<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
May 15, 1998
Dear Shareholder,
We are pleased to present you with the semiannual report for the Investment
Grade Municipal Income Fund Inc. (the "Fund") for the six-month period ended
March 31, 1998.
GENERAL MARKET OVERVIEW
===============================================================================
[GRAPHIC] The bond markets weakened slightly during the first quarter of 1998.
Despite little inflationary pressure, evidence of a pickup in the U.S. economy
and fears of an overbought market moderated the bulls. Speculation as to the
ultimate impact of the Asian crisis on the United States also gave investors
cause for concern.
The municipal bond market continued to lag the Treasury market during the
first quarter. Municipal issuers took advantage of low rates to refinance
outstanding debt with new, lower yielding bonds. As a result, by quarter-end
municipals had cheapened and were yielding 86% of comparable-maturity
Treasurys. Historically, on average, municipal securities yield 82% to 83% of
comparable Treasurys. This yield relationship tends to return to its average,
which suggests municipals are poised to outperform as the supply of bonds is
placed.
PORTFOLIO REIVEW
===============================================================================
[GRAPHIC] Performance--For the six-month period ended March 31, 1998, the Fund
(symbol: PPM) returned 3.43% based on changes in the Fund's net asset value
and 2.97% based on changes in its share price on the New York Stock Exchange.
At March 31, 1998 the Fund's net asset value per share was $16.90, while
its share price on the New York Stock Exchange was $15.06. During the
six-month period ended March 31, 1998, the Fund paid dividends from net
investment income totaling $0.45 per share, or 7.5 cents per share per month.
Based on the dividend paid in March and the Fund's market price on March 31,
1998, the Fund's annualized market yield was 5.98%.
Portfolio Highlights--Management continues to monitor relative-value
relationships between municipal sectors in pursuit of select municipal bonds
that provide more upside potential without a significant increase in risk.
During this period of lower prices we took on new positions that
represented particularly wide spreads. Boosting the portfolio's yield, we
added Port of Corpus Christi, Texas--Valero (0.9% of net assets at March 31,
1998), Pennsylvania Turnpike Authority (1.0%) and Naperville, Illinois
Electric Revenue Bonds (0.4%).
We are keeping the Fund's exposure to reinvestment risk relatively low,
with more than 75% invested in bonds with call protections of at least five
years. Because of continued high municipal debt issuance, we expect further
opportunities to increase yield. We will continue to look for securities that
provide attractive value across the yield curve and across the state credit
and industry sectors.
SEMIANNUAL REPORT
Investment Grade
Municipal Income
Fund Inc.
Top five sectors, as
percent of portfolio assets,
March 31, 1998*
Water 17.8%
Power 17.0%
Healthcare 11.1%
General Obligations 9.7%
Sales Tax 7.5%
* Allocations subject to change
Investment
Grade Municipal
Income Fund Inc.
FUND PROFILE
Goal:
High current income exempt from federal income tax, consistent with
preservation of capital
Portfolio Managers:
Elbridge T. Gerry III, Cynthia N. Bow, Mitchell Hutchins Asset Management Inc.
Total Net Assets:
$255.1 million as of March 31, 1998
Dividend Payments:
Monthly
1
<PAGE>
SEMIANNUAL REPORT
OUTLOOK
===============================================================================
[GRAPHIC} We believe the U.S. economy is slowing slightly due to the Asian
impact, though the effects will not show up in economic statistics for a while.
The Federal budget is now running a surplus, which should reduce government
borrowing and ease the upward pressure on market interest rates. We expect
U.S. economic growth to exceed 3% in 1998, with inflation just under 2%--a
positive environment for bonds.
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued
support and welcome any comments or questions you may have.
For a quarterly Fund Profile on the Investment Grade Municipal Income Fund
Inc. or other funds in the PaineWebber Family of Funds, please contact your
investment executive.
/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.
/S/ Cynthia N. Bow
CYNTHIA N. BOW
Vice President,
Mitchell Hutchins Asset Management Inc.
Portfolio Manager, Investment Grade
Municipal Income Fund Inc.
This letter is intended to assist shareholders in understanding how the
Fund performed during the six-month period ended March 31, 1998, and reflects
our views at the time we are writing this report. Of course, these views may
change in response to changing circumstances. We encourage you to consult your
investment executive regarding your personal investment program.
- ---------------
1 Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses,
and should be read carefully before investing.
INVESTMENT GRADE
MUNICIPAL INCOME
FUND INC.
Quality breakdown as
percent of portfolio assets,
March 31, 1998*
[GRAPHIC]
Cash Equivalents
BBB/Baa
A/A
AA/Aa
AAA/Aaa
*Allocations subject to change
2
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS MARCH 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
--------- ------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C>
Long-Term Municipal Bonds--96.97%
Alaska--2.83%
$6,540 Valdez Marine Terminal British Petroleum Company
Sohio Pipeline Project Aa2 AA 12/01/25 7.000% $ 7,207,930
-----------
California--1.47%
3,500 California Public Works Board
California State University Library Projects Series A
(Pre-refunded with U.S. Government Securities
to 09/01/00 @ 102) Aaa AAA 09/01/16 6.250 3,757,215
-----------
Colorado--3.38%
5,950 Arapahoe County Capital Improvement
Trust Fund Highway Revenue (Pre-refunded with
U.S. Government Securities to 08/31/05 @ 103) Aaa AA 08/31/26 7.000 7,074,074
1,500 Denver City & County
Excise Tax Revenue Bonds (MBIA Insured) Aaa AAA 09/01/14 6.500 1,550,730
-----------
8,624,804
-----------
Connecticut--3.62%
8,590 Connecticut Housing Finance Authority Series A & B Aa2 AA 05/15/14 6.200
to 11/15/23 to 6.750 9,232,885
Georgia--0.21%
500 Municipal Electric Authority of Georgia Series B A3 A 01/01/16 6.375 537,710
-----------
Illinois--12.62%
1,000 Illinois Educational Facilities Authority
Northwestern University (Pre-refunded with
U.S. Government Securities to 12/01/01 @ 102) A AA+ 12/01/21 6.900 1,110,430
1,890 Illinois Toll & Highway Authority Series A (FGIC Insured) Aaa AAA 01/01/16 6.200 2,050,537
2,650 University of Illinois Auxiliary Facilities Aa AA- 04/01/22 5.750 2,739,331
7,380 Chicago Gas Supply Revenue People's Gas Aa3 AA- 03/01/15 6.875 8,084,716
4,000 Chicago Water Works (Pre-refunded with
U.S. Government Securities to 11/15/99 @ 100) A1 AA- 11/15/19 6.000 4,137,600
250 Metropolitan Pier & Exposition Authority A2 A+ 06/15/27 6.500 273,013
11,350 Metropolitan Pier & Exposition Authority
(Pre-refunded with U.S. Government Securities to
06/15/03 @ 102) Aaa AA 06/15/27 6.500 12,737,764
1,000 Naperville Electric Revenue Aa A 05/01/12 5.700 1,061,730
-----------
32,195,121
-----------
Indiana--10.95%
5,320 Indiana Transportation Finance Authority
Airport Facilities Series A (Pre-refunded with
U.S. Government Securities to 11/01/02 @ 102) Aaa AA 11/01/16 6.250 5,853,436
1,430 Indiana Transportation Finance Authority
Airport Facilities Series A A1 A 11/01/16 6.250 1,541,640
6,000 Indianapolis Gas Utility Revenue Series A (FGIC Insured) Aaa AAA 06/01/23 6.200 6,478,080
2,000 Indianapolis Local Public Improvement Bond Bank Aa AA- 07/01/10 6.000 2,141,220
4,000 Marion County Hospital Authority
Methodist Hospital of Indiana Aa3 AAA 09/01/13 6.500 4,427,440
</TABLE>
3
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
--------- ------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C>
Long-Term Municipal Bonds (continued)
Indiana (concluded)
$5,725 Petersburg County Pollution Control Revenue
Indianapolis Power & Light Company Aa2 AA- 12/01/24 6.625% $ 6,332,251
1,000 Purdue University Series B (Pre-refunded with
U.S. Government Securities to 01/01/05 @ 103) Aa2 AA- 07/01/15 6.700 1,156,620
-----------
27,930,687
Kentucky--3.32%
7,750 Boone County Pollution Control Revenue
Dayton Power & Light Company Aa3 AA- 11/15/22 6.500 8,468,425
-----------
8,500 Massachusetts Bay Transportation Authority Series C
(Pre-refunded with U.S. Government
Securities to 03/01/02 @ 102) A1 A 03/01/23 6.100 9,218,590
6,000 Massachusetts Water Resources Authority Series A
(Pre-refunded with U.S. Government
Securities to 07/15/02 @ 102) Aaa AAA 07/15/21 6.500 6,653,940
2,750 Massachusetts Water Resources Authority Series A
(Pre-refunded with U.S. Government
Securities to 12/01/01 @ 102) Aaa AAA 12/01/19 6.500 3,021,755
-----------
18,894,285
-----------
Nevada--2.89%
6,750 Clark County Pollution Control Revenue
Nevada Power Company (FGIC Insured) Aaa AAA 06/01/19 6.600 7,381,193
-----------
New York--12.42%
695 New York City General Obligation
Subseries C-1 & Series H A3 BBB+ 02/01/16 7.000 761,309
to 08/01/17
4,400 New York City General Obligation Series H
(Pre-refunded with U.S. Government Securities to
02/01/02 @ 101 1/2) Ba BBB+ 02/01/16 7.000 4,887,960
1,055 New York City General Obligation Subseries C-1
(Pre-refunded with U.S. Government Securities to
08/01/02 @ 101 1/2) Aaa BBB+ 08/01/17 7.000 1,187,634
6,000 New York State Local Government Assistance Corporation
Series B (Pre-refunded with U.S.
Government Securities to 04/01/02 @ 102) Aaa A+ 04/01/21 6.250 6,573,480
5,350 New York State Local Government Assistance
Corporation Series D (Pre-refunded with
U.S. Government Securities to 04/01/02 @ 102) Aaa AAA 04/01/21 6.750 5,959,151
1,500 New York State Medical Care Facilities
Hospital & Nursing Homes (FHA Insured) Aa AAA 02/15/31 6.600 1,638,390
8,695 New York City Municipal Water Finance Authority
Water & Sewer System Series A A2 A- 06/15/17 6.000 9,204,157
to 06/15/21 to 6.250
1,375 New York City Municipal Water Finance Authority
Water & Sewer System Series A (Pre-refunded with
U.S. Government Securities to 06/15/01 @ 100) A2 A- 06/15/21 6.250 1,464,086
-----------
31,676,167
-----------
</TABLE>
4
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
--------- ------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C>
Long-Term Municipal Bonds (continued)
North Carolina--2.18%
$2,700 North Carolina Eastern Municipal Power Agency Series A Baa1 BBB 01/01/21 6.400% $ 2,855,439
2,550 North Carolina Municipal Power Agency
Catawba Electric Revenue A3 A- 01/01/17 6.250 2,699,048
-----------
5,554,487
-----------
Pennsylvania--0.99%
2,500 Pennsylvania Turnpike Commission
Turnpike Revenue Series N (FGIC Insured) Aaa AAA 12/01/19 5.500 2,533,700
-----------
Rhode Island--2.55%
6,175 Rhode Island Housing Finance Authority
Homeownership Opportunity Series 10-A Aa2 AA+ 04/01/27 6.500 6,512,093
-----------
South Carolina--4.89%
5,035 South Carolina Public Service Authority Santee Cooper
Series D (Pre-refunded with U.S.
Government Securities to 07/01/02 @ 102) Aaa AAA 07/01/31 6.625 5,604,307
6,290 Richland County Pollution Control Revenue
Union Camp Corporation Project Series C A1 A- 11/01/20 6.550 6,852,578
-----------
12,456,885
-----------
Texas--13.31%
5,000 Texas Health Facilities Development Corporation
All Saints Episcopal Hospital (MBIA Insured) Aaa AAA 08/15/22 6.250 5,461,750
4,000 Coastal Bend Health Facilities
Incarnate Word Health Services (AMBAC Insured) Aaa AAA 01/01/17 6.300 4,347,720
4,750 Harris County Subordinated Lien Revenue Aa2 AA 08/01/14 6.750 5,182,107
915 Harris County Toll Road Authority Senior Lien
(AMBAC Insured) Aaa AAA 08/15/17 6.500 1,003,819
1,000 Houston Water & Sewer System Series B
(Pre-refunded with U.S. Government Securities to
12/01/02 @ 102) A A 12/01/14 6.375 1,087,500
6,575 Houston Water & Sewer System Series C
(Pre-refunded with U.S. Government Securities to
12/01/01 @ 102) (AMBAC Insured) Aaa AAA 12/01/17 6.375 7,093,523
2,350 Port Corpus Christi Industrial Development Revenue
Valero Energy Corporation Series C Baa3 BBB- 04/01/18 5.400 2,351,857
6,750 Sabine River Authority Pollution Control Revenue
Texas Utilities Electric Company (FGIC Insured) Aaa AAA 10/01/22 6.550 7,404,075
-----------
33,932,351
-----------
Virginia--4.38%
4,500 Virginia Beach Development Authority
Sentara Bayside Hospital Aa2 AA 11/01/21 6.300 4,841,820
5,815 Virginia Transportation Board Revenue
Route 28 Project Aa AA 04/01/18 6.500 6,333,756
-----------
11,175,576
-----------
</TABLE>
5
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
--------- ------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C>
Long-Term Municipal Bonds (concluded)
Washington--4.70%
$6,625 Metropolitan Seattle Sewer Series T
(Pre-refunded with U.S. Government Securities to
01/01/00 @ 102) Aaa AA- 01/01/31 6.875% $ 7,084,444
4,500 Metropolitan Seattle Sewer Series W (MBIA Insured) Aaa AAA 01/01/33 6.300 4,891,185
------------
11,975,629
------------
Wisconsin--2.85%
6,750 Wisconsin Health and Educational Facilities
Authority-Sisters of Sorrowful Mother Health
Care System (MBIA Insured) Aaa AAA 06/01/20 6.250 7,273,800
------------
Total Long-Term Municipal Bonds (cost--$226,493,490) 247,320,943
------------
Short-Term Municipal Notes--1.53%
Arizona--0.04%
100 Maricopa County Pollution Control Revenue
Public Service Company P1 A1+ 04/01/98 3.800* 100,000
------------
Florida--0.35%
700 Dade County Water & Sewer System Revenue VMIG1 AAA 04/01/98 3.650* 700,000
200 Hillsborough County Pollution Control Revenue VMIG1 A1+ 04/01/98 3.800* 200,000
------------
900,000
------------
Louisiana--0.04%
100 Louisiana State Offshore Terminal Revenue VMIG1 A1+ 04/01/98 3.750* 100,000
------------
New York--0.47%
200 New York City Subseries A-8 VMIG1 A1+ 04/01/98 3.850* 200,000
100 New York City Subseries B-2 (MBIA Insured) VMIG1 A1+ 04/01/98 3.850* 100,000
200 New York City Subseries B-3 VMIG1 A1+ 04/01/98 3.800* 200,000
200 New York City Subseries B-3 (MBIA Insured) VMIG1 A1+ 04/01/98 3.850* 200,000
100 New York City Subseries B-4 VMIG1 A1+ 04/01/98 3.800* 100,000
400 New York City Subseries E-4 VMIG1 A1+ 04/01/98 3.850* 400,000
------------
1,200,000
------------
Wyoming--0.63%
1,600 Lincoln County Pollution Control Revenue
(Exxon Project) P1 A1+ 04/01/98 3.850* 1,600,000
------------
Total Short-Term Municipal Notes (cost--$3,900,000) 3,900,000
------------
Total Investments (cost--$230,393,490)--98.50% 251,220,943
Other assets in excess of liabilities--1.50% 3,831,423
------------
Net Assets--100.00% $255,052,366
------------
------------
</TABLE>
- ---------------
* Variable rate demand notes are payable on demand. The maturity dates
shown are the next interest rate reset dates. The interest rates shown
are the current rates as of March 31, 1998.
AMBAC--American Municipal Bond Assurance Corporation
FGIC--Financial Guaranty Insurance Company
FHA--Federal Housing Authority
MBIA--Municipal Bond Investors Assurance
See accompanying notes to financial statements
6
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1998 (unaudited)
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost--$230,393,490) $251,220,943
Cash 12,278
Interest receivable 4,267,876
Other assets 5,246
------------
Total assets 255,506,343
------------
Liabilities
Dividends payable to preferred shareholders 179,124
Payable to investment adviser and administrator 168,043
Accrued expenses and other liabilities 106,810
------------
Total liabilities 453,977
------------
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
------------
Common Stock--$0.001 par value; total authorized shares--199,998,400;
10,356,667 shares issued and outstanding 153,674,140
Undistributed net investment income 894,651
Accumulated net realized loss from investment transactions (343,878)
Net unrealized appreciation of investments 20,827,453
------------
Net assets applicable to common shareholders 175,052,366
------------
Total net assets $255,052,366
------------
------------
Net asset value per common share ($175,052,366 applicable to 10,356,667 common shares outstanding) $16.90
======
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months
Ended
March 31, 1998
(unaudited)
<S> <C>
Investment income:
Interest $7,375,633
----------
Expenses:
Investment advisory and administration 1,144,383
Auction Preferred Shares expenses 96,405
Custody and accounting 77,579
Legal and audit 26,371
Reports and notices to shareholders 25,346
Transfer agency and service fees 15,060
Directors' fees 5,250
Amortization of organizational expenses 3,898
Other expenses 8,675
----------
1,402,967
Less: Fee waivers from adviser (158,942)
----------
Net expenses 1,244,025
----------
Net investment income 6,131,608
----------
Realized and unrealized gains from investment activities:
Net realized gains from investment transactions --
Net change in unrealized appreciation/depreciation of investments 1,211,155
----------
Net realized and unrealized gain from investment activities 1,211,155
----------
Net increase in net assets resulting from operations $7,342,763
----------
----------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the
Six Months
Ended For the Year
March 31, 1998 Ended
(unaudited) September 30, 1997
<S> <C> <C>
From operations:
Net investment income $ 6,131,608 $12,320,828
Net realized gain from investment transactions -- 106,492
Net change in unrealized appreciation/depreciation of investments 1,211,155 6,678,013
------------ ------------
Net increase in net assets resulting from operations 7,342,763 19,105,333
------------ ------------
Dividends to shareholders from:
Net investment income--common stockholders (4,660,500) (9,321,000)
Net investment income--preferred stockholders (1,396,439) (2,821,607)
------------ ------------
Total dividends to stockholders (6,056,939) (12,142,607)
------------ ------------
Net increase in net assets 1,285,824 6,962,726
Net assets:
Beginning of period 253,766,542 246,803,816
------------ ------------
End of period (including undistributed net investment
income of $894,651 and $819,982, respectively) $255,052,366 $253,766,542
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended
March 31, 1998
(unaudited)
------------------
<S> <C>
Cash flows provided (used) by operating activities:
Interest received $ 7,299,194
Expenses paid (net of fee waivers) (1,348,434)
Sale of short-term portfolio investments, net 5,900,000
Purchase of long-term portfolio investments (5,966,640)
-----------
Net cash provided by operating activities 5,884,120
-----------
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 (1,271,564)
-----------
Net cash used for financing activities (5,932,064)
-----------
Net decrease in cash (47,944)
Cash at beginning of period 60,222
-----------
Cash at end of period $ 12,278
-----------
-----------
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 $7,342,763
-----------
Increase in investments, at value (1,287,564)
Increase in interest receivable (66,670)
Amortization of deferred organizational expenses 3,898
Increase in other assets (5,246)
Increase in payable to investment adviser and administrator 6,820
Decrease in accrued expenses and other liabilities (109,881)
-----------
Total adjustments (1,458,643)
-----------
Net cash provided by operating activities $5,884,120
-----------
-----------
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Investment Grade Municipal 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.
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. The following is
a summary of significant accounting policies:
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 asset management
subsidiary of PaineWebber Incorporated and 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 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.
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
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
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,
1998, Mitchell Hutchins voluntarily waived $158,942 in investment advisory and
administration fees from the Fund.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at March 31,
1998 was substantially the same as the cost of securities for financial
statement purposes.
At March 31, 1998, 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) $20,847,474
Gross depreciation (from investments having an excess of cost over value) (20,021)
-----------
Net unrealized appreciation of investments $20,827,453
===========
</TABLE>
For the six months ended March 31, 1998, total aggregate purchases and
sales of portfolio securities, excluding short-term securities, were
$5,966,640 and $0, respectively.
FEDERAL TAX STATUS
The Fund intends to distribute substantially all of its tax-exempt income
and any taxable income and to comply with the 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, 1997, the Fund had a net capital loss carryforward of
$343,878 available as a reduction, to the extent provided in the regulations,
of future net realized capital gains, and will expire by September 30, 2004.
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.
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, 7,775 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 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 3.31% to
3.85% for the six months ended March 31, 1998.
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, unless otherwise required
by law, 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.
12
<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 For the Period
Six Months November 6,
Ended 1992+
March 31, For the Years Ended through
1998 September 30, September 30,
(unaudited) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $16.78 $ 16.11 $15.73 $ 14.72 $17.04 $ 15.00
------ ------- ------ ------- ------ -------
Net investment income 0.59 1.19 1.21 1.18 1.17 0.94
Net realized and unrealized gains (losses)
from investments 0.11 0.65 0.35 1.03 (2.28) 2.13
------ ------- ------ ------- ------ -------
Net increase (decrease) from investment
operations 0.70 1.84 1.56 2.21 (1.11) 3.07
------ ------- ------ ------- ------ -------
Dividends from net investment income:
Common stockholders (0.45) (0.90) (0.90) (0.90) (0.98) (0.73)
Common share equivalent of dividends paid to
preferred stockholders (0.13) (0.27) (0.28) (0.30) (0.21) (0.14)
Distributions from net realized gains from
investment transactions -- -- -- -- (0.02) --
------ ------- ------ ------- ------ -------
Total dividends and distributions to
stockholders (0.58) (1.17) (1.18) (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 $16.90 $ 16.78 $16.11 $ 15.73 $14.72 $ 17.04
------ ------- ------ ------- ------ -------
------ ------- ------ ------- ------ -------
Per share market value, end of period $15.06 $ 15.06 $13.63 $ 13.00 $12.38 $ 15.63
------ ------- ------ ------- ------ -------
------ ------- ------ ------- ------ -------
Total investment return (1) 2.97% 17.76% 12.03% 12.63% (15.21)% 9.10%
------ ------- ------ ------- ------ -------
------ ------- ------ ------- ------ -------
Ratios to average net assets attributable
to common shares:
Total expenses, net of waivers from adviser 1.43%* 1.44% 1.34% 1.69% 1.70% 1.55%*
Total expenses, before waivers from adviser 1.61%* 1.77% 1.71% 1.82% 1.70% 1.55%*
Net investment income before preferred stock
dividends 7.03%* 7.27% 7.61% 7.87% 7.32% 6.55%*
Preferred stock dividends 1.60%* 1.66% 1.73% 2.02% 1.33% 0.95%*
Net investment income available to common
stockholders 5.43%* 5.61% 5.88% 5.85% 5.99% 5.60%*
Supplemental data:
Net assets, end of period (000's) $255,052 $253,767 $246,804 $242,906 $232,406 $256,466
Portfolio turnover rate 0% 3% 0% 7% 0% 6%
Asset coverage per share of preferred stock,
end of period $159,408 $158,604 $154,252 $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 stockholders
at prices obtained under the Fund's Dividend Reinvestment Plan. Total
investment return for periods of less than one year has not been
annualized. Total investment return does not reflect brokerage
commissions.
13
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION
THE FUND
Investment Grade Municipal Income Fund Inc. (the "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 asset
management subsidiary of PaineWebber Incorporated, which has over $52 billion
in assets under management as of April 30, 1998.
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 in 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. The ability of such stockholders to participate in the Plan may change
if their shares are transferred into the name of another broker or nominee.
A stockholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and stockholders who
have previously terminated participation in the Plan may rejoin it at any
time. Changes in elections must be made in writing to the Fund's transfer
agent and should include the stockholder's name and address as they appear on
that share certificate or in the transfer agent's records. An election to
terminate participation in the Plan, until such election is changed, will be
deemed an election by a stockholder to take all subsequent distributions in
cash. An election will be effective only for distributions declared and having
a record date at least ten days after the date on which the election is
received.
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 number of shares of common stock purchased with each dividend will be
equal to the result obtained by dividing the amount of the dividend payable to
a particular stockholder by the average price per share (including applicable
brokerage commissions) that the transfer agent was able to obtain in the open
market. The Fund will not issue any new shares of common stock in connection
with the Plan. There is no charge to participants for reinvesting dividends or
other distributions. The transfer agent's fees for handling the reinvestment
of distributions will be paid by the Fund. However, each participant pays a
pro rata share of brokerage commissions incurred with respect to the transfer
agent's open market purchases of common stock in connection with the
reinvestment of distributions. The automatic reinvestment of dividends and
other distributions in shares of common stock does not relieve participants of
any income tax that may be payable on such distributions.
Additional information regarding the Plan may be obtained from, and all
correspondence concerning the Plan should be directed to, the transfer agent
at PNC Bank, National Association, c/o PFPC Inc., P.O. Box 8950, Wilmington,
Delaware 19899.
14
<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
PRINCIPAL OFFICERS
Margo N. Alexander
President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Dennis L. McCauley
Vice President
Paul H. Schubert
Vice President and Treasurer
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
The financial information included herein is taken from the records of the
Fund without examination by independent auditors who do not express an opinion
thereon.
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 shares of its
common stock in the open market at market prices.
This report is sent to the shareholders of the Fund for their information. It
is not a prospectus, circular or representation intended for the use in the
purchase or sale of shares of the Fund or of any securities mentioned in this
report.
<PAGE>
SEMIANNUAL REPORT
INVESTMENT
GRADE MUNICIPAL
INCOME FUND INC.
MARCH 31, 1998
PaineWebber
(Copyright) 1998 PaineWebber Incorporated
Member SIPC
