<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC. SEMIANNUAL REPORT
May 20, 1999
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, 1999.
MARKET REVIEW
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
The crisis in Russia last August and fears of it spreading to Latin America
heightened investors' aversion to credit risk and prompted them to sell other
securities in favor of U.S. Treasurys. The "flight to quality" ultimately drove
U.S. Treasury bond yields to a low of 4.70% in October. To fend off a
threatening global financial crisis, the Federal Reserve cut the short-term
interest rate by 0.25% three times in as many months, lowering it from 5.50% to
4.75%. As the bond markets began to stabilize, investors returned to them in
search of bargains.
Long-term interest rates remained in the low 5% range until early February
1999, when Federal Reserve Chairman Alan Greenspan expressed an inclination to
restrain economic policy and confessed that he might have overdone interest-rate
cuts during the fall crisis. This surprised market participants, and the yield
on the 30-year Treasury bond rose by about one-half of a percentage point in
response. Economic growth and inflation held steady, however, so investors had
no real cause for concern.
As Treasury yields rose in February, municipal bonds strongly outperformed
taxable bonds, reversing their underperformance throughout 1998. Long-term
AAA-rated municipal bonds finished the fiscal year yielding about 84% of
comparable U.S. Treasurys--close to their historical average. At year-end 1998,
municipal bonds yielded about 97% of U.S. Treasurys. As rates rose,
municipalities delayed their financing, further decreasing supply and resulting
in significant municipal bond outperformance.
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Performance--For the six-month period ended March 31, 1999, the Fund (symbol:
PPM) returned 1.36% based on changes in the Fund's net asset value (assuming,
for illustration only, that dividends were reinvested at the net asset value on
the payable dates) and 2.46% based on changes in its share price on the New York
Stock Exchange (assuming dividends were reinvested under the Dividend
Reinvestment Plan).
At March 31, 1999, the Fund's net asset value per share was $16.87, while its
share price on the New York Stock Exchange was $15.88. During the six-month
period ended March 31, 1999, the Fund paid dividends to common stockholders from
net investment income totaling $0.45 per share, or $0.075 per share per month.
Based on the dividend paid in March and the Fund's market price on March 31,
1999, the Fund's annualized market yield was 5.67%.
Highlights--During the period we sold some pre-refunded holdings and replaced
them with longer-maturity securities to maintain our duration (interest-rate
exposure) targets. Portfolio additions during the period included Massachusetts
Water (0.8%), Philadelphia School District (1.1%) and New York City (0.6%).*
Each bond purchased represents an attractive structure that provides convexity,
that is, greater potential for total return, and above average-yield for its
duration risk.
* Weightings represent percentages of portfolio assets as of March 31, 1999. The
Fund's portfolio is actively managed and its composition will vary over time.
INVESTMENT GRADE
MUNICIPAL
INCOME FUND INC.
Top Five Sectors*
Power 17.1%
----------
Water 15.5%
--------
Healthcare 11.1%
------
General
Obligations 11.1%
------
Sales Tax 7.4%
----
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:
$254.7 million as of March 31, 1999
Dividend Payments:
Monthly
1
<PAGE>
SEMIANNUAL REPORT
INVESTMENT GRADE
MUNICIPAL
INCOME FUND INC.
Credit Quality*
[GRAPHIC OMITTED]
OUTLOOK
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Concerns about the domestic economy and inflation have reemerged recently.
Though we continue to look for swap opportunities to achieve our duration
targets, we have become more cautious and expect to target a more moderate level
of interest rate risk than we would have six months ago. Municipal issuance was
moderate during the last reporting period. We do not expect it to change
dramatically in the next period, and believe that municipal bonds will stay
within their current trading range in relation to taxable 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 Review on
Investment Grade Municipal Income Fund Inc. or a fund in the PaineWebber Family
of Funds,/1 please contact your Financial Advisor.
Sincerely,
/s/ Margo Alexander
- ---------------------------------------------
Margo Alexander
Chairman and Chief Executive Officer
Mitchell Hutchins Asset Management Inc.
/s/ Brian M. Storms
- ---------------------------------------------
Brian M. Storms
President and Chief Operating Officer
Mitchell Hutchins Asset Management Inc.
/s/ Elbridge T. Gerry, III
- ---------------------------------------------
Elbridge T. Gerry, III
Senior Vice President
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, 1999, and reflects our
views at the time of its writing. Of course, these views may change in response
to changing circumstances. We encourage you to consult your Financial Advisor
regarding your personal investment program.
- --------------
*Weightings represent percentages of portfolio assets as of March 31, 1999.
The Fund's portfolio is actively managed and its composition will vary over
time.
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.
2
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (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--97.96%
Alaska--2.80%
$ 6,540 Valdez Marine Terminal British Petroleum Company
Sohio Pipeline Project................................... Aa2 AA+ 12/01/25 7.000% $ 7,131,216
------------
California--2.64%
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 3,717,700
3,000 California Statewide Communities Development Authority
Irvine Apartment Communities Series A-3.................. Baa2 BBB 05/17/10 5.100+ 2,997,300
------------
6,715,000
------------
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 NR 08/31/26 7.000 7,093,352
1,500 Denver City & County
Excise Tax Revenue Bonds (MBIA Insured).................. Aaa AAA 09/01/14 6.500 1,519,650
------------
8,613,002
------------
Connecticut--3.66%
8,590 Connecticut Housing Finance Authority Series A & B......... Aa3 AA 05/15/14 to 6.200 to
11/15/23 6.750 9,322,878
------------
Georgia--0.21%
500 Municipal Electric Authority of Georgia Series B........... A3 A 01/01/16 6.375 537,380
------------
Illinois--11.02%
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 1,101,930
1,890 Illinois Toll & Highway Authority Series A (FGIC Insured).. Aaa AAA 01/01/16 6.200 2,079,832
2,650 University of Illinois Auxiliary Facilities................ Aa3 AA- 04/01/22 5.750 2,780,963
7,380 Chicago Gas Supply Revenue People's Gas.................... Aa3 AA- 03/01/15 6.875 8,025,750
250 Metropolitan Pier & Exposition Authority................... A1 AA- 06/15/27 6.500 273,090
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 12,723,690
1,000 Naperville Electric Revenue................................ Aa2 NR 05/01/12 5.700 1,072,180
------------
28,057,435
------------
</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--10.93%
$ 1,430 Indiana Transportation Finance Authority
Airport Facilities Series A.............................. A1 A 11/01/16 6.250% $ 1,542,713
5,320 Indiana Transportation Finance Authority
Airport Facilities Series A (Pre-refunded with
U.S. Government Securities to 11/01/02 @ 102)........... Aaa A 11/01/16 6.250 5,858,809
6,000 Indianapolis Gas Utility Revenue Series A
(Pre-refunded with U.S. Government Securities
to 06/01/02 @ 102) (FGIC Insured)........................ Aaa AAA 06/01/23 6.200 6,545,160
2,000 Indianapolis Local Public Improvement Bond Bank............ Aa AA- 07/01/10 6.000 2,181,180
4,000 Marion County Hospital Authority
Methodist Hospital of Indiana (Escrowed to maturity)..... Aa3 AAA 09/01/13 6.500 4,134,800
5,725 Petersburg County Pollution Control Revenue
Indianapolis Power & Light Company....................... Aa2 AA- 12/01/24 6.625 6,422,191
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 1,156,780
------------
27,841,633
------------
Kentucky--3.31%
7,750 Boone County Pollution Control Revenue
Dayton Power & Light Company............................. Aa3 AA- 11/15/22 6.500 8,440,448
------------
Massachusetts--8.21%
8,500 Massachusetts Bay Transportation Authority Series C
(Pre-refunded with U.S. Government Securities to
03/01/02 @ 102).......................................... Aa3 AA- 03/01/23 6.100 9,190,115
2,000 Massachusetts Water Pollution Abatement Series A........... Aa1 AA 08/01/16 5.375 2,088,800
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 3,003,632
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 6,623,700
------------
20,906,247
------------
Nevada--2.89%
6,750 Clark County Pollution Control Revenue
Nevada Power Company (FGIC Insured)...................... Aaa AAA 06/01/19 6.600 7,354,058
------------
</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)
New York--13.39%
$ 35 New York City General Obligation
Subseries C-1 & Series H................................. A3 A- 08/01/17 7.000% $ 38,531
600 New York City General Obligation Series H.................. A3 A- 02/01/16 7.000 653,232
4,400 New York City General Obligation Series H
(Pre-refunded with U.S. Government Securities to
02/01/02 @ 101 1/2)..................................... NR A- 02/01/16 7.000 4,842,244
1,500 New York City General Obligation Series J
(MBIA Insured)........................................... Aaa AAA 08/01/13 5.375 1,577,280
1,115 New York City General Obligation Subseries C-1
(Pre-refunded with U.S. Government Securities to
08/01/02 @ 101 1/2)...................................... Aaa A- 08/01/17 7.000 1,244,117
1,000 New York State Dormitory Authority Revenue Series 2
2nd City University Series 2............................. Baa1 BBB+ 07/01/28 5.000 958,440
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 6,541,800
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 5,908,433
1,500 New York State Medical Care Facilities
Hospital & Nursing Homes (FHA Insured)................... NR AAA 02/15/31 6.600 1,627,005
8,695 New York City Municipal Water Finance Authority
Water & Sewer System Series A............................ A1 A 06/15/17 to 6.000 to 9,257,087
06/15/21 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)............ Aaa A 06/15/21 6.250 1,453,595
------------
34,101,764
------------
North Carolina--2.20%
2,700 North Carolina Eastern Municipal Power Agency
Series A................................................. Baa1 BBB 01/01/21 6.400 2,849,580
1,630 North Carolina Municipal Power Agency
Catawba Electric Revenue................................. A3 A- 01/01/17 6.250 1,737,955
920 North Carolina Municipal Power Agency
Catawba Electric Revenue (Pre-refunded with
U.S. Government Securities to 01/01/03 @ 102)............ A3 A- 01/01/17 6.250 1,013,316
------------
5,600,851
------------
Pennsylvania--2.08%
2,500 Pennsylvania State Turnpike Commission
Turnpike Revenue Series N (FGIC Insured)................. Aaa AAA 12/01/19 5.500 2,556,950
2,680 Philadelphia School District Series A (MBIA Insured)....... Aaa AAA 04/01/15 5.250 2,751,315
------------
5,308,265
------------
</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 (continued)
Rhode Island--2.55%
$ 6,175 Rhode Island Housing Finance Authority
Homeownership Opportunity Series 10-A................... Aa2 AA+ 04/01/27 6.500% $ 6,501,596
------------
South Carolina--4.88%
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 5,571,127
6,290 Richland County Pollution Control Revenue
Union Camp Corporation Project Series C.................. A1 A- 11/01/20 6.550 6,852,137
------------
12,423,264
------------
Texas--13.12%
5,000 Texas Health Facilities Development Corporation
All Saints Episcopal Hospital (MBIA Insured)............. Aaa AAA 08/15/22 6.250 5,478,100
4,000 Coastal Bend Health Facilities
Incarnate Word Health System (AMBAC Insured)............. Aaa AAA 01/01/17 6.300 4,349,480
4,750 Harris County Subordinated Lien Revenue.................... Aa2 AA 08/01/14 6.750 5,143,537
915 Harris County Toll Road Authority Senior Lien
(AMBAC Insured).......................................... Aaa AAA 08/15/17 6.500 1,000,928
1,000 Houston Water & Sewer System Series B
(Pre-refunded with U.S. Government
Securities to 12/01/01 @ 102)............................ A3 A 12/01/14 6.375 1,083,540
6,180 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 6,651,040
2,350 Port Corpus Christi Industrial Development Revenue
Valero Energy Corporation Series C....................... Baa3 BBB- 04/01/18 5.400 2,317,076
6,750 Sabine River Authority Pollution Control Revenue
Texas Utilities Electric Company (FGIC Insured).......... Aaa AAA 10/01/22 6.550 7,389,630
------------
33,413,331
------------
Virginia--4.39%
4,500 Virginia Beach Development Authority
Sentara Bayside Hospital................................. Aa2 AA 11/01/21 6.300 4,872,915
5,815 Virginia Transportation Board Revenue
Route 28 Project......................................... Aa AA 04/01/18 6.500 6,308,170
------------
11,181,085
------------
Washington--3.44%
3,625 Metropolitan Seattle Sewer Series T
(Pre-refunded with U.S. Government Securities to
01/01/00 @ 102).......................................... Aaa AA- 01/01/31 6.875 3,795,991
4,500 Metropolitan Seattle Sewer Series W (MBIA Insured)......... Aaa AAA 01/01/33 6.300 4,967,595
------------
8,763,586
------------
</TABLE>
6
<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)
Wisconsin--2.86%
$ 6,750 Wisconsin Health and Educational Facilities
Authority--Sisters of Sorrowful Mother Health
Care System (MBIA Insured)............................... Aaa AAA 06/01/20 6.250% $ 7,274,205
------------
Total Long-Term Municipal Bonds (cost--$229,679,498)................ 249,487,244
------------
SHORT-TERM MUNICIPAL NOTES--0.51%
Georgia--0.39%
1,000 Burke County Development Authority
Pollution Control Revenue Georgia Power Company.......... VMIG1 A-1 04/01/99 3.300* 1,000,000
------------
New York--0.12%
300 New York City Series B Subseries B-7 (AMBAC Insured)....... VMIG1 A-1+ 04/01/99 3.300* 300,000
------------
Total Short-Term Municipal Notes (cost--$1,300,000)................. 1,300,000
------------
Total Investments (cost--$230,979,498)--98.47%...................... 250,787,244
Other assets in excess of liabilities--1.53%........................ 3,897,715
------------
Net Assets--100.00%................................................. $254,684,959
============
</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, 1999.
+ Variable rate demand note is payable on demand. The interest rate shown is the
current rate at March 31, 1999. The maturity date reflects the earliest date
bond can be put back to issuer.
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.
7
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999 (unaudited)
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost--$230,979,498) ......................................... $250,787,244
Cash ............................................................................................. 6,157
Interest receivable .............................................................................. 4,301,530
Other assets ..................................................................................... 4,387
------------
Total assets ..................................................................................... 255,099,318
------------
Liabilities
Dividends payable to preferred shareholders ...................................................... 176,168
Payable to investment adviser and administrator .................................................. 167,908
Accrued expenses and other liabilities ........................................................... 70,283
------------
Total liabilities ................................................................................ 414,359
------------
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 .............................................................. 1,085,264
Accumulated net realized gain from investment transactions ....................................... 117,809
Net unrealized appreciation of investments ....................................................... 19,807,746
------------
Net assets applicable to common shareholders ..................................................... 174,684,959
------------
Total net assets ................................................................................. $254,684,959
============
Net asset value per common share ($174,684,959 applicable to 10,356,667 common shares
outstanding)................................................................................... $ 16.87
============
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months
Ended
March 31, 1999
(unaudited)
------------------
<S> <C>
Investment income:
Interest ........................................................... $ 7,420,499
-----------
Expenses:
Investment advisory and administration ............................. 1,149,221
Auction Preferred Shares expenses .................................. 147,320
Custody and accounting ............................................. 77,615
Legal and audit .................................................... 39,836
Reports and notices to shareholders ................................ 32,470
Transfer agency fees ............................................... 18,028
Directors' fees .................................................... 5,250
Other expenses ..................................................... 10,011
-----------
1,479,751
Less: Fee waivers from adviser ..................................... (159,613)
-----------
Net expenses ....................................................... 1,320,138
-----------
Net investment income .............................................. 6,100,361
-----------
Realized and unrealized gains (losses) from investment activities:
Net realized gain from investment transactions .................. 461,687
Net change in unrealized appreciation/depreciation of
investments.................................................... (2,889,406)
-----------
Net realized and unrealized loss from investment activities ........ (2,427,719)
-----------
Net increase in net assets resulting from operations ............... $ 3,672,642
===========
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six Months
Ended For the Year
March 31,1999 Ended
(unaudited) September 30, 1998
------------------ ------------------
<S> <C> <C>
From operations:
Net investment income ........................................... $ 6,100,361 $ 12,294,764
Net realized gain from investment transactions .................. 461,687 --
Net change in unrealized appreciation/depreciation of
investments.................................................... (2,889,406) 3,080,854
------------- -------------
Net increase in net assets resulting from operations ............ 3,672,642 15,375,618
------------- -------------
Dividends to stockholders from:
Net investment income--common stockholders ...................... (4,660,500) (9,321,000)
Net investment income--preferred stockholders ................... (1,309,733) (2,838,610)
------------- -------------
Total dividends to stockholders ................................. (5,970,233) (12,159,610)
------------- -------------
Net increase (decrease) in net assets ........................... (2,297,591) 3,216,008
Net assets:
Beginning of period ............................................. 256,982,550 253,766,542
------------- -------------
End of period (including undistributed net investment income
of $1,085,264 and $955,136, respectively) ...................... $ 254,684,959 $ 256,982,550
============= =============
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended
March 31, 1999
(unaudited)
------------------
<S> <C>
Cash flows provided (used) by operating activities:
Interest received ........................................................... $ 7,490,292
Expenses paid (net of fee waivers) .......................................... (1,552,495)
Purchase of short-term portfolio investments, net ........................... (1,300,000)
Purchase of long-term portfolio investments ................................. (6,453,925)
Sale of long-term portfolio investments ..................................... 7,692,525
-----------
Net cash provided by operating activities ................................... 5,876,397
-----------
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 ......... (1,209,740)
-----------
Net cash used for financing activities ...................................... (5,870,240)
-----------
Net increase in cash ........................................................ 6,157
Cash at beginning of period ................................................. --
-----------
Cash at end of period ....................................................... $ 6,157
-----------
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 ........................ $ 3,672,642
-----------
Decrease in investments, at value ........................................... 2,361,316
Decrease in interest receivable ............................................. 74,796
Increase in other assets .................................................... (4,043)
Increase in payable to investment adviser and administrator ................. 4,827
Decrease in accrued expenses and other liabilities .......................... (233,141)
-----------
Total adjustments ........................................................... 2,203,755
-----------
Net cash provided by operating activities ................................... $ 5,876,397
===========
</TABLE>
See accompanying notes to financial statements
11
<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.
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.
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, 1999, Mitchell Hutchins voluntarily waived $159,613 in investment advisory
and administration fees from the Fund.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at March 31,
1999 was substantially the same as the cost of securities for financial
statement purposes.
At March 31,1999, 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).............. $19,883,648
Gross depreciation (from investments having an excess of cost over value).............. (75,902)
-----------
Net unrealized appreciation of investments............................................. $19,807,746
===========
</TABLE>
For the six months ended March 31, 1999, total aggregate purchases and sales
of portfolio securities, excluding short-term securities, were $6,453,925 and
$7,692,525, 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, 1998, 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, 8,235 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 3 months for APS Series B. Dividend rates ranged from 3.00% to
3.55% for the six months ended March 31, 1999.
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.
13
<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
Six Months
Ended
March 31, For the Years Ended September 30,
1999 ------------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.......................... $ 17.09 $ 16.78 $ 16.11 $ 15.73 $ 14.72 $ 17.04
-------- -------- -------- -------- -------- --------
Net investment income......................................... 0.59 1.19 1.19 1.21 1.18 1.17
Net realized and unrealized gains (losses) from investments... (0.23) 0.29 0.65 0.35 1.03 (2.28)
-------- -------- -------- -------- -------- --------
Net increase (decrease) from investment operations............ 0.36 1.48 1.84 1.56 2.21 (1.11)
-------- -------- -------- -------- -------- --------
Dividends from net investment income:
Common stockholders......................................... (0.45) (0.90) (0.90) (0.90) (0.90) (0.98)
Common share equivalent of dividends paid to preferred
stockholders.............................................. (0.13) (0.27) (0.27) (0.28) (0.30) (0.21)
Distributions from net realized gains from investment
transactions.............................................. -- -- -- -- -- (0.02)
-------- -------- -------- -------- -------- --------
Total dividends and distributions to stockholders............. (0.58) (1.17) (1.17) (1.18) (1.20) (1.21)
-------- -------- -------- -------- -------- --------
Net asset value, end of period................................ $ 16.87 $ 17.09 $ 16.78 $ 16.11 $ 15.73 $ 14.72
======== ======== ======== ======== ======== ========
Market value, end of period................................... $ 15.88 $ 15.94 $ 15.06 13.63 $ 13.00 $ 12.38
======== ======== ======== ======== ======== ========
Total investment return (1)................................... 2.46% 12.21% 17.76% 12.03% 12.63% (15.21)%
======== ======== ======== ======== ======== ========
Ratios to average net assets attributable to common shares:
Total expenses, net of waivers from adviser................. 1.50%* 1.44% 1.44% 1.34% 1.69% 1.70%
Total expenses, before waivers from adviser................. 1.69%* 1.62% 1.77% 1.71% 1.82% 1.70%
Net investment income before preferred stock dividends...... 6.95%* 7.03% 7.27% 7.61% 7.87% 7.32%
Preferred stock dividends................................... 1.49%* 1.62% 1.66% 1.73% 2.02% 1.33%
Net investment income available to common stockholders...... 5.46%* 5.41% 5.61% 5.88% 5.85% 5.99%
Supplemental data:
Net assets, end of period (000's)........................... $254,685 $256,983 $253,767 $246,804 $242,906 $232,406
Portfolio turnover rate..................................... 3% 0% 3% 0% 7% 0%
Asset coverage per share of preferred stock, end of period.. $159,178 $160,614 $158,604 $154,252 $151,816 $145,254
</TABLE>
- --------------
* 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
period of less than one year has not been annualized. Total investment
return does not reflect brokerage commissions.
14
<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 $61 billion in
assets under management as of April 30, 1999.
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.
An annual meeting of shareholders of the Fund was held on January 21, 1999.
At the meeting, Margo N.Alexander, Richard Q. Armstrong, E. Garrett Bewkes, Jr.,
Richard R. Burt, Mary C. Farrell, Meyer Feldberg, George W. Gowen, Frederick V.
Malek and Carl W. Schafer were elected to serve as directors until the next
annual meeting of shareholders, or until their successors are elected and
qualified; and PricewaterhouseCoopers LLP was ratified as independent
accountants for the Fund for fiscal year ended September 30, 1999.
COMMON STOCK AND APS SHARES VOTING AS A SINGLE CLASS:
PROPOSAL 1
Shares
Shares Withhold
Voted For Authority
--------- ---------
To vote for or against the election of:
Richard Q. Armstrong .................. 9,917,947.35 107,438.133
E. Garrett Bewkes, Jr ................. 9,908,625.35 116,760.133
Richard R. Burt ....................... 9,921,158.35 104,227.133
Mary C. Farrell ....................... 9,918,703.35 106,682.133
George W. Gowen ....................... 9,907,462.35 117,923.133
Frederick V. Malek .................... 9,912,836.35 112,549.133
Carl W. Schafer ....................... 9,917,096.35 108,289.133
15
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (continued)
PROPOSAL 2
<TABLE>
<CAPTION>
Shares
Shares Withhold Shares
Voted For Authority Against
--------- --------- -------
<S> <C> <C> <C>
Ratification of the selection of
PricewaterhouseCoopers LLP as independent accountants
for the fiscal year ending September 30, 1999 ....... 9,902,742.048 102,189.438 20,454.000
</TABLE>
AUCTION PREFERRED SHARES:
PROPOSAL 1
Shares
Shares Withhold
Voted For Authority
--------- ---------
To vote for or against the election of:
Margo N. Alexander .................... 1,600.000 0
Meyer Feldberg ........................ 1,600.000 0
(Broker non-votes and abstentions are included within the "Shares Withhold
Authority" totals)
YEAR 2000 RISKS
Like other funds and financial and business organizations around the world,
the Fund could be adversely affected if the computer systems used by its
investment adviser, other service providers and entities with computer systems
that are linked to Fund records do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Issue."
Mitchell Hutchins is taking steps that it believes are reasonably designed to
address the Year 2000 Issue with respect to the computer systems that it uses,
and to obtain satisfactory assurances that each of the Fund's other major
service providers is taking comparable steps. However, there can be no assurance
that these steps will be sufficient to avoid any
adverse impact on the Fund.
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
16
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (concluded)
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.
17
<PAGE>
(Page intentionally left blank)
<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
Brian M. Storms
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, 1999
PaineWebber
(C)1999 PaineWebber Incorporated
Member SIPC
