Regulatory Filings • Dec 31, 2009
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Download Source FileN-CSR 1 a09-33846_1ncsr.htm N-CSR
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 | |
|---|---|
| Western Asset Municipal High Income Fund | |
| Inc. | |
| (Exact name of registrant as | |
| specified in charter) | |
| 55 Water Street, New York, NY | 10041 |
| (Address of principal executive | |
| offices) | (Zip code) |
| Robert I. Frenkel, Esq. Legg Mason & Co., LLC 100 First Stamford Place Stamford, CT 06902 | |
| (Name and address of agent for | |
| service) | |
| Registrants telephone number, including | |
| area code: | (888)777-0102 |
| Date of fiscal year end: | October 31 |
| Date of reporting period: | October 31, |
| 2009 |
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ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
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*ANNUAL REPORT* / OCTOBER 31, 2009
*Western Asset Municipal High Income Fund Inc.*
*(MHF)*
Managed by WESTERN ASSET
INVESTMENT PRODUCTS: NOT FDIC INSURED · NO BANK GUARANTEE · MAY LOSE VALUE
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*Fund objective*
The Fund seeks high current income exempt from federal income taxes.
*Whats inside*
| Letter from the chairman | I |
|---|---|
| Fund overview | 1 |
| Fund at a glance | 6 |
| Schedule of investments | 7 |
| Statement of assets and liabilities | 17 |
| Statement of operations | 18 |
| Statements of changes in net assets | 19 |
| Financial highlights | 20 |
| Notes to financial statements | 21 |
| Report of independent registered public | |
| accounting firm | 27 |
| Additional information | 28 |
| Annual chief executive officer and chief | |
| financial officer certifications | 34 |
| Dividend reinvestment plan | 35 |
| Important tax information | 37 |
*Legg Mason Partners Fund Advisor, LLC (LMPFA) is the Funds investment manager and Western Asset Management Company (Western Asset) is the Funds subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc.*
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*Letter from the chairman*
Dear Shareholder,
While the U.S. economy remained weak during much of the twelve-month reporting period ended October 31, 2009, the lengthiest recession since the Great Depression finally appeared to have ended during the third quarter of 2009.
Looking back, the U.S. Department of Commerce reported that fourth quarter 2008 U.S. gross domestic product (GDP) i contracted 5.4%. Economic weakness accelerated during the first quarter of 2009, as GDP fell 6.4%. However, the economic environment started to get relatively better during the second quarter, as GDP fell 0.7%. The economys more modest contraction was due, in part, to smaller declines in both exports and business spending. After contracting four consecutive quarters, the Commerce Departments preliminary estimate for third quarter 2009 GDP growth was 2.8%. A variety of factors helped the economy to expand, including the governments $787 billion stimulus program and its Cash for Clunkers car rebate program, which helped spur an increase in car sales.
Even before GDP advanced in the third quarter, there were signs that the economy was starting to regain its footing. The manufacturing sector, as measured by the Institute for Supply Managements PMI ii , rose to 52.9 in August 2009, the first time it surpassed 50 since January 2008 (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion). While the PMI dipped to 52.6 in September, it rose to 55.7 in October, its best reading since April 2006.
The housing market also saw some improvement during the reporting period. According to its most recent data, the S&P/Case-Shiller Home Price Index iii indicated that home prices rose 1.2% in August 2009 versus the prior month. This marked the fourth straight monthly gain. In addition, the National Association of Realtors Pending Home Sales Index iv rose 6.1% in September, the eighth consecutive monthly increase.
One area that remained weakand could hamper the magnitude of economic recoverywas the labor market. While monthly job losses have moderated compared to earlier in the year, the unemployment rate rose to 10.2% in October 2009, its highest level in more than twenty-six years. Since
Western Asset Municipal High Income Fund Inc. I
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*Letter from the chairman *continued****
December 2007, the number of unemployed has risen by approximately 8.2 million and there have been twenty-two consecutive months of job losses.
The Federal Reserve Board (Fed) v continued to pursue an accommodative monetary policy during the reporting period. After reducing the federal funds rate vi from 5.25% in August 2007 to a range of 0 to 1/4 percent in December 2008a historic lowthe Fed has maintained this stance thus far in 2009. In conjunction with its November 2009 meeting, the Fed said that it will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
During the twelve months ended October 31, 2009, both short- and long-term Treasury yields experienced periods of heightened volatility. When the period began, two- and ten-year Treasury yields were 1.56% and 4.01%, respectively. The ongoing fallout from the issues related to the subprime mortgage market, the credit crisis, forced selling by leveraged investors and a lack of liquidity triggered several flights to quality. During these periods, Treasury yields moved lower (and their prices higher), while riskier segments of the market saw their yields move higher (and their prices lower). This was particularly true toward the end of 2008, as the turmoil in the financial markets and sharply falling stock prices caused investors to flee securities that were perceived to be risky, even high-quality corporate bonds and high-grade municipal bonds. When the first half of the reporting period ended on April 30, 2009, two- and ten-year Treasury yields were 0.91% and 3.16%, respectively.
During the second half of the period, Treasury yields generally moved higher (and their prices lower) until early June. Two- and ten-year yields peaked at 1.42% and 3.98%, respectively, before falling and ending the reporting period at 0.90% and 3.41%, respectively. In a reversal from 2008, investor risk aversion faded as the twelve-month reporting period progressed, driving spread sector (non-Treasury) prices higher.
The municipal bond market performed largely in line with its taxable bond counterpart over the twelve months ended October 31, 2009. Over that period, the Barclays Capital Municipal Bond Index vii and the Barclays Capital U.S. Aggregate Index viii returned 13.60% and 13.79%, respectively. The municipal market was supported by strong demand, coupled with declining new issuance of tax-free bonds.
*A special note regarding increased market volatility*
Dramatically higher volatility in the financial markets has been very challenging for many investors. Market movements have been rapidsometimes in reaction to economic news, and sometimes creating the news.
II Western Asset Municipal High Income Fund Inc.
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In the midst of this evolving market environment, we at Legg Mason want to do everything we can to help you reach your financial goals. Now, as always, we remain committed to providing you with excellent service and a full spectrum of investment choices. Rest assured, we will continue to work hard to ensure that our investment managers make every effort to deliver strong long-term results.
We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our enhanced website, www.leggmason.com/cef. Here you can gain immediate access to many special features to help guide you through difficult times, including:
· Fund prices and performance,
· Market insights and commentaries from our portfolio managers, and
· A host of educational resources.
During periods of market unrest, it is especially important to work closely with your financial advisor and remember that reaching ones investment goals unfolds over time and through multiple market cycles. Time and again, history has shown that, over the long run, the markets have eventually recovered and grown.
*Information about your fund*
Please read on for a more detailed look at prevailing economic and market conditions during the Funds reporting period and to learn how those conditions have affected Fund performance.
Important information with regard to recent regulatory developments that may affect the Fund is contained in the Notes to Financial Statements included in this report.
As always, thank you for your confidence in our stewardship of your assets. We look forward to helping you meet your financial goals.
Sincerely,
*R. Jay Gerken, CFA*
Chairman, President and Chief Executive Officer
November 27, 2009
Western Asset Municipal High Income Fund Inc. III
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*Letter from the chairman *continued****
All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
| i | Gross
domestic product (GDP) is the market value of all final goods and services
produced within a country in a given period of time. |
| --- | --- |
| ii | The
Institute for Supply Managements PMI is based on a survey of purchasing
executives who buy the raw materials for manufacturing at more than 350
companies. It offers an early reading on the health of the manufacturing
sector. |
| iii | The
S&P/Case-Shiller Home Price Index measures the residential housing
market, tracking changes in the value of the residential real estate market
in twenty metropolitan regions across the United States. |
| iv | The
Pending Home Sales Index is an index created by the National Association of
Realtors that tracks home sales in which a contract is signed but the sale
has not yet closed. The Index is a leading indicator of future existing home
sales as it typically takes four to six weeks to close a sale after a
contract has been signed. |
| v | The
Federal Reserve Board (Fed) is responsible for the formulation of policies
designed to promote economic growth, full employment, stable prices, and a
sustainable pattern of international trade and payments. |
| vi | The
federal funds rate is the rate charged by one depository institution on an
overnight sale of immediately available funds (balances at the Federal
Reserve) to another depository institution; the rate may vary from depository
institution to depository institution and from day to day. |
| vii | The
Barclays Capital Municipal Bond Index is a market value weighted index of
investment grade municipal bonds with maturities of one year or more. |
| viii | The
Barclays Capital U.S. Aggregate Index is a broad-based bond index comprised
of government, corporate, mortgage- and asset-backed issues, rated investment
grade or higher, and having at least one year to maturity. |
IV Western Asset Municipal High Income Fund Inc.
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*Fund overview*
*Q. What is the Funds investment strategy?*
*A.* The Fund seeks high current income exempt from federal income taxes. The Fund invests primarily in intermediate- and long-term municipal debt securities issued by state and local governments. However, the Fund may invest in municipal obligations of any maturity. The Fund may invest in non-publicly traded municipal securities, zero-coupon municipal obligations and non-appropriation or other municipal lease obligations.
At Western Asset Management Company (Western Asset), the Funds subadviser, we utilize a fixed-income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Assets senior portfolio managers, research analysts and an in-house economist. Under this team approach, management of client fixed-income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization.
*Q. What were the overall market conditions during the Funds reporting period?*
*A.* During the fiscal year, the fixed-income market was impacted by the fallout from the financial crisis in 2008 and the subsequent return to more normal conditions given the aggressive actions taken by the Federal Reserve Board (Fed) i , the U.S. Department of the Treasury and other government entities.
The yields on two- and ten-year Treasuries began the fiscal year at 1.56% and 4.01%, respectively. As the reporting period began, we were in the midst of a flight to quality, triggered by the seizing credit markets and a sharp drop in Treasury yields. The ten-year Treasury yield bottomed at 2.08% on December 18, 2008. At the epicenter of the turmoil were the continued repercussions from the September 2008 bankruptcy of Lehman Brothers. During this time, investors were drawn to the relative safety of shorter-term Treasuries, while riskier portions of the bond market performed poorly.
However, as the fiscal year progressed, conditions in the credit markets improved, there were signs that the economy was stabilizing and investor risk aversion abated. This led to falling demand (and higher yields) for Treasuries and a strong sharp rally in the spread sectors (non-U.S. Treasuries). Also supporting the spread sectors was strong demand from investors seeking incremental yields given the low rates available from short-term fixed-income securities.
Toward the end of the reporting period, Treasury yields continued to move higher, especially on the long end of the yield curve ii . This was due to
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 1
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*Fund overview *continued****
concerns regarding the massive amount of new Treasury issuance that would be needed to fund the economic stimulus package. At the conclusion of the fiscal year, two- and ten-year Treasury yields were 0.90% and 3.41%, respectively.
While municipal bonds were not immune to the volatility in the financial markets, overall, they generated strong results during the fiscal year. As the reporting period began in November 2008, there was a great deal of uncertainty in the municipal market, as prices had fallen sharply in the previous two months. This challenging environment was triggered by a number of issues, including increased risk aversion, downgrades of monoline bond insurers, the seizing auction rate preferred market and forced selling by highly leveraged investors into illiquid markets. In addition, there were fears that the deepening recession would negatively impact municipalities, as they would generate less tax revenues.
While the fundamentals in the municipal market did not significantly change, tax-free bond prices rallied during much of the reporting period. This was due, in part, to improving technical factors, including less forced selling and better liquidity. Demand for tax-free bonds also increased, as investors were drawn to their attractive yields. All told, municipal bonds generated strong results, with the Barclays Capital Municipal Bond Index iii returning 13.60% for the twelve months ended October 31, 2009.
*Q. How did we respond to these changing market conditions?*
*A.* We made a number of tactical adjustments to the portfolio during the fiscal year. Toward the beginning of the period, we further increased the Funds overweight exposure to essential service revenue bonds. These included securities issued by municipalities for enterprises such as Power, Water & Sewer, Health Care, Transportation and Education. Not only did these securities offer attractive yields, but we also expected that they would outperform their General Obligation counterparts given the challenging economic environment. We also further pared the Funds exposure to General Obligation bonds. These securities are typically more economically sensitive, in that the issuing municipality repays bondholders from tax revenues.
*Performance review*
For the twelve months ended October 31, 2009, Western Asset Municipal High Income Fund Inc. returned 12.30% based on its net asset value (NAV) iv and 18.49% based on its New York Stock Exchange (NYSE) market price per share. The Funds unmanaged benchmark, the Barclays Capital Municipal Bond Index, returned 13.60% over the same time frame. The Lipper High Yield Municipal Debt Closed-End Funds Category Average v returned 24.22% for the same period. Please note that Lipper performance returns are based on each funds NAV.
2 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
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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 or legal adviser.
During the twelve-month period, the Fund made distributions to shareholders totaling $0.44 per share. The performance table shows the Funds twelve-month total return based on its NAV and market price as of October 31, 2009. Past performance is no guarantee of future results.
*PERFORMANCE SNAPSHOT* as of October 31, 2009 (unaudited)
| PRICE
PER SHARE | 12-MONTH TOTAL RETURN* |
| --- | --- |
| $7.45 (NAV) | 12.30 % |
| $7.25 (Market Price) | 18.49 % |
*All figures represent past performance and are not a guarantee of future results.*
*Total returns are based on changes in NAV or market price, respectively. Total returns assume the reinvestment of all distributions in additional shares in accordance with the Funds Dividend Reinvestment Plan.**
*Q. What were the leading contributors to performance?*
*A.* The largest contributor to relative performance for the period was the Funds overweight exposure to the Industrial Development Revenue/Pollution Control Revenue (IDR/PCR) sector. Within the sector, the Funds exposure to gas prepay securities significantly enhanced its results. These securities, which are backed by certain broker/dealers, performed poorly early in 2008 given the turmoil in the financial markets. However, as a number of broker/dealers changed their status to bank holding companies and government initiatives such as the Troubled Asset Relief Program (TARP) added confidence in the financial system, gas prepay securities rebounded sharply during the fiscal year.
The Funds overweight position and security selection in the Health Care sector also significantly contributed to performance. Within the sector, we emphasized some of the better-quality names that we felt were more secure and less likely to experience downgrades. Elsewhere, our underweight to State and Local General Obligation bonds was beneficial, as they underperformed essential service revenue bonds. We continued to favor essential service revenue bonds as they offered higher yields and are typically less susceptible to fallout from weak economic environments.
*Q. What were the leading detractors from performance?*
*A.* The largest detractor from performance for the period was the Funds yield curve positioning. An underweight to the intermediate (ten-year) portion of the yield curve detracted from results as it performed well during the twelve-month period as a whole. Our exposure to cash was also a drag
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 3
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*Fund overview *continued****
on performance, given the strong performance in the municipal market and the low yields available from short-term money market instruments.
Our futures trading strategy was another meaningful detractor from performance. In particular, our use of a short position in U.S. Treasury futures reduced the Funds overall duration vi . This strategy was detrimental to results as municipal yields declined over the period. Additionally, the outperformance of the U.S. Treasury market versus the municipal market, especially following the collapse of Lehman Brothers, caused this strategy to detract from results.
The Funds exposure to Pre-refunded vii securities also detracted from results. While these high-quality securities performed extremely well during the markets meltdown in 2008 and during periods of risk aversion over the fiscal year, this sector underperformed the benchmark during the twelve-month period as a whole. Elsewhere, certain IDR/PCR holdings and security selection in the Special Tax Obligation sector negatively impacted the Funds results.
Finally, the Fund does not use leverage as compared to its Lipper peer group, which is comprised of funds that are both levered and unlevered. The levered funds within the Lipper peer group benefited from the municipal bond rally in 2009, driving up the peer group average return for the period.
*Looking for additional information?*
The Fund is traded under the symbol MHF and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available on-line under the symbol XMHFX on most financial websites. Barrons and The Wall Street Journals Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites, as well as www.leggmason.com/cef.
In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Standard Time, for the Funds current NAV, market price and other information.
4 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
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Thank you for your investment in Western Asset Municipal High Income Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Funds investment goals.
Sincerely,
*Western Asset Management Company*
November 17, 2009
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.
RISKS: The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. High-yield bonds involve greater credit and liquidity risks than investment grade bonds. As interest rates rise, bond prices fall, reducing the value of the Fund. 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.
All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
| i | The
Federal Reserve Board (Fed) is responsible for the formulation of policies
designed to promote economic growth, full employment, stable prices and a
sustainable pattern of international trade and payments. |
| --- | --- |
| ii | The
yield curve is the graphical depiction of the relationship between the yield
on bonds of the same credit quality but different maturities. |
| iii | The
Barclays Capital Municipal Bond Index is a market value weighted index of
investment grade municipal bonds with maturities of one year or more. |
| iv | Net
asset value (NAV) is calculated by subtracting total liabilities and
outstanding preferred stock (if any) from the closing value of all securities
held by the Fund (plus all other assets) and dividing the result (total net
assets) by the total number of the common shares outstanding. The NAV
fluctuates with changes in the market prices of securities in which the Fund
has invested. However, the price at which an investor may buy or sell shares
of the Fund is the Funds market price as determined by supply of and demand for
the Funds shares. |
| v | Lipper, Inc.,
a wholly-owned subsidiary of Reuters, provides independent insight on global
collective investments. Returns are based on the twelve-month period ended
October 31, 2009, including the reinvestment of all distributions,
including returns of capital, if any, calculated among the 15 funds in the
Funds Lipper category. |
| vi | Duration
is the measure of the price sensitivity of a fixed-income security to an
interest rate change of 100 basis points. Calculation is based on the
weighted average of the present values for all cash flows. |
| vii | A pre-refunded bond is a
bond in which the original security has been replaced by an escrow, usually
consisting of treasuries or agencies, which has been structured to pay
principal and interest and any call premium, either to a call date (in the
case of a pre-refunded bond), or to maturity (in the case of an escrowed to
maturity bond). |
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 5
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*Fund at a glance (unaudited)*
*INVESTMENT BREAKDOWN (%)* As a percent of total investments
The bar graphs above represent the composition of the Funds investments as of October 31, 2009 and October 31, 2008 and do not include derivatives. The Fund is actively managed. As a result, the composition of the Funds investments is subject to change at any time.
6 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
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*Schedule of investments*
*October 31, 2009*
*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*
| FACE AMOUNT | SECURITY | VALUE |
|---|---|---|
| MUNICIPAL | ||
| BONDS 98.6% | ||
| Alaska 0.6% | ||
| $ 1,055,000 | Alaska | |
| Industrial Development & Export Authority Revenue, Williams Lynxs Alaska | ||
| Cargoport, 8.125% due 5/1/31 (a) | $ 939,699 | |
| Arizona 1.1% | ||
| 1,500,000 | Salt | |
| Verde, AZ Financial Corp., Gas Revenue, 5.000% due 12/1/37 | 1,284,615 | |
| 500,000 | University | |
| Medical Center Corp., AZ, Hospital Revenue, 6.250% due 7/1/29 | 536,675 | |
| Total Arizona | 1,821,290 | |
| Arkansas 1.0% | ||
| Arkansas | ||
| State Development Financing Authority: | ||
| 1,000,000 | Hospital Revenue, Washington Regional Medical | |
| Center, 7.375% due 2/1/29 (b) | 1,013,330 | |
| 600,000 | Industrial Facilities Revenue, Potlatch Corp. Projects, | |
| 7.750% due 8/1/25 (a) | 604,428 | |
| Total Arkansas | 1,617,758 | |
| California 5.4% | ||
| 1,500,000 | Barona, | |
| CA, Band of Mission Indians, GO, 8.250% due 12/1/20 | 1,413,495 | |
| 2,000,000 | California | |
| Health Facilities Financing Authority Revenue, Refunding, Cedars-Sinai | ||
| Medical Center, 5.000% due 11/15/27 | 1,990,560 | |
| 2,000,000 | Golden | |
| State Tobacco Securitization Corp., California Tobacco Settlement Revenue, | ||
| Asset Backed, 7.800% due 6/1/42 (b) | 2,419,060 | |
| 2,000,000 | M-S-R | |
| Energy Authority, CA, 6.500% due 11/1/39 | 2,138,340 | |
| 600,000 | Redding, | |
| CA, Redevelopment Agency, Tax Allocation, Shastec Redevelopment Project, | ||
| 5.000% due 9/1/29 | 537,972 | |
| Total California | 8,499,427 | |
| Colorado 5.8% | ||
| Colorado | ||
| Educational & Cultural Facilities Authority Revenue: | ||
| 705,000 | Charter School, Peak to Peak Project, 7.500% due | |
| 8/15/21 (b) | 772,384 | |
| Cheyenne Mountain Charter Academy: | ||
| 680,000 | 5.250% due 6/15/25 | 696,674 |
| 510,000 | 5.125% due 6/15/32 | 502,916 |
| 785,000 | Elbert County Charter, 7.375% due 3/1/35 | 732,758 |
| 810,000 | Unrefunded, University of Denver Project, | |
| NATL/FGIC, 5.250% due 3/1/23 | 851,707 | |
| 4,000,000 | Public | |
| Authority for Colorado Energy, Natural Gas Purchase Revenue, 6.125% due | ||
| 11/15/23 | 4,146,920 | |
| 1,000,000 | Reata | |
| South Metropolitan District, CO, GO, 7.250% due 6/1/37 | 809,090 | |
| 500,000 | Southlands, | |
| CO, Metropolitan District No. 1, GO, 7.125% due 12/1/34 (b) | 621,705 | |
| Total Colorado | 9,134,154 | |
| District of Columbia 1.3% | ||
| 1,895,000 | District | |
| of Columbia COP, District Public Safety & Emergency, AMBAC, 5.500% | ||
| due 1/1/20 | 1,994,639 |
See Notes to Financial Statements.
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 7
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*Schedule of investments *continued****
*October 31, 2009*
*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*
| FACE AMOUNT | SECURITY | VALUE |
|---|---|---|
| Florida 8.0% | ||
| $ 875,000 | Beacon | |
| Lakes, FL, Community Development District, Special Assessment, 6.900% due | ||
| 5/1/35 | $ 747,591 | |
| 1,500,000 | Bonnet | |
| Creek Resort Community Development District, Special Assessment, 7.500% due | ||
| 5/1/34 | 1,227,420 | |
| 2,000,000 | Capital | |
| Projects Finance Authority, FL, Student Housing Revenue, Capital Projects | ||
| Loan Program, Florida University, 7.850% due 8/15/31 (b) | 2,169,080 | |
| 905,000 | Century | |
| Parc Community Development District, Special Assessment, 7.000% due 11/1/31 | 878,366 | |
| 1,000,000 | Highlands | |
| County, FL, Health Facilities Authority Revenue, Adventist Health Systems, | ||
| 6.000% due 11/15/25 (b) | 1,128,070 | |
| 2,000,000 | Martin | |
| County, FL, IDA Revenue, Indiantown Cogeneration Project, 7.875% due 12/15/25 (a) | 2,105,720 | |
| 1,000,000 | Orange | |
| County, FL, Health Facilities Authority Revenue, First Mortgage, GF, Orlando | ||
| Inc. Project, 9.000% due 7/1/31 | 990,390 | |
| 290,000 | Palm | |
| Beach County, FL, Health Facilities Authority Revenue, John F. Kennedy | ||
| Memorial Hospital Inc. Project, 9.500% due 8/1/13 (c) | 342,461 | |
| 2,000,000 | Reunion | |
| East Community Development District, Special Assessment, 7.375% due 5/1/33 | 1,459,840 | |
| 1,000,000 | Santa | |
| Rosa, FL, Bay Bridge Authority Revenue, 6.250% due 7/1/28 | 630,710 | |
| 1,000,000 | University | |
| of Central Florida, COP, FGIC, 5.000% due 10/1/25 | 940,620 | |
| Total Florida | 12,620,268 | |
| Georgia 7.0% | ||
| Atlanta, | ||
| GA, Airport Revenue: | ||
| 1,000,000 | FGIC, 5.625% due 1/1/30 (a) | 1,007,680 |
| 1,000,000 | FSA, 5.000% due 1/1/26 | 1,035,290 |
| Atlanta, | ||
| GA: | ||
| 2,000,000 | Development Authority Educational Facilities Revenue, Science Park LLC | |
| Project, 5.000% due 7/1/32 | 1,951,900 | |
| 2,500,000 | Tax Allocation, Atlantic Station Project, 7.900% due 12/1/24 (b) | 2,886,300 |
| 2,000,000 | Water & Wastewater Revenue, 6.250% due 11/1/39 | 2,149,120 |
| 1,000,000 | DeKalb, | |
| Newton & Gwinnett Counties, GA, Joint Development Authority Revenue, | ||
| GGC Foundation LLC Project, 6.125% due 7/1/40 | 1,097,320 | |
| 1,000,000 | Gainesville & | |
| Hall County, GA, Development Authority Revenue, Senior Living Facilities, | ||
| Lanier Village Estates, 7.250% due 11/15/29 | 1,011,940 | |
| Total Georgia | 11,139,550 | |
| Hawaii 2.8% | ||
| Hawaii | ||
| State Department of Budget & Finance Special Purpose: | ||
| 2,000,000 | Revenue, Hawaiian Electric Co., 6.500% due 7/1/39 | 2,160,580 |
| Senior Living Revenue: | ||
| 550,000 | 6.400% due 11/15/14 | 558,635 |
| 1,500,000 | 7.500% due 11/15/15 | 1,563,600 |
| 200,000 | 15 Craigside Project, 8.750% due 11/15/29 | 221,696 |
| Total Hawaii | 4,504,511 |
See Notes to Financial Statements.
8 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
SEQ.=1,FOLIO='8',FILE='C:\JMS\105727\09-33846-1\task3853350\33846-1-bi-05.htm',USER='105727',CD='Dec 27 05:43 2009'
*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*
| FACE AMOUNT | SECURITY | VALUE |
|---|---|---|
| Illinois 0.5% | ||
| $ 1,000,000 | Illinois | |
| Finance Authority Revenue, Refunding, Chicago Charter School Project, 5.000% | ||
| due 12/1/26 | $ 868,930 | |
| Indiana 0.4% | ||
| County | ||
| of St. Joseph, IN, EDR, Holy Cross Village Notre Dame Project: | ||
| 285,000 | 6.000% due 5/15/26 | 244,627 |
| 550,000 | 6.000% due 5/15/38 | 433,229 |
| Total Indiana | 677,856 | |
| Kansas 0.7% | ||
| 1,150,000 | Salina, | |
| KS, Hospital Revenue, Refunding & Improvement Salina Regional | ||
| Health, 5.000% due 10/1/22 | 1,170,758 | |
| Kentucky 2.0% | ||
| 1,000,000 | Louisville & | |
| Jefferson County, KY, Metro Government Health System Revenue, Norton | ||
| Healthcare Inc., 5.250% due 10/1/36 | 956,940 | |
| 2,000,000 | Owen | |
| County, KY, Waterworks System Revenue, Kentucky American Water Co. Project, | ||
| 6.250% due 6/1/39 | 2,156,720 | |
| Total Kentucky | 3,113,660 | |
| Louisiana 1.2% | ||
| 1,000,000 | Epps, | |
| LA, COP, 8.000% due 6/1/18 | 1,005,680 | |
| 1,000,000 | St. | |
| John Baptist Parish, LA, Revenue, Marathon Oil Corp., 5.125% due 6/1/37 | 910,180 | |
| Total Louisiana | 1,915,860 | |
| Maryland 1.0% | ||
| 1,500,000 | Maryland | |
| State Economic Development Corp. Revenue, Chesapeake Bay, 7.730% due 12/1/27 (b) | 1,523,340 | |
| Massachusetts 4.0% | ||
| 860,000 | Boston, | |
| MA, Industrial Development Financing Authority Revenue, Roundhouse | ||
| Hospitality LLC Project, 7.875% due 3/1/25 (a) | 722,142 | |
| 3,000,000 | Massachusetts | |
| Educational Financing Authority Education Loan Revenue, AGC, 6.125% due | ||
| 1/1/22 (a) | 3,125,760 | |
| 1,000,000 | Massachusetts | |
| State DFA Revenue, Briarwood, 8.250% due 12/1/30 (b) | 1,088,120 | |
| 265,000 | Massachusetts | |
| State Port Authority Revenue, 13.000% due 7/1/13 (c) | 320,934 | |
| 1,000,000 | Massachusetts | |
| State, HEFA Revenue, Caritas Christi Obligation, 6.750% due 7/1/16 | 1,039,340 | |
| Total Massachusetts | 6,296,296 | |
| Michigan 5.3% | ||
| 2,130,000 | Allen | |
| Academy, COP, 7.500% due 6/1/23 | 1,876,189 | |
| Cesar | ||
| Chavez Academy, COP: | ||
| 1,000,000 | 6.500% due 2/1/33 | 847,240 |
| 1,000,000 | 8.000% due 2/1/33 | 1,001,920 |
| 1,000,000 | Gaudior | |
| Academy, COP, 7.250% due 4/1/34 | 852,300 | |
| 2,000,000 | Royal | |
| Oak, MI, Hospital Finance Authority Revenue, William Beaumont Hospital, | ||
| 8.250% due 9/1/39 | 2,352,640 |
See Notes to Financial Statements.
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 9
SEQ.=1,FOLIO='9',FILE='C:\JMS\105727\09-33846-1\task3853350\33846-1-bi-05.htm',USER='105727',CD='Dec 27 05:43 2009'
*Schedule of investments *continued****
*October 31, 2009*
*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*
| FACE AMOUNT | SECURITY | VALUE |
|---|---|---|
| Michigan 5.3% continued | ||
| $ 975,000 | Star | |
| International Academy, COP, 7.000% due 3/1/33 | $ 817,196 | |
| 700,000 | William | |
| C. Abney Academy, COP, 6.750% due 7/1/19 | 693,567 | |
| Total Michigan | 8,441,052 | |
| Missouri 0.8% | ||
| 1,300,000 | Missouri | |
| State HEFA Revenue, Refunding, St. Lukes Episcopal, 5.000% due 12/1/21 | 1,301,482 | |
| Montana 1.2% | ||
| 2,345,000 | Montana | |
| State Board of Investment, Resource Recovery Revenue, Yellowstone Energy LP | ||
| Project, 7.000% due 12/31/19 (a) | 1,920,508 | |
| New Hampshire 1.0% | ||
| 1,600,000 | New | |
| Hampshire HEFA Revenue, Healthcare System, Covenant Health System, 5.500% due | ||
| 7/1/34 | 1,559,840 | |
| New Jersey 8.7% | ||
| 1,500,000 | Casino | |
| Reinvestment Development Authority Revenue, NATL, 5.250% due 6/1/20 | 1,528,215 | |
| 1,000,000 | New | |
| Jersey EDA, Retirement Community Revenue, SeaBrook Village Inc., 8.250% due | ||
| 11/15/30 (b) | 1,087,640 | |
| New | ||
| Jersey Health Care Facilities Financing Authority Revenue, Trinitas Hospital | ||
| Obligation Group: | ||
| 5,000,000 | 5.250% due 7/1/30 | 4,194,750 |
| 3,000,000 | 7.500% due 7/1/30 (b) | 3,161,520 |
| 5,000,000 | New | |
| Jersey State, EDA, Revenue, Refunding, 6.875% due 1/1/37 (a) | 3,794,050 | |
| Total New Jersey | 13,766,175 | |
| New Mexico 0.6% | ||
| 1,000,000 | Otero | |
| County, NM, Jail Project Revenue, 7.500% due 12/1/24 | 988,380 | |
| New York 3.5% | ||
| 700,000 | Brookhaven, | |
| NY, IDA Civic Facilities Revenue, Memorial Hospital Medical Center Inc., | ||
| 8.250% due 11/15/30 (b) | 759,822 | |
| 1,000,000 | Monroe | |
| County, NY, IDA, Civic Facilities Revenue, Woodland Village Project, 8.550% | ||
| due 11/15/32 (b) | 1,097,340 | |
| 2,000,000 | MTA, | |
| New York Service Contract, Refunding, AMBAC, 5.000% due 7/1/30 | 2,024,180 | |
| 695,000 | New | |
| York City, NY, IDA, Civic Facilities Revenue, Special Needs Facilities Pooled | ||
| Program, 8.125% due 7/1/19 (b) | 720,242 | |
| 840,000 | Suffolk | |
| County, NY, IDA, Civic Facilities Revenue, Eastern Long Island Hospital | ||
| Association, 7.750% due 1/1/22 (b) | 939,549 | |
| Total New York | 5,541,133 | |
| North Carolina 0.6% | ||
| 905,000 | North | |
| Carolina Medical Care Community, Health Care Facilities Revenue, First | ||
| Mortgage, DePaul Community Facilities Project, 7.625% due 11/1/29 (b) | 923,100 |
See Notes to Financial Statements.
10 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
SEQ.=1,FOLIO='10',FILE='C:\JMS\105727\09-33846-1\task3853350\33846-1-bi-05.htm',USER='105727',CD='Dec 27 05:43 2009'
*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*
| FACE AMOUNT | SECURITY | VALUE |
|---|---|---|
| Ohio 2.7% | ||
| $ 1,500,000 | Cuyahoga | |
| County, OH, Hospital Facilities Revenue, Canton Inc. Project, 7.500% due | ||
| 1/1/30 | $ 1,522,830 | |
| 1,500,000 | Miami | |
| County, OH, Hospital Facilities Revenue, Refunding and Improvement Upper | ||
| Valley Medical Center, 5.250% due 5/15/21 | 1,468,260 | |
| 1,260,000 | Riversouth | |
| Authority, OH, Revenue, Riversouth Area Redevelopment, 5.000% due 12/1/25 | 1,314,205 | |
| Total Ohio | 4,305,295 | |
| Pennsylvania 5.7% | ||
| 1,000,000 | Cumberland | |
| County, PA, Municipal Authority Retirement Community Revenue, Wesley | ||
| Affiliate Services Inc. Project, 7.250% due 1/1/35 (b) | 1,180,090 | |
| 1,000,000 | Lebanon | |
| County, PA, Health Facilities Authority Revenue, Good Samaritan Hospital | ||
| Project, 6.000% due 11/15/35 | 923,510 | |
| 1,000,000 | Monroe | |
| County, PA, Hospital Authority Revenue, Pocono Medical Center, 5.000% due 1/1/27 | 926,970 | |
| 940,000 | Northumberland | |
| County, PA, IDA Facilities Revenue, NHS Youth Services Inc. Project, 7.500% | ||
| due 2/15/29 | 817,988 | |
| 2,000,000 | Pennsylvania | |
| Economic Development Financing Authority, Health Systems Revenue, Albert | ||
| Einstein Healthcare, 6.250% due 10/15/23 | 2,090,280 | |
| 1,000,000 | Philadelphia, | |
| PA, Authority for IDR, Host Marriot LP Project, Remarketed 10/31/95, 7.750% | ||
| due 12/1/17 (a) | 942,290 | |
| 2,000,000 | Westmoreland | |
| County, PA, IDA Revenue, Health Care Facilities, Redstone Highlands Health, | ||
| 8.125% due 11/15/30 (b) | 2,172,720 | |
| Total Pennsylvania | 9,053,848 | |
| Tennessee 4.3% | ||
| 1,000,000 | Clarksville, | |
| TN, Natural Gas Acquisition Corp. Gas Revenue, 5.000% due 12/15/21 | 930,200 | |
| 1,000,000 | Johnson | |
| City, TN, Health & Educational Facilities Board, Hospital Revenue, | ||
| Mountain States Health Alliance, 5.500% due 7/1/36 | 976,690 | |
| 2,500,000 | Shelby | |
| County, TN, Health Educational & Housing Facilities Board Revenue, | ||
| Trezevant Manor Project, 5.750% due 9/1/37 | 1,979,475 | |
| 3,000,000 | Tennessee | |
| Energy Acquisition Corp., Gas Revenue, 5.250% due 9/1/26 | 2,842,470 | |
| Total Tennessee | 6,728,835 | |
| Texas 15.3% | ||
| 1,500,000 | Brazos | |
| River, TX, Harbor Industrial Development Corp., Environmental Facilities | ||
| Revenue, Dow Chemical Co., 5.900% due 5/1/28 (a)(d) | 1,503,960 | |
| 1,500,000 | Burnet | |
| County, TX, Public Facility Project Revenue, 7.500% due 8/1/24 | 1,509,630 | |
| Garza | ||
| County, TX, Public Facility Corp.: | ||
| 1,000,000 | 5.500% due 10/1/18 | 940,190 |
| 2,000,000 | Project Revenue, 5.750% due 10/1/25 | 2,049,520 |
| 2,000,000 | Gulf | |
| Coast of Texas, IDA, Solid Waste Disposal Revenue, CITGO Petroleum Corp. | ||
| Project, 7.500% due 9/30/12 (a)(d) | 2,057,380 |
See Notes to Financial Statements.
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 11
SEQ.=1,FOLIO='11',FILE='C:\JMS\105727\09-33846-1\task3853350\33846-1-bi-05.htm',USER='105727',CD='Dec 27 05:43 2009'
*Schedule of investments *continued****
*October 31, 2009*
*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*
| FACE AMOUNT | SECURITY | VALUE |
|---|---|---|
| Texas 15.3% continued | ||
| $ 2,000,000 | Harris | |
| County, TX, Cultural Education Facilities Finance Corp., Medical Facilities | ||
| Revenue, Baylor College of Medicine, 5.625% due 11/15/32 | $ 1,815,080 | |
| 2,750,000 | Houston, | |
| TX, Airport Systems Revenue, Special Facilities, Continental Airlines Inc. | ||
| Project, 6.125% due 7/15/27 (a) | 2,304,610 | |
| 1,000,000 | Laredo, | |
| TX, ISD Public Facility Corp. Lease Revenue, AMBAC, 5.000% due 8/1/29 | 1,002,730 | |
| 1,000,000 | Midlothian, | |
| TX, Development Authority, Tax Increment Contract Revenue, 6.200% due | ||
| 11/15/29 | 995,430 | |
| 2,500,000 | North | |
| Texas Tollway Authority Revenue, 5.750% due 1/1/40 | 2,535,500 | |
| 2,000,000 | Texas | |
| Midwest Public Facility Corp. Revenue, Secure Treatment Facility Project, | ||
| 9.000% due 10/1/30 | 2,082,840 | |
| 1,500,000 | Texas | |
| State Public Finance Authority, Uplift Education, 5.750% due 12/1/27 | 1,462,110 | |
| 1,865,000 | West | |
| Texas Detention Facility Corp. Revenue, 8.000% due 2/1/25 | 1,656,679 | |
| Willacy | ||
| County, TX: | ||
| 1,025,000 | Local Government Corp. Revenue, 6.875% due 9/1/28 | 855,896 |
| PFC Project Revenue: | ||
| 1,000,000 | 8.250% due 12/1/23 | 926,480 |
| 580,000 | County Jail, 7.500% due 11/1/25 | 510,528 |
| Total Texas | 24,208,563 | |
| U.S. Virgin Islands 1.7% | ||
| 2,500,000 | Virgin | |
| Islands Public Finance Authority Revenue, Matching Fund Loan, 6.750% due | ||
| 10/1/37 | 2,647,925 | |
| Virginia 2.3% | ||
| 345,000 | Alexandria, | |
| VA, Redevelopment & Housing Authority, MFH Revenue, Parkwood Court | ||
| Apartments Project, 8.125% due 4/1/30 | 321,826 | |
| 1,000,000 | Broad | |
| Street CDA Revenue, 7.500% due 6/1/33 | 896,930 | |
| 2,500,000 | Chesterfield | |
| County, VA, EDA, Solid Waste and Sewer Disposal Revenue, Virginia Electric | ||
| Power Co. Project, 5.600% due 11/1/31 (a) | 2,450,450 | |
| Total Virginia | 3,669,206 | |
| West Virginia 1.5% | ||
| 2,500,000 | Pleasants | |
| County, WV, PCR, Refunding County Commission Allegheny, 5.250% due 10/15/37 | 2,340,275 | |
| Wisconsin 0.6% | ||
| 1,000,000 | Wisconsin | |
| State HEFA Revenue, Aurora Health Care, 6.400% due 4/15/33 | 1,018,150 | |
| TOTAL | ||
| INVESTMENTS 98.6% (Cost $158,218,638#) | 156,251,763 | |
| Other | ||
| Assets in Excess of Liabilities 1.4% | 2,168,556 | |
| TOTAL | ||
| NET ASSETS 100.0% | $ 158,420,319 |
| (a) | Income
from this issue is considered a preference item for purposes of calculating
the alternative minimum tax (AMT). |
| --- | --- |
| (b) | Pre-Refunded
bonds are escrowed with U.S. government obligations and/or U.S. government
agency securities and are considered by the manager to be triple-A rated even
if issuer has not applied for new ratings. |
See Notes to Financial Statements.
12 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
SEQ.=1,FOLIO='12',FILE='C:\JMS\105727\09-33846-1\task3853350\33846-1-bi-07.htm',USER='105727',CD='Dec 27 05:53 2009'
*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*
| (c) | Bonds
are escrowed to maturity by government securities and/or U.S. government
agency securities and are considered by the manager to be triple-A rated even
if issuer has not applied for new ratings. |
| --- | --- |
| (d) | Maturity
date shown represents the mandatory tender date. |
| # | Aggregate
cost for federal income tax purposes is $158,158,897. |
Abbreviations used in this schedule:
| AGC | | Assured
Guaranty Corporation Insured Bonds |
| --- | --- | --- |
| AMBAC | | American
Municipal Bond Assurance Corporation Insured Bonds |
| CDA | | Community
Development Authority |
| COP | | Certificate
of Participation |
| DFA | | Development
Finance Agency |
| EDA | | Economic
Development Authority |
| EDR | | Economic
Development Revenue |
| FGIC | | Financial
Guaranty Insurance Company Insured Bonds |
| FSA | | Financial
Security Assurance Insured Bonds |
| GO | | General
Obligation |
| HEFA | | Health &
Educational Facilities Authority |
| IDA | | Industrial
Development Authority |
| IDR | | Industrial
Development Revenue |
| ISD | | Independent
School District |
| MFH | | Multi-Family
Housing |
| MTA | | Metropolitan
Transportation Authority |
| NATL | | National
Public Finance Guarantee Corporation Insured Bonds |
| PCR | | Pollution
Control Revenue |
| PFC | | Public
Facilities Corporation |
*SUMMARY OF INVESTMENTS BY INDUSTRY (unaudited)**
| Health care | 19.9 |
|---|---|
| Pre-refunded/escrowed to maturity | 16.8 |
| Industrial revenue | 16.8 |
| Leasing | 11.3 |
| Education | 7.0 |
| Power | 6.7 |
| Special tax obligation | 5.2 |
| Transportation | 4.6 |
| Solid waste/resource recovery | 4.1 |
| Other revenue | 3.6 |
| Local general obligation | 2.4 |
| Water & sewer | 1.4 |
| Housing | 0.2 |
| 100.0 % |
See Notes to Financial Statements.
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 13
SEQ.=1,FOLIO='13',FILE='C:\JMS\105727\09-33846-1\task3853350\33846-1-bi-07.htm',USER='105727',CD='Dec 27 05:53 2009'
*Schedule of investments *continued****
*October 31, 2009*
*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*
| RATINGS TABLE (unaudited) | |
|---|---|
| S&P/Moodys/Fitch | |
| AAA/Aaa | 6.6 % |
| AA/Aa | 2.8 |
| A | 26.8 |
| BBB/Baa | 24.9 |
| BB/Ba | 6.7 |
| CCC/Caa | 1.5 |
| CC/Ca | 0.4 |
| NR | 30.3 |
| 100.0 % |
| | As
a percentage of total investments. |
| --- | --- |
| | In
the event that a security is rated by multiple nationally recognized
statistical rating organizations (NRSROs) and receives different ratings,
the Fund will treat the security as being rated in the lowest rating category
received from an NRSRO. |
See pages 15 and 16 for definitions of ratings.
14 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
SEQ.=1,FOLIO='14',FILE='C:\JMS\105727\09-33846-1\task3853350\33846-1-bi-07.htm',USER='105727',CD='Dec 27 05:53 2009'
*Bond ratings (unaudited)*
The definitions of the applicable rating symbols are set forth below:
Standard & Poors Ratings Service (Standard & Poors) Ratings from AA to CCC may be modified by the addition of a plus (+) or minus () sign to show relative standings within the major rating categories.
| AAA | | Bonds
rated AAA have the highest rating assigned by Standard & Poors.
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 issues only in a small degree. |
| A | | Bonds
rated A have a strong capacity to pay interest and repay principal although
they are 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
bonds in this category than in higher rated categories. |
| BB,
B, CCC, CC
and C | | Bonds
rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents the
lowest degree of speculation and C 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 | | Bonds
rated D are in default and payment of interest and/or repayment of
principal is in arrears. |
Moodys Investors Service (Moodys) 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 ranking 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 can be visualized as 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 as 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. |
| 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 and therefore 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 any long period of time may be small. |
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 15
SEQ.=1,FOLIO='15',FILE='C:\JMS\105727\09-33846-1\task3853350\33846-1-bi-07.htm',USER='105727',CD='Dec 27 05:53 2009'
*Bond ratings (unaudited) continued***
| Caa | | Bonds
rated Caa are of poor standing. These may be in default, or present
elements of danger may exist 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 short-comings. |
| C | | Bonds
rated C are the lowest class of bonds and issues so rated can be regarded
as having extremely poor prospects of ever attaining any real investment standing. |
Fitch Ratings Service (Fitch) Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standings within the major rating categories.
| AAA | | Bonds
rated AAA have the highest rating assigned by Fitch. 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 issues only in a small degree. |
| A | | Bonds
rated A have a strong capacity to pay interest and repay principal although
they are 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
bonds in this category than in higher rated categories. |
| BB,
B, CCC and CC | | Bonds
rated BB, B, CCC and CC are regarded, on balance, as predominantly
speculative 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. |
| NR | | Indicates
that the bond is not rated by Standard & Poors, Moodys or Fitch. |
*Short-term security ratings (unaudited)*
| SP-1 | | Standard &
Poors highest rating indicating very strong or strong capacity to pay principal
and interest; those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign. |
| --- | --- | --- |
| A-1 | | Standard &
Poors 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 | | Moodys
highest rating for issues having a demand feature - VRDO. |
| MIG
1 | | Moodys
highest rating for short-term municipal obligations. |
| P-1 | | Moodys
highest rating for commercial paper and for VRDO prior to the advent of the
VMIG 1 rating. |
| F1 | | Fitchs
highest rating indicating the strongest capacity for timely payment of
financial commitments; those issues determined to possess overwhelming strong
credit feature are denoted with a plus (+) sign. |
16 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
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*Statement of assets and liabilities*
*October 31, 2009*
| ASSETS: — Investments, at value (Cost $158,218,638) | $156,251,763 | |
|---|---|---|
| Interest receivable | 3,356,286 | |
| Receivable for securities sold | 20,000 | |
| Prepaid expenses | 11,994 | |
| Total Assets | 159,640,043 | |
| LIABILITIES: | ||
| Due to custodian | 1,020,200 | |
| Investment management fee payable | 74,583 | |
| Directors fees payable | 5,036 | |
| Accrued expenses | 119,905 | |
| Total Liabilities | 1,219,724 | |
| TOTAL NET ASSETS | $158,420,319 | |
| NET ASSETS: | ||
| Par value ($0.01 par value; 21,273,078 shares | ||
| issued and outstanding; 500,000,000 shares authorized) | $ 212,731 | |
| Paid-in capital in excess of par value | 192,096,219 | |
| Undistributed net investment income | 750,301 | |
| Accumulated net realized loss on investments and | ||
| futures contracts | (32,672,057 | ) |
| Net unrealized depreciation on investments | (1,966,875 | ) |
| TOTAL NET ASSETS | $158,420,319 | |
| Shares Outstanding | 21,273,078 | |
| Net Asset Value | $7.45 |
See Notes to Financial Statements.
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 17
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*Statement of operations*
*For the Year Ended October 31, 2009*
| INVESTMENT INCOME: — Interest | $ 10,146,420 | |
|---|---|---|
| EXPENSES: | ||
| Investment management fee (Note 2) | 810,495 | |
| Shareholder reports | 50,744 | |
| Audit and tax | 43,623 | |
| Directors fees | 42,861 | |
| Legal fees | 38,354 | |
| Transfer agent fees | 28,979 | |
| Stock exchange listing fees | 19,867 | |
| Insurance | 5,037 | |
| Custody fees | 1,578 | |
| Miscellaneous expenses | 9,404 | |
| Total Expenses | 1,050,942 | |
| NET INVESTMENT INCOME | 9,095,478 | |
| REALIZED | ||
| AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS (NOTES 1, 3 | ||
| AND 4): | ||
| Net Realized Loss From: | ||
| Investment transactions | (2,768,659 | ) |
| Futures contracts | (2,460,161 | ) |
| Net Realized Loss | (5,228,820 | ) |
| Change in Net Unrealized Appreciation/Depreciation | ||
| From: | ||
| Investments | 14,402,370 | |
| Futures contracts | (950,949 | ) |
| Change in Net Unrealized | ||
| Appreciation/Depreciation | 13,451,421 | |
| NET GAIN ON INVESTMENTS AND FUTURES CONTRACTS | 8,222,601 | |
| INCREASE IN NET ASSETS FROM OPERATIONS | $17,318,079 |
See Notes to Financial Statements.
18 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
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*Statements of changes in net assets*
| FOR THE YEARS ENDED
OCTOBER 31, | 2009 | | 2008 | |
| --- | --- | --- | --- | --- |
| OPERATIONS: | | | | |
| Net investment income | $ 9,095,478 | | $ 9,315,087 | |
| Net realized loss | (5,228,820 | ) | (3,721,736 | ) |
| Change in net unrealized appreciation/depreciation | 13,451,421 | | (20,902,204 | ) |
| Increase (Decrease) in Net Assets
From Operations | 17,318,079 | | (15,308,853 | ) |
| DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 1): | | | | |
| Net investment income | (9,409,089 | ) | (8,918,253 | ) |
| Decrease in Net Assets From
Distributions to Shareholders | (9,409,089 | ) | (8,918,253 | ) |
| FUND SHARE TRANSACTIONS: | | | | |
| Reinvestment of distributions (153,817 and 56,336
shares issued, respectively) | 1,059,181 | | 436,238 | |
| Increase in Net Assets From Fund
Share Transactions | 1,059,181 | | 436,238 | |
| INCREASE (DECREASE) IN NET ASSETS | 8,968,171 | | (23,790,868 | ) |
| NET ASSETS: | | | | |
| Beginning of year | 149,452,148 | | 173,243,016 | |
| End of year* | $158,420,319 | | $149,452,148 | |
| * Includes undistributed net investment income of: | $750,301 | | $1,079,803 | |
See Notes to Financial Statements.
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 19
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*Financial highlights*
*FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31:*
| NET ASSET VALUE, BEGINNING OF YEAR | 2009 — $7.08 | 2008 — $8.23 | 2007 — $8.22 | 2006 — $7.95 | 2005 — $7.84 | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| INCOME (LOSS) FROM OPERATIONS: | ||||||||||
| Net investment income | 0.43 | 0.44 | 0.42 | 0.42 | 0.45 | |||||
| Net realized and unrealized gain (loss) | 0.38 | (1.17 | ) | | 0.26 | 0.11 | ||||
| Total income (loss) from | ||||||||||
| operations | 0.81 | (0.73 | ) | 0.42 | 0.68 | 0.56 | ||||
| LESS DISTRIBUTIONS FROM: | ||||||||||
| Net investment income | (0.44 | ) | (0.42 | ) | (0.41 | ) | (0.41 | ) | (0.45 | ) |
| Total distributions | (0.44 | ) | (0.42 | ) | (0.41 | ) | (0.41 | ) | (0.45 | ) |
| NET ASSET VALUE, END OF YEAR | $7.45 | $7.08 | $8.23 | $8.22 | $7.95 | |||||
| MARKET PRICE, END OF YEAR | $7.25 | $6.53 | $7.75 | $7.84 | $7.10 | |||||
| Total return, based on NAV 1,2 | 12.30 | % | (9.02 | )% | 5.40 | % | 9.24 | % | 7.82 | % 3 |
| Total return, based on Market | ||||||||||
| Price 2 | 18.49 | % | (10.89 | )% | 4.06 | % | 16.66 | % | 2.16 | % |
| NET ASSETS, END OF YEAR (MILLIONS) | $158 | $149 | $173 | $173 | $167 | |||||
| RATIOS TO AVERAGE NET ASSETS: | ||||||||||
| Gross expenses | 0.71 | % | 0.71 | % | 0.84 | % 4 | 0.79 | % | 0.85 | % |
| Net expenses | 0.71 | 0.71 | 0.79 | 4,5 | 0.79 | 5 | 0.85 | |||
| Net investment income | 6.17 | 5.59 | 5.14 | 5.27 | 5.74 | |||||
| PORTFOLIO TURNOVER RATE | 17 | % | 17 | % | 16 | % | 18 | % | 39 | % |
1 Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.
2 The total return calculation assumes that distributions are reinvested in accordance with the Funds dividend reinvestment plan. Past performance is no guarantee of future results.
3 The prior investment manager fully reimbursed the Fund for losses incurred resulting from an investment transaction error. Without this reimbursement, total return would not have changed.
4 Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would both have been 0.73%.
5 Reflects fee waivers and/or expense reimbursements.
See Notes to Financial Statements.
20 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
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*Notes to financial statements*
*1. Organization and significant accounting policies*
Western Asset Municipal High Income Fund Inc. (the Fund) was incorporated in Maryland and is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the 1940 Act). The Fund seeks high current income exempt from federal income taxes.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (GAAP). 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. Subsequent events have been evaluated through December 21, 2009, the issuance date of the financial statements.
*(a) Investment valuation.* Securities are valued at the mean between the last quoted bid and asked prices provided by an independent pricing service that are based on transactions in municipal obligations, quotations from municipal bond dealers, market transactions in comparable securities and various other relationships between securities. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. When prices are not readily available, or are determined not to reflect fair value, the Fund values these securities at fair value as determined in accordance with the procedures approved by the Funds Board of Directors. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates fair value.
The Fund has adopted Financial Accounting Standards Board Codification Topic 820 (formerly Statement of Financial Accounting Standards No. 157) (ASC Topic 820). ASC Topic 820 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for measuring fair value based on inputs used to value the Funds investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.
· Level 1 quoted prices in active markets for identical investments
· Level 2 other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
· Level 3 significant unobservable inputs (including the Funds own assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 21
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*Notes to financial statements *continued****
The Fund uses valuation techniques to measure fair value that are consistent with the market approach, income approach and/or cost approach, depending on the type of the security and the particular circumstance.
The following is a summary of the inputs used in valuing the Funds assets carried at fair value:
| DESCRIPTION | QUOTED PRICES (LEVEL 1) | OTHER SIGNIFICANT OBSERVABLE INPUTS (LEVEL 2) | SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) | TOTAL |
|---|---|---|---|---|
| Municipal bonds | | $156,251,763 | | $156,251,763 |
See Schedule of Investments for additional detailed categorizations.
*(b) Futures contracts.* The Fund may use futures contracts to gain exposure to, or hedge against, changes in the value of equities, interest rates or foreign currencies. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the Fund is required to deposit with a broker cash or cash equivalents in an amount equal to a certain percentage of the contract amount. This is known as the initial margin. Subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. The daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
*(c) Credit and market risk.* The Fund invests in high yield instruments that are subject to certain credit and market risks. The yields of high yield obligations reflect, among other things, perceived credit and market risks. The Funds investment in securities rated below investment grade typically involves risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading.
*(d) Security transactions and investment income.* Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Funds policy is to
22 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
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generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.
*(e) Distributions to shareholders.* Distributions from net investment income for the Fund, if any, are declared and paid on a monthly basis. The Fund intends to satisfy conditions that will enable interest from municipal securities, which is exempt from federal and certain state income taxes, to retain such tax-exempt status when distributed to the shareholders of the Fund. Distributions of net realized gains, if any, are taxable and are declared at least annually. Distributions are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
*(f) Federal and other taxes.* It is the Funds policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the Code), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal income tax provision is required in the Funds financial statements.
Management has analyzed the Funds tax positions taken on federal income tax returns for all open tax years and has concluded that as of October 31, 2009, no provision for income tax would be required in the Funds financial statements. The Funds federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by Internal Revenue Service and state departments of revenue.
*(g) Reclassification.* GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. During the current year, the following reclassifications have been made:
| (a) | UNDISTRIBUTED NET INVESTMENT INCOME — | ACCUMULATED NET REALIZED LOSS — $733,106 | PAID-IN CAPITAL — $(733,106 | |
|---|---|---|---|---|
| (b) | $(15,891 | ) | 15,891 | |
(a) Reclassifications are primarily due to the expiration of a capital loss carryover.
(b) Reclassifications are primarily due to differences between book and tax accretion of market discount on fixed income securities.
*2. Investment management agreement and other transactions with affiliates*
Legg Mason Partners Fund Advisor, LLC (LMPFA) is the Funds investment manager and Western Asset Management Company (Western Asset) is the Funds subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (Legg Mason).
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 23
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*Notes to financial statements *continued****
LMPFA provides administrative and certain oversight services to the Fund. The Fund pays LMPFA an investment management fee, calculated daily and paid monthly, at an annual rate of 0.55% of the Funds average daily net assets.
LMPFA has delegated to Western Asset the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund.
Certain officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.
*3. Investments*
During the year ended October 31, 2009, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
| Purchases | $24,788,260 |
|---|---|
| Sales | 23,828,661 |
At October 31, 2009, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
| Gross unrealized appreciation | $ 6,038,136 | |
|---|---|---|
| Gross unrealized depreciation | (7,945,270 | ) |
| Net unrealized depreciation | $(1,907,134 | ) |
*4. Derivative instruments and hedging activities*
Financial Accounting Standards Board Codification Topic 815 (formerly Statement of Financial Accounting Standards No. 161) (ASC Topic 815) requires enhanced disclosure about an entitys derivative and hedging activities.
The following tables provide information about the effect of derivatives and hedging activities on the Funds Statement of Operations for the six months ended October 31, 2009. The first table provides additional detail about the amounts and sources of gains/(losses) realized on derivatives during the period. The second table provides additional information about the changes in unrealized appreciation/(depreciation) resulting from the Funds derivatives and hedging activities during the period.
*AMOUNT OF REALIZED GAIN OR (LOSS) ON DERIVATIVES RECOGNIZED*
| INTEREST RATE CONTRACTS — RISK | OTHER CONTRACTS — RISK | TOTAL | |
|---|---|---|---|
| Futures contracts | $258,708 | | $258,708 |
24 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
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*CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON DERIVATIVES RECOGNIZED*
| INTEREST RATE CONTRACTS — RISK | OTHER CONTRACTS — RISK | TOTAL | |
|---|---|---|---|
| Futures contracts | $(230,105) | | $(230,105) |
At October 31, 2009, the Fund did not have any derivative instruments outstanding. During the year ended October 31, 2009, the Fund had an average market value of $7,504,792 in futures contracts (to sell).
*5. Distributions subsequent to October 31, 2009*
On August 13, 2009, the Board of Directors of the Fund declared a dividend distribution in the amount of $0.037 per share payable on November 27, 2009 to shareholders of record on November 20, 2009. On November 16, 2009, the Board of Directors of the Fund declared dividend distributions in the amount of $0.037 per share payable on December 28, 2009, January 29, 2010 and February 26, 2010 to shareholders of record on December 18, 2009, January 22, 2010 and February 19, 2010, respectively.
*6. Income tax information and distributions to shareholders*
The tax character of distributions paid during the fiscal years ended October 31, was as follows:
| 2009 | 2008 | |
|---|---|---|
| Distributions Paid From: | ||
| Tax-exempt income | $9,405,995 | $8,918,253 |
| Ordinary income | 3,094 | |
| Total taxable distributions | 3,094 | |
| Total distributions paid | $9,409,089 | $8,918,253 |
As of October 31, 2009, the components of accumulated earnings on a tax basis were as follows:
| Undistributed tax-exempt income net | $ 791,710 | |
|---|---|---|
| Capital loss carryforward* | (32,731,798 | ) |
| Other book/tax temporary differences (a) | (41,409 | ) |
| Unrealized appreciation/(depreciation) (b) | (1,907,134 | ) |
| Total accumulated earnings / (losses) net | $(33,888,631 | ) |
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 25
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*Notes to financial statements *continued****
| Year of Expiration | Amount | |
|---|---|---|
| 10/31/2010 | $ (601,572 | ) |
| 10/31/2011 | (5,066,581 | ) |
| 10/31/2012 | (10,608,178 | ) |
| 10/31/2013 | (5,677,661 | ) |
| 10/31/2015 | (1,928,255 | ) |
| 10/31/2016 | (2,673,203 | ) |
| 10/31/2017 | (6,176,348 | ) |
| $(32,731,798 | ) |
These amounts will be available to offset any future taxable capital gains.
| (a) | Other
book/tax temporary differences are attributable primarily to book/tax
differences in the timing of the deductibility of various expenses. |
| --- | --- |
| (b) | The difference between
book-basis and tax-basis unrealized appreciation/(depreciation) is
attributable primarily to the difference between book & tax
accretion methods for market discount on fixed income securities. |
26 Western Asset Municipal High Income Fund Inc. 2009 Annual Report
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*Report of independent registered public accounting firm*
*The Board of Directors and Shareholders Western Asset Municipal High Income Fund Inc.:*
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Western Asset Municipal High Income Fund Inc. as of October 31, 2009, 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 the 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 Funds 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2009, by correspondence with the custodian. 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 Western Asset Municipal High Income Fund Inc. as of October 31, 2009, 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 the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
| New York, New York |
| December 21, 2009 |
Western Asset Municipal High Income Fund Inc. 2009 Annual Report 27
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*Additional information (unaudited)*
*Information about Directors and Officers*
The business and affairs of Western Asset Municipal High Income Fund Inc. (the 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.
*NON-INTERESTED DIRECTORS*
| CAROL
L. COLMAN | |
| --- | --- |
| c/o Chairman of the Fund, Legg Mason & Co., LLC (Legg
Mason) | |
| 620 Eighth Avenue, New York, NY 10018 | |
| Birth
year | 1946 |
| Position(s) held with Fund 1 | Director and Member of the
Nominating and Audit Committees, Class I |
| Term of office 1 and length of time served | Since 2007 |
| Principal occupation(s) during past five years | President, Colman
Consulting Company (consulting) |
| Number of portfolios in fund complex overseen by director (including the Fund) | 21 |
| Other board member ships held by Director | None |
| DANIEL P. CRONIN | |
| c/o Chairman of the Fund, Legg Mason | |
| 620 Eighth Avenue, New York, NY 10018 | |
| Birth year | 1946 |
| Position(s) held with Fund 1 | Director and Member of the
Nominating and Audit Committees, Class II |
| Term of office 1 and length of time served | Since 2007 |
| Principal occupation(s) during past five years | Retired; formerly,
Associate General Counsel, Pfizer Inc. (prior to and including 2004) |
| Number of portfolios in fund complex overseen by director (including the Fund) | 21 |
| Other board member ships held by Director | None |
28 Western Asset Municipal High Income Fund Inc.
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| PAOLO M. CUCCHI | |
|---|---|
| c/o Chairman of the Fund, Legg Mason | |
| 620 Eighth Avenue, New York, NY 10018 | |
| Birth year | 1941 |
| Position(s) held with Fund 1 | Director |
| and Member of the Nominating and Audit Committees, Class II | |
| Term of office 1 and length of time served | Since |
| 2001 | |
| Principal occupation(s) during past five years | Professor |
| of French and Italian at Drew University; formerly, Vice President and Dean | |
| of College of Liberal Arts at Drew University (1984 to 2009) | |
| Number of portfolios in fund complex overseen by director (including the Fund) | 21 |
| Other board member ships held by Director | None |
| LESLIE H. GELB | |
| c/o Chairman of the Fund, Legg Mason | |
| 620 Eighth Avenue, New York, NY 10018 | |
| Birth year | 1937 |
| Position(s) held with Fund 1 | Director |
| and Member of the Nominating and Audit Committees, Class II | |
| Term of office 1 and length of time served | Since |
| 2007 | |
| Principal occupation(s) during past five years | President |
| Emeritus and Senior Board Fellow (since 2003), The Council on Foreign | |
| Relations; formerly, President (prior to 2003), The Council on Foreign | |
| Relations; formerly, Columnist, Deputy Editorial Page Editor and Editor, | |
| Op-Ed Page, The New York Times | |
| Number of portfolios in fund complex overseen by director (including the Fund) | 21 |
| Other board member ships held by Director | Director |
| of two registered investment companies advised by Blackstone Asia Advisors | |
| LLC: India Fund, Inc. and Asia Tigers Fund, Inc. (since 1994) |
Western Asset Municipal High Income Fund Inc. 29
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*Additional information (unaudited) continued***
*Information about Directors and Officers*
| WILLIAM
R. HUTCHINSON | |
| --- | --- |
| c/o Chairman of the Fund, Legg Mason | |
| 620 Eighth Avenue, New York, NY 10018 | |
| Birth year | 1942 |
| Position(s) held with Fund 1 | Director
and Member of the Nominating and Audit Committees, Class III |
| Term of office 1 and length of time served | Since
1998 |
| Principal occupation(s) during past five years | President,
W.R. Hutchinson & Associates Inc. (consulting) (since 2001) |
| Number of portfolios in fund complex overseen by director (including the Fund) | 21 |
| Other board member ships held by Director | Director,
Associated Banc Corp. (banking) (since 1994) and Non-Executive Chairman of
the Board (since December 1, 2009) |
| RIORDAN
ROETT | |
| c/o Chairman of the Fund, Legg Mason | |
| 620 Eighth Avenue, New York, NY 10018 | |
| Birth year | 1938 |
| Position(s) held with Fund 1 | Director
and Member of the Nominating and Audit Committees, Class I |
| Term of office 1 and length of time served | Since
2007 |
| Principal occupation(s) during past five years | The
Sarita and Don Johnston Professor of Political Science and Director of
Western Hemisphere Studies, Paul H. Nitze School of Avanced International
Studies, The Johns Hopkins University (since 1973) |
| Number of portfolios in fund complex overseen by director (including the Fund) | 21 |
| Other board member ships held by Director | None |
30 Western Asset Municipal High Income Fund Inc.
SEQ.=1,FOLIO='30',FILE='C:\JMS\rsampat\09-33846-1\task3853089\33846-1-bi-13.htm',USER='105982',CD='Dec 25 23:15 2009'
| JESWALD
W. SALACUSE | |
| --- | --- |
| c/o Chairman of the Fund, Legg Mason | |
| 620 Eighth Avenue, New York, NY 10018 | |
| Birth year | 1938 |
| Position(s) held with Fund 1 | Director
and Member of the Nominating and Audit Committees, Class III |
| Term of office 1 and length of time served | Since
2007 |
| Principal occupation(s) during past five years | Henry
J. Braker Professor of Commercial Law, The Fletcher School of Law and
Diplomacy, Tufts University (since 1986); President and Member, Arbitration
Tribunal, World Bank/ICSID (since 2004) |
| Number of portfolios in fund complex overseen by director (including the Fund) | 21 |
| Other board member ships held by Director | Director
of two registered investment companies advised by Blackstone Asia Advisors
LLC: India Fund, Inc. and Asia Tigers Fund Inc. (since 1993) |
*INTERESTED DIRECTOR*
| R.
JAY GERKEN, CFA 2 | |
| --- | --- |
| Legg Mason | |
| 620 Eighth Avenue, New York, NY 10018 | |
| Birth year | 1951 |
| Position(s) held with Fund 1 | Chairman,
President and Chief Executive Officer, Class I |
| Term of office 1 and length of time served | Since
2002 |
| Principal occupation(s) during past five years | Managing
Director, Legg Mason & Co., LLC; Chairman of the Board and
Trustee/Director of 148 funds associated with Legg Mason Partners Fund
Advisor, LLC (LMPFA) and its affiliates; President of LMPFA (since 2006);
Chairman, President and Chief Executive Officer (CEO) of certain mutual
funds associated with Legg Mason, Inc. or its affiliates; President and
CEO, Smith Barney Fund Management LLC and Chairman, President and CEO, Citi
Fund Management, Inc. (formerly registered investment advisers) (since
2002); formerly, Managing Director of Citigroup Global Markets Inc. (CFM)
(1989 to 2006); formerly, Chairman, President and CEO, Travelers Investment
Adviser Inc. (2002 to 2005) |
| Number of portfolios in fund complex overseen by director (including the Fund) | 135 |
| Other board member ships held by Director | Former
Trustee, Consulting Group Capital Group Capital Markets Funds (2002 to 2006) |
Western Asset Municipal High Income Fund Inc. 31
SEQ.=1,FOLIO='31',FILE='C:\JMS\rsampat\09-33846-1\task3853089\33846-1-bi-13.htm',USER='105982',CD='Dec 25 23:15 2009'
*Additional information (unaudited) continued***
*Information about Directors and Officers*
*OFFICERS*
| KAPREL OZSOLAK | |
|---|---|
| Legg Mason | |
| 55 Water Street, New York, NY 10041 | |
| Birth year | 1965 |
| Position(s) held with Fund 1 | Chief |
| Financial Officer and Treasurer | |
| Term of office 1 and length of time served | Since |
| 2004 | |
| Principal occupation(s) during past five years | Director |
| of Legg Mason; Chief Financial Officer and Treasurer of certain funds | |
| associated with Legg Mason; formerly, Controller of certain funds associated | |
| with certain predecessor firms of Legg Mason (2002 to 2004) | |
| TED P. BECKER | |
| Legg Mason | |
| 620 Eighth Avenue, New York, NY 10018 | |
| Birth year | 1951 |
| Position(s) held with Fund 1 | Chief |
| Compliance Officer | |
| Term of office 1 and length of time served | Since |
| 2006 | |
| Principal occupation(s) during past five years | Director |
| of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of | |
| LMPFA (since 2006); Managing Director of Compliance at Legg Mason, (since | |
| 2005); Chief Compliance Officer with certain mutual funds associated with | |
| Legg Mason, LMPFA and certain affiliates (since 2006); formerly, Managing | |
| Director of Compliance at Citigroup Asset Management (CAM) or its | |
| predecessors (2002 to 2005) | |
| ROBERT I. FRENKEL | |
| Legg Mason | |
| 100 First Stamford Place, Stamford, CT 06902 | |
| Birth year | 1954 |
| Position(s) held with Fund 1 | Secretary |
| and Chief Legal Officer | |
| Term of office 1 and length of time served | Since |
| 2003 | |
| Principal occupation(s) during past five years | Managing |
| Director and General Counsel of Global Mutual Funds for Legg Mason and its | |
| predecessor (since 1994); Secretary and Chief Legal Officer of mutual funds | |
| associated with Legg Mason (since 2003); formerly, Secretary of CFM (2001 to | |
| 2004) |
32 Western Asset Municipal High Income Fund Inc.
SEQ.=1,FOLIO='32',FILE='C:\JMS\rsampat\09-33846-1\task3853089\33846-1-bi-13.htm',USER='105982',CD='Dec 25 23:15 2009'
| THOMAS
C. MANDIA | |
| --- | --- |
| Legg
Mason | |
| 100 First Stamford Place, Stamford, CT 06902 | |
| Birth year | 1962 |
| Position(s) held with Fund 1 | Assistant
Secretary |
| Term of office 1 and length of time served | Since
2006 |
| Principal occupation(s) during past five years | Managing
Director and Deputy General Counsel of Legg Mason (since 2005); Managing
Director and Deputy General Counsel for CAM (1992 to 2005) |
| ALBERT
LASKAJ | |
| Legg
Mason | |
| 55 Water Street, New York, NY 10041 | |
| Birth year | 1977 |
| Position(s) held with Fund 1 | Controller |
| Term of office 1 and length of time served | Since
2007 |
| Principal occupation(s) during past five years | Vice
President of Legg Mason (since 2008); Controller of certain funds associated
with Legg Mason (since 2007); formerly, Assistant Controller of certain
mutual funds associated with Legg Mason (2005 to 2007); formerly, Accounting
Manager of certain mutual funds associated with certain predecessor firms of
Legg Mason (2003 to 2005) |
| STEVEN
FRANK | |
| Legg
Mason | |
| 55 Water Street, New York, NY 10041 | |
| Birth year | 1967 |
| Position(s) held with Fund 1 | Controller |
| Term of office 1 and length of time served | Since
2005 |
| Principal occupation(s) during past five years | Vice
President of Legg Mason (since 2002); Controller of certain funds associated
with Legg Mason or its predecessors (since 2005); formerly, Assistant
Controller of certain mutual funds associated with Legg Mason predecessors
(2001 to 2005) |
1 The Funds Board of Directors is divided into three classes: Class I, Class II and Class III. The terms of office of the Class I, II and III Directors expire at the Annual Meetings of Stockholders in the year 2012, year 2010 and year 2011, respectively, or thereafter in each case when their respective successors are duly elected and qualified. The Funds executive officers are chosen each year at the first meeting of the Funds Board of Directors following the Annual Meeting of Stockholders, to hold office until the meeting of the Board following the next Annual Meeting of Stockholders and until their successors are duly elected and qualified.
2 Mr. Gerken is an interested person of the Fund as defined in the 1940 Act because Mr. Gerken is an officer of LMPFA and certain of its affiliates.
Western Asset Municipal High Income Fund Inc. 33
SEQ.=1,FOLIO='33',FILE='C:\JMS\rsampat\09-33846-1\task3853089\33846-1-bi-13.htm',USER='105982',CD='Dec 25 23:15 2009'
*Annual chief executive officer and chief financial officer certifications (unaudited)*
The Funds Chief Executive Officer (CEO) has submitted to the NYSE the required annual certification, and the Fund also has included the certifications of the Funds CEO and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Funds Form N-CSR filed with the SEC for the period of this report.
34 Western Asset Municipal High Income Fund Inc.
SEQ.=1,FOLIO='34',FILE='C:\JMS\105927\09-33846-1\task3853335\33846-1-bi-15.htm',USER='105927',CD='Dec 27 03:20 2009'
*Dividend reinvestment plan (unaudited)*
The Funds policy, which may be changed by the Funds 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 Funds 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 Funds Dividend Reinvestment Plan (Plan), a shareholder whose capital shares are registered in his or her own name will have all distributions reinvested automatically by American Stock Transfer & Trust Company (AST), 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 AST, 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 Funds 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, AST 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 AST has completed its purchases, the market price exceeds 98% of what the NAV per share of the capital shares was at the valuation time, AST 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
Western Asset Municipal High Income Fund Inc. 35
SEQ.=1,FOLIO='35',FILE='C:\JMS\105927\09-33846-1\task3853335\33846-1-bi-15.htm',USER='105927',CD='Dec 27 03:20 2009'
*Dividend reinvestment plan (unaudited) *continued****
extent AST is unable to stop open market purchases and cause the Fund to issue the remaining shares, the average per share price paid by AST may exceed 98% of the NAV per share of the capital shares. AST 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.
AST 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 AST 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. ASTs 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 AST or the Fund on at least 30 days written notice to Plan participants. All correspondence concerning the Plan should be directed by mail to American Stock Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038 or by telephone at 1 (877) 366-6441.
36 Western Asset Municipal High Income Fund Inc.
SEQ.=1,FOLIO='36',FILE='C:\JMS\105927\09-33846-1\task3853335\33846-1-bi-15.htm',USER='105927',CD='Dec 27 03:20 2009'
*Important tax information (unaudited)*
All of the net investment income distributions paid monthly by the Fund in November 2008 and from January 2009 through October 2009 qualify as tax-exempt interest dividends for Federal income tax purposes. Additionally, 99.60% of the net investment income distribution paid in December 2008 qualifies as a tax-exempt interest dividend for Federal income tax purposes.
Please retain this information for your records.
Western Asset Municipal High Income Fund Inc. 37
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(This page intentionally left blank.)
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*Western Asset Municipal High Income Fund Inc.*
| Directors | Investment manager |
|---|---|
| Carol | |
| L. Colman | Legg |
| Mason Partners Fund Advisor, LLC | |
| Daniel | |
| P. Cronin | |
| Paolo | |
| M. Cucchi | Subadviser |
| Leslie | |
| H. Gelb | Western |
| Asset Management Company | |
| R. | |
| Jay Gerken, CFA | |
| Chairman | Custodian |
| William | |
| R. Hutchinson | State |
| Street Bank and Trust Company | |
| Riordan | |
| Roett | 1 |
| Lincoln Street | |
| Jeswald | |
| W. Salacuse | Boston, |
| Massachusetts 02111 | |
| Officers | Transfer agent |
| R. | |
| Jay Gerken, CFA | American |
| Stock Transfer & Trust Company | |
| President and Chief Executive | |
| Officer | 59 |
| Maiden Lane | |
| New | |
| York, New York 10038 | |
| Kaprel | |
| Ozsolak | |
| Chief Financial Officer and | |
| Treasurer | Independent registered public |
| accounting firm | |
| KPMG | |
| LLP | |
| Ted | |
| P. Becker | 345 |
| Park Avenue | |
| Chief Compliance Officer | New |
| York, New York 10154 | |
| Robert | |
| I. Frenkel | Legal counsel |
| Secretary and Chief Legal Officer | Simpson |
| Thacher & Bartlett LLP | |
| 425 | |
| Lexington Avenue | |
| Thomas | |
| C. Mandia | New |
| York, New York 10017-3909 | |
| Assistant Secretary | |
| New York Stock Exchange Symbol | |
| Albert | |
| Laskaj | MHF |
| Controller | |
| Steven | |
| Frank | |
| Controller | |
| Western Asset Municipal High Income | |
| Fund Inc. | |
| 55 | |
| Water Street | |
| New | |
| York, New York 10041 |
SEQ.=1,FOLIO='',FILE='C:\JMS\105727\09-33846-1\task3853350\33846-1-bi-17.htm',USER='105727',CD='Dec 27 06:26 2009'
*Privacy policy*
We are committed to keeping nonpublic personal information about you secure and confidential. This notice is intended to help you understand how we fulfill this commitment. From time to time, we may collect a variety of personal information about you, including:
· Information we receive from you on applications and forms, via the telephone, and through our websites;
· Information about your transactions with us, our affiliates, or others (such as your purchases, sales, or account balances); and
· Information we receive from consumer reporting agencies.
We do not disclose nonpublic personal information about our customers or former customers, except to our affiliates (such as broker-dealers or investment advisers within the Legg Mason family of companies) or as is otherwise permitted by applicable law or regulation. For example, we may share this information with others in order to process your transactions or service an account. We may also provide this information to companies that perform marketing services on our behalf, such as printing and mailing, or to other financial institutions with whom we have joint marketing agreements. When we enter into such agreements, we will require these companies to protect the confidentiality of this information and to use it only to perform the services for which we hired them.
With respect to our internal security procedures, we maintain physical, electronic, and procedural safeguards to protect your nonpublic personal information, and we restrict access to this information.
If you decide at some point either to close your account(s) or become an inactive customer, we will continue to adhere to our privacy policies and practices with respect to your nonpublic personal information.
NOT PART OF THE ANNUAL REPORT
SEQ.=1,FOLIO='',FILE='C:\JMS\105727\09-33846-1\task3853350\33846-1-bi-17.htm',USER='105727',CD='Dec 27 06:26 2009'
*Western Asset Municipal High Income Fund Inc.*
WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.
55 Water Street
New York, New York 10041
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time, the Fund may purchase, at market prices, shares of its common stock in the open market.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. The Funds Forms N-Q are available on the SECs website at www.sec.gov. The Funds Forms N-Q may be reviewed and copied at the SECs 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 1-888-777-0102.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities are available (1) without charge, upon request, by calling 1-888-777-0102, (2) on the Funds website at www.leggmason.com/cef and (3) on the SECs website at www.sec.gov.
This report is transmitted to the shareholders of the Western Asset Municipal High Income Fund Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
American Stock
Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
*WASX010547 12/09 SR09-975*
SEQ.=1,FOLIO='',FILE='C:\JMS\105727\09-33846-1\task3853350\33846-1-bi-17.htm',USER='105727',CD='Dec 27 06:26 2009'
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrants 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 William R. Hutchinson, the Chairman of the Boards 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. Hutchinson as the Audit Committees financial expert. Mr. Hutchinson is an independent Director pursuant to paragraph (a)(2) of Item 3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
a) Audit Fees . The aggregate fees billed in the last two fiscal years ending October 31, 2008 and October 31, 2009 (the Reporting Periods) for professional services rendered by the Registrants principal accountant (the Auditor) for the audit of the Registrants annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $38,400 in 2008 and $40,500 in 2009.
b) Audit-Related Fees . The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrants financial statements were $0 in 2008 and $23 in 2009. These services consisted of procedures performed in connection with the audit performed relating to the Tender Options Bonds for the Western Asset Municipal High Income Fund Inc.
In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrants investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Western Asset Municipal High Income Fund Inc. (service affiliates), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods (prior to August 6, 2003 services provided by the Auditor were not required to be pre-approved).
(c) Tax Fees . The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (Tax Services) were $2,900 in 2008 and $3,100 in 2009. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.
d) All Other Fees . There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item 4 for the Western Asset Municipal High Income Fund Inc.
All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (LMPFA), and any entity controlling, controlled by or under
SEQ.=1,FOLIO='',FILE='C:\JMS\105952\09-33846-1\task3858289\33846-1-ga.htm',USER='105952',CD='Dec 31 14:27 2009'
common control with LMPFA that provided ongoing services to Western Asset Municipal High Income Fund Inc. requiring pre-approval by the Audit Committee in the Reporting Period.
(e) Audit Committees pre-approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
(1) The Charter for the Audit Committee (the Committee) of the Board of each registered investment company (the Fund) advised by LMPFA or one of their affiliates (each, an Adviser) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Funds independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.
The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (Covered Service Providers) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.
(2) For the Western Asset Municipal High Income Fund Inc., the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for 2008 and 2009; Tax Fees were 100% and 100% for 2008 and 2009; and Other Fees were 100% and 100% for 2008 and 2009.
(f) N/A
(g) Non-audit fees billed by the Auditor for services rendered to Western Asset Municipal High Income Fund Inc., LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Western Asset Municipal High Income Fund Inc. during the reporting period were $0 in 2009.
(h) Yes. Western Asset Municipal High Income Fund Inc.s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountants independence. All services provided by the Auditor to the Western Asset Municipal High Income
SEQ.=1,FOLIO='',FILE='C:\JMS\105952\09-33846-1\task3858289\33846-1-ga.htm',USER='105952',CD='Dec 31 14:27 2009'
Fund Inc. or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
a) The independent board members are acting as the registrants audit committee as specified in Section 3(a)(58)(B) of the Exchange Act . The Audit Committee consists of the following Board members:
William R. Hutchinson
Paolo M. Cucchi
Daniel P. Cronin
Carol L. Colman
Leslie H. Gelb
Riordan Roett
Jeswald W. Salacuse
b) Not applicable
ITEM 6. SCHEDULE OF INVESTMENTS.
Included herein under Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
*Proxy Voting Guidelines and Procedures*
Legg Mason Partners Fund Advisor, LLC (LMPFA) delegates the responsibility for voting proxies for the fund to the subadviser through its contracts with the subadviser. The subadviser will use its own proxy voting policies and procedures to vote proxies. Accordingly, LMPFA does not expect to have proxy-voting responsibility for the fund. Should LMPFA become responsible for voting proxies for any reason, such as the inability of the subadviser to provide investment advisory services, LMPFA shall utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained.
The subadvisers Proxy Voting Policies and Procedures govern in determining how proxies relating to the funds portfolio securities are voted and are provided below. Information regarding how each fund voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge (1) by calling 888-425-6432, (2) on the funds website at http://www.leggmason.com/individualinvestors and (3) on the SECs website at http://www.sec.gov.
*Background*
Western Asset Management Company (WA or Western Asset) have adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (Advisers Act). Our authority to vote the proxies of our clients is established through investment management agreements or comparable documents, and our proxy voting guidelines have been tailored to reflect these specific contractual obligations. In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the
SEQ.=1,FOLIO='',FILE='C:\JMS\105952\09-33846-1\task3858289\33846-1-ga.htm',USER='105952',CD='Dec 31 14:27 2009'
Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.
In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (except that WA may so consult and agree with each other) regarding the voting of any securities owned by its clients.
*Policy*
Western Assets proxy voting procedures are designed and implemented in a way that is reasonably expected to ensure that proxy matters are handled in the best interest of our clients. While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration Western Assets contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent Western Asset deems appropriate).
*Procedures*
Responsibility and Oversight
The Western Asset Compliance Department (Compliance Department) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (Corporate Actions). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
Client Authority
Prior to August 1, 2003, all existing client investment management agreements (IMAs) will be reviewed to determine whether Western Asset has authority to vote client proxies. At account start-up, or upon amendment of an IMA, the applicable client IMA are similarly reviewed. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Client Account Transition Team maintains a matrix of proxy voting authority.
Proxy Gathering
Registered owners of record, client custodians, client banks and trustees (Proxy Recipients) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Prior to August 1, 2003, Proxy Recipients of existing clients will be reminded of the appropriate routing to Corporate Actions for proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
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Proxy Voting
Once proxy materials are received by Corporate Actions, they are forwarded to the Compliance Department for coordination and the following actions:
a. Proxies are reviewed to determine accounts impacted.
b. Impacted accounts are checked to confirm Western Asset voting authority.
c. Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.)
d. If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the clients proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.
e. Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analysts or portfolio managers basis for their decision is documented and maintained by the Compliance Department.
f. Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.
Timing
Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
Recordkeeping
Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:
a. A copy of Western Assets policies and procedures.
b. Copies of proxy statements received regarding client securities.
c. A copy of any document created by Western Asset that was material to making a decision how to vote proxies.
d. Each written client request for proxy voting records and Western Assets written response to both verbal and written client requests.
e. A proxy log including:
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Issuer name;
Exchange ticker symbol of the issuers shares to be voted;
Council on Uniform Securities Identification Procedures (CUSIP) number for the shares to be voted;
A brief identification of the matter voted on;
Whether the matter was proposed by the issuer or by a shareholder of the issuer;
Whether a vote was cast on the matter;
A record of how the vote was cast; and
Whether the vote was cast for or against the recommendation of the issuers management team.
Records are maintained in an easily accessible place for five years, the first two in Western Assets offices.
Disclosure
Part II of the WA Form ADV contains a description of Western Assets proxy policies. Prior to August 1, 2003, Western Asset will deliver Part II of its revised Form ADV to all existing clients, along with a letter identifying the new disclosure. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
Conflicts of Interest
All proxies are reviewed by the Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:
Whether Western Asset (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company;
Whether Western Asset or an officer or director of Western Asset or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, Voting Persons) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and
Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.
*Voting Guidelines*
Western Assets substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.
Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a companys board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.
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I. Board Approved Proposals
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
Western Asset votes proxies for the election of the companys nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:
a. Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors.
b. Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.
c. Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.
d. Votes are cast on a case-by-case basis in contested elections of directors.
Western Asset generally favors compensation programs that relate executive compensation to a companys long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:
a. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.
b. Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.
c. Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stocks current market price.
d. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.
The management of a companys capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on
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board-approved proposals involving changes to a companys capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.
a. Western Asset votes for proposals relating to the authorization of additional common stock.
b. Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).
c. Western Asset votes for proposals authorizing share repurchase programs.
Western Asset votes these issues on a case-by-case basis on board-approved transactions.
Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:
a. Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.
b. Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.
Western Asset votes for board-approved proposals approving such routine business matters such as changing the companys name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.
a. Western Asset votes on a case-by-case basis on proposals to amend a companys charter or bylaws.
b. Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.
II. Shareholder Proposals
SEC regulations permit shareholders to submit proposals for inclusion in a companys proxy statement. These proposals generally seek to change some aspect of a companys corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the companys board of directors on all shareholder proposals, except as follows:
Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.
Western Asset votes for shareholder proposals that are consistent with Western Assets proxy voting guidelines for board-approved proposals.
Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.
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III. Voting Shares of Investment Companies
Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.
Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients portfolios.
Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.
IV. Voting Shares of Foreign Issuers
In the event Western Asset is required to vote on securities held in foreign issuers i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.
Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.
Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.
Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.
Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a companys outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a companys outstanding common stock where shareholders have preemptive rights.
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ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
*(a)(1):*
| NAME
AND ADDRESS | LENGTH OF TIME SERVED | PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS |
| --- | --- | --- |
| S.
Kenneth Leech Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since 2006 | Co-portfolio
manager of the fund; Chief Investment Officer of Western Asset since 1998. |
| Stephen
A. Walsh Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since 2006 | Co-portfolio
manager of the fund; Deputy Chief Investment Officer of Western Asset since
2000. |
| Joseph Deane Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since 2006 | Co-portfolio manager of the fund; portfolio manager at
Western Asset since 2005; prior to that time, Mr. Deane was with
Citigroup Asset Management or one of its affiliates since 1972. |
| David Fare Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since 2006 | Co-portfolio manager of the fund; portfolio manager at
Western Asset since 2005; prior to that time, Mr. Fare was with
Citigroup Asset Management or one of its affiliates since 1989. |
| Robert Amodeo Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since 2007 | Co-portfolio manager of the fund; portfolio manager at
Western Asset since 2005; prior to that time, Mr. Amodeo was a Managing
Director and portfolio manager with Salomon Brothers Asset Management Inc
from 1992 to 2005. |
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*(a)(2): DATA TO BE PROVIDED BY FINANCIAL CONTROL*
The following tables set forth certain additional information with respect to the funds portfolio managers for the fund. Unless noted otherwise, all information is provided as of October 31, 2009.
Other Accounts Managed by Portfolio Managers
The table below identifies the number of accounts (other than the fund) for which the funds portfolio managers have day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.
| Portfolio | Registered — Investment | Other Pooled — Investment | Other |
|---|---|---|---|
| Manager(s) | Companies | Vehicles | Accounts |
| S. Kenneth Leech | 110 registered | ||
| investment companies with $188.2 billion in total assets under management | 231 Other pooled investment vehicles with $111.4 billion | ||
| in assets under management* | 853 | ||
| Ot her accounts with | |||
| $203.7 on in total assets under management** | |||
| Stephen A. Walsh | 110 registered | ||
| investment companies with $188.2 billion in total assets under management | 231 Other pooled | ||
| investment vehicles with $111.4 billion in assets under management* | 853 Other accounts with $203.7 billion in | ||
| total assets under management** | |||
| Joseph P. Deane | 25 registered | ||
| investment companies with $27.2 billion in total assets under management | 0 Other pooled | ||
| investment vehicles with $0.0 billion in assets under management | 18 Other accounts with | ||
| $1.4 billion in total assets under management | |||
| David T. Fare | 25 registered | ||
| investment companies with $27.2 billion in total assets under management | 0 Other pooled | ||
| investment vehicles with $0.0 billion in assets under management | 18 Other accounts with | ||
| $1.4 billion in total assets under management | |||
| Robert Amodeo | 25 registered | ||
| investment companies with $27.2 billion in total assets under management | 0 Other pooled | ||
| investment vehicles with $0.0 billion in assets under management | 18 Other accounts with | ||
| $1.4 billion in total assets under management |
| * | Includes 7 accounts
managed, totaling $1.1 billion, for which advisory fee is performance based. |
| --- | --- |
| ** | Includes 97 accounts managed, totaling $25.0 billion, for
which advisory fee is performance based. |
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The numbers above reflect the overall number of portfolios managed by employees of Western Asset Management Company (Western Asset). Mr. Leech and Mr. Walsh are involved in the management of all the Firms portfolios, but they are not solely responsible for particular portfolios. Western Assets investment discipline emphasizes a team approach that combines the efforts of groups of specialists working in different market sectors. They are responsible for overseeing implementation of Western Assets overall investment ideas and coordinating the work of the various sector teams. This structure ensures that client portfolios benefit from a consensus that draws on the expertise of all team members.
*(a)(3): Portfolio Manager Compensation*
With respect to the compensation of the portfolio managers, Western Assets compensation system assigns each employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.
In addition, the subadvisers employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the subadviser, and are determined by the professionals job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is a portfolio managers investment performance versus appropriate peer groups and benchmarks ( e.g ., a securities index and with respect to a fund, the benchmark set forth in the funds Prospectus to which the funds average annual total returns are compared or, if none, the benchmark set forth in the funds annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensationwith 3 years having the most emphasis. The subadviser may also measure a portfolio managers pre-tax investment performance against other benchmarks, as it determines appropriate. Because portfolio managers are generally responsible for multiple accounts (including the funds) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development, length of service to the subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadvisers business.
Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.
*Potential Conflicts of Interest*
Conflicts of Interest
The manager, subadvisers and portfolio managers have interests which conflict with the interests of the fund. There is no guarantee that the policies and procedures adopted by the manager, the subadvisers and the fund will be able to identify or mitigate these conflicts of interest.
Some examples of material conflicts of interest include:
Allocation of Limited Time and Attention . A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds
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and/or accounts. A portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those funds and accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. Such a portfolio manager may make general determinations across multiple funds, rather than tailoring a unique approach for each fund. The effects of this conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.
Allocation of Limited Investment Opportunities; Aggregation of Orders . If a portfolio manager identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit the funds ability to take full advantage of the investment opportunity. Additionally, a subadviser may aggregate transaction orders for multiple accounts for purpose of execution. Such aggregation may cause the price or brokerage costs to be less favorable to a particular client than if similar transactions were not being executed concurrently for other accounts. In addition, a subadvisers trade allocation policies may result in the funds orders not being fully executed or being delayed in execution.
Pursuit of Differing Strategies . At times, a portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts. For example, a portfolio manager may determine that it would be in the interest of another account to sell a security that the fund holds long, potentially resulting in a decrease in the market value of the security held by the fund.
Cross Trades . Portfolio managers may manage funds that engage in cross trades, where one of the managers funds or accounts sells a particular security to another fund or account managed by the same manager. Cross trades may pose conflicts of interest because of, for example, the possibility that one account sells a security to another account at a higher price than an independent third party would pay or otherwise enters into a transaction that it would not enter into with an independent party, such as the sale of a difficult-to-obtain security.
Selection of Broker/Dealers . Portfolio managers may select or influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide subadvisers with brokerage and research services, These services may be taken into account in the selection of brokers and dealers whether a broker is being selected to effect a trade on an agency basis for a commission or (as is normally the case for the funds) whether a dealer is being selected to effect a trade on a principal basis. This may result in the payment of higher brokerage fees and/or execution at a less favorable price than might have otherwise been available. The services obtained may ultimately be more beneficial to certain of the managers funds or accounts than to others (but not necessarily to the funds that pay the increased commission or incur the less favorable execution). A decision as to the selection of brokers and dealers could therefore yield disproportionate costs and benefits among the funds and/or accounts managed.
Variation in Financial and Other Benefits . A conflict of interest arises where the financial or other benefits available to a portfolio manager differ among the funds and/or accounts that he or she manages. If the amount or structure of the investment managers management fee and/or a portfolio managers compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others. Similarly, the desire to maintain assets under management or to enhance the portfolio managers performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager. A portfolio manager may, for example, have an incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor such funds and/or accounts. Also, a portfolio managers or the managers or a subadvisers desire to
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increase assets under management could influence the portfolio manager to keep a fund open for new investors without regard to potential benefits of closing the fund to new investors. Additionally, the portfolio manager might be motivated to favor funds and/or accounts in which he or she has an ownership interest or in which the investment manager and/or its affiliates have ownership interests. Conversely, if a portfolio manager does not personally hold an investment in the fund, the portfolio managers conflicts of interest with respect to the fund may be more acute.
Related Business Opportunities . The investment manager or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that provide greater overall returns to the investment manager and its affiliates.
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*(a)(4): Portfolio Manager Securities Ownership*
The table below identifies the dollar range of securities beneficially owned by each portfolio managers as of October 31, 2009.
| Portfolio Manager(s) | Dollar Range of Portfolio Securities Beneficially Owned |
|---|---|
| S. Kenneth Leech | A |
| Stephen A. Walsh | A |
| Joseph | |
| P. Deane | A |
| David | |
| T. Fare | A |
| Robert | |
| Amodeo | A |
Dollar Range ownership is as follows: A: none B: $1 - $10,000 C: 10,001 - $50,000 D: $50,001 - $100,000 E: $100,001 - $500,000 F: $500,001 - $1 million G: over $1 million
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
None.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrants principal executive officer and principal financial officer have concluded that the registrants 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 registrants internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrants last fiscal half-year (the registrants second fiscal half-year in the case of an annual report) that have materially affected, or are
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likely to materially affect the registrants internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) (1) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.CERT
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.906CERT
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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.
| Western Asset Municipal High Income
Fund Inc. | |
| --- | --- |
| By: | /s/ R. Jay Gerken |
| | (R.
Jay Gerken) |
| | Chief Executive
Officer of |
| | Western
Asset Municipal High Income Fund Inc. |
| Date: | December 30, 2009 |
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 | |
| Western | |
| Asset Municipal High Income Fund Inc. | |
| Date: | December 30, |
| 2009 | |
| By: | /s/ Kaprel Ozsolak |
| (Kaprel | |
| Ozsolak) | |
| Chief Financial | |
| Officer of | |
| Western | |
| Asset Municipal High Income Fund Inc. | |
| Date: | December 30, |
| 2009 |
SEQ.=1,FOLIO='',FILE='C:\JMS\105621\09-33846-1\task3852726\33846-1-jc.htm',USER='105621',CD='Dec 25 08:33 2009'
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