UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-5497
Municipal High Income Fund Inc.
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Smith Barney Fund Management LLC
300 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 451-2010
Date of fiscal year end: October 31
Date of reporting period: October 31, 2003
ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
[CLIP ART]
Municipal
High Income
Fund Inc.
[GRAPHIC OMITTED]
Annual
Report
[CLIP ART]
October 31,
2003
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Municipal High Income Fund Inc.
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WHAT'S INSIDE
Letter from the Chairman .................................................. 1
Schedule of Investments ................................................... 5
Statement of Assets and Liabilities ....................................... 18
Statement of Operations ................................................... 19
Statements of Changes in Net Assets ....................................... 20
Notes to Financial Statements ............................................. 21
Financial Highlights ...................................................... 25
Independent Auditors' Report .............................................. 26
Financial Data ............................................................ 27
Additional Information .................................................... 28
Tax Information ........................................................... 30
Dividend Reinvestment Plan ................................................ 31
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Municipal High Income Fund Inc.
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LETTER FROM THE CHAIRMAN
[PHOTO OMITTED]
R. JAY GERKEN, CFA
Chairman, President and
Chief Executive Officer
Dear Shareholder,
Although the volatility in the U.S. Treasury bond markets triggered by signs of
a sharply accelerating economy exerted pressure on municipal bonds over the
summer, the Municipal High Income Fund Inc. finished the 12-month period ended
October 31, 2003 in positive territory on a total return basis. However, based
on its market price as well as its net asset value ("NAV"),(i) the fund
underperformed both the unmanaged Lehman Brothers Municipal Bond Index,(ii)
which returned 5.11%, and the fund's Lipper peer group of closed-end high-yield
municipal debt funds, which returned 7.48%, over the same period.(iii)
As of the end of October in comparison to many other funds, your fund generated
a relatively high level of tax-exempt income. During the 12 months ended October
31, 2003, the fund distributed dividends to shareholders totaling $0.558 per
share. The table shows the annualized distribution yields and 12-month total
returns based on the fund's October 31, 2003 NAV per share and its New York
Stock Exchange ("NYSE") closing price. Past performance is not indicative of
future results. Please note that certain investors may be subject to the federal
Alternative Minimum Tax, and state and local taxes will apply. Capital gains, if
any, are fully taxable. Please consult your personal tax adviser.
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FUND PERFORMANCE AS OF OCTOBER 31, 2003
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Annualized 12-Month
Price Per Share Distribution Yield Total Return
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$7.92 (NAV) 7.05% 4.42%
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$7.65 (NYSE) 7.29% 7.17%
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Total returns are based on changes in NAV or the market price, respectively.
Total return assumes the reinvestment of all dividends and/or capital gains
distributions, if any, 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, 2003 and is subject to change.
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Market Overview
During the year, many states continued to grapple with budgetary pressures
brought on by the faltering economy, layoffs and declining incomes -- all
leading to lower tax revenues. To stimulate economic growth, the Fed lowered its
interest rate targets to four-decade lows and lawmakers passed a significant
tax-cut package this year. Indeed, it seemed that the government was going to
throw "everything but the kitchen sink" at the economy in an attempt to revive
its growth.
In May, the bond markets rose significantly in anticipation that the Fed would
again lower its target for short-term rates. U.S. Treasury bonds subsequently
sold off and continued to spiral downward throughout July due, in part, to
concerns about stronger-than-expected economic growth. During this tumultuous
time, however, municipal bonds held up better for the month. Airline issues were
significant contributors to the high-yield municipal bond market. Although these
issues came under pressure during the middle of the period, they rebounded and
their strong collective performance by the end of October favorably impacted the
municipal high-yield market's returns.
Factors Influencing Fund Performance
Issue- and sector-specific factors, particularly in the lifecare, multi-family
and new toll road development sectors, detracted from fund performance. Results
were enhanced, in part, by the fund's exposure to special facilities bonds for
airlines (with the exception of one issue that remained in selective default) as
bankruptcy concerns that had pressured this segment of the market diminished. We
also shortened portfolio duration while seeking to maintain a relatively high
level of tax-exempt income. Due to the steepness of the yield curve, with yields
on shorter term bonds much lower than on long term bonds, this was accomplished
primarily by maintaining a short position in U.S. Treasury futures. Although
this lower-duration approach marginally detracted from the fund's performance
when rates were dropping, it helped to better preserve the value of the fund
during many of the times when long-term yields were rising, such as in July.
At times of uncertainty such as these, now may be a more important time than
ever to develop and stick with a long-range plan. In addition to their
income-producing capabilities, bonds can be an effective means of diversifying
an overall investment portfolio. And municipal securities have the added benefit
of providing income free from federal, and sometimes state and local, income
taxes. However, in this environment of bond volatility marred by budget
deficits, it is critical to perform a thorough analysis before carefully
choosing municipal bonds. Furthermore, higher-yield municipal bonds carry more
credit risk than investment-grade issues. In our opinion, this is all the more
reason why investing in municipal bonds with a professional fund manager is a
more prudent strategy than buying these bonds directly. In my view, fund
managers can facilitate the investment diversification and thorough credit
analysis that is important in managing risk.
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Looking for Additional Information?
The fund is traded under the symbol "MHF" and its closing market price is
available in most newspapers under the New York Stock Exchange listings. The
daily NAV is available online under symbol XMHFX. Barron's and The Wall Street
Journal's Monday editions carry closed-end fund tables that will provide
additional information. In addition, the fund issues a quarterly allocation
press release that can be found on most major financial web sites.
In a continuing effort to provide information concerning the fund, shareholders
may call 1-888-735-6507, Monday through Friday from 8:00 a.m. to 6:00 p.m.
Eastern Time (ET), for the fund's current net asset value, market price and
other information regarding the fund's portfolio holdings and allocations.
As always, thank you for your continued confidence in our stewardship of your
assets.
Sincerely,
/s/ R. Jay Gerken
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
November 19, 2003
The information provided 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 October 31, 2003 and are subject to
change. Please refer to pages 5 through 13 for a list and percentage breakdown
of the fund's holdings.
(i) NAV is a price that reflects the value of the fund's underlying portfolio
plus other assets, less the fund's liabilities. 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 shares.
(ii) 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.
(iii) Lipper Inc. is a major independent mutual-fund tracking organization.
Returns are based on the 12-month period ended October 31, 2003,
calculated among 12 funds in the fund's Lipper peer group of closed-end
high-yield municipal debt funds, including the reinvestment of dividends
and capital gains, if any.
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Take Advantage of the Fund's Dividend Reinvestment Plan!
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 31. 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 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 shares 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 shares 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 Inc. at 1 (800) 331-1710.
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Municipal High Income Fund Inc.
Schedule of Investments
[CLIP ART] October 31, 2003
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FACE
AMOUNT RATING(a) SECURITY VALUE
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Alabama -- 4.0%
$ 4,000,000 BB+ Butler, AL IDB, Solid Waste Disposal Revenue, (James River
Corp. Project), 8.000% due 9/1/28 (b)(c) ...................... $ 4,013,240
615,000 NR Capstone Improvement District of Brookwood, AL, Series A,
7.700% due 8/15/23 (d) ........................................ 153,750
1,000,000 D Mobile, AL IDB, Solid Waste Disposal Revenue, (Mobile
Energy Services Co. Project), 6.950% due 1/1/20 (d) ........... 7,000
1,000,000 NR Rainbow City, AL Special Health Care Facility Financing
Authority, Series A, 8.250% due 1/1/31 ........................ 1,037,490
1,000,000 AAA West Jefferson, AL Amusement & Public Park Authority Revenue,
(Visionland Project), (Call 12/1/06 @ 102),
8.000% due 12/1/26 (e) ........................................ 1,200,050
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6,411,530
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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) ........ 1,089,150
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Arizona -- 3.4%
1,500,000 NR Casa Grande, AZ IDA, Hospital Revenue, Casa Grande Regional
Medical Center, Series A, 7.625% due 12/1/29 .................. 1,544,970
1,750,000 Ca* Gila County, AZ IDA Revenue, ASARCO Inc.,
5.550% due 1/1/27 ............................................. 805,000
Maricopa, AZ IDA, MFH Revenue:
485,000 NR Avalon Apartments Project, Series C,
10.000% due 4/1/30 (d) ..................................... 290,190
960,000 NR Gran Victoria Housing LLC Project, Series B,
10.000% due 5/1/31 (c) ..................................... 968,985
1,810,000 NR Phoenix, AZ IDA, MFH Revenue, (Ventana Palms
Apartments Project), Series B, 8.000% due 10/1/34 ............. 1,801,565
------------
5,410,710
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Arkansas -- 1.1%
Arkansas State Development Finance Authority:
1,000,000 BBB++ Hospital Revenue, (Washington Regional Medical
Center Project), 7.375% due 2/1/29 (c) ..................... 1,082,970
600,000 BB+ Industrial Facilities Revenue, (Potlatch Corp. Project),
Series A, 7.750% due 8/1/25 (b)(c) ......................... 636,126
------------
1,719,096
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California -- 6.9%
1,500,000 NR Barona, CA Band of Mission Indians, GO,
8.250% due 1/1/20 (c) ......................................... 1,608,480
3,000,000 AAA California State Department of Water Resources, Power Supply
Revenue, Series A, MBIA-Insured, 5.375% due 5/1/21 (c) ........ 3,160,620
See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2003
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FACE
AMOUNT RATING(a) SECURITY VALUE
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California -- 6.9% (continued)
$ 1,500,000 NR California Statewide Communities Development Authority
Revenue, (East Valley Tourist Project), Series A,
9.250% due 10/1/20 (c) ........................................ $ 1,408,860
Golden State Tobacco Securitization Corp., Tobacco
Settlement Revenue:
1,000,000 A-++ 5.625% due 6/1/38 .......................................... 969,610
2,000,000 BBB 7.800% due 6/1/42 .......................................... 2,040,280
1,865,000 Ba3* Vallejo, CA COP, Touro University, 7.375% due 6/1/29 ............. 1,902,244
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11,090,094
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Colorado -- 0.6%
999,000 NR Highline Business Improvement District, Littleton, CO GO,
Series B, 8.750% due 12/15/19 ................................. 1,003,955
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Connecticut -- 1.1%
1,735,000 NR Connecticut State Development Authority, Aquarium Project
Revenue, (Mystic Marinelife Aquarium Project), Series A,
7.000% due 12/1/27 ............................................ 1,710,467
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District of Columbia -- 1.9%
1,895,000 AAA District of Columbia COP, AMBAC-Insured,
5.500% due 1/1/20 ............................................. 2,062,499
1,215,000 BBB District of Columbia, Tobacco Settlement Financing Corp.,
6.500% due 5/15/33 ............................................ 1,071,387
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3,133,886
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Florida -- 10.5%
1,000,000 NR Beacon Lakes Community Development District, Special
Assessment, Series A, 6.900% due 5/1/35 (c) 1,007,590
Capital Projects Finance Authority, FL:
2,000,000 NR Continuing Care Retirement, Glenridge on Palmer Ranch,
Series A, 8.000% due 6/1/32 (c) ............................ 2,049,940
2,000,000 NR Student Housing Revenue, Florida University, Series A,
7.850% due 8/15/31 (c) ..................................... 2,006,380
1,000,000 NR Capital Trust Agency Revenue, Seminole Tribe Convention
Center, Series A, 10.000% due 10/1/33 ......................... 1,189,350
995,000 NR Century Parc Community Development District, Special
Assessment, 7.000% due 11/1/31 ................................ 1,023,457
2,750,000 NR Hillsborough County, FL IDA Revenue, (Lake Shore Villas
Project), Series A, 6.750% due 7/1/29 ......................... 2,151,848
875,000 NR Homestead, FL IDR, Community Rehabilitation Providers
Program, Series A, 7.950% due 11/1/18 ......................... 899,859
2,000,000 BBB- Martin County, FL IDA Revenue, (Indiantown Cogeneration
Project), Series A, 7.875% due 12/15/25 (b) ................... 2,069,120
See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2003
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FACE
AMOUNT RATING(a) SECURITY VALUE
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Florida -- 10.5% (continued)
$ 1,000,000 NR Orange County, FL Health Facilities Authority Revenue, First
Mortgage, (GF/Orlando, Inc. Project), 9.000% due 7/1/31 ....... $ 1,004,900
2,000,000 NR Reunion East Community Development District, Special
Assessment, Series A, 7.375% due 5/1/33 ....................... 2,089,380
1,475,000 NR Waterlefe Community Development District, Golf Course
Revenue, 8.125% due 10/1/25 ................................... 1,515,371
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17,007,195
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Georgia -- 4.0%
1,000,000 AAA Atlanta, GA Airport Revenue, Series B, FGIC-Insured,
5.625% due 1/1/30 (b)(c) ...................................... 1,045,480
2,500,000 NR Atlanta, GA Tax Allocation, (Atlantic Station Project),
7.900% due 12/1/24 (c) ........................................ 2,545,025
1,000,000 NR Atlanta, GA Urban Residential Finance Authority, MFH Revenue,
Park Place Apartments, Series A, 6.750% due 3/1/31 (c) ........ 922,010
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 ........................................... 1,029,950
1,005,000 NR Walton County, GA IDA Revenue, (Walton Manufacturing Co.
Project), 8.500% due 9/1/07 ................................... 925,253
------------
6,467,718
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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 ............................... 2,087,500
------------
Indiana -- 1.8%
2,500,000 B- East Chicago, IN PCR, (Inland Steel Co. Project No. 10),
6.800% due 6/1/13 ............................................. 1,850,000
1,000,000 CCC Indiana State Development Finance Authority, PCR, (Inland
Steel Co. Project No. 13), 7.250% due 11/1/11 (b) ............. 550,000
975,000 NR Indianapolis, IN MFH Revenue, (Lake Nora Fox Club Project),
Series B, 7.500% due 10/1/29 (d) .............................. 487,451
------------
2,887,451
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Kentucky -- 0.9%
1,500,000 B Kenton County, KY Airport Board Revenue, (Delta Airlines
Project), Series A, 7.500% due 2/1/20 (b) ..................... 1,499,520
------------
Louisiana -- 6.0%
1,000,000 NR Epps, LA COP, 8.000% due 6/1/18 .................................. 976,450
2,000,000 NR Louisiana Local Government Environmental Facilities,
Community Development Authority Revenue, St. James Place,
Series A, 8.000% due 11/1/25 .................................. 1,862,500
2,975,000 NR Louisiana Public Facilities Authority Hospital Revenue, (Lake
Charles Memorial Hospital Project), 8.625% due 12/1/30 ........ 2,443,219
See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2003
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FACE
AMOUNT RATING(a) SECURITY VALUE
===============================================================================================================
Louisiana -- 6.0% (continued)
Port of New Orleans, LA IDR:
Avondale Industries, Inc. Project:
$ 335,000 NR 8.250% due 6/1/04 (f) ...................................... $ 348,561
2,785,000 NR Call 6/1/04 @ 103, 8.500% due 6/1/14 (c)(e) ................ 2,970,453
1,000,000 BB- Continental Grain Co. Project, 7.500% due 7/1/13 .............. 1,020,920
------------
9,622,103
------------
Maryland -- 1.8%
3,000,000 NR Maryland State Economic Development Corp. Revenue,
Chesapeake Bay, Series A, 7.730% due 12/1/27 .................. 2,864,670
------------
Massachusetts -- 5.3%
Boston, MA IDA Financing Revenue:
750,000 NR Crosstown Center Project, 8.000% due 9/1/35 (b)(c) ............ 754,718
970,000 NR Roundhouse Hospitality LLC Project,
7.875% due 3/1/25 (b)(c) ................................... 989,061
Massachusetts State Development Finance Agency Revenue:
1,100,000 NR Alliance Health Care Facility, Series A, 7.100% due 7/1/32 .... 1,054,526
1,000,000 NR Briarwood, Series B, 8.250% due 12/1/30 ....................... 1,052,050
Massachusetts State Health & Education Facilities
Authority Revenue:
1,000,000 AAA Beth Israel Deaconess Medical Center, Series G-4,
AMBAC-Insured, INFLOS, 10.803% due 7/1/25 (g) ............... 1,025,720
1,000,000 BBB Caritas Christi Obligation, Series B, 6.750% due 7/1/16 .... 1,018,320
690,000 AA Massachusetts State HFA, Single-Family Housing Revenue,
Series 38, 7.200% due 12/1/26 (b) ............................. 713,301
1,965,000 NR Massachusetts State Industrial Finance Agency Revenue,
Assisted Living Facility, (Marina Bay LLC Project),
7.500% due 12/1/27 (b) ........................................ 1,992,726
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8,600,422
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Michigan -- 3.6%
2,130,000 NR Allen Academy, COP, 7.500% due 6/1/23 (c) ........................ 2,066,207
1,000,000 NR Cesar Chavez Academy, COP, 8.000% due 2/1/33 ..................... 1,012,360
Garden City, MI Hospital Finance Authority, Hospital
Revenue, Garden City Hospital Obligation Group,
Series A:
2,000,000 Ba2* 5.625% due 9/1/10 ........................................... 1,777,800
1,000,000 Ba2* 5.750% due 9/1/17 ........................................... 795,960
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) ............................ 100,000
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5,752,327
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See Notes to Financial Statements.
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2003
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FACE
AMOUNT RATING(a) SECURITY VALUE
===============================================================================================================
Minnesota -- 0.6%
$ 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) ............................... $ 910,530
------------
Missouri -- 0.2%
250,000 NR St. Joseph, MO IDA, (Living Community of St. Joseph Project),
7.000% due 8/15/32 ............................................ 255,658
------------
Montana -- 2.0%
4,515,000 NR Montana State Board of Investment, Resource Recovery
Revenue, (Yellowstone Energy L.P. Project),
7.000% due 12/31/19 (b) ....................................... 3,278,793
------------
New Jersey -- 3.9%
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
1,000,000 NR Retirement Community Revenue, 8.250% due 11/15/30 ............. 1,076,320
3,000,000 BBB- New Jersey Health Care Facilities Financing Authority Revenue,
Trinitas Hospital Obligation Group, 7.500% due 7/1/30 ......... 3,289,770
1,720,000 BBB Tobacco Settlement Financing Corp. Revenue,
6.750% due 6/1/39 ............................................. 1,570,240
------------
6,356,330
------------
New Mexico -- 0.0%
60,000 AAA New Mexico Mortgage Finance Authority, Single-Family
Mortgage Program, Series B, FHA-Insured,
8.300% due 3/1/20 (b) ......................................... 61,223
------------
New York -- 3.4%
700,000 NR Brookhaven, NY IDA, Civic Facility Revenue, Memorial Hospital
Medical Center, Series A, 8.250% due 11/15/30 (c) ............. 739,074
1,000,000 NR Monroe County, NY IDA, Woodland Village Project,
8.550% due 11/15/32 ........................................... 1,066,590
New York City, NY IDA, Civic Facility Revenue:
1,360,000 NR Community Residence for the Developmentally Disabled,
7.500% due 8/1/26 .......................................... 1,446,224
1,230,000 NR Special Needs Facility Pooled Program, Series A-1,
8.125% due 7/1/19 .......................................... 1,320,048
990,000 NR Suffolk County, NY IDA, Civic Facility Revenue, Southampton
Hospital Association, Series A, 7.750% due 1/1/22 ............. 1,000,167
------------
5,572,103
------------
See Notes to Financial Statements.
9
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===============================================================================================================
North Carolina -- 2.5%
$ 1,000,000 NR Charlotte, NC Special Facilities Revenue, Charlotte/Douglas
International Airport, 5.600% due 7/1/27 (b) .................. $ 724,500
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 .......................................... 1,133,050
980,000 NR 7.625% due 11/1/29 ......................................... 1,006,156
1,000,000 AAA North Carolina Municipal Power Agency, Catawba Electric
Revenue, MBIA-Insured, FLAIRS, 10.909% due 1/1/11 ............. 1,232,470
------------
4,096,176
------------
Ohio -- 3.3%
1,500,000 BBB Cuyahoga County, OH Hospital Facilities Revenue,
(Canton Inc. Project), 7.500% due 1/1/30 ...................... 1,646,625
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 8.100% due 7/1/18 .......................................... 1,226,029
375,000 AAA Unrefunded Balance, 8.100% due 7/1/18 ...................... 425,625
2,000,000 BBB- Ohio State Air Quality Development Authority Revenue, Cleveland
Pollution Control, Series A, 6.000% due 12/1/13 ............... 2,068,980
1,250,000 NR Ohio State Solid Waste Revenue, Republic Engineered
Steels Inc., 9.000% due 6/1/21 (b)(d) ......................... 0
------------
5,367,259
------------
Oklahoma -- 0.8%
2,000,000 B1* Oklahoma Development Finance Authority Revenue, Hillcrest
Healthcare System, Series A, 5.625% due 8/15/29 ............... 1,371,500
------------
Pennsylvania -- 9.8%
2,200,000 C* Allegheny County, PA IDA, Airport Special Facilities Revenue,
(USAir Inc. Project), Series B, 8.500% due 3/1/21 (b)(d) ...... 260,876
Beaver County, PA IDA, PCR:
1,500,000 BBB Cleveland Electric Illuminating Co. Project,
7.625% due 5/1/25 (c) ...................................... 1,594,170
2,000,000 BBB Toledo Edison Co. Project, 7.625% due 5/1/20 (c) .............. 2,125,560
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 ................................... 1,002,710
3,000,000 NR Dauphin County, PA General Authority Revenue, Hotel &
Conference Center - Hyatt Regency, 6.200% due 1/1/29 .......... 2,432,160
2,640,000 NR Montgomery County, PA Higher Education & Health Authority
Revenue, Temple Continuing Care Center,
6.625% due 7/1/19 (d) ......................................... 1,161,600
See Notes to Financial Statements.
10
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Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===============================================================================================================
Pennsylvania -- 9.8% (continued)
$ 1,000,000 NR Northumberland County, PA IDA, (NHS Youth Services Inc.
Project), Series A, 7.500% due 2/15/29 ........................ $ 976,610
1,000,000 NR Philadelphia, PA Authority for IDR, (Host Marriott L.P.
Project), Remarketed 10/31/95, 7.750% due 12/1/17 ............. 1,012,370
Scranton-Lackawanna, PA Health & Welfare Authority Revenue:
500,000 BB+++ Allied Services Rehabilitation Hospital, Series A,
7.600% due 7/15/20 ......................................... 500,830
Moses Taylor Hospital Project:
1,115,000 BB+ 6.150% due 7/1/14 .......................................... 750,540
3,050,000 BB+ 6.250% due 7/1/20 .......................................... 1,900,547
2,000,000 NR Westmoreland County, PA IDA, Healthcare Facilities, Redstone
Highlands Health, Series B, 8.125% due 11/15/30 ............... 2,158,560
------------
15,876,533
------------
Rhode Island -- 1.2%
2,500,000 NR Tobacco Settlement Financing Corp. Revenue, FLAIRS,
9.687% due 6/1/08 ............................................. 1,995,700
------------
South Carolina -- 2.2%
Connector 2000 Association Inc., SC Toll Road Revenue:
Capital Appreciation, Series B:
3,100,000 B- Zero coupon bond to yield 8.638% due 1/1/27 ................ 97,309
7,750,000 B- Zero coupon bond to yield 9.916% due 1/1/34 ................ 208,553
2,000,000 B- Southern Connector Project, Series A, 5.375% due 1/1/38 ....... 856,100
335,000 NR Florence County, SC IDR, Stone Container Corp.,
7.375% due 2/1/07 ............................................. 340,105
530,000 NR McCormick County, SC COP, 9.750% due 7/1/09 ...................... 531,902
2,000,000 NR Tobacco Settlement Revenue Management Authority,
FLAIRS, 10.765% due 5/15/28 ................................... 1,498,480
------------
3,532,449
------------
South Dakota -- 0.9%
1,450,000 NR Oglala Sioux Tribe, SD Pine Ridge County, Revenue Bonds,
7.500% due 7/1/13 ............................................. 1,452,639
------------
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 ............................................. 1,791,540
------------
Texas -- 7.7%
Bexar County, TX Housing Financial Corp, MFH:
995,000 NR Continental Lady Ester, Series A, 6.875% due 6/1/29 (c) ....... 931,778
1,175,000 Baa3* Nob Hill Apartments, Series B, 8.500% due 6/1/31 (c) .......... 1,139,856
240,000 Baa3* Waters at Northern Hills, Series C, 7.750% due 8/1/36 (c) ..... 230,354
See Notes to Financial Statements.
11
================================================================================
Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===============================================================================================================
Texas -- 7.7% (continued)
$ 2,000,000 Ba3* Gulf Coast, TX IDA, Solid Waste Disposal Revenue, (CITGO
Petroleum Corp. Project), 7.500% due 5/1/25 (b) ............... $ 2,021,740
2,750,000 B- Houston, TX Airport Systems Revenue, Special Facilities,
Continental Airlines Inc., Series C, 6.125% due 7/15/27 (b) ... 2,205,555
1,000,000 BB Port Corpus Christi, TX Industrial Development Corp., (CITGO
Petroleum Corp. Project), 8.250% due 11/1/31 (b) .............. 1,027,440
980,000 Ba1* Texas State Affordable Housing Corp., MFH Revenue, HIC
Arborstone Baybrook, Series C, 7.250% due 11/1/31 ............. 954,834
1,405,000 B3* Travis County, TX HFA, MFH Revenue, (Lakeview Apartments
Project), Series A, 6.375% due 1/1/34 ......................... 1,048,776
1,865,000 NR West Texas Detention Facility Corp. Revenue,
8.000% due 2/1/25 ............................................. 1,842,154
1,000,000 NR Willacy County, TX, (Public Facility Corp. Project),
Series A-1, 8.250% due 12/1/23 ................................ 1,007,100
------------
12,409,587
------------
Utah -- 1.8%
1,615,000 NR Hurricane, UT Health Facilities Development Revenue, (Mission
Health Services Project), 10.500% due 7/1/20 (d) .............. 969,000
2,000,000 NR Utah State HFA Revenue, (RHA Community Services of
Utah Inc. Project), Series A, 6.875% due 7/1/27 ............... 1,933,000
------------
2,902,000
------------
Virginia -- 2.7%
550,000 NR Alexandria, VA Redevelopment & Housing Authority, MFH
Revenue, (Parkwood Court Apartments Project), Series C,
8.125% due 4/1/30 ............................................. 555,506
1,000,000 NR Broad Street Community Development Authority Revenue,
7.500% due 6/1/33 (c) ......................................... 979,570
1,000,000 NR Fairfax County, VA EDA Revenue, Retirement Community,
Greenspring Village Inc., Series A, 7.500% due 10/1/29 ........ 1,051,520
23,400,000 BBB-++ Pocahontas Parkway Association, VA Toll Road Revenue,
Capital Appreciation, Series B, zero coupon bond to yield
8.494% due 8/15/34 ............................................ 1,711,944
------------
4,298,540
------------
West Virginia -- 0.3%
500,000 NR West Virginia EDA, Commercial Development Revenue,
(Stonewall Jackson Project), Series B, 8.000% due 4/1/30 ...... 486,735
------------
See Notes to Financial Statements.
12
================================================================================
Municipal High Income Fund Inc.
Schedule of Investments (continued)
[CLIP ART] October 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===============================================================================================================
Wisconsin -- 0.7%
$ 1,745,000 NR Wisconsin State Health & Educational Facilities Authority
Revenue, (Benchmark Healthcare of Green Bay Inc. Project),
Series A, 7.750% due 5/1/27 ................................... $ 1,134,250
------------
TOTAL INVESTMENTS -- 100.0%
(Cost -- $180,599,684**) ......................................... $161,507,339
============
(a) All ratings are by Standard & Poor's Rating 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) All or a portion of this security has been segregated and/or held as
collateral for open futures contracts commitments.
(d) Security is currently in default.
(e) Pre-Refunded bonds escrowed 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) Bonds escrowed to maturity with U.S. government securities are considered
by the manager to be triple-A rated even if issuer has not applied for new
ratings.
(g) Inverse floating rate security; coupon varies inversely with level of
short-term tax exempt interest rates.
** Aggregate cost for Federal income tax purposes is $180,365,548.
See Notes to Financial Statements.
13
Municipal High Income Fund Inc.
Summary of Investments by Industry*
[CLIP ART] October 31, 2003
================================================================================
Hospitals ................................................. 16.4%
Lifecare Systems .......................................... 15.2
Industrial Development .................................... 12.6
Multi-Family Housing ...................................... 6.9
Pollution Control ......................................... 6.9
Transportation ............................................ 5.9
Tobacco ................................................... 5.7
Education ................................................. 4.3
Cogeneration Facilities ................................... 3.3
Utilities ................................................. 2.7
Public Facilities ......................................... 2.6
Other ..................................................... 17.5
-----
100.0%
=====
----------
* As a percentage of total investments. Please note that Fund holdings are
as of October 31, 2003 and are subject to change.
14
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.
D -- Bond rated "D" are in default, and payment of interest and/or
repayment of principal is in arrears.
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.
15
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 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.
A -- Bonds rated "A" have a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to
changes in circumstances or in economic conditions than is the
case for higher ratings.
BBB -- Bonds rated "BBB" 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" 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, -- Bonds rated "CCC", "CC" and "C" carry the real possibility of
CC and C defaulting. 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.
16
Municipal High Income Fund Inc.
[CLIP ART] 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.
Abbreviations* (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
----------
* Abbreviations may or may not appear in the schedule of investments.
17
Municipal High Income Fund Inc.
Statement of Assets and Liabilities
[CLIP ART] October 31, 2003
================================================================================
ASSETS:
Investments, at value (Cost -- $180,599,684) ................... $ 161,507,339
Cash ........................................................... 470,033
Interest receivable ............................................ 4,434,995
Receivable for securities sold ................................. 25,000
-------------
Total Assets ................................................... 166,437,367
-------------
LIABILITIES:
Payable to broker -- variation margin .......................... 233,594
Dividends payable .............................................. 184,988
Investment advisory fee payable ................................ 54,875
Administration fee payable ..................................... 29,582
Accrued expenses ............................................... 127,909
-------------
Total Liabilities .............................................. 630,948
-------------
Total Net Assets ................................................... $ 165,806,419
=============
NET ASSETS:
Par value of capital shares .................................... $ 209,348
Capital paid in excess of par value ............................ 192,513,196
Undistributed net investment income ............................ 716,587
Accumulated net realized loss from investment transactions
and futures contracts ....................................... (7,933,532)
Net unrealized depreciation of investments and futures contracts (19,699,180)
-------------
Total Net Assets ................................................... $ 165,806,419
=============
Shares Outstanding ................................................. 20,934,822
-------------
Net Asset Value .................................................... $ 7.92
-------------
See Notes to Financial Statements.
18
Municipal High Income Fund Inc.
Statement of Operations
[CLIP ART] For the Year Ended October 31, 2003
================================================================================
INVESTMENT INCOME:
Interest ................................................. $ 13,199,558
------------
EXPENSES:
Investment advisory fee (Note 3) ......................... 666,046
Administration fee (Note 3) .............................. 333,023
Audit and legal .......................................... 92,931
Shareholder servicing fees ............................... 60,749
Shareholder communications ............................... 57,395
Directors' fees .......................................... 50,514
Stock exchange listing fees .............................. 32,022
Custody .................................................. 26,649
Other .................................................... 9,777
------------
Total Expenses ........................................... 1,329,106
------------
Net Investment Income ........................................ 11,870,452
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 4 AND 5):
Realized Loss From:
Investment transactions ................................ (4,084,272)
Futures contracts ...................................... (824,084)
------------
Net Realized Loss ........................................ (4,908,356)
------------
Change in Net Unrealized Depreciation of Investments
and Futures Contracts:
Beginning of year ...................................... (19,294,641)
End of year ............................................ (19,699,180)
------------
Increase in Net Unrealized Depreciation .................. (404,539)
------------
Net Loss on Investments and Futures Contracts ................ (5,312,895)
------------
Increase in Net Assets From Operations ....................... $ 6,557,557
============
See Notes to Financial Statements.
19
Municipal High Income Fund Inc.
Statements of Changes in Net Assets
[CLIP ART] For the Years Ended October 31,
================================================================================
2003 2002
---- ----
Operations:
Net investment income ........................... $ 11,870,452 $ 11,994,943
Net realized loss ............................... (4,908,356) (164,823)
Increase in net unrealized depreciation ......... (404,539) (10,433,215)
------------- -------------
Increase in Net Assets From Operations .......... 6,557,557 1,396,905
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
Net investment income ........................... (11,657,895) (11,902,496)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders ............... (11,657,895) (11,902,496)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net asset value of shares issued for
reinvestment of dividends ................... 398,716 1,446,084
------------- -------------
Increase in Net Assets From
Fund Share Transactions ..................... 398,716 1,446,084
------------- -------------
Decrease in Net Assets .............................. (4,701,622) (9,059,507)
NET ASSETS:
Beginning of year ............................... 170,508,041 179,567,548
------------- -------------
End of year* .................................... $ 165,806,419 $ 170,508,041
============= =============
* Includes undistributed net investment income of: .. $ 716,587 $ 507,327
============= =============
See Notes to Financial Statements.
20
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 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) in accordance with Statement of Position
93-2 Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies, book
and tax basis differences relating to shareholder distributions and other
permanent book and tax differences are reclassified to paid-in capital. In
addition, the character of income and gains to be distributed is determined in
accordance with income tax regulations which may differ from accounting
principles generally accepted in the United States of America. At October 31,
2003, reclassifications were made to the capital accounts of the Fund 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 $269,935 was reclassified to paid-in capital. Net investment
income and net assets were not affected by this change; and (i) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
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.
21
Municipal High Income Fund Inc.
[CLIP ART] Notes to Financial Statements (continued)
================================================================================
2. Exempt-Interest Dividends and Other Distributions
The Fund intends to satisfy conditions that will enable interest from
municipal securities, which is exempt from Federal income tax, to retain such
tax-exempt status when distributed to the shareholders of the Fund.
It is the Fund's policy to distribute dividends monthly. 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"), an indirect wholly-owned
subsidiary of Citigroup Inc. ("Citigroup"), acts as investment adviser to the
Fund. The Fund pays SBFM an investment advisory fee calculated at an annual rate
of 0.40% of the Fund's 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 Fund's 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, 2003, the aggregate cost of purchases
and proceeds from sales of investments (including maturities of long-term
investments, but excluding short-term investments) were as follows:
Purchases ........................................................ $45,758,144
===========
Sales ............................................................ $45,726,367
===========
At October 31, 2003, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
Gross unrealized appreciation .................................. $ 4,122,678
Gross unrealized depreciation .................................. (22,980,887)
------------
Net unrealized depreciation .................................... $(18,858,209)
============
5. Futures Contracts
Securities or cash equal to the initial margin amount are either deposited
with the broker or segregated by the custodian upon entering into the futures
contract. 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
22
Municipal High Income Fund Inc.
[CLIP ART] Notes to Financial Statements (continued)
================================================================================
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 typically 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.
At October 31, 2003, the Fund had the following open futures contracts:
Number of Basis Market Unrealized
Contracts Expiration Value Value Loss
--------- ---------- ----- ------ ----------
To Sell:
U.S. Treasury 20 Year Bond .... 325 12/03 $34,726,759 $35,333,594 $(606,835)
6. Capital Loss Carryforward
At October 31, 2003, the Fund had, for Federal income tax purposes,
approximately $8,540,000 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:
2004 2005 2007 2008 2009 2010 2011
---- ---- ---- ---- ---- ---- ----
Carryforward amounts ....... $205,000 $400,000 $786,000 $748,000 $733,000 $602,000 $5,066,000
7. Income Tax Information and Distributions to Shareholders
The tax character of distributions paid during the year was:
================================================================================
Tax-exempt $11,633,059
Ordinary income 24,836
--------------------------------------------------------------------------------
Total $11,657,895
================================================================================
At October 31, 2003, the tax basis components of distributable earnings
were:
================================================================================
Undistributed tax-exempt $ 500,228
--------------------------------------------------------------------------------
Accumulated capital losses (8,540,367)
--------------------------------------------------------------------------------
Unrealized depreciation (18,858,209)
================================================================================
The difference between book basis and tax basis unrealized depreciation is
attributable primarily to mark-to-market of derivative contracts and the
treatment of accretion of discounts.
23
Municipal High Income Fund Inc.
[CLIP ART] Notes to Financial Statements (continued)
================================================================================
8. Capital Shares
At October 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:
Year Ended Year Ended
October 31, 2003 October 31, 2002
------------------------ -------------------------
Shares Amount Shares Amount
------- -------- ------- ----------
Shares issued on reinvestment ....... 51,722 $398,716 174,992 $1,446,084
======= ======== ======= ==========
9. Subsequent Event
The Fund has received the following information from Citigroup Asset
Management ("CAM"), the Citigroup business unit which includes the Fund's
Investment Manager and other investment advisory companies, all of which are
indirect, wholly-owned subsidiaries of Citigroup. CAM is reviewing its entry,
through an affiliate, into the transfer agent business in the period 1997-1999.
As CAM currently understands the facts, at the time CAM decided to enter the
transfer agent business, CAM sub-contracted for a period of five years certain
of the transfer agency services to a third party and also concluded a revenue
guarantee agreement with this sub-contractor providing that the sub-contractor
would guarantee certain benefits to CAM or its affiliates (the "Revenue
Guarantee Agreement"). In connection with the subsequent purchase of the
sub-contractor's business by an affiliate of the current sub-transfer agent
(PFPC Inc.) used by CAM on many of the funds it manages, this Revenue Guarantee
Agreement was amended eliminating those benefits in exchange for arrangements
that included a one-time payment from the sub-contractor.
The Boards of CAM-managed funds (the "Boards") were not informed of the
Revenue Guarantee Agreement with the sub-contractor at the time the Boards
considered and approved the transfer agent arrangements. Nor were the Boards
informed of the subsequent amendment to the Revenue Guarantee Agreement when
that occurred.
CAM has begun to take corrective actions. CAM will pay to the applicable
funds $16 million (plus interest) that CAM and its affiliates received from the
Revenue Guarantee Agreement and its amendment. CAM also plans an independent
review to verify that the transfer agency fees charged by CAM were fairly priced
as compared to competitive alternatives. CAM is instituting new procedures and
making changes designed to ensure no similar arrangements are entered into in
the future.
CAM has briefed the SEC, the New York State Attorney General and other
regulators with respect to this matter, as well as the U.S. Attorney who is
investigating the matter. CAM is cooperating with governmental authorities on
this matter, the ultimate outcome of which is not yet determinable.
The Fund's transfer agent is PFPC Inc., which is not affiliated with CAM.
24
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:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net Asset Value,
Beginning of Year ................. $ 8.16 $ 8.67 $ 8.86 $ 9.00 $ 9.77
--------- --------- --------- --------- ---------
Income (Loss) From Operations:
Net investment income(1) .......... 0.57 0.58 0.59 0.60 0.58
Net realized and unrealized loss(1) (0.25) (0.52) (0.20) (0.16) (0.76)
--------- --------- --------- --------- ---------
Total Income (Loss)
From Operations ................... 0.32 0.06 0.39 0.44 (0.18)
--------- --------- --------- --------- ---------
Less Distributions From:
Net investment income ............. (0.56) (0.57) (0.58) (0.58) (0.59)
--------- --------- --------- --------- ---------
Total Distributions ................. (0.56) (0.57) (0.58) (0.58) (0.59)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year ........ $ 7.92 $ 8.16 $ 8.67 $ 8.86 $ 9.00
========= ========= ========= ========= =========
Total Return,
Based on Market Price ............. 7.17% (4.70)% 13.85% 9.39% (15.76)%
========= ========= ========= ========= =========
Total Return,
Based on Net Asset Value .......... 4.42% 0.91% 4.77% 5.97% (1.79)%
========= ========= ========= ========= =========
Net Assets,
End of Year (millions) ............ $ 166 $ 171 $ 180 $ 181 $ 184
========= ========= ========= ========= =========
Ratios to Average Net Assets:
Expenses .......................... 0.80% 0.80% 0.82% 0.71% 0.73%
Net investment income(1) .......... 7.13 6.84 6.74 6.72 6.08
Portfolio Turnover Rate ............. 28% 33% 15% 27% 27%
Market Price, End of Year ........... $ 7.650 $ 7.680 $ 8.640 $ 8.125 $ 8.000
----------
(1) Effective November 1, 2001, the Fund adopted a change in the accounting
method, that requires the Fund to amortize premiums and accrete all
discounts. Without the adoption of this change, 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.
25
Municipal High Income Fund Inc.
Independent Auditors' Report
[CLIP ART]
================================================================================
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, 2003, 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, 2003, 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, 2003, 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 10, 2003
26
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
------ ------- -------------- ------ -------- ------
11/27/01 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
2/25/03 2/28/03 7.4000 7.99 0.0465 7.51
3/25/03 3/28/03 7.4000 7.93 0.0465 7.48
4/22/03 4/25/03 7.4400 7.88 0.0465 7.49
5/27/03 5/30/03 7.7500 7.93 0.0465 7.78
6/24/03 6/27/03 7.6700 7.87 0.0465 7.83
7/22/03 7/25/03 7.7300 7.88 0.0465 7.72
8/26/03 8/29/03 7.6300 7.81 0.0465 7.78
9/23/03 9/26/03 7.7200 7.87 0.0465 7.71
10/28/03 10/31/03 7.7000 7.91 0.0465 7.73
----------
* As of record date.
27
Municipal High Income Fund Inc.
[CLIP ART] Additional Information (unaudited)
================================================================================
Additional Information About Your Fund
The Fund's Adviser and some of its affiliates have received requests for
information from various government regulators regarding market timing, late
trading, fees and other mutual fund issues in connection with various
investigations. The Adviser and its affiliates are responding to those
information requests, but are not in a position to predict the outcome of these
requests and investigations.
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 73
Dwight B. Crane Director Since Professor, Harvard 49 None
Harvard Business School 1998 Business School
Soldiers Field Road
Morgan Hall #375
Boston, MA 02163
Age 66
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 62
Robert A. Frankel Director Since Managing Partner of 24 None
1961 Deergrass Way 1998 Robert A. Frankel
Carlsbad, CA 92009 Management
Age 76 Consultants
Paul Hardin Director Since Chancellor Emeritus and 35 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 & 40 Director of Associated
535 N. Michigan 1998 Associates, Inc.; Formerly Bank and Associated
Chicago, IL 60611 Group Vice President of Mergers Banc-Corp
Age 61 & Acquisitions at BP Amoco
George M. Pavia Director Since Senior Partner of Pavia & Harcourt 7 None
600 Madison Avenue 2001 Attorneys
New York, NY10022
Age 75
28
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, CFA** Chairman, Since Managing Director of Citigroup 220 None
Citigroup Asset Management President and 2002 Global Markets Inc. ("CGM");
("CAM") Chief Executive Chairman, President and Chief
399 Park Avenue Officer Executive Officer of Smith Barney
4th Floor Fund Management LLC ("SBFM"),
New York, NY 10022 Travelers Investment Adviser, Inc.
Age 52 ("TIA") and Citi Fund Management
Inc.; President and Chief Executive
Officer of certain mutual funds
associated with Citigroup Inc.
("Citigroup"); Formerly Portfolio
Manager of Smith Barney Allocation
Series Inc. (from 1996-2001) and
Smith Barney Growth and Income
Fund (from 1996-2000)
Officers:
Andrew B. Shoup*** Senior Vice Since Director of CAM; Senior Vice N/A N/A
CAM President 2003 President and Chief Administrative
125 Broad Street and Chief Officer of mutual funds associated
10th Floor Administrative with Citigroup; Head of
New York, NY 10004 Officer International Funds Administration
Age 47 of CAM from 2001 to 2003; Director
of Global Funds Administration of
CAM from 2000 to 2001; Head of
U.S. Citibank Funds Administration
of CAM from 1998 to 2000
Richard L. Peteka Chief Financial Since Director of CGM; Chief Financial N/A N/A
CAM Officer and 2002 Officer and Treasurer of certain
125 Broad Street Treasurer mutual funds associated with
11th Floor Citigroup; Director and Head of
New York, NY 10004 Internal Control for CAM U.S.
Age 42 Mutual Fund Administration from
1999-2002; Vice President, Head
of Mutual Fund Administration
and Treasurer at Oppenheimer
Capital from 1996-1999
29
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
------------------------------------------------------------------------------------------------------------------------------------
Peter M. Coffey Vice President Since Managing Director of CGM; N/A N/A
CAM and Investment 1999 Investment Officer of SBFM
399 Park Avenue Officer
4th Floor
New York, NY 10022
Age 59
Kaprel Ozsolak Controller Since Vice President of CGM; N/A N/A
CAM 2002 Controller of certain funds
125 Broad Street associated with Citigroup
11th Floor
New York, NY 10004
Age 38
Robert I. Frenkel Secretary*** Since Managing Director and General N/A N/A
CAM and Chief 2003 Counsel of Global Mutual Funds
300 First Stamford Place Legal Officer for CGM and its predecessor
4th Floor (since 1994); Secretary of CFM;
Stamford, CT 06902 Secretary and Chief Legal Officer
Age 48 of mutual funds associated with
Citigroup
----------
* Directors are elected for a term of three years.
** Mr. Gerken is an "interested person" of the Fund as defined in the
Investment Company Act of 1940, as amended, because Mr. Gerken is an
officer of SBFM and certain of its affiliates.
*** As of November 25, 2003.
Municipal High Income Fund Inc.
[CLIP ART] Tax Information (unaudited)
================================================================================
For multi-state municipal funds:
For Federal tax purposes, the Fund hereby designates for the fiscal year ended
October 31, 2003:
o 99.79% of the dividends paid by the fund from net investment income
as tax exempt for regular Federal income tax purposes.
30
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 capital shares. 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 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
shareholders at least once a year.
Under the Fund's Dividend Reinvestment Plan ("Plan"), a shareholder whose
capital shares is registered in his or her own name will have all distributions
reinvested automatically by PFPC Inc. ("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 capital shares 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 capital shares 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 capital shares at the time of valuation
(which is the close of business on the determination date) exceeds the market
price of capital shares, PFPC will buy capital shares 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 capital shares 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 capital shares 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
31
Municipal High Income Fund Inc.
[CLIP ART] Dividend Reinvestment Plan (unaudited) (continued)
================================================================================
exceed 98% of the NAV per share of the capital shares. PFPC will begin to
purchase capital shares 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. Capital shares 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 capital shares
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 Inc., 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 capital shares in the open market. For the year
ended October 31, 2003, the Fund has not repurchased any shares.
32
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, CFA
Chairman
Paul Hardin
William R. Hutchinson
George M. Pavia
Officers
R. Jay Gerken, CFA
President and Chief
Executive Officer
Andrew B. Shoup*
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
Robert I. Frenkel
Secretary* and Chief Legal Officer
Investment Adviser and Administrator
Smith Barney Fund Management LLC
399 Park Avenue
New York, New York 10022
Transfer Agent
PFPC Inc.
P.O. Box 8030
Boston, Massachusetts 02266-8030
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
* As of November 25, 2003.
[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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by telephoning the Fund (toll-free) at 1-800-451-2010 and by
visiting the SEC's web site at www.sec.gov.
Municipal High Income Fund Inc.
125 Broad Street
10th Floor, MF-2
New York, NY10004
FD01049 12/03
03-5790
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the registrant has determined that Robert A.
Frankel, the Chairman of the Board's Audit Committee, possesses the
technical attributes identified in Instruction 2(b) of Item 3 to Form
N-CSR to qualify as an "audit committee financial expert," and has
designated Mr. Frankel as the Audit Committee's financial expert. Mr.
Frankel is an "independent" Director pursuant to paragraph (a)(2) of
Item 3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Board of Directors of the Fund has delegated the authority to
develop policies and procedures relating to proxy voting to the
Manager. The Manager is part of Citigroup Asset Management ("CAM"), a
group of investment adviser affiliates of Citigroup, Inc.
("Citigroup"). Along with the other investment advisers that comprise
CAM, the Manager has adopted a set of proxy voting policies and
procedures (the "Policies") to ensure that the Manager votes proxies
relating to equity securities in the best interest of clients.
In voting proxies, the Manager is guided by general fiduciary
principles and seeks to act prudently and solely in the best interest
of clients. The Manager attempts to consider all factors that could
affect the value of the investment and will vote proxies in the manner
that it believes will be consistent with efforts to maximize
shareholder values. The Manager may utilize an external service
provider to provide it with information and/or a recommendation with
regard to proxy votes. However, such recommendations do not relieve the
Manager of its responsibility for the proxy vote.
In the case of a proxy issue for which there is a stated position in
the Policies, CAM generally votes in accordance with such stated
position. In the case of a proxy issue for which there is a list of
factors set forth in the Policies that CAM considers in voting on such
issue, CAM votes on a case-by-case basis in accordance with the general
principles set forth above and considering such enumerated factors. In
the case of a proxy issue for which there is no stated position or list
of factors that CAM considers in voting on such issue, CAM votes on a
case-by-case basis in accordance with the general principles set forth
above. Issues for which there is a stated position set forth in the
Policies or for which there is a list of factors set forth in the
Policies that CAM considers in voting on such issues fall into a
variety of categories, including election of directors, ratification of
auditors, proxy and tender offer defenses, capital structure issues,
executive and director compensation, mergers and corporate
restructurings, and social and environmental issues. The stated
position on an issue set forth in the Policies can always be
superseded, subject to the duty to act solely in the best interest of
the beneficial owners of accounts, by the investment management
professionals responsible for the account whose shares are being voted.
Issues applicable to a particular industry may cause CAM to abandon a
policy that would have otherwise applied to issuers generally. As a
result of the independent investment advisory services provided by
distinct CAM business units, there may be occasions when different
business units or different portfolio managers within the same business
unit vote differently on the same issue.
In furtherance of the Manager's goal to vote proxies in the best
interest of clients, the Manager follows procedures designed to
identify and address material conflicts that may arise between the
Manager's interests and those of its clients before voting proxies on
behalf of such clients. To seek to identify conflicts of interest, CAM
periodically notifies CAM employees (including employees of the
Manager) in writing that they are under an obligation (i) to be aware
of the potential for conflicts of interest with respect to voting
proxies on behalf of client accounts both as a result of their personal
relationships and due to special circumstances that may arise during
the conduct of CAM's and the Manager's business, and (ii) to bring
conflicts of interest of which they become aware to the attention of
compliance personnel. The Manager also maintains and considers a list
of significant relationships that could present a conflict of interest
for the Manager in voting proxies. The Manager is also sensitive to the
fact that a significant, publicized relationship between an issuer and
a non-CAM affiliate might appear to the public to influence the manner
in which the Manager decides to vote a proxy with respect to such
issuer. Absent special circumstances or a significant, publicized
non-CAM affiliate relationship that CAM or the Manager for prudential
reasons treats as a potential conflict of interest because such
relationship might appear to the public to influence the manner in
which the Manager decides to vote a proxy, the Manager generally takes
the position that non-CAM relationships between Citigroup and an issuer
(e.g. investment banking or banking) do not present a conflict of
interest for the Manager in voting proxies with respect to such issuer.
Such position is based on the fact that the Manager is operated as an
independent business unit from other Citigroup business units as well
as on the existence of information barriers between the Manager and
certain other Citigroup business units.
CAM maintains a Proxy Voting Committee, of which the Manager personnel
are members, to review and address conflicts of interest brought to its
attention by compliance personnel. A proxy issue that will be voted in
accordance with a stated position on an issue or in accordance with the
recommendation of an independent third party is not brought to the
attention of the Proxy Voting Committee for a conflict of interest
review because the Manager's position is that to the extent a conflict
of interest issue exists, it is resolved by voting in accordance with a
pre-determined policy or in accordance with the recommendation of an
independent third party. With respect to a conflict of interest brought
to its attention, the Proxy Voting Committee first determines whether
such conflict of interest is material. A conflict of interest is
considered material to the extent that it is determined that such
conflict is likely to influence, or appear to influence, the Manager's
decision-making in voting proxies. If it is determined by the Proxy
Voting Committee that a conflict of interest is not material, the
Manager may vote proxies notwithstanding the existence of the conflict.
If it is determined by the Proxy Voting Committee that a conflict of
interest is material, the Proxy Voting Committee is responsible for
determining an appropriate method to resolve such conflict of interest
before the proxy affected by the conflict of interest is voted. Such
determination is based on the particular facts and circumstances,
including the importance of the proxy issue and the nature of the
conflict of interest. Methods of resolving a material conflict of
interest may include, but are not limited to, disclosing the conflict
to clients and obtaining their consent before voting, or suggesting to
clients that they engage another party to vote the proxy on their
behalf.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal
financial officer have concluded that the registrant's disclosure
controls and procedures (as defined in Rule 30a- 3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act")) are
effective as of a date within 90 days of the filing date of this
report that includes the disclosure required by this paragraph,
based on their evaluation of the disclosure controls and
procedures required by Rule 30a-3(b) under the 1940 Act and
15d-15(b) under the Securities Exchange Act of 1934.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940
Act) that occurred during the registrant's last fiscal half-year
(the registrant's second fiscal half-year in the case of an
annual report) that have materially affected, or are likely to
materially affect the registrant's internal control over
financial reporting.
ITEM 10. EXHIBITS.
(a) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(b) Attached hereto.
Exhibit 99.CERT Certifications pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.906CERT Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this Report
to be signed on its behalf by the undersigned, there unto duly authorized.
Municipal High Income Fund Inc.
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
Municipal High Income Fund Inc.
Date: December 30, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
Municipal High Income Fund Inc.
Date: December 30, 2003
By: /s/ Richard L. Peteka
(Richard L. Peteka)
Chief Financial Officer of
Municipal High Income Fund Inc.
Date: December 30, 2003