Notes to Financial Statements (continued)
6. Regulatory Matters
On May 31, 2005, the U.S. Securities and Exchange Commission (“SEC”) issued an order in connection with the settlement of an administrative proceeding against SBFM and Citigroup Global Markets Inc. (“CGM”) relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds (the “Affected Funds”).
The SEC order finds that SBFM and CGM willfully violated Section 206(1) of the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the order finds that SBFM and CGM knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data”), the Affected Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”), the Citigroup business unit that, at the time, included the fund’s investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGM. The order also finds that SBFM and CGM willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed. SBFM and CGM do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.
The SEC censured SBFM and CGM and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order requires Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan prepared and submitted for approval by the SEC. The order also requires that transfer agency fees received from the Funds since December 1, 2004 less certain expenses be placed in escrow and provides that a portion of such fees may be subsequently distributed in accordance with the terms of the order.
The order required SBFM to recommend a new transfer agent contract to the Affected Fund boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGM would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Fund’s Board selected a new transfer agent for the Fund. No Citigroup affiliate submitted
Municipal High Income Fund Inc. 2005 Annual Report | 27 |
Notes to Financial Statements (continued)
a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.
At this time, there is no certainty as to how the proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. Although there can be no assurance, SBFM does not believe that this matter will have a material adverse effect on the Affected Funds.
This Fund is not one of the Affected Funds and therefore did not implement the transfer agent arrangement described above and therefore will not receive any portion of the distributions.
On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason, Inc. (“Legg Mason”).
7. Subsequent Events
On December 1, 2005, Citigroup completed the sale of substantially all of its asset management business, CAM to Legg Mason. As a result, the Fund’s Manager, previously an indirect wholly-owned subsidiary of Citigroup, has become a wholly-owned subsidiary of Legg Mason. Completion of the sale caused the Fund’s existing investment management contract to terminate. The Fund’s shareholders previously approved a new investment management contract between the Fund and the Manager which became effective on December 1, 2005.
Legg Mason, whose principal executive offices are at 100 Light Street, Baltimore, Maryland 21202, is a financial services holding company. As of December 2, 2005, Legg Mason’s asset management operation had aggregate assets under management of approximately $830 billion.
Effective December 1, 2005, CGM will no longer be an affiliated person of the Fund under the Investment Company Act of 1940, as amended. As a result, the Fund will be permitted to execute transactions with CGM or an affiliate of CGM as agent without the restrictions applicable to transactions with affiliated persons. Similarly, the Fund generally will be permitted to purchase securities in underwritings in which CGM or an affiliate of CGM is a member without the restrictions imposed by certain rules of the Securities and Exchange Commission. The Manager’s use of CGM or affiliates of CGM as agent in portfolio transactions with the Fund will be governed by the fund’s policy of seeking the best overall terms available.
Certain officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the fund.
The Fund’s Board has approved American Stock Transfer & Trust Co. (“AST”) to serve as transfer agent for the Fund. The principal business office of AST is located at 59 Maiden Lane, New York, NY 10038.
28 | Municipal High Income Fund Inc. 2005 Annual Report |
At a meeting of the Fund’s Board of Directors, the Board considered the re-approval for an annual period of the Fund’s management agreement (the “Agreement”), pursuant to which Smith Barney Fund Management LLC (the “Manager”) provides the Fund with investment advisory and administrative services. The Board members who are not “interested persons” (as defined in the Investment Company Act of 1940, as amended (the “Independent Directors”)) of the Fund were assisted in their review by Fund counsel and independent legal counsel and met with independent legal counsel in executive sessions separate from representatives of the Manager. The Independent Directors requested and received information from the Manager they deemed reasonably necessary for their review of the Agreement and the performance of the Manager. Prior to the Board’s deliberations, Citigroup Inc. (“Citigroup”) had announced an agreement to sell the Manager to Legg Mason Inc. (“Legg Mason”), which, subject to certain approvals, was expected to be effective later in the year. Consequently, representatives of Legg Mason discussed with the Board Legg Mason’s intentions regarding the preservation and strengthening of the Manager’s business. The Independent Directors also requested and received certain assurances from senior management of Legg Mason regarding the continuation of the level of services provided to the Fund and its shareholders should the sale of the Manager be consummated. At another Board meeting, representatives of Citigroup Asset Management (“CAM”) and Legg Mason made additional presentations to and responded to further questions from the Board regarding Legg Mason’s acquisition of CAM, which includes the Manager. After considering these presentations and reviewing additional written materials provided by CAM and Legg Mason, the Board, including the Independent Directors, approved, subject to shareholder approval, a new Agreement permitting the Manager to continue to provide its services to the Fund after consummation of the sale of the Manager to Legg Mason. (Shareholders approved the new Agreement and the sale of CAM to Legg Mason was consummated as of December 1, 2005.)
In voting to approve the Agreement, the Independent Directors considered whether the approval of the Agreement would be in the best interests of the Fund and its shareholders, an evaluation based on several factors including those discussed below.
The Board received a presentation from representatives of the Manager regarding the nature, extent and quality of services provided to the Fund and other funds in the CAM fund complex. In addition, the Independent Directors received and considered other information regarding the services provided to the Fund by the Manager under the Agreement during the past year, including a description of the administrative and other services rendered to the Fund and its shareholders by the Manager. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager about the management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Fund’s service providers. The Board’s evaluation of the services provided by the Manager took into account the Board’s knowledge and familiarity gained as Board members of funds in the CAM fund complex, including the scope
Board Approval of Management Agreement (unaudited) (continued)
and quality of the investment management and other capabilities of the Manager and the quality of the Manager’s administrative and other services. The Board observed that the scope of services provided by the Manager had expanded over time as a result of regulatory and other developments, including maintaining and monitoring its own and the Fund’s expanded compliance programs. The Board also considered the Manager’s response to recent regulatory compliance issues affecting the Manager and the CAM fund complex. The Board reviewed information received from the Manager and the Fund’s Chief Compliance Officer regarding the implementation to date of the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the Investment Company Act of 1940, as amended.
The Board reviewed the qualifications, backgrounds and responsibilities of the Fund’s senior personnel and the portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered the willingness of the Manager to consider and implement organizational changes to improve investment results and the services provided to the CAM fund complex. The Board noted that the Manager’s Office of the Chief Investment Officer, comprised of the senior officers of the investment teams managing the funds in the CAM complex, participates in reporting to the Board on investment matters. The Board also considered, based on its knowledge of the Manager and its affiliates, the financial resources available to CAM and its parent organization, Citigroup Inc.
The Board also considered the Manager’s brokerage policies and practices, the standards applied in seeking best execution, the Manager’s policies and practices regarding soft dollars, the use of a broker affiliated with the Manager and the existence of quality controls applicable to brokerage allocation procedures. In addition, management also reported to the Board on, among other things, its business plans, recent organizational changes and portfolio manager compensation plan.
The Board concluded that, overall, it was satisfied with the nature, extent and quality of services provided (and expected to be provided) under the Agreement by the Manager.
Fund Performance
The Board received and reviewed performance information for the Fund and for a group of comparable funds (the “Performance Universe”) selected by Lipper Inc., an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Board also was provided with information comparing the Fund’s performance since its inception to the Lipper category averages. The Board members noted that they had also received and discussed with management information at periodic intervals comparing the Fund’s performance against its benchmark index. The information comparing the Fund’s performance to that of the Performance Universe, consisting of all closed-end non-leveraged funds classified as “high yield municipal debt funds” by Lipper, was for the one-, three-, five- and ten-year periods ended March 31, 2005. The Fund performed below the median for each period. The
32 | Municipal High Income Fund Inc. 2005 Annual Report |
Board Approval of Management Agreement (unaudited) (continued)
Board also reviewed performance information provided by the Manager for periods ended June 2005, which showed the Fund’s performance continued to be below the Lipper category average during the second quarter. The Board members then discussed with the Fund’s portfolio manager the reasons for the Fund’s underperformance compared to the Performance Universe. The Board noted that the portfolio manager explained that credit quality deterioration and some issue defaults adversely impacted the Fund’s results. The Board also noted the portfolio manager’s position that while the Fund’s hedge position reduced volatility and helped performance when yields spiked up sharply, on balance it detracted from relative and absolute performance as longer term yields actually declined. Management also noted that there was a change in the reporting structure of the portfolio management team, which was intended to improve the Fund’s results over time. Based on its review, the Board generally was satisfied with management’s efforts to improve the Fund’s performance, but concluded that it was necessary to continue to closely monitor the performance of the Fund and its portfolio management team.
Management Fees and Expense Ratios
The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) on the Fund’s Net Assets payable by the Fund to the Manager for investment advisory and administrative services in light of the nature, extent and quality of the management services provided by the Manager.
Additionally, the Board received and considered information comparing the Fund’s Contractual Management Fee and the Fund’s overall expense ratio with those of funds in both the relevant expense group (the “Expense Group”) and a broader group of funds, each selected and provided by Lipper. The Board also reviewed information regarding the fees the Manager charged any of its other U.S. clients investing primarily in an asset class similar to that of the Fund including, where applicable, separate accounts. The Manager reviewed with the Board the significant differences in the scope of services provided to the Fund and to these other clients, noting that the Fund is provided with regulatory compliance and administrative services, office facilities and fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers. The Board considered the fee comparisons in light of the scope of services required to manage these different types of accounts. The Board received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a proposed framework of fees based on asset classes.
The information comparing the Fund’s Contractual Management Fee as well as its actual total expense ratios to its Expense Group, consisting of three non-leveraged closed-end funds (including the Fund) classified as “high yield municipal debt funds” by Lipper, showed that the Fund’s Contractual Management Fee was lower than the median of management fees paid by the other funds in the Expense Group. The Board noted that the Fund’s actual total expense ratio was at the median of the total expense ratios of the funds in the Expense Group.
Municipal High Income Fund Inc. 2005 Annual Report | 33 |
Board Approval of Management Agreement (unaudited) (continued)
After discussion with the Board, the Manager offered to reduce the Contractual Management Fee from .60% to .55% of the value of the Fund’s managed assets.
Taking all of the above into consideration, the Board determined that the management fee (particularly with the Manager’s agreement to reduce the Contractual Management Fee rate) was reasonable in light of the comparative performance and expense information and the nature, extent and quality of the services provided to the Fund under the Agreement.
Manager Profitability
The Board received and considered a profitability analysis of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the CAM fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data as well as a report from an outside consultant that had reviewed the Manager’s methodology. The Board also noted the profitability percentage ranges determined by appropriate court cases to be reasonable given the services rendered to investment companies. The Board determined that the Manager’s profitability was not excessive in light of the nature, extent and quality of the services provided to the Fund.
Economies of Scale
The Board received and considered information regarding whether there have been economies of scale with respect to the management of the Fund, whether the Fund has appropriately benefited from any economies of scale, and whether there is potential for realization of any further economies of scale. The Board considered whether economies of scale in the provision of services to the Fund were being passed along to the shareholders. The Board also considered whether alternative management fee structures would be more appropriate or reasonable taking into consideration economies of scale or other efficiencies.
The Board noted that as a closed-end fund, the Fund’s ability to increase its asset level was limited and that a discussion of economies of scale typically is predicated on increasing assets. The Board also considered the Manager’s agreement to reduce its fee and the effect such reduction would have on the total expense ratio of the Fund. The Board noted that it appeared that the benefits of any economies of scale also would be appropriately shared with shareholders through increased investment in fund management and administration resources.
Other Benefits to the Manager
The Board considered other benefits received by the Manager and its affiliates as a result of the Manager’s relationship with the Fund, including any soft dollar arrangements, receipt of brokerage commissions and the opportunity to offer additional products and services to Fund shareholders.
34 | Municipal High Income Fund Inc. 2005 Annual Report |
Board Approval of Management Agreement (unaudited) (continued)
In light of the costs of providing investment management and other services to the Fund and the Manager’s ongoing commitment to the Fund, the profits and other ancillary benefits that the Manager and its affiliates received were considered reasonable.
Based on their discussions and considerations, including those described above, the Board members approved the Agreement to continue for another year.
No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Agreement.
Additional Information
On June 23, 2005, Citigroup entered into a definitive agreement (the “Transaction Agreement”) with Legg Mason under which Citigroup agreed to sell substantially all of its asset management business, CAM, which includes the Adviser, to Legg Mason in exchange for the broker-dealer and investment banking businesses of Legg Mason and certain other considerations (the “Transaction”). The Transaction closed on December 1, 2005.
The consummation of the Transaction resulted in the automatic termination of the Fund’s current advisory agreement in accordance with the Investment Company Act of 1940, as amended (the “1940 Act”). Prior to the closing of the Transaction, the Fund’s Board approved a new management agreement between the Fund and the Adviser (the “New Management Agreement”) and authorized the Fund’s officers to submit the New Management Agreement to shareholders for their approval.
On July 11, 2005, members of the Board discussed with CAM management and certain Legg Mason representatives the Transaction and Legg Mason’s general plans and intentions regarding CAM’s business and its combination with Legg Mason’s business. The Board Members also inquired about the plans for and anticipated roles and responsibilities of certain CAM employees and officers after the Transaction.
At a meeting held on August 10 and 11, 2005, the Fund’s Board, including a majority of the Board Members who are not “interested persons” of the Fund or the Adviser as defined in the 1940 Act (the “Independent Board Members”), approved the New Management Agreement. To assist the Board in its consideration of the New Management Agreement, Legg Mason provided materials and information about Legg Mason, including its financial condition, asset management capabilities and organization, and CAM provided materials and information about the Transaction between Legg Mason and Citigroup. Representatives of CAM and Legg Mason also made presentations to and responded to questions from the Board. The Independent Board Members, through their independent legal counsel, also requested and received additional information from CAM and Legg Mason in connection with their consideration of the New Management Agreement. The additional information was provided in advance of and at the August meeting. After the presentations and after reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to consider the New Management Agreement. The Independent Board Members also conferred separately and with their counsel about the Transaction on a number of occasions, including in connection with the July and August meetings.
Municipal High Income Fund Inc. 2005 Annual Report | 35 |
Board Approval of Management Agreement (unaudited) (continued)
In their deliberations concerning the New Management Agreement, among other things, the Board Members considered:
(i) the reputation, financial strength and resources of Legg Mason and its investment advisory subsidiaries;
(ii) that, following the Transaction, CAM will be part of an organization focused on the asset management business;
(iii) that Legg Mason and its wholly-owned subsidiary, Western Asset Management Company and its affiliates (“Western Asset”), are experienced and respected asset management firms, and that Legg Mason has advised the Board Members that (a) it intends to combine the fixed income investment operations (including money market fund operations) of CAM with those of Western Asset and may also wish to combine other CAM operations with those of other Legg Mason subsidiaries; (b) after the closing of the Transaction, it will take steps to combine the investment management operations of Western Asset with the fixed income operations of the Adviser, which, among other things, may involve Western Asset and the Adviser sharing common systems and procedures, employees (including portfolio managers), investment and trading platforms, and other resources; (c) it is expected that these combination processes will result in changes to portfolio managers or portfolio management teams for a number of the CAM funds, subject to Board oversight and appropriate notice to shareholders, and that, in other cases, the current portfolio managers or portfolio management teams will remain in place; and (d) in the future, it may recommend that Western Asset or other Legg Mason subsidiaries be appointed as the adviser or sub-adviser to some or all of the CAM funds, subject to applicable regulatory requirements;
(iv) that CAM management had advised the Board that a number of portfolio managers and other key CAM personnel would be retained after the closing of the Transaction;
(v) that CAM management and Legg Mason have advised the Board that following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Fund and their shareholders by the Adviser, including compliance services;
(vi) that under the Transaction Agreement, Citigroup and Legg Mason have agreed not to take any action that is not contemplated by the Transaction or fail to take any action that to their respective knowledge would cause any “undue burden” on Fund shareholders under applicable provisions of the 1940 Act;
(vii) the assurances from Citigroup and Legg Mason that, for a three year period following the closing of the Transaction, Citigroup-affiliated broker-dealers will continue to offer the Fund as an investment product, and the potential benefits to Fund shareholders from this and other third-party distribution access;
(viii) the potential benefits to Fund shareholders from being part of a combined fund family with Legg Mason sponsored funds;
36 | Municipal High Income Fund Inc. 2005 Annual Report |
Board Approval of Management Agreement (unaudited) (continued)
(ix) that Citigroup and Legg Mason would derive benefits from the Transaction and that, as a result, they have a financial interest in the matters that were being considered;
(x) the potential effects of regulatory restrictions on the Fund if Citigroup-affiliated broker-dealers remain principal underwriters of the Fund after the closing of the Transaction;
(xi) the fact that the Fund’s total advisory and administrative fees will not increase by virtue of the New Management Agreement, but will remain the same;
(xii) the terms and conditions of the New Management Agreement, including the differences from the current advisory agreement, and the benefits of a single, uniform form of agreement covering these services;
(xiii) that the Fund would not bear the costs of obtaining shareholder approval of the New Management Agreement;
(xiv) that the Fund would avail itself of permissions granted under certain licensing arrangements between Citigroup and Legg Mason that would permit the Fund (including any share classes thereof) to maintain its current name, as well as all logos, trademarks and service marks, related to Citigroup or any of its affiliates for some agreed upon time period after the closing of the Transaction ; and
(xv) that, as discussed in detail above, within the past year the Board had performed a full annual review of the current advisory agreement as required by the 1940 Act. In that regard, the Board, in its deliberations concerning the New Management Agreement, considered the same factors regarding the nature, quality and extent of services provided, costs of services provided, profitability, fall out benefits, fees and economies of scale and investment performance as it did when it renewed the current advisory agreement, and reached substantially the same conclusions.
Municipal High Income Fund Inc. 2005 Annual Report | 37 |
Additional Information (unaudited)
Information about Directors and Officers
The business and affairs of Municipal High Income Fund Inc. (“Fund”) are managed under the direction of the Board of Directors. Information pertaining to the Directors and Officers of the Fund is set forth below.
Name, Address
and Birth Year | Position(s)
Held with
Fund | | Term of
Office*
and Length
of Time
Served | Principal
Occupation(s)
During Past
Five Years | Number of
Portfolios
in Fund
Complex
Overseen
by Director | Other
Directorships
Held by
Director | |
| | | | | | | |
Non-Interested Directors: | | | | | | | |
Dwight B. Crane | Director | | Since | Professor, Harvard | 48 | None | |
Harvard Business School | | | 1998 | Business School | | | |
Soldiers Field Road | | | | | | | |
Morgan Hall #375 | | | | | | | |
Boston, MA 02163 | | | | | | | |
Birth Year: 1937 | | | | | | | |
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 | | | | | | | |
Birth Year: 1941 | | | | | | | |
Robert A. Frankel | Director | | Since | Managing Partner of | 18 | None | |
1961 Deergrass Way | | | 1998 | Robert A. Frankel | | | |
Carlsbad, CA 92009 | | | | Management Consultants | | | |
Birth Year: 1927 | | | | | | | |
Paul Hardin | Director | | Since | Chancellor Emeritus and | 34 | None | |
12083 Morehead | | | 2001 | Professor of Law at the | | | |
Chapel Hill, NC 27514 | | | | University of North Carolina | | | |
Birth Year: 1931 | | | | at Chapel Hill | | | |
William R. Hutchinson | Director | | Since | President of WR Hutchinson | 44 | Director of | |
535 N. Michigan | | | 1998 | & Associates, Inc.; Formerly | | Associated | |
Chicago, IL 60611 | | | | Group Vice President of | | Bank and | |
Birth Year: 1942 | | | | Mergers & Acquisitions at | | Associated | |
| | | | BP Amoco | | Banc-Corp | |
George M. Pavia | Director | | Since | Senior Partner of Pavia & | 7 | None | |
600 Madison Avenue | | | 2001 | Harcourt Attorneys | | | |
New York, NY 10022 | | | | | | | |
Birth Year: 1928 | | | | | | | |
38 | Municipal High Income Fund Inc. 2005 Annual Report |
Additional Information (unaudited) (continued)
Name, Address
and Birth Year | Position(s)
Held with
Fund | Term of
Office*
and Length
of Time
Served | Principal
Occupation(s)
During Past
Five Years | Number of
Portfolios
in Fund
Complex
Overseen
by Director | Other
Board
Memberships
Held by
Director | |
| | | | | | |
Interested Directors: | | | | | | |
R. Jay Gerken, CFA** | Chairman, | Since | Managing Director of | 171 | None | |
Citigroup Asset Management | President and | 2002 | CAM; Chairman, President | | | |
(“CAM”) | Chief Executive | | and Chief Executive Officer | | | |
399 Park Avenue | Officer | | of Smith Barney Fund | | | |
Mezzanine | | | Management LLC (“SBFM”), | | | |
New York, NY 10022 | | | and Citi Fund Management | | | |
Birth Year: 1951 | | | Inc. (“CFM”); President and | | | |
| | | Chief Executive Officer of | | | |
| | | certain mutual funds | | | |
| | | associated with CAM; | | | |
| | | Formerly, Portfolio Manager | | | |
| | | of Smith Barney Allocation | | | |
| | | Series Inc. (from 1996 to | | | |
| | | 2001) and Smith Barney | | | |
| | | Growth and Income Fund | | | |
| | | (from 1996 to 2000); | | | |
| | | Chairman, President and | | | |
| | | Chief Executive Officer of | | | |
| | | Travelers Investment | | | |
| | | Advisers, Inc. (“TIA”) (from | | | |
| | | 2002 to 2005) | | | |
Officers: | | | | | | |
Andrew B. Shoup | Senior Vice | Since | Director of CAM; Senior | N/A | N/A | |
CAM | President | 2003 | Vice President and Chief | | | |
125 Broad Street | and Chief | | Administrative Officer of | | | |
11th Floor | Administrative | | certain mutual funds | | | |
New York, NY 10004 | Officer | | associated with CAM; | | | |
Birth Year: 1956 | | | Treasurer of certain mutual | | | |
| | | funds associated with CAM; | | | |
| | | Head of International | | | |
| | | Funds Administration 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) | | | |
Kaprel Ozsolak | Chief Financial | Since | Director of CAM; Chief | N/A | N/A | |
CAM | Officer and | 2004 | Financial Officer and | | | |
125 Broad Street | Treasurer | | Treasurer of certain mutual | | | |
11th Floor | | | funds associated with | | | |
New York, NY 10004 | | | CAM; Controller of certain | | | |
Birth Year: 1965 | | | mutual funds associated | | | |
| | | with CAM (from 2002 to | | | |
| | | 2004) | | | |
Municipal High Income Fund Inc. 2005 Annual Report | 39 |
Additional Information (unaudited) (continued)
Name, Address
and Birth Year | | Position(s)
Held with
Fund | | Term of
Office* and
Length
of Time
Served | | Principal
Occupation(s)
During Past
Five Years | | Number of
Portfolios
In Fund
Complex
Overseen
by Directors | | Other
Board
Memberships
Held by
Director | |
| | | | | | | | | | | |
Peter M. Coffey
CAM
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1944 | | Vice President
and Investment
Officer | | Since
1999 | | Managing Director of CAM; Investment Officer of SBFM | | N/A | | N/A | |
Joseph P. Deane***
CAM
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1947 | | Vice President
and Investment
Officer | | As of
2006 | | Managing Director of CAM; Investment Officer of SBFM | | N/A | | N/A | |
David T. Fare***
CAM
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1962 | | Vice President
and Investment
Officer | | As of
2006 | | Director of CAM; Investment Officer of SBFM | | N/A | | N/A | |
George Benoit
CAM
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1960 | | Investment
Officer | | Since
2004 | | Director of CAM | | N/A | | N/A | |
Steven Frank
CAM
125 Broad Street
11th Floor
New York, NY 10004
Birth Year: 1967 | | Controller | | Since
2005 | | Vice President of CAM (since 2002); Controller of certain mutual funds associated with CAM; Assistant Controller of CAM (from 2001 to 2005); Accounting Manager of CAM (from 1996 to 2001) | | N/A | | N/A | |
Andrew Beagley
CAM
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1962 | | Chief
Compliance
Officer | | Since
2004 | | Director of CAM; Managing Director of Compliance, North America, CAM (since 2000); Chief Anti-Money Laundering Compliance Officer, and Chief Compliance Officer of certain mutual funds associated with CAM; Director of Compliance, Europe, the Midde East and Africa, CAM (from 1999 to2000); Chief Compliance Officer, SBFM and CFM; Formerly Chief Compliance Officer, TIA (from 2002 to 2005) | | N/A | | N/A | |
40 | Municipal High Income Fund Inc. 2005 Annual Report |
Additional Information (unaudited) (continued)
Name, Address
and Birth Year | | Position(s)
Held with
Fund | | Term of
Office* and
Length
of Time
Served | | Principal
Occupation(s)
During Past
Five Years | | Number of
Portfolios
In Fund
Complex
Overseen
by Directors | | Other
Board
Memberships
Held by
Director | |
Robert I. Frenkel
CAM
300 First Stamford Place
4th Floor
Stamford, CT 06902
Date of Birth: 1954 | | Secretary
and Chief
Legal Officer | | Since
2003 | | Managing Director and General Counsel of Global Mutual Funds for CAM and its predecessor (since 1994); Secretary of CFM (from 2001 to 2004); Secretary and Chief Legal Officer of mutual funds associated with CAM | | N/A | | N/A | |
| | |
* | | 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. |
*** | | Effective as of January 1, 2006. |
Municipal High Income Fund Inc. 2005 Annual Report | 41 |
Annual Chief Executive Officer and
Chief Financial Officer Certifications (unaudited)
The Fund’s CEO has submitted to the NYSE the required annual certification and, the Fund also has included the Certifications of the Fund’s CEO and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Fund’s Form N-CSR filed with the SEC, for the period of this report.
42 | Municipal High Income Fund Inc. 2005 Annual Report |
Additional Shareholder Information (unaudited)
Results of a Special Meeting of Shareholders
On October 21, 2005, a Special Meeting of Shareholders was held to approve a new management agreement. The following table provides the number of votes cast for, against or withheld, as well as the number of abstentions as to the matter voted on at the Special Meeting of Shareholders.
Item Voted On | | Votes For | | Votes Against | | Abstentions | |
New Management Agreement | | 10,513,534 | | 580,009 | | 472,297 | |
Municipal High Income Fund Inc. 2005 Annual Report | 43 |
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 are 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 capital 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 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 capital shares 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 capital shares 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 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
44 | Municipal High Income Fund Inc. 2005 Annual Report |
Dividend Reinvestment Plan (unaudited) (continued)
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 its 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 43027, Providence, Rhode Island 02940-3027 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 its capital shares in the open market. For the year ended October 31, 2005, the Fund has not repurchased any shares.
Municipal High Income Fund Inc. 2005 Annual Report | 45 |
Important Tax Information (unaudited)
All of the net investment income distributions paid monthly by the Fund from November 2004 through December 2004 qualify as tax-exempt interest dividends for Federal income tax purposes. Additionally, 98.28% of the net investment income distributions paid monthly by the Fund from January 1, 2005 through October 31, 2005 qualify as tax-exempt interest dividends for Federal income tax purposes.
Please retain this information for your records.
46 | Municipal High Income Fund Inc. 2005 Annual Report |
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| | DIRECTORS 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 Kaprel Ozsolak Chief Financial Officer and Treasurer Peter M. Coffey Vice President and Investment Officer Joseph P. Deane* Vice President and Investment Officer David T. Fare* Vice President and Investment Officer George Benoit Investment Officer | | OFFICERS (continued) Andrew Beagley Chief Compliance Officer Steven Frank 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 CUSTODIAN State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 TRANSFER AGENT PFPC Inc. P.O. Box 43027 Providence, Rhode Island 02940-3027 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 345 Park Avenue New York, New York 10154 |
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| | * Effective as of January 1, 2006. | | |
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Municipal High Income Fund Inc.
Municipal High Income Fund Inc.
125 Broad Street
10th Floor, MF-2
New York, New York 10004
The Fund files its complete schedule of portfolio holdings with Securities Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the Commission’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call 1-888-735-6507.
Information on how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, and a description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling 1-800-451-2010, (2) on the Fund’s website at www.citigroupAM.com, and (3) on the SEC’s website at www.sec.gov.
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
This report is submitted for the general information of the shareholders of Municipal High Income Fund Inc., and is not for use with the general public.
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
FD01049 12/05 05-9445
