INVESTMENT GRADE
MUNICIPAL
INCOME FUND INC.
Semi-Annual Report
March 31, 1996
PAINEWEBBER
INVEST WITH MORE INTELLIGENCE.
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May 17, 1996
Dear Shareholder,
We are pleased to present you with the semi-annual report for Investment Grade
Municipal Income Fund Inc. for the six months ended March 31, 1996. Moderate
economic growth, low inflation and strong corporate earnings growth helped
propel the stock market to record-breaking levels during 1995. The bond market
also rallied during 1995, providing investors with their third-best year since
the 1920s.
Investor sentiment changed quickly in early March 1996, however, in response to
government reports showing higher-than-expected economic growth; there was a
sharp drop in bond prices and volatility in the stock market. Meanwhile, the
Federal Reserve's Open Market Committee decided to keep monetary policy
unchanged at the March 26, 1996 meeting. The Fed's decision not to lower rates
in March (and, again in May) suggests that officials do not foresee a recession
or accelerating inflation.
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 wreaked
havoc on the bond market. There were positive fundamentals for municipals during
1995, including low new issue supply and a declining interest rate environment.
However, during the spring of 1995, presidential candidates began suggesting new
Federal income tax policies. The most notable proposal was the flat tax, which
would eliminate all investment income from Federal taxation: under this plan,
Federal tax-exemption would no longer be the unique privilege of municipal
bonds, which could cause demand to decrease. The market's response to the flat
tax discussions was, we believe, overstated.
Flat tax fever was rampant during the first half of 1995 and, as a result,
demand dwindled and municipal securities underperformed Treasuries. However, by
the fourth quarter of 1995, the municipal market began outperforming the
Treasury market, as flat tax fears abated and new issue supply continued to be
low. As of March 31, 1996, high quality, long-term municipal bonds were yielding
an average of 85% of comparable maturity Treasury bonds, which is an
historically attractive yield level. (The municipal market reached its low
relative to Treasuries in the spring of 1995, prior to the mention of tax
reform.) It appears as though new issue supply will continue to be low and
demand for municipals continues to increase. Therefore, we expect that municipal
outperformance could continue for the remainder of 1996.
PORTFOLIO REVIEW
Effective January 22, 1996, Elbridge T. Gerry III assumed management
responsibility for the Fund. Mr. Gerry joined Mitchell Hutchins as Senior Vice
President in charge of all municipal investments from JP Morgan & Company, where
he began his career in 1981. At JP Morgan, Mr. Gerry co-managed the municipal
department with over $5 billion in municipal assets and for the past four years,
he was Vice President in the Global Asset Management Group.
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The Fund's total return for the six months ended March 31, 1996, based on the
Fund's net asset value was 3.93%, while the Fund's total return for the same
time period based on the Fund's market value was 7.30%. As of March 31, 1996,
the Fund's net asset value per share was $15.90, and its share price on the New
York Stock Exchange was $13.50.
The Fund paid dividends from net investment income to common shareholders, which
totalled $0.45 per share of common stock during the six months ended March 31,
1996. The Fund has paid a monthly dividend of $0.0750 per share of common stock
since July 1995. Given the current interest rate environment, we anticipate that
the monthly dividend will remain unchanged for the remainder of 1996.
The Fund's dividends benefitted from declining short-term interest rates during
the six months ended March 31, 1996. As short-term rates decreased, the benefit
derived from the Fund's Auction Preferred Shares ("APS") increased. 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 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 March 31, 1996, the Fund was fully invested in long-term municipal
securities with an average maturity of 21.4 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 March 31, 1996, was as follows:
[CHART]
Cash equivalents,
prerefunded bonds,
and AAA or Aaa 34.8%
AA or Aa 29.9% BBB or Baa 6.7% A1/A+ 1.5% A or A 27.1%
The largest percentages of the Fund's net assets as of March 31, 1996 were
invested in securities of Illinois, 14.5%; New York 13.8%; and Texas 12.5%,
issuers. As of March 31, 1996, three of the largest sector holdings were water,
18.1%; power, 17.0%; and hospitals, 14.0%
Going forward, we see opportunities in select spots on the yield curve,
specifically issues in the fifteen to twenty year maturity range. We intend to
diversify the portfolio further to better position the Fund
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across the yield curve and the credit spectrum as well as to increase the
structural variety of bonds included in the portfolio. These three
diversification strategies should offer the dual advantage of greater return
potential without increasing risk.
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,
<TABLE>
<S> <C>
/s/ Margo Alexander /s/ Elbridge T. Gerry III
MARGO ALEXANDER ELBRIDGE T. GERRY III
President, Senior Vice President,
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
Portfolio Manager,
Investment Grade Municipal Income Fund Inc.
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3
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Investment Grade Municipal Income Fund Inc.
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Portfolio of Investments
March 31, 1996--(unaudited)
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LONG-TERM MUNICIPAL BONDS--95.36%
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<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- ---------- ------------ ------------ -------------------- -------------- ------------
<C> <S> <C> <C> <C> <C> <C>
ALASKA--2.91%
$ 6,540 Valdez Marine Terminal
British Petroleum Co.
Sohio Pipeline Project......... Aa3 AA- 12/01/25 7.000% $ 7,120,948
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CALIFORNIA--1.45%
3,500 California Public Works Board
California State University.... A A- 09/01/16 6.250 3,558,905
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COLORADO--0.64%
1,500 Denver City & County
Excise Tax Revenue Bonds
(MBIA Insured)................. Aaa AAA 09/01/14 6.500 1,560,810
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CONNECTICUT--4.05%
9,650 Connecticut Housing Finance
Authority....................... Aa AA 05/15/14 to 11/15/23 6.200 to 6.750 9,916,907
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GEORGIA--0.21%
500 Municipal Electric Authority of
Georgia......................... A A 01/01/16 6.375 505,445
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ILLINOIS--14.48%
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 1,130,130
3,000 Illinois Health Facilities
Authority
Glen Oaks Hospital............. Baa1 BBB 11/15/19 7.000 3,069,180
3,000 Illinois Health Facilities
Authority
Hinsdale Hospital.............. Baa1 BBB 11/15/19 7.000 3,054,270
1,890 Illinois Toll & Highway
Authority
(FGIC Insured)................. Aaa AAA 01/01/16 6.200 1,933,319
7,380 Chicago Gas Supply People's
Gas............................. Aa3 AA- 03/01/15 6.875 7,835,198
4,000 Chicago Water Works............. A1 AA- 11/15/19 6.000 3,984,640
11,600 Metropolitan Pier & Exposition
Authority....................... A A+ 06/15/27 6.500 11,880,952
2,650 University of Illinois.......... Aa AA- 04/01/22 5.750 2,543,126
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35,430,815
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INDIANA--10.77%
6,750 Indiana Transportation Financing
Authority....................... A NR 11/01/16 6.250 6,767,280
6,000 Indianapolis Gas Utility (FGIC
Insured)........................ Aaa AAA 06/01/23 6.200 6,130,380
2,000 Indianapolis Local Public
Improvement
Bond Bank...................... Aa AA- 07/01/10 6.000 2,058,420
4,000 Marion County Hospital Authority
Methodist Hospital of
Indiana......................... Aa AA- 09/01/13 6.500 4,187,040
5,725 Petersburg County Pollution
Control Indianapolis Power &
Light Company................... Aa2 AA- 12/01/24 6.625 6,126,952
1,000 Purdue University............... Aa AA- 07/01/15 6.700 1,091,890
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26,361,962
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</TABLE>
4
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Investment Grade Municipal Income Fund Inc.
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LONG-TERM MUNICIPAL BONDS--(CONTINUED)
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<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- ---------- ------------ ------------ -------------------- -------------- ------------
<C> <S> <C> <C> <C> <C> <C>
KENTUCKY--3.36%
$ 7,750 Boone County Pollution Control
Dayton Power & Light Co........ Aa3 AA- 11/15/22 6.500% $ 8,213,295
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MASSACHUSETTS--7.45%
8,500 Massachusetts Bay Transportation
Authority....................... A1 A+ 03/01/23 6.100 8,488,355
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 6,685,560
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 3,056,377
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18,230,292
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NEVADA--2.95%
6,750 Clark County Pollution Control
Nevada Power (FGIC Insured).... Aaa AAA 06/01/19 6.600 7,230,060
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NEW YORK--12.37%
6,000 New York State Local Government
Assistance Corp................ A A 04/01/21 6.250 6,098,040
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 6,028,433
1,500 New York State Medical Care
Facilities
(FHA-Insured).................. NR AAA 02/15/31 6.600 1,560,075
6,150 New York City General
Obligation...................... Baa1 BBB+ 02/01/16 to 08/01/17 7.000 6,473,367
10,070 New York City Municipal Water
Finance......................... A A- 06/15/17 to 06/15/21 6.000 to 6.250 10,103,615
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30,263,530
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NORTH CAROLINA--2.16%
2,700 North Carolina Eastern Municipal
Power Agency................... A BBB+ 01/01/21 6.400 2,712,231
2,550 North Carolina Municipal Power
Agency Catawba Electric
Revenue......................... A A- 01/01/17 6.250 2,566,754
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5,278,985
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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 1,196,902
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RHODE ISLAND--2.57%
6,175 Rhode Island Housing Finance.... Aa AA+ 04/01/27 6.500 6,279,666
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</TABLE>
5
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Investment Grade Municipal Income Fund Inc.
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LONG-TERM MUNICIPAL BONDS--(CONCLUDED)
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<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- ---------- ------------ ------------ -------------------- -------------- ------------
<C> <S> <C> <C> <C> <C> <C>
SOUTH CAROLINA--5.02%
$ 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% $ 5,641,567
6,290 Richland County Pollution
Control
Union Camp..................... A1 A- 11/01/20 6.550 6,642,177
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12,283,744
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TEXAS--12.47%
5,000 Texas Health Facilities
Development Corp.
All Saints Episcopal Hospital
(MBIA Insured)................. Aaa AAA 08/15/22 6.250 5,138,750
4,000 Coastal Bend Health Facilities
Incarnate Word Health System
(AMBAC Insured)................. Aaa AAA 01/01/17 6.300 4,157,600
4,750 Harris County
Subordinated Lien Revenue...... Aa AA- 08/01/14 6.750 5,135,748
915 Harris County Toll Road
Authority
Senior Lien (AMBAC Insured).... Aaa AAA 08/15/17 6.500 971,913
1,000 Houston Water & Sewer System.... A A 12/01/14 6.375 1,041,420
6,575 Houston Water & Sewer System
(AMBAC Insured)................ Aaa AAA 12/01/17 6.375 6,826,362
6,750 Sabine River Authority Pollution
Control
(FGIC Insured)................. Aaa AAA 10/01/22 6.550 7,239,577
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30,511,370
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VIRGINIA--4.34%
4,500 Virginia Beach Development
Authority
Sentara Bayside Hospital....... Aa AA 11/01/21 6.300 4,518,495
5,815 Virginia Transportation Board
Revenue
Route 28 Project............... Aa AA 04/01/18 6.500 6,095,457
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10,613,952
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WASHINGTON--4.87%
4,500 Metropolitan Seattle Sewer (MBIA
Insured)........................ Aaa AAA 01/01/33 6.300 4,642,920
6,625 Metropolitan Seattle Sewer
(Pre-refunded
with U.S. Government Securities
to 01/01/00 @ 102).............. Aaa AA- 01/01/31 6.875 7,286,705
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11,929,625
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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 6,861,443
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TOTAL LONG-TERM MUNICIPAL BONDS
(cost--$222,304,615)....................... 233,348,656
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</TABLE>
6
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Investment Grade Municipal Income Fund Inc.
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SHORT-TERM MUNICIPAL NOTES--2.98%
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<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- ---------- ------------ ------------ -------------------- -------------- ------------
<C> <S> <C> <C> <C> <C> <C>
FLORIDA--0.04%
$ 100 Hillsborough County Pollution
Control*........................ VMIG1 A-1+ 04/01/96 3.700% $ 100,000
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NEW YORK--1.43%
200 New York City Series A*......... VMIG1 A-1 04/01/96 3.850 200,000
1,800 New York City Series B*......... VMIG1 A-1+ 04/01/96 3.800 1,800,000
700 New York City Series E*......... VMIG1 A-1+ 04/01/96 3.750 700,000
400 New York State Energy Research
and Development Authority
Pollution Control Revenue*..... VMIG1 A-1+ 04/01/96 3.400 400,000
400 New York State Energy Research
and Development Authority
Pollution Control Revenue*..... VMIG1 A-1+ 04/01/96 3.450 400,000
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3,500,000
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WYOMING--1.51%
3,700 Lincoln County Pollution
Control*........................ P-1 A-1+ 04/01/96 3.800 3,700,000
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TOTAL SHORT-TERM MUNICIPAL NOTES
(cost--$7,300,000)......................... 7,300,000
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TOTAL INVESTMENTS
(cost--$229,604,615)--98.34%............... 240,648,656
Other assets in excess of
liabilities--1.66%.......................... 4,051,410
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NET ASSETS--100.00%......................... $244,700,066
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</TABLE>
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* Variable rate demand notes are payable on demand. The maturity date reflects
earlier of reset date or maturity date. The interest rates shown are the
current rates as of March 31, 1996 and reset daily.
AMBAC--American Municipal Bond Assurance Corporation
FGIC--Financial Guaranty Insurance Company
FHA--Federal Housing Authority
MBIA--Municipal Bond Investors Assurance
NR--Not Rated
See accompanying notes to financial statements
7
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Investment Grade Municipal Income Fund Inc.
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Statement of Assets and Liabilities
March 31, 1996--(unaudited)
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<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost--$229,604,615)..................... $240,648,656
Cash......................................................................... 91,523
Interest receivable.......................................................... 4,371,620
Deferred organizational expenses............................................. 60,202
Other assets................................................................. 8,853
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Total assets.............................................................. 245,180,854
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LIABILITIES
Payable to investment adviser and administrator.............................. 135,380
Dividends payable to preferred shareholders.................................. 182,836
Accrued expenses and other liabilities....................................... 162,572
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Total liabilities......................................................... 480,788
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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.......................................... 432,255
Accumulated net realized losses from investment transactions................. (450,370)
Net unrealized appreciation of investments................................... 11,044,041
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Net assets applicable to common shareholders.............................. 164,700,066
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Total net assets.......................................................... $244,700,066
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Net asset value per common share ($164,700,066 applicable to 10,356,667
common shares outstanding).............................................. $15.90
</TABLE>
See accompanying notes to financial statements
8
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Investment Grade Municipal Income Fund Inc.
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Statement of Operations
For the Six Months Ended March 31, 1996 (unaudited)
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<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest..................................................................... $ 7,400,718
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EXPENSES:
Investment advisory and administration....................................... 1,118,454
Auction Preferred Shares expenses............................................ 142,410
Custody and accounting....................................................... 51,039
Legal and audit.............................................................. 33,942
Reports and notices to shareholders.......................................... 31,738
Amortization of organizational expenses...................................... 20,440
Transfer agency and service fees............................................. 7,838
Directors' fees.............................................................. 5,500
Other expenses............................................................... 6,876
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1,418,237
Less: Fee waivers from adviser.................................................. (310,682)
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Net expenses.................................................................... 1,107,555
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NET INVESTMENT INCOME........................................................... 6,293,163
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REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gains from investment transactions.............................. --
Net change in unrealized appreciation/depreciation of investments............ 1,609,034
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NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT ACTIVITIES.................... 1,609,034
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $ 7,902,197
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</TABLE>
See accompanying notes to financial statements
9
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Investment Grade Municipal Income Fund Inc.
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Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
For the Six Months
Ended For the Year
March 31, 1996 Ended
(unaudited) September 30, 1995
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<S> <C> <C>
FROM OPERATIONS:
Net investment income................................. $ 6,293,163 $ 12,211,758
Net realized losses from investment transactions...... -- (447,179)
Net change in unrealized appreciation/depreciation of
investments......................................... 1,609,034 11,192,984
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Net increase in net assets resulting from
operations.......................................... 7,902,197 22,957,563
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DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income--common stockholders............ (4,660,500) (9,323,071)
Net investment income--preferred stockholders......... (1,447,166) (3,134,892)
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Total dividends and distributions to
stockholders..................................... (6,107,666) (12,457,963)
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Net increase in net assets............................ 1,794,531 10,499,600
NET ASSETS:
Beginning of period................................... 242,905,535 232,405,935
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End of period (including undistributed net investment
income of $432,255 and $246,758, respectively)...... $244,700,066 $242,905,535
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</TABLE>
See accompanying notes to financial statements
10
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Investment Grade Municipal Income Fund Inc.
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Statement of Cash Flows
For the Six Months Ended March 31, 1996--(unaudited)
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<TABLE>
<S> <C>
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Interest received............................................................. $ 7,390,066
Expenses paid (net of fee waivers)............................................ (1,121,246)
Purchase of short-term portfolio investments, net............................. (200,000)
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Net cash provided by operating activities..................................... 6,068,820
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CASH FLOWS USED FOR FINANCING ACTIVITIES:
Dividends paid from net investment income to common stockholders.............. (4,660,500)
Dividends paid from net investment income to preferred stockholders........... (1,393,512)
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Net cash used for financing activities........................................ (6,054,012)
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NET INCREASE IN CASH............................................................. 14,808
CASH AT BEGINNING OF PERIOD...................................................... 76,715
-----------
CASH AT END OF PERIOD............................................................ $ 91,523
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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.......................... $ 7,902,197
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Increase in investments, at value............................................. (1,823,118)
Decrease in interest receivable............................................... 3,432
Amortization of deferred organizational expenses.............................. 20,440
Increase in other assets...................................................... (8,853)
Increase in payable to investment adviser and administrator................... 5,537
Decrease in accrued expenses and other liabilities............................ (30,815)
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Total adjustments.......................................................... (1,833,377)
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Net cash provided by operating activities..................................... $ 6,068,820
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</TABLE>
See accompanying notes to financial statements
11
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Investment Grade Municipal Income Fund Inc.
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Notes to Financial Statements--(unaudited)
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ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Investment Grade Municipal Income Fund Inc. (formerly PaineWebber Premier
Tax-Free Income Fund Inc.) (the "Fund") was incorporated in Maryland on August
6, 1992 and is registered with the Securities and Exchange Commission 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 to Investment Grade Municipal Income Fund Inc. at a meeting held on June 2,
1995 and shareholders approved the name change on January 18, 1996.
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.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
Valuation of Investments--Where market quotations are readily available,
portfolio securities are valued thereon, provided such quotations adequately
reflect the fair value of the securities, in the judgment of Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of
PaineWebber Incorporated, investment adviser and administrator of the Fund. 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.
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.
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,
12
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Investment Grade Municipal Income Fund Inc.
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such amounts are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
CONCENTRATION OF RISK
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 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 six months ended March
31, 1996, Mitchell Hutchins voluntarily waived a portion of its investment
advisory and administration fees from the Fund.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at March 31, 1996,
was substantially the same as the cost of securities for financial statement
purposes.
At March 31, 1996, the components of the net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (from investments having an excess of value
over cost).................................................... $11,119,269
Gross depreciation (from investments having an excess of cost
over value)................................................... (75,228)
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Net unrealized appreciation of investments.................... $11,044,041
-----------
-----------
</TABLE>
FEDERAL INCOME 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.
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 net realized capital gains,
13
<PAGE>
Investment Grade Municipal Income Fund Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
and will expire by September 30, 2003. To the extent that such losses are used
to offset future capital gains, it is probable that the gains so offset will not
be distributed.
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 October 1, 1995.
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 3.25% to 4.05%
for the six months ended March 31, 1996.
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 Inc.
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Selected data for a share of common stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
For the Period
For the For the Years Ended November 6,
Six Months Ended September 30, 1992+ through
March 31, 1996 --------------------- September 30,
(unaudited) 1995 1994 1993
---------------- -------- --------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 15.73 $ 14.72 $ 17.04 $ 15.00
------- -------- --------- -------
Net investment income...................... 0.61 1.18 1.17 0.94
Net realized and unrealized gains (losses)
from investments.......................... 0.15 1.03 (2.28) 2.13
------- -------- --------- -------
Net increase (decrease) from investment
operations................................ 0.76 2.21 (1.11) 3.07
------- -------- --------- -------
Dividends from net investment income to:
Common shareholders....................... (0.45) (0.90) (0.98) (0.73)
Common share equivalent of dividends paid
to preferred shareholders............... (0.14) (0.30) (0.21) (0.14)
Distributions from net realized gains from
investment transactions................. -- -- (0.02) --
------- -------- --------- -------
Total dividends and distributions to
shareholders............................ (0.59) (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............. $ 15.90 $ 15.73 $ 14.72 $ 17.04
------- -------- --------- -------
------- -------- --------- -------
Per share market value, end of period...... $ 13.50 $ 13.00 $ 12.38 $ 15.63
------- -------- --------- -------
------- -------- --------- -------
Total investment return(1)................. 7.30% 12.63% (15.21)% 9.10%
------- -------- --------- -------
------- -------- --------- -------
Ratios to average net assets attributable
to common shares:
Total expenses net of waivers from
adviser.................................. 1.31%* 1.69% 1.70% 1.55%*
Total expenses before waivers from
adviser.................................. 1.68%* 1.82% 1.70% 1.55%*
Net investment income before preferred
stock dividends.......................... 7.45%* 7.87% 7.32% 6.55%*
Preferred stock dividends................. 1.71%* 2.02% 1.33% 0.95%*
Net investment income available to common
shareholders............................. 5.74%* 5.85% 5.99% 5.60%*
Supplemental data:
Net assets, end of period (000's)......... $244,700 $242,906 $ 232,406 $256,466
Portfolio turnover rate................... 0% 7% 0% 6%
Asset coverage per share of preferred
stock, end of period.................... $152,938 $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.
15
<PAGE>
Investment Grade Municipal Income Fund Inc.
- --------------------------------------------------------------------------------
General Information
- --------------------------------------------------------------------------------
THE FUND
Investment Grade Municipal Income Fund Inc. 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 $43 billion in assets under management
as of April 30, 1996.
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, each Sunday in The New York Times and each week in Barron's, as
well as numerous other newspapers.
An annual meeting of shareholders of the Fund was held on January 18, 1996. At
the meeting the following were approved for the Fund:
1) An amendment to the Fund's Articles of Incorporation to change the name of
the Fund from "PaineWebber Premier Tax-Free Income Fund Inc." to "Investment
Grade Municipal Income Fund Inc."
The votes were as follows:
ALL SHARES VOTING TOGETHER
<TABLE>
<CAPTION>
SHARES SHARES SHARES
VOTED FOR VOTED AGAINST WITHHOLD AUTHORITY
- ------------- ------------- ------------------
<S> <C> <C>
9,850,448.323 83,286.455 85,457.001
</TABLE>
2) The following were elected to serve as directors until the annual meeting of
shareholders in 1997, or until their successors are elected and qualified.
The votes were as follows:
ALL SHARES VOTING TOGETHER
<TABLE>
<CAPTION>
SHARES VOTED FOR SHARES WITHHOLD AUTHORITY
---------------- -------------------------
<S> <C> <C>
Richard Q. Armstrong................................... 9,860,275.133 158,916.646
E. Garrett Bewkes, Jr.................................. 9,871,507.075 147,684.704
Ricard R. Burt......................................... 9,863,918.584 155,273.195
John R. Torell III..................................... 9,863,515.800 155,675.979
William D. White*...................................... 9,857,760.251 161,431.528
</TABLE>
- ------------
* Effective April 11, 1996, Mr. White resigned as Director of the Fund at a
special shareholder meeting held on April 11, 1996. Mary C. Farrell, George W.
Gowen and Frederic V. Malek were elected to serve as directors of the Fund.
16
<PAGE>
Investment Grade Municipal Income Fund Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AUCTION PREFERRED SHARES
<TABLE>
<CAPTION>
SHARES VOTED FOR SHARES WITHHOLD AUTHORITY
---------------- -------------------------
<S> <C> <C>
Margo N. Alexander..................................... 834.000 0.000
Meyer Feldberg......................................... 834.000 0.000
</TABLE>
3) Ratification of Price Waterhouse LLP as the Fund's independent accountants
for the fiscal year ending September 30, 1996.
The votes were as follows:
ALL SHARES VOTING TOGETHER
<TABLE>
<CAPTION>
SHARES SHARES SHARES
VOTED FOR VOTED AGAINST WITHHOLD AUTHORITY
- ------------- ------------- ------------------
<S> <C> <C>
9,904,147.892 39,724.000 75,319.887
</TABLE>
(Broker non-votes and abstentions are included within the "Shares Withhold
Authority" totals.)
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.
17
<PAGE>
- ------------------------------------------------------------
DIRECTORS
E. Garrett Bewkes, Jr., Chairman
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
John R. Torell III
- ------------------------------------------------------------
PRINCIPAL OFFICERS
Margo N. Alexander
President
Julian F. Sluyters
Vice President and Treasurer
Dianne E. O'Donnell
Vice President and Secretary
Victoria E. Schonfeld
Vice President
Dennis L. McCauley
Vice President
Elbridge T. Gerry III
Vice President
- ------------------------------------------------------------
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 sent to the shareholders of the Fund for
their information. It is not a prospectus, circular or
represenation intended for the use in the purchase or sale
of shares of the Fund or any securities mentioned in this
report.
The financial information provided herein is taken from the
records of the Fund without examination by independent
accountants who do not express an opinion thereon.
C 1996 PaineWebber Incorporated
