INVESTMENT GRADE
MUNICIPAL
INCOME FUND
(formerly PaineWebber
Premier Tax-Free
Income Fund Inc.)
Annual Report
September 30, 1995
PaineWebber
We invest in relationships.
(C)1995 PaineWebber Incorporated 930423-374
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Dear Shareholder,
During the year ended September 30, 1995, the pace of U.S. economic growth
slowed in response to the Federal Reserve Board's repeated increases in the
benchmark Federal Funds rate, the rate banks charge each other for overnight
borrowing. With seven short-term interest rate hikes between February 1994 and
February 1995, the Federal Reserve Board raised the Federal Funds rate to 6.0%,
and effectively doubled short-term interest rates in twelve months. On July 6,
1995, the Federal Reserve cut the benchmark Federal Funds rate by 0.25%. This
decrease, the first in nearly three years, signals that the Federal Reserve
Board believes that inflationary pressures have eased enough to accommodate an
adjustment in monetary policy from restrictive toward neutral.
MUNICIPAL MARKET OVERVIEW
During the first few months of 1995, the municipal market rebounded strongly
from the lows reached in 1994, when the Fed's monetary tightening policy
negatively affected municipal securities prices. The predominant theme in the
municipal market early in 1995 was the lack of supply in the municipal market
place. After years of high volume, new issue supply declined dramatically in
1994. A record $292 billion in new bonds were issued in 1993, while in 1994 new
issue supply was reduced to $164 billion. Estimates for new issue supply in 1995
are approximately $144 billion. With fewer bonds entering the market, demand is
generally exceeding supply, pushing up the prices of existing bonds.
This positive momentum during the first few months of 1995 culminated in a
municipal bond market rally. Unfortunately, two events derailed the market's
performance. Continued fall-out from the Orange County, California bankruptcy
cast a pall on the market and investors became increasingly nervous about
whether or not municipal bonds were secure. In addition, in the spring of 1995,
politicians began exploring alternative restructuring ideas for the Federal tax
code. Under certain proposals, the benefit of Federal tax-exemption would no
longer be enjoyed solely by municipal bonds. If this were to happen, municipal
bonds would no longer present as attractive an investment as they are now. As a
result, the demand for municipals tapered off. We believe, however, that
municipal bonds will continue to be a tax-advantaged product and that other
forms of investments will continue to be subject to taxation. Given the nature
of the political process, the final results of tax reform will probably not be
clear until after the 1996 election. We will monitor this and keep the portfolio
responsive to any changing investment environment.
PORTFOLIO REVIEW
Effective August 14, 1995, PaineWebber Premier Tax-Free Income Fund commenced
doing business under its trade name, Investment Grade Municipal Income Fund (the
"Fund"). The long-term municipal market reached its yield highs and price lows
by mid-November 1994. After that, the tenor of the market place changed.
Long-term rates started declining and prices rose dramatically and the spread
between long- and short-term rates compressed. However, new tax restructuring
proposals and continued fallout from the Orange County bankruptcy stalled the
municipal market's performance during the last several months. The Fund's total
return for the year ended September 30, 1995, based on the Fund's net asset
value was 13.50%, while the Fund's total return for the same time period based
on
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the Fund's market value was 12.63%. As of September 30, 1995, the Fund's net
asset value per share was $15.73, while its share price on the New York Stock
Exchange was $13.00.
The Fund paid dividends from net investment income to common shareholders, which
totalled $0.90 per share of common stock during the year ended September 30,
1995. On July 10, 1995, the Fund declared a monthly dividend of $0.075 per
common share, a 7.14% increase in the Fund's payout. The Fund's dividends
benefitted from Mitchell Hutchins Asset Management Inc. voluntarily waving 0.25%
of the 0.90% annualized management fees from June 1 through September 30, 1995.
In addition, the Fund's dividends were affected by the decreases in short-term
interest rates. As short-term rates decreased, the benefit derived from the
Fund's Auction Preferred Shares ("APS") increased, increasing the dividend paid
to the Fund's common shareholders.
As you know, the Fund's dividends have benefitted in the past from the use of
leverage through the issuance of APS. By investing the proceeds of the APS
offering in longer-term municipal bonds, the Fund has been able to earn a
spread, the difference between short- and long-term interest rates, over the
rate paid on the APS, which is a short-term rate. The amount of the spread,
after paying the costs attributable to the APS, increases the income dividends
payable to common shareholders. As always, our goal is to provide the best use
of leverage for the Fund to the common shareholders.
As of September 30, 1995, the Fund was fully invested in long-term municipal
securities with an average maturity of 22 years and was fully diversified. Using
the higher of Moody's Investors Service, Inc. or Standard & Poor's ratings, the
ratings mix in the portfolio as of September 30, 1995, was as follows:
Cash equivalents,
prerefunded bonds,
and AAA or Aaa 35.5%
AA or Aa 30.1%
BBB or Baa 5.2%
A1/A+ 2.0%
A or A 27.2%
The largest percentages of the Fund's net assets as of September 30, 1995 were
invested in securities of Illinois, 14.5%; Texas, 12.4%; and New York, 12.4%,
issuers. As of September 30, 1995, three of the largest sector holdings were
water, 18.2%; power, 17.5%; and hospitals, 14.1%.
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2
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Going forward, our outlook is one of cautious optimism. The Federal Reserve
Board appears to have engineered a "soft landing" - a slowdown in economic
growth without a decline into recession. If the Fed has been successful, it
appears as though the direction of short-term interest rates will continue to
decline. In addition, we believe the fundamentals are favorable for municipal
bonds. With low new issue supply expected for the remainder of 1995, the
probable supply/demand imbalance is favorable. While all the talk about flat tax
proposals may make for interesting conversation for the remainder of 1995 and
the election year, we believe it is unlikely to pass through the legislature and
into law. Our long-term outlook is for strength in the municipal market after
the domestic economic picture becomes clearer.
We value you as a shareholder and as a client, and thank you for your continued
support. We welcome any comments or questions you may have.
Sincerely,
/s/ Gregory W. Serbe
GREGORY W. SERBE
Managing Director,
Mitchell Hutchins Asset Management Inc.
Portfolio Manager,
Investment Grade Municipal Income Fund
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3
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Investment Grade Municipal Income Fund
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Portfolio of Investments
September 30, 1995
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LONG-TERM MUNICIPAL BONDS--95.40%
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<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
- ---------- ------------ ------------ -------------------- -------------- ------------
ALASKA--2.89%
<C> <S> <C> <C> <C> <C> <C>
$ 6,540 Valdez Marine Terminal
British Petroleum Co.
Sohio Pipeline Project........ A1 AA- 12/01/25 7.000% $ 7,019,709
------------
CALIFORNIA--1.44%
3,500 California Public Works Board
California State University.... A A- 09/01/16 6.250 3,487,575
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COLORADO--0.65%
1,500 Denver City & County
Excise Tax Revenue Bonds
(MBIA Insured)................. Aaa AAA 09/01/14 6.500 1,575,885
------------
CONNECTICUT--4.08%
9,650 Connecticut Housing Finance Aa AA 05/15/14 to 11/15/23 6.200 to 9,916,222
Authority...................... 6.750 ------------
GEORGIA--0.21%
500 Municipal Electric Authority of
Georgia........................ A A 01/01/16 6.375 501,145
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ILLINOIS--14.51%
1,000 Illinois Educational Facilities
Authority Northwestern
University (Pre-refunded with
U.S. Government Securities to
12/01/01 @ $102).............. NR AA- 12/01/21 6.900 1,137,380
3,000 Illinois Health Facilities
Authority
Glen Oaks Hospital............ Baa1 BBB 11/15/19 7.000 3,025,560
3,000 Illinois Health Facilities
Authority
Hinsdale Hospital............. Baa1 BBB 11/15/19 7.000 3,025,560
1,890 Illinois Toll & Highway
Authority
(FGIC Insured)................ Aaa AAA 01/01/16 6.200 1,910,979
7,380 Chicago Gas Supply People's
Gas............................ Aa3 AA- 03/01/15 6.875 7,918,445
4,000 Chicago Water Works............. A1 A+ 11/15/19 6.000 3,949,400
11,600 Metropolitan Pier & Exposition
Authority...................... A A+ 06/15/27 6.500 11,756,600
2,650 University of Illinois.......... Aa AA- 04/01/22 5.750 2,525,503
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35,249,427
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INDIANA--10.75%
6,750 Indiana Transportation Financing
Authority...................... A A 11/01/16 6.250 6,733,732
6,000 Indianapolis Gas Utility (FGIC
Insured)....................... Aaa AAA 06/01/23 6.200 6,071,400
2,000 Indianapolis Local Public
Improvement
Bond Bank..................... Aa AA- 07/01/10 6.000 2,068,380
4,000 Marion County Hospital Authority
Methodist Hospital of
Indiana....................... Aa AA- 09/01/13 6.500 4,179,080
5,725 Petersburg County Pollution
Control Indianapolis Power &
Light Company................... Aa2 AA- 12/01/24 6.625 5,998,312
1,000 Purdue University............... Aa AA- 07/01/15 6.700 1,066,280
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26,117,184
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</TABLE>
4
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Investment Grade Municipal Income Fund
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LONG-TERM MUNICIPAL BONDS--(CONTINUED)
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<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
- ---------- ------------ ------------ -------------------- -------------- ------------
<C> <S> <C> <C> <C> <C> <C>
KENTUCKY--3.33%
$7,750 Boone County Pollution Control
Dayton Power & Light Co. ...... Aa3 AA- 11/15/22 6.500% $ 8,084,955
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MASSACHUSETTS--7.54%
8,500 Massachusetts Bay Transportation
Authority...................... A1 A+ 03/01/23 6.100 8,499,490
6,000 Massachusetts Water Resources
Authority (Pre-refunded with
U.S. Government Securities to
07/15/02 @ $102).............. Aaa AAA 07/15/21 6.500 6,735,060
2,750 Massachusetts Water Resources
Authority (Pre-refunded with
U.S. Government Securities to
12/01/01 @ $102).............. Aaa AAA 12/01/19 6.500 3,077,167
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18,311,717
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NEVADA--2.91%
6,750 Clark County Pollution Control
Nevada Power (FGIC Insured).... Aaa AAA 06/01/19 6.600 7,061,648
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NEW YORK--12.37%
6,000 New York State Local Government
Assistance Corp................ A A 04/01/21 6.250 6,055,020
5,350 New York State Local Government
Assistance Corp. (Pre-refunded
with U.S. Government Securities
to 04/01/02 @ $102)........... Aaa AAA 04/01/21 6.750 6,086,214
1,500 New York State Medical Care
Facilities
(FHA Insured)................. NR AAA 02/15/31 6.600 1,550,115
6,150 New York City General Baa1 BBB+ 02/01/16 to 08/01/17 7.000 6,390,878
Obligation.....................
10,070 New York City Municipal Water A A- 06/15/17 to 06/15/21 6.000 to 6.250 9,973,603
Finance........................
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30,055,830
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NORTH CAROLINA--2.12%
2,700 North Carolina Eastern Municipal
Power Agency................... A BBB+ 01/01/21 6.400 2,643,408
2,550 North Carolina Municipal Power
Agency Catawba Electric
Revenue....................... A A- 01/01/17 6.250 2,511,368
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5,154,776
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PENNSYLVANIA--0.49%
1,190 Philadelphia Hospitals and
Higher Educational Facilities
Authority Chestnut Hill
Hospital....................... A A- 11/15/22 6.500 1,194,748
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RHODE ISLAND--2.57%
6,175 Rhode Island Housing Finance.... Aa AA+ 04/01/27 6.500 6,237,738
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</TABLE>
5
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Investment Grade Municipal Income Fund
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LONG-TERM MUNICIPAL BONDS--(CONCLUDED)
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<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATE RATE VALUE
- ---------- ------------ ------------ -------------------- -------------- ------------
SOUTH CAROLINA--5.03%
<C> <S> <C> <C> <C> <C> <C>
$5,035 South Carolina Public Service
Authority
Santee Cooper (Pre-refunded
with U.S. Government Securities
to 07/01/02 @ $102)........... Aaa AAA 07/01/31 6.625% $ 5,685,472
6,290 Richland County Pollution
Control Union Camp. ........... A1 A- 11/01/20 6.550 6,520,214
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12,205,686
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TEXAS--12.42%
5,000 Texas Health Facilities
Development Corp.
All Saints Episcopal Hospital
(MBIA Insured)................. Aaa AAA 08/15/22 6.250 5,138,500
4,000 Coastal Bend Health Facilities
Incarnate Word Health System
(AMBAC Insured)................ Aaa AAA 01/01/17 6.300 4,089,440
4,750 Harris County
Subordinated Lien Revenue...... Aa AA+ 08/01/14 6.750 5,074,947
915 Harris County Toll Road
Authority
Senior Lien (AMBAC Insured)... Aaa AAA 08/15/17 6.500 963,413
1,000 Houston Water & Sewer System.... A A 12/01/14 6.375 1,024,620
6,575 Houston Water & Sewer System
(AMBAC Insured)................. Aaa AAA 12/01/17 6.375 6,795,920
6,750 Sabine River Authority Pollution
Control
(FGIC Insured)................. Aaa AAA 10/01/22 6.550 7,086,690
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30,173,530
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VIRGINIA--4.38%
4,500 Virginia Beach Development
Authority
Sentara Bayside Hospital...... Aa AA 11/01/21 6.300 4,567,905
5,815 Virginia Transportation Board
Revenue
Route 28 Project.............. Aa AA 04/01/18 6.500 6,077,198
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10,645,103
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WASHINGTON--4.91%
4,500 Metropolitan Seattle Sewer (MBIA
Insured)....................... Aaa AAA 01/01/33 6.300 4,584,690
6,625 Metropolitan Seattle Sewer
(Pre-refunded with U.S.
Government Securities to
01/01/00 @ $102).............. Aaa AA- 01/01/31 6.875 7,342,620
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11,927,310
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WISCONSIN--2.80%
6,750 Wisconsin Health and Educational
Facilities Authority Sisters of
Sorrowful Mother Health Care
System (MBIA Insured)......... Aaa AAA 06/01/20 6.250 6,805,350
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TOTAL LONG-TERM MUNICIPAL BONDS
(cost--$222,290,531)....................... 231,725,538
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</TABLE>
6
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Investment Grade Municipal Income Fund
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SHORT-TERM MUNICIPAL NOTES--2.92%
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<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATE RATE VALUE
- ---------- ------------ ------------ -------------------- -------------- ------------
<C> <S> <C> <C> <C> <C> <C>
FLORIDA--0.95%
$2,300 Hillsborough County Pollution
Control*....................... VMIG1 A-1+ 05/15/18 4.500% $ 2,300,000
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WYOMING--1.97%
4,800 Lincoln County Pollution
Control* (Exxon)............... VMIG1 A-1+ 11/01/14 4.600 4,800,000
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TOTAL SHORT-TERM MUNICIPAL NOTES
(cost--$7,100,000)......................... 7,100,000
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TOTAL INVESTMENTS
(cost--$229,390,531)--98.32%............... 238,825,538
Other assets in excess of
liabilities--1.68%......................... 4,079,997
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NET ASSETS--100.00%......................... $242,905,535
============
</TABLE>
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* Variable rate demand notes are payable on demand. The maturity dates shown are
the stated maturities; the interest rates shown are the current rates as of
September 30, 1995 and reset daily.
AMBAC--American Municipal Bond Assurance Corporation
FGIC--Financial Guaranty Insurance Company
FHA--Federal Housing Authority
MBIA--Municipal Bond Insurance Association
NR--Not Rated
See accompanying notes to financial statements
7
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Investment Grade Municipal Income Fund
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Statement of Assets and Liabilities
September 30, 1995
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<TABLE>
ASSETS
<S> <C>
Investments in securities, at value (cost--$229,390,531)..................... $238,825,538
Cash......................................................................... 76,715
Interest receivable.......................................................... 4,375,052
Deferred organizational expenses............................................. 80,642
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Total assets.............................................................. 243,357,947
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LIABILITIES
Payable to investment adviser and administrator.............................. 129,843
Dividends payable to preferred shareholders.................................. 129,182
Accrued expenses and other liabilities....................................... 193,387
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Total liabilities......................................................... 452,412
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NET ASSETS
Auction Preferred Shares Series A & B-1,600 non-participating shares
authorized, issued and outstanding; $0.001 par value; $50,000 liquidation
value.................................................................... 80,000,000
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Common Stock--$0.001 par value; total authorized shares--199,998,400;
10,356,667 shares issued and outstanding................................... 10,357
Paid in capital in excess of par value of common shares...................... 153,663,783
Undistributed net investment income.......................................... 246,758
Accumulated net realized losses from investment transactions................. (450,370)
Net unrealized appreciation of investments................................... 9,435,007
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Net assets applicable to common shareholders.............................. 162,905,535
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Total net assets.......................................................... $242,905,535
============
Net asset value per common share ($162,905,535 applicable to 10,356,667
common shares outstanding).............................................. $15.73
=====
</TABLE>
See accompanying notes to financial statements
8
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Investment Grade Municipal Income Fund
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Statement of Operations
For the Year Ended September 30, 1995
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<TABLE>
INVESTMENT INCOME:
<S> <C>
Interest..................................................................... $14,830,669
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EXPENSES:
Investment advisory and administration....................................... 2,116,761
Auction Preferred Shares expenses............................................ 269,819
Custody and accounting....................................................... 125,040
Reports and notices to shareholders.......................................... 112,353
Legal and audit.............................................................. 99,812
Amortization of organizational expenses...................................... 38,094
Transfer agency and service fees............................................. 17,821
Directors' fees.............................................................. 11,000
Other expenses............................................................... 30,644
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2,821,344
Less: Fee waivers from adviser.................................................. (202,433)
-----------
Net expenses.................................................................... 2,618,911
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NET INVESTMENT INCOME........................................................... 12,211,758
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REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized losses from investment transactions............................. (447,179)
Net change in unrealized appreciation/depreciation of investments............ 11,192,984
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NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT ACTIVITIES.................... 10,745,805
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $22,957,563
===========
</TABLE>
See accompanying notes to financial statements
9
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Investment Grade Municipal Income Fund
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Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
For the Years Ended
September 30,
----------------------------
1995 1994
------------ ------------
FROM OPERATIONS:
<S> <C> <C>
Net investment income........................................... $ 12,211,758 $ 12,102,474
Net realized gains (losses) from investment transactions........ (447,179) 175,219
Net change in unrealized appreciation/depreciation of
investments.................................................... 11,192,984 (23,797,805)
------------ ------------
Net increase (decrease) in net assets resulting from
operations..................................................... 22,957,563 (11,520,112)
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DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income--common stockholders...................... (9,323,071) (10,103,964)
Net investment income--preferred stockholders................... (3,134,892) (2,208,428)
Net realized gains from investment transactions-common
stockholders................................................... -- (187,456)
Net realized gains from investment transactions-preferred
stockholders................................................... -- (40,160)
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Total dividends and distributions to stockholders............ (12,457,963) (12,540,008)
------------ ------------
Net increase (decrease) in net assets........................... 10,499,600 (24,060,120)
NET ASSETS:
Beginning of year............................................... 232,405,935 256,466,055
------------ ------------
End of year (including undistributed net investment income of
$246,758 and $492,963, respectively).......................... $242,905,535 $232,405,935
============ ============
</TABLE>
See accompanying notes to financial statements
10
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Investment Grade Municipal Income Fund
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Statement of Cash Flows
For the Year Ended September 30, 1995
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<TABLE>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
<S> <C>
Interest received............................................................ $ 14,701,368
Expenses paid (net of fee waivers)........................................... (2,510,358)
Purchase of short-term portfolio investments, net............................ (2,600,000)
Purchase of long-term portfolio investments.................................. (16,307,352)
Sale of long-term portfolio investments...................................... 19,218,077
------------
Net cash provided by operating activities.................................... 12,501,735
------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Dividends paid from net investment income to common stockholders............. (9,323,071)
Dividends paid from net investment income to preferred stockholders.......... (3,112,800)
------------
Net cash used for financing activities....................................... (12,435,871)
------------
NET INCREASE IN CASH............................................................ 65,864
CASH AT BEGINNING OF PERIOD..................................................... 10,851
------------
CASH AT END OF PERIOD........................................................... $ 76,715
============
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net increase in net assets resulting from operations......................... $ 22,957,563
------------
Decrease in cost of investments.............................................. 731,405
Net change in unrealized appreciation/depreciation of investments............ (11,192,984)
Increase in interest receivable.............................................. (102,802)
Amortization of organizational expenses...................................... 38,094
Decrease in payable to investment adviser and administrator.................. (44,333)
Increase in accrued expenses and other liabilities........................... 114,792
------------
Total adjustments......................................................... (10,455,828)
------------
Net cash provided by operating activities.................................... $ 12,501,735
============
</TABLE>
See accompanying notes to financial statements
11
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Investment Grade Municipal Income Fund
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Notes to Financial Statements
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ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Investment Grade Municipal Income Fund (formerly PaineWebber Premier Tax-Free
Income Fund Inc.) (the "Fund") was incorporated in Maryland on August 6, 1992 as
a closed-end, diversified management investment company. Effective August 14,
1995, the Fund commenced conducting business under the name "Investment Grade
Municipal Income Fund." The Board of Directors approved the change of the Fund's
name at a meeting held on June 2, 1995, subject to shareholder approval of the
change. Prior to November 6, 1992, the Fund had no activities other than
organizational matters and the sale of 6,667 shares of common stock to Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary
of PaineWebber Incorporated. Organizational costs have been deferred and are
being amortized on the straight line method over a period not to exceed 60
months from the date the Fund commenced operations.
Valuation of Investments--Where market quotations are readily available,
portfolio securities are valued thereon, provided such quotations adequately
reflect, in the judgment of Mitchell Hutchins, investment adviser and
administrator of the Fund, the fair value of the securities. When market
quotations are not readily available, securities are valued based upon
appraisals received from a pricing service which utilizes a computerized matrix
pricing system, or based upon appraisals derived from information concerning
those securities or similar securities received from recognized dealers in those
securities. All other securities are valued at fair value as determined in good
faith by or under the direction of the Fund's board of directors. The amortized
cost method of valuation, which approximates market value, is used to value
certain debt obligations with 60 days or less remaining to maturity, unless the
Fund's board of directors determines that this does not represent fair value.
The Fund follows an investment policy of investing primarily in municipal
obligations of various states. Economic changes affecting those states and
certain of their public bodies and municipalities may affect the ability of the
issuers within those states to pay interest on, or repay principal of, municipal
obligations held by the Fund.
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis. Discounts are accreted and premiums are amortized
as adjustments to interest income and the identified cost of securities.
Federal Tax Status--The Fund intends to distribute substantially all of its
tax-exempt income and any taxable income and to comply with the other
requirements of the Internal Revenue Code applicable to regulated investment
companies. Accordingly, no provision for income taxes is required. In addition,
by distributing during each calendar year substantially all of its net
investment income, capital gains and certain other amounts, if any, the Fund
intends not to be subject to a federal excise tax.
In accordance with Treasury Regulations, the Fund has elected to defer $447,179
of realized capital losses arising after October 31, 1994. Such losses have been
treated for tax purposes as arising on
12
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Investment Grade Municipal Income Fund
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October 1, 1995. At September 30, 1995, the Fund had a net capital loss
carryforward of $3,191. The loss carryforward is available as a reduction, to
the extent provided in the regulations, of future realized capital gains, and
will expire by September 30, 2003. To the extent these losses are used to offset
future capital gains, it is probable that the gains so offset will not be
distributed.
Dividends and Distributions--The Fund intends to pay monthly cash dividends to
common stockholders at a level rate that over time will result in the
distribution of all of the Fund's net investment income remaining after the
payment of dividends on any outstanding preferred stock. Dividends and
distributions to common stockholders are recorded on the ex-dividend date.
Dividends to preferred stockholders are accrued daily. Dividends from net
investment income and distributions from realized capital gains from investment
transactions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund's board of directors has approved an investment advisory and
administration contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Fund. In accordance with the Advisory Contract, Mitchell Hutchins receives
compensation from the Fund, computed weekly and paid monthly, at the annual rate
of 0.90% of the Fund's average weekly net assets. For the year ended September
30, 1995, Mitchell Hutchins voluntarily waived $202,433 in investment advisory
and administration fees from the Fund.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at September 30,
1995, was substantially the same as the cost of securities for financial
statement purposes.
At September 30, 1995, the components of the net unrealized appreciation of
investments were as follows:
Gross appreciation (from investments having an excess of value
over cost)................................................... $9,559,411
Gross depreciation (from investments having an excess of cost
over value).................................................. (124,404)
----------
Net unrealized appreciation of investments..................... $9,435,007
----------
----------
For the year ended September 30, 1995, aggregate purchases and sales of
portfolio securities, excluding short-term securities were $16,307,352 and
$19,218,077, respectively.
13
<PAGE>
Investment Grade Municipal Income Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CAPITAL STOCK
Common Stock
There are 199,998,400 shares of $0.001 par value common stock authorized. Of the
10,356,667 common shares outstanding, 6,667 shares are owned by Mitchell
Hutchins.
Auction Preferred Shares
The Fund has issued 800 shares of Auction Preferred Shares Series A and 800
shares of Auction Preferred Shares Series B, which are referred to herein
collectively as the "APS." All shares of each series of APS will have a
liquidation preference of $50,000 per share plus an amount equal to accumulated
but unpaid dividends upon liquidation.
Dividends, which are cumulative, are generally reset every 28 days for APS
Series A and 90 days for APS Series B. Dividend rates ranged from 3.14% to 5.00%
for the year ended September 30, 1995.
The Fund is subject to certain restrictions relating to the APS. Failure to
comply with these restrictions could preclude the Fund from declaring any
distributions to common shareholders or repurchasing common shares and/or could
trigger the mandatory redemption of APS at liquidation value.
The APS are entitled to one vote per share and will vote with holders of common
stock as a single class, except that the preferred shares will vote separately
as a class on certain matters, as required by law. The holders of the preferred
shares have the right to elect two directors of the fund.
14
<PAGE>
Investment Grade Municipal Income Fund
- --------------------------------------------------------------------------------
Quarterly Results of Operations--(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED AND NET INCREASE
UNREALIZED GAINS (DECREASE)
(LOSSES) FROM IN NET ASSETS
INVESTMENT RESULTING FROM
NET INVESTMENT
INCOME ACTIVITIES OPERATIONS
---------------- ----------------- -----------------
PER PER PER
TOTAL COMMON TOTAL COMMON TOTAL COMMON
QUARTER ENDED (000'S) SHARE (000'S) SHARE (000'S) SHARE
- --------------------------------------------- ------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1995........................... $ 3,127 $0.30 $ 1,985 $0.19 $ 5,112 $0.49
June 30, 1995................................ 3,043 0.30 1,555 0.15 4,598 0.45
March 31, 1995............................... 3,018 0.29 14,115 1.36 17,133 1.65
December 31, 1994............................ 3,024 0.29 (6,909) (0.67) (3,885) (0.38)
------- ------ -------- ------ -------- ------
Totals.................................... $12,212 $1.18 $ 10,746 $1.03 $ 22,958 $2.21
======= ====== ======== ====== ======== ======
September 30, 1994........................... $ 3,005 $0.29 $ (2,960) $(0.28) $ 45 $0.01
June 30, 1994................................ 3,041 0.30 (1,783) (0.18) 1,258 0.12
March 31, 1994............................... 3,038 0.29 (18,096) (1.74) (15,058) (1.45)
December 31, 1993............................ 3,018 0.29 (783) (0.08) 2,235 0.21
------- ------ -------- ------ -------- ------
Totals.................................... $12,102 $1.17 $(23,622) $(2.28) $(11,520) $(1.11)
======= ====== ======== ====== ======== ======
</TABLE>
15
<PAGE>
Investment Grade Municipal Income Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Selected data for a share of common stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
For the Years Ended For the Period
September 30, November 6,
--------------------- 1992+ through
1995 1994 September 30, 1993
-------- --------- ------------------
<S> <C> <C> <C>
Net asset value, beginning of period.................... $ 14.72 $ 17.04 $ 15.00
-------- --------- -------
Net investment income................................... 1.18 1.17 0.94
Net realized and unrealized gains (losses) from
investment transactions................................ 1.03 (2.28) 2.13
-------- --------- -------
Net increase (decrease) from investment operations...... 2.21 (1.11) 3.07
-------- --------- -------
Dividends from net investment income to:
Common shareholders.................................... (0.90) (0.98) (0.73)
Common share equivalent of dividends paid to preferred
shareholders........................................... (0.30) (0.21) (0.14)
Distributions from net realized gains from investment
transactions........................................... -- (0.02) --
-------- --------- -------
Total dividends and distributions to shareholders....... (1.20) (1.21) (0.87)
-------- --------- -------
Underwriting and offering costs incurred with the
preferred stock offering charged to common stock....... -- -- (0.16)
-------- --------- -------
Net asset value, end of period.......................... $ 15.73 $ 14.72 $ 17.04
======== ========= =======
Per share market value, end of period................... $ 13.00 $ 12.38 $ 15.63
======== ========= =======
Total investment return(1).............................. 12.63% (15.21)% 9.10%
======== ========= =======
Ratios to average net assets attributable to common
shares:
Total expenses net of waivers from adviser............. 1.69% 1.70% 1.55%*
Total expenses before waivers from adviser............. 1.82% 1.70% 1.55%*
Net investment income before preferred stock
dividends............................................. 7.87% 7.32% 6.55%*
Preferred stock dividends.............................. 2.02% 1.33% 0.95%*
Net investment income available to common
shareholders.......................................... 5.85% 5.99% 5.60%*
Supplemental data:
Net assets, end of period (000's)...................... $242,906 $ 232,406 $256,466
Portfolio turnover rate................................ 7% 0% 6%
Asset coverage per share of preferred stock, end of
period................................................ $151,816 $ 145,254 $160,291
</TABLE>
- ------------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day and a sale at the current market
price on the last day of each period reported and assuming reinvestment of
dividends and other distributions to common shareholders at prices obtained
under the Fund's Dividend Reinvestment Plan. Total investment returns for
periods of less than one year have not been annualized. Total investment
return does not reflect brokerage commissions.
16
<PAGE>
Investment Grade Municipal Income Fund
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Stockholders and Board of Directors of
Investment Grade Municipal Income Fund (formerly PaineWebber Premier Tax-Free
Income Fund Inc.)
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of Investment Grade
Municipal Income Fund (the "Fund") at September 30, 1995, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the two years in the period then ended and for the period
November 6, 1992 (commencement of operations) through September 30, 1993, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1995 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
November 15, 1995
17
<PAGE>
Investment Grade Municipal Income Fund
- --------------------------------------------------------------------------------
Tax Information
- --------------------------------------------------------------------------------
We are required by subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (September
30, 1995), as to the federal tax status of distributions received by
stockholders during such fiscal year. Accordingly, we are advising you that all
dividends paid during the fiscal year were federal tax-exempt interest
dividends.
The Fund did not invest in any securities which paid interest subject to the
federal alternative minimum tax for individual taxpayers during its fiscal year.
Therefore, none of the dividends paid by the Fund were subject to such tax.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar year 1995. The second notification, which
reflects the amount to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1996. Stockholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Fund.
18
<PAGE>
Investment Grade Municipal Income Fund
- --------------------------------------------------------------------------------
General Information
- --------------------------------------------------------------------------------
THE FUND
Investment Grade Municipal Income Fund ("Fund") is a diversified closed-end
management investment company whose shares trade on the New York Stock Exchange,
Inc. ("NYSE"). The Fund's investment objective is to achieve a high level of
current income that is exempt from federal income tax, consistent with the
preservation of capital. The Fund's investment adviser and administrator is
Mitchell Hutchins Asset Management Inc., a wholly owned subsidiary of
PaineWebber Incorporated, which has over $44 billion in assets under management
as of October 31, 1995.
SHAREHOLDER INFORMATION
The Fund's NYSE trading symbol is "PPM." Weekly comparative net asset value and
market price information about the Fund is published each Monday in The Wall
Street Journal and The New York Times and each week in Barron's, as well as
numerous other newspapers.
DISTRIBUTION POLICY
The Fund's Board of Directors has established a Dividend Reinvestment Plan (the
"Plan") under which all common stockholders whose shares are registered in their
own names, or in the name of PaineWebber or its nominee, will have all dividends
and other distributions on their shares of common stock automatically reinvested
in additional shares of common stock, unless such common stockholders elect to
receive cash. Common stockholders who elect to hold their shares in the name of
another broker or nominee should contact such broker or nominee to determine
whether, or how, they may participate in the Plan. Additional shares of common
stock acquired under the Plan will be purchased in the open market, on the NYSE,
at prices that may be higher or lower than the net asset value per share of the
common stock at the time of the purchase. The Fund will not issue any new shares
of common stock in connection with the Plan.
19
<PAGE>
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<PAGE>
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<PAGE>
---------------------------------------
DIRECTORS
E. Garrett Bewkes, Jr., Chairman
Richard Q. Armstrong
Richard R. Burt
Meyer Feldberg
John R. Torell III
William D. White
---------------------------------------
PRINCIPAL OFFICERS
Margo N. Alexander
President
Victoria E. Schonfeld
Vice President
Gregory W. Serbe
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Julian F. Sluyters
Vice President and Treasurer
---------------------------------------
INVESTMENT ADVISER
AND ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
---------------------------------------
Notice is hereby given in accordance
with Section 23(c) of the Investment
Company Act of 1940 that from time to
time the Fund may purchase at market
prices shares of its common stock in
the open market.
This report is not to be used in
connection with the offering of shares
of the Fund unless accompanied or
preceded by an effective prospectus.
(C) 1995 PaineWebber Incorporated
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