage Purchase Revenue,
Series C-2, 7.000% due 11/15/32 (b) ......................... 15,611
------------
Maryland -- 1.8%
3,000,000 NR Maryland State Economic Development Corp. Revenue,
Chesapeake Bay, Series A, 7.730% due 12/1/27 ................ 2,973,510
------------
Massachusetts -- 5.7%
Boston, MA IDA Financing Revenue:
750,000 NR Crosstown Center Project, 8.000% due 9/1/35 (b) ............. 735,383
970,000 NR Roundhouse Hospitality LLC Project,
7.875% due 3/1/25 (b) ..................................... 973,958
Massachusetts State Development Finance Agency Revenue:
1,000,000 NR Alliance Health Care Facility, Series A, 7.100% due 7/1/32 .. 999,870
1,000,000 NR Briarwood, Series B, 8.250% due 12/1/30 ..................... 1,038,560
Massachusetts State Health & Education Facilities
Authority Revenue:
1,000,000 AAA Beth Israel Deaconess Medical Center, Series G-4,
AMBAC-Insured, Variable Rate INFLOS,
10.540% due 7/1/25 (f) .................................. 1,043,210
1,000,000 BBB Caritas Christi Obligation, Series B, 6.750% due 7/1/16 ... 1,088,300
400,000 Ba2* Saint Memorial Medical Center, Series A,
6.000% due 10/1/23 ...................................... 351,620
1,145,000 AA Massachusetts State HFA, Single-Family Housing Revenue,
Series 38, 7.200% due 12/1/26 (b) ........................... 1,194,613
2,000,000 NR Massachusetts State Industrial Finance Agency Revenue,
Assisted Living Facility, (Marina Bay LLC Project),
7.500% due 12/1/27 (b) ...................................... 2,023,920
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9,449,434
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See Notes to Financial Statements.
10
Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2002
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FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
Michigan -- 2.0%
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 ......................................... $ 1,635,200
1,000,000 B1* 5.750% due 9/1/17 ......................................... 707,320
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)(d) .......................... 1,000,000
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3,342,520
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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) ............................. 669,230
2,000,000 NR Sartell, MN Health Care & Housing Facilities Revenue,
(Foundation for Healthcare Project), Series A,
6.500% due 9/1/16 ........................................... 1,878,440
1,935,000 Ba2* St. Paul, MN Housing & Redevelopment Authority Hospital
Revenue, (Healtheast Project), Series A,
6.625% due 11/1/17 .......................................... 1,658,411
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4,206,081
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Missouri -- 0.1%
250,000 NR St. Joseph, MO IDA, (Living Community of St. Joseph Project),
7.000% due 8/15/32 .......................................... 243,265
------------
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) ..................................... 3,900,143
------------
New Jersey -- 6.1%
3,000,000 Ba3* Camden County, NJ Improvement Authority Revenue, (Health
Care Redevelopment Project - Cooper Health System),
5.875% due 2/15/15 (c) ...................................... 2,442,000
New Jersey EDA, Series A:
1,000,000 NR Healthcare Facility Revenue, (Sayreville Senior Living
Project), 6.375% due 4/1/29 (d) ........................... 420,000
850,000 NR Presbyterian Home at Montgomery Inc., First Mortgage,
Series A, 6.375% due 11/1/31 .............................. 850,927
1,000,000 NR Retirement Community Revenue, 8.250% due 11/15/30 ........... 1,074,500
New Jersey Health Care Facilities Financing Authority Revenue:
2,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27 ............... 2,021,380
3,000,000 BBB- Trinitas Hospital Obligation Group, 7.500% due 7/1/30 (c) ... 3,262,860
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10,071,667
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See Notes to Financial Statements.
11
Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
New Mexico -- 0.1%
$ 240,000 AAA New Mexico Mortgage Finance Authority, Single-Family
Mortgage Program, Series B, FHA-Insured,
8.300% due 3/1/20 (b) ....................................... $ 248,633
------------
New York -- 5.3%
700,000 NR Brookhaven, NY IDA, Civic Facility Revenue, Memorial Hospital
Medical Center, Series A, 8.250% due 11/15/30 ............... 739,417
Monroe County, NY IDA:
1,900,000 NR Empire Sports Project, Series A, 6.250% due 3/1/28 .......... 1,145,947
1,000,000 NR Woodland Village Project, 8.550% due 11/15/32 ............... 1,050,760
New York City, NY IDA, Civic Facility Revenue:
1,380,000 NR Community Residence for the Developmentally Disabled,
7.500% due 8/1/26 ......................................... 1,435,090
1,335,000 NR Special Needs Facility Pooled Program, Series A-1,
8.125% due 7/1/19 ......................................... 1,414,913
Suffolk County, NY IDA Civic Facility Revenue, Southampton
Hospital Association:
Series A:
1,000,000 NR 7.250% due 1/1/20 ....................................... 997,920
1,000,000 NR 7.750% due 1/1/22 ....................................... 986,120
1,000,000 NR Series B, 7.625% due 1/1/30 ............................... 1,016,620
------------
8,786,787
------------
North Carolina -- 1.5%
1,000,000 NR Charlotte, NC Special Facilities Revenue, Charlotte/Douglas
International Airport, 5.600% due 7/1/27 (b) ................ 391,360
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 ......................................... 1,092,452
1,000,000 NR 7.625% due 11/1/29 ........................................ 1,013,260
------------
2,497,072
------------
Ohio -- 3.3%
1,500,000 BBB Cuyahoga County, OH Hospital Facilities Revenue,
(Canton Inc. Project), 7.500% due 1/1/30 .................... 1,646,835
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 ........................... 1,257,173
420,000 AAA Unrefunded Balance, 8.100% due 7/1/18 ..................... 486,914
See Notes to Financial Statements.
12
Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
Ohio -- 3.3% (continued)
$ 2,000,000 BBB- Ohio State Air Quality Development Authority Revenue
Refunding, Cleveland Pollution Control, Series A,
6.000% due 12/1/13 .......................................... $ 2,018,220
1,250,000 NR Ohio State Solid Waste Revenue, Republic Engineered
Steels Inc., 9.000% due 6/1/21 (b)(d) ....................... 0
------------
5,409,142
------------
Oklahoma -- 0.9%
2,000,000 B2* Oklahoma Development Finance Authority Revenue, Hillcrest
Healthcare System, Series A, 5.625% due 8/15/29 ............. 1,426,540
------------
Pennsylvania -- 11.6%
2,200,000 CCC- Allegheny County, PA IDA, Airport Special Facilities Revenue,
(USAir, Inc. Project), Series B, 8.500% due 3/1/21 (b)(d) ... 910,096
Beaver County, PA IDA, PCR:
1,500,000 BBB Cleveland Electric Illuminating Co. Project,
7.625% due 5/1/25 ......................................... 1,593,630
2,000,000 BBB Toledo Edison Co. Project, 7.625% due 5/1/20 ................ 2,124,840
3,000,000 NR Dauphin County, PA General Authority Revenue, Hotel &
Conference Center - Hyatt Regency, 6.200% due 1/1/29 ........ 2,453,190
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)(c) ................................... 2,555,100
2,640,000 NR Montgomery County, PA Higher Education & Health
Authority Revenue, Temple Continuing Care Center,
6.625% due 7/1/19 ........................................... 2,067,727
135,000 NR Northumberland County, PA IDA, IDR, (Beverly Enterprises Inc.
Project), 6.875% due 2/1/03 ................................. 135,635
1,000,000 NR Philadelphia, PA Authority for IDR, (Host Marriott L.P.
Project), Remarketed 10/31/95, 7.750% due 12/1/17 ........... 1,037,170
Scranton-Lackawanna, PA Health & Welfare Authority Revenue:
500,000 BB+++ Allied Services Rehabilitation Hospital, Series A,
7.600% due 7/15/20 ........................................ 504,220
Moses Taylor Hospital Project:
1,190,000 BB+ 6.150% due 7/1/14 ......................................... 1,091,539
3,050,000 BB+ 6.250% due 7/1/20 ......................................... 2,645,051
2,000,000 NR Westmoreland County, PA IDA, Healthcare Facilities, Redstone
Highlands Health, Series B, 8.125% due 11/15/30 ............. 2,078,040
------------
19,196,238
------------
South Carolina -- 3.1%
Connector 2000 Association Inc., SC Toll Road Revenue:
Capital Appreciation, Series B:
3,100,000 BBB- Zero coupon bond to yield 8.920% due 1/1/27 ............... 243,164
7,750,000 BBB- Zero coupon bond to yield 10.380% due 1/1/34 .............. 290,780
2,000,000 BBB- Southern Connector Project, Series A, 5.375% due 1/1/38 ..... 1,063,900
See Notes to Financial Statements.
13
Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
South Carolina -- 3.1% (continued)
$ 435,000 NR Florence County, SC IDR, Stone Container Corp.,
7.375% due 2/1/07 ........................................... $ 437,005
595,000 NR McCormick County, SC COP, 9.750% due 7/1/09 ................... 595,785
2,650,000 NR Tobacco Settlement Revenue Management Authority, SC
Variable Rate INFLOS, 9.610% due 5/15/28 (f) ................ 2,531,068
------------
5,161,702
------------
South Dakota -- 0.9%
1,575,000 NR Oglala Sioux Tribe, SD Pine Ridge County, Revenue Bonds,
7.500% due 7/1/13 ........................................... 1,576,874
------------
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 ........................................... 1,833,976
------------
Texas -- 7.8%
Bexar County, TX Housing Financial Corp., MFH:
1,000,000 NR Continental Lady Ester, Series A, 6.875% due 6/1/29 ......... 956,790
1,185,000 Baa3* Nob Hill Apartments, Series B, 8.500% due 6/1/31 ............ 1,172,451
245,000 Baa3* Waters at Northern Hills, Series C, 7.750% due 8/1/36 ....... 240,360
2,000,000 Ba3* El Paso, TX International Airport Revenue, Special
Facilities, (Marriott Corp. Project), 7.750% due 3/1/12 ..... 2,028,380
2,000,000 Baa2* Gulf Coast, TX IDA, Solid Waste Disposal Revenue,
(CITGO Petroleum Corp. Project), 7.500% due 5/1/25 (b) ...... 2,000,000
2,750,000 B+ Houston, TX Airport Systems Revenue, Special Facilities,
Continental Airlines Inc., Series C, 6.125% due 7/15/27 (b) . 1,332,815
Houston, TX Hotel Occupancy, Tax & Special Revenue, Capital
Appreciation, Series B, AMBAC-Insured:
3,000,000 AAA Zero coupon bond to yield 5.680% due 9/1/32 ............... 576,150
1,000,000 AAA Zero coupon bond to yield 5.680% due 9/1/33 ............... 181,710
1,000,000 CCC++ Northgate Crossing, TX Municipal Utility, District No. 1,
GO, 8.875% due 12/1/13 ...................................... 1,032,970
995,000 Baa3* Texas State Affordable Housing Corp., MFH Revenue,
HIC Arborstone Baybrook, Series C, 7.250% due 11/1/31 ....... 967,807
1,405,000 Baa2* Travis County, TX HFA, MFH Revenue, (Lakeview Apartments
Project), Series A, 6.375% due 1/1/34 ....................... 1,426,707
1,000,000 NR Willacy County, TX (Public Facility Corp. Project) Revenue,
Series A-1, 8.250% due 12/1/23 .............................. 974,620
------------
12,890,760
------------
Utah -- 1.9%
1,615,000 NR Hurricane, UT Health Facilities Development Revenue,
(Mission Health Services Project), 10.500% due 7/1/20 ....... 1,130,500
See Notes to Financial Statements.
14
Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2002
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
Utah -- 1.9% (continued)
$ 2,000,000 NR Utah State HFA Revenue, (RHA Community Services
of Utah Inc. Project), Series A, 6.875% due 7/1/27 .......... $ 1,943,180
------------
3,073,680
------------
Virginia -- 1.9%
590,000 A3* Alexandria, VA Redevelopment & Housing Authority,
MFH Revenue, (Parkwood Court Apartments Project),
Series C, 8.125% due 4/1/30 ................................. 603,594
1,000,000 NR Fairfax County, VA EDA Revenue, Retirement Community,
Greenspring Village Inc., Series A, 7.500% due 10/1/29 ...... 1,083,410
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 .......................................... 1,392,300
------------
3,079,304
------------
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 .... 980,420
------------
Wisconsin -- 1.8%
2,000,000 NR Badger Tobacco Asset Securitization Corp., WI Rite-PA 1046,
Variable Rate INFLOS, 9.290% due 12/1/06 (f) ................ 1,848,720
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
------------
2,999,220
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $184,230,899**) ...................................... $165,381,570
============
(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 segregated for collateral for open futures contracts
commitments.
(d) Security is currently in default.
(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 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
Municipal High Income Fund Inc.
Summary of Municipal Bonds by Combined Ratings
[CLIP ART] October 31, 2002 (unaudited)
================================================================================
Standard & Percent of
Moody's and/or Poor's Total Investments
--------------------------------------------------------------------------------
Aaa AAA 4.9%
Aa AA 0.7
A A 4.4
Baa BBB 13.7*
Ba BB 11.1**
B B 4.0
Caa CCC 1.4***
Ca CC 0.3
NR NR 59.5
------
100.0%
======
* 1.2% was rated by Fitch IBCA, Duff & Phelps ("Fitch").
** 0.3% was rated by Fitch.
*** 0.6% was rated by Fitch.
16
Municipal High Income Fund Inc.
[CLIP ART] 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
Municipal High Income Fund Inc.
[CLIP ART] 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 "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.
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.
18
Municipal High Income Fund Inc.
[CLIP ART] 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
Municipal High Income Fund Inc.
Statement of Assets and Liabilities
[CLIP ART] October 31, 2002
================================================================================
ASSETS:
Investments, at value (Cost -- $184,230,899) ................... $ 165,381,570
Cash ........................................................... 190,728
Interest receivable ............................................ 4,266,115
Receivable for securities sold ................................. 983,804
-------------
Total Assets ................................................... 170,822,217
-------------
LIABILITIES:
Payable to broker -- variation margin .......................... 65,625
Investment advisory fee payable ................................ 62,099
Administration fee payable ..................................... 30,789
Accrued expenses ............................................... 155,663
-------------
Total Liabilities .............................................. 314,176
-------------
Total Net Assets .................................................. $ 170,508,041
=============
NET ASSETS:
Par value of capital shares .................................... $ 208,831
Capital paid in excess of par value ............................ 192,384,932
Undistributed net investment income ............................ 507,327
Accumulated net realized loss from security transactions and
futures contracts ............................................ (3,298,408)
Net unrealized depreciation of investments and futures contracts (19,294,641)
-------------
Total Net Assets .................................................. $ 170,508,041
=============
Shares Outstanding ................................................ 20,883,100
-------------
Net Asset Value ................................................... $ 8.16
-------------
See Notes to Financial Statements.
20
Municipal High Income Fund Inc.
Statement of Operations
[CLIP ART] For the Year Ended October 31, 2002
================================================================================
INVESTMENT INCOME:
Interest ................................................... $ 13,401,348
------------
EXPENSES:
Investment advisory fee (Note 3) ........................... 701,628
Administration fee (Note 3) ................................ 350,814
Shareholder communications ................................. 166,056
Audit and legal ............................................ 55,064
Shareholder and system servicing fees ...................... 39,853
Directors' fees ............................................ 39,358
Custody .................................................... 38,386
Other ...................................................... 15,246
------------
Total Expenses ............................................. 1,406,405
------------
Net Investment Income ......................................... 11,994,943
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 4 AND 5):
Realized Loss From:
Security transactions (excluding short-term securities) .. (112,776)
Futures contracts ........................................ (52,047)
------------
Net Realized Loss .......................................... (164,823)
------------
Increase in Net Unrealized Depreciation (Note 1) ........... (10,433,215)
------------
Net Loss on Investments and Futures Contracts ................. (10,598,038)
------------
Increase in Net Assets From Operations ........................ $ 1,396,905
============
See Notes to Financial Statements.
21
Municipal High Income Fund Inc.
Statements of Changes in Net Assets
[CLIP ART] For the Years Ended October 31,
================================================================================
2002 2001
---- ----
Operations:
Net investment income ......................... $ 11,994,943 $ 12,153,225
Net realized loss ............................. (164,823) (733,106)
Increase in net unrealized depreciation ....... (10,433,215) (3,386,185)
------------- -------------
Increase in Net Assets From Operations ........ 1,396,905 8,033,934
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
Net investment income ......................... (11,902,496) (11,958,713)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders ............... (11,902,496) (11,958,713)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net asset value of shares issued for
reinvestment of dividends ................... 1,446,084 2,166,492
------------- -------------
Increase in Net Assets From
Fund Share Transactions ..................... 1,446,084 2,166,492
------------- -------------
Decrease in Net Assets ........................... (9,059,507) (1,758,287)
NET ASSETS:
Beginning of year ............................. 179,567,548 181,325,835
------------- -------------
End of year* .................................. $ 170,508,041 $ 179,567,548
============= =============
* Includes undistributed net investment income of: $ 507,327 $ 298,182
============= =============
See Notes to Financial Statements.
22
Municipal High Income Fund Inc.
[CLIP ART] Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
Municipal High Income Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities are
valued at the mean between the bid and asked prices provided by an independent
pricing service. Securities with no readily obtainable market quotations are
valued at fair value as determined by an independent pricing service under the
supervision of the Fund's Board of Directors; (c) securities maturing within 60
days are valued at cost plus accreted discount, or minus amortized premium,
which approximates value; (d) gains or losses on the sale of securities are
calculated by using the specific identification method; (e) interest income,
adjusted for amortization of premium and accretion of 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 November 1, 2001.
This change does not affect the Fund's net asset value, but does change the
classification of certain amounts in the
23
Municipal High Income Fund Inc.
[CLIP ART] Notes to Financial Statements (continued)
================================================================================
statement of operations. For the year ended October 31, 2002, interest income
increased by $74,113, net realized loss increased by $8,564 and the change in
net unrealized depreciation of investments increased by $65,549. 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.
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 year ended October 31, 2002, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
Purchases ...................................................... $ 57,015,012
============
Sales .......................................................... $ 58,768,163
============
At October 31, 2002, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
Gross unrealized appreciation .................................. $ 4,028,973
Gross unrealized depreciation .................................. (22,687,491)
------------
Net unrealized depreciation .................................... $(18,658,518)
============
24
Municipal High Income Fund Inc.
[CLIP ART] Notes to Financial Statements (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 October 31, 2002, the Fund had the following open futures contracts:
Basis Market Unrealized
# of Contracts Expiration Value Value Loss
==================================================================================================
Sold Contracts:
U.S. Treasury 20 Year Bond 150 12/02 $16,153,125 $16,598,437 $(445,312)
==================================================================================================
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
Municipal High Income Fund Inc.
[CLIP ART] Notes to Financial Statements (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 October 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:
Year Ended Year Ended
October 31, 2002 October 31, 2001
--------------------- --------------------
Shares Amount Shares Amount
-------- ---------- -------- ----------
Shares issued on reinvestment .. 174,992 $1,446,084 235,025 $2,166,492
======== ========== ======== ==========
26
Municipal High Income Fund Inc.
[CLIP ART] Financial Highlights
================================================================================
For a share of capital stock outstanding throughout each year ended October 31,
unless otherwise noted:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net Asset Value, Beginning of Year ......... $ 8.67 $ 8.86 $ 9.00 $ 9.77 $ 9.76
--------- --------- --------- --------- ---------
Income (Loss) From Operations:
Net investment income(1) ................. 0.58 0.59 0.60 0.58 0.60
Net realized and unrealized gain (loss)(1) (0.52) (0.20) (0.16) (0.76) 0.03
--------- --------- --------- --------- ---------
Total Income (Loss) From Operations ........ 0.06 0.39 0.44 (0.18) 0.63
--------- --------- --------- --------- ---------
Less Distributions From:
Net investment income .................... (0.57) (0.58) (0.58) (0.59) (0.61)
In excess of net investment income ....... -- -- -- -- (0.01)
--------- --------- --------- --------- ---------
Total Distributions ........................ (0.57) (0.58) (0.58) (0.59) (0.62)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year ............... $ 8.16 $ 8.67 $ 8.86 $ 9.00 $ 9.77
========= ========= ========= ========= =========
Total Return, Based on Market Value ........ (4.70)% 13.85% 9.39% (15.76)% 9.34%
========= ========= ========= ========= =========
Total Return, Based on
Net Asset Value .......................... 0.91% 4.77% 5.97% (1.79)% 6.75%
========= ========= ========= ========= =========
Net Assets, End of Year (000s) ............. $ 170,508 $ 179,568 $ 181,326 $ 184,085 $ 197,944
========= ========= ========= ========= =========
Ratios to Average Net Assets:
Expenses ................................. 0.80% 0.82% 0.71% 0.73% 0.74%
Net investment income(1) ................. 6.84 6.74 6.72 6.08 6.07
Portfolio Turnover Rate .................... 33% 15% 27% 27% 57%
Market Value, End of Year .................. $ 7.680 $ 8.640 $ 8.125 $ 8.000 $ 10.125
----------
(1) 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.
27
Municipal High Income Fund Inc.
[CLIP ART] Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Municipal High Income Fund Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Municipal High Income Fund Inc.
("Fund") as of October 31, 2002, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the years
in the two-year period then ended and financial highlights for each of the years
in the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2002, by correspondence with the custodian.
As to securities sold but not yet delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Fund as of October 31, 2002, and the results of its operations for the year then
ended, the changes in its net assets for each of the years in the two-year
period then ended, and financial highlights for each of the years in the
five-year period then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
New York, New York
December 11, 2002
28
Municipal High Income Fund Inc.
[CLIP ART] 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
----------
* As of record date.
29
Municipal High Income Fund Inc.
[CLIP ART] Additional Information (unaudited)
================================================================================
Information about Directors and Officers
The business and affairs of Municipal High Income Fund Inc. ("Fund") are managed
under the direction of the Board of Directors. Information pertaining to the
Directors and Officers of the Fund is set forth below.
Number of
Term of Portfolios
Office* Principal in Fund Other
Position(s) and Length Occupation(s) Complex Directorships
Held with of Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
------------------------------------------------------------------------------------------------------------------------------------
Non-Interested Directors:
Allan J. Bloostein Director Since President of Allan J. 35 Taubman Centers Inc.
27 West 67th Street 1998 Bloostein Associates
New York, NY 10023
Age 72
Dwight B. Crane Director Since Professor, Harvard 51 None
Harvard Business School 1998 Business School
Soldiers Field Road
Morgan Hall #375
Boston, MA 02163
Age 65
Paolo M. Cucchi Director Since Vice President and Dean of 7 None
Drew University 2001 College of Liberal Arts at
108 Brothers College Drew University
Madison, NJ 07940
Age 61
Robert A. Frankel Director Since Managing Partner of 24 None
8 John Walsh Blvd. 1998 Robert A. Frankel
Peekskill, NY 10566 Management Consultants
Age 75
Dr. Paul Hardin Director Since Chancellor Emeritus and 36 None
12083 Morehead 2001 Professor of Law at the
Chapel Hill, NC 27514 University of North Carolina
Age 72 at Chapel Hill
William R. Hutchinson Director Since President of WR Hutchinson & 7 Director of Associated
535 N. Michigan 1998 Associates, Inc.; Formerly Bank and Associated
Chicago, IL 60611 Group Vice President of Mergers Banc-Corp
Age 60 & Acquisitions at BP Amoco
George M. Pavia Director Since Senior Partner of Pavia & Harcourt 8 None
600 Madison Avenue 2001 Attorneys
New York, NY 10022
Age 74
30
Municipal High Income Fund Inc.
[CLIP ART] Additional Information (unaudited) (continued)
================================================================================
Number of
Term of Portfolios
Office* Principal in Fund Other
Position(s) and Length Occupation(s) Complex Directorships
Held with of Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
------------------------------------------------------------------------------------------------------------------------------------
Interested Directors:
R. Jay Gerken Chairman, Since Managing Director of Salomon 226 None
SSB President and 2002 Smith Barney Inc. ("SSB");
399 Park Avenue Chief Executive Chairman, President and Chief
4th Floor Officer Executive Officer of Smith
New York, NY 10022 Barney Fund Management LLC
Age 51 ("SBFM"), Travelers Investment
Adviser, Inc. ("TIA") and Citi
Fund Management Inc.
----------
* Directors are elected for a term of three years.
Officers:
Lewis E. Daidone Senior Vice Since Managing Director of SSB; N/A N/A
SSB President 1998 Director and Senior Vice
125 Broad Street and Chief President of SBFM and TIA;
11th Floor Administrative Chief Financial Officer and
New York, NY 10004 Officer Treasurer of mutual funds
Age 45 affiliated with Citigroup Inc.
Richard L. Peteka Chief Financial Since Director and Head of Internal N/A N/A
SSB Officer and 2002 Control for Citigroup Asset
125 Broad Street Treasurer Management U.S. Mutual Fund
11th Floor Administration from 1999-2002;
New York, NY 10004 Vice President, Head of Mutual
Age 41 Fund Administration and
Treasurer at Oppenheimer Capital
from 1996-1999
Peter M. Coffey Vice President Since Managing Director of SSB; N/A N/A
SSB and Investment 1999 Investment Officer of SBFM
399 Park Avenue Officer
4th Floor
New York, NY 10022
Age 58
Kaprel Ozsolak Controller Since Vice President of SSB N/A N/A
SSB 2002
125 Broad Street
11th Floor
New York, NY 10004
Age 37
Christina T. Sydor Secretary Since Managing Director of SSB; N/A N/A
SSB 1998 General Counsel and Secretary
300 First Stamford Place of SBFM and TIA
4th Floor
Stamford, CT 06902
Age 51
31
Municipal High Income Fund Inc.
[CLIP ART] 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
32
Municipal High Income Fund Inc.
[CLIP ART] Dividend Reinvestment Plan (unaudited) (continued)
================================================================================
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 October 31,
2002, the Fund has not repurchased any shares.
33
Municipal High Income Fund Inc.
[CLIP ART] Tax Information (unaudited)
================================================================================
For Federal tax purposes, the Fund hereby designates for the fiscal year ended
October 31, 2002:
o 99.89% of the dividends paid by the Fund from net investment income
as tax exempt for regular Federal income tax purposes.
34
Municipal High Income Fund Inc.
[CLIP ART] 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
(This page intentionally left blank.)
[GRAPHIC OMITTED]
[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
FD01049 12/02
02-4158