INVESTMENT GRADE MUNICIPAL INCOME FUND INC. ANNUAL REPORT
November 15, 1999
Dear Shareholder,
We are pleased to present you with the annual report for the Investment Grade
Municipal Income Fund Inc. (the "Fund") for the fiscal year ended September 30,
1999.
INVESTMENT GRADE MUNICIPAL
INCOME FUND INC.
PROFILE
as of September 30, 1999
Investment Goal:
High current income
exempt from federal
income tax, consistent
with preservation of
capital
Portfolio Managers:
Elbridge T. Gerry, III
and Cynthia N. Bow,
Mitchell Hutchins Asset Management Inc.
Commencement:
November 6, 1992
NYSE Symbol:
PPM
Dividend Payments:
Monthly
MARKET REVIEW
- -------------------------------------------------------------------------------
The latter half of the Fund's fiscal year was a difficult time for municipal
investors as the effects of rising interest rates worked their way through the
markets. Amid fears of returning inflation, the Federal Reserve increased
short-term rates twice, 0.25% on the last day of June and 0.25% again in August,
in an attempt to cool what it saw as a potentially overheating economy. Overall
rates rose accordingly, and the long Treasury bond's yield rose to 6.30% before
settling back to 6.05% at period-end.
Y2K also remained a concern in the third quarter. Fears of computer
malfunctions and uncertainty about what might occur on January 1 led many
issuers to bring new bonds to market in the third quarter rather than the
fourth, before Y2K issues moved to the forefront of investors' minds. The surge
of issuance created an oversupply of municipal bonds, which, combined with
higher interest rates, pushed bond prices lower during the quarter. A secondary
effect of Y2K concerns was the decision of many bond fund managers to raise cash
in anticipation of year-end liquidity needs. While we are unsure exactly what
impact "Year 2000" will have on the markets, we believe our portfolios are well
positioned to meet their liquidity needs and are invested in those issuers best
prepared for the transition from 1999 to 2000.
OUTLOOK
Municipal investors remain wary of yet another 25 basis point increase before
year-end, which would effectively undo the 75 basis points of credit easing
undertaken in 1998. While the Federal Reserve's preemptive moves to restrain
inflation have had a negative effect on the municipal market in the short term,
we expect this policy to have beneficial long-term effects. The domestic economy
continues to grow faster than expectations while keeping inflation fairly well
in check. As long as the markets anticipate Fed moves, the countering of
slightly increasing price pressures with slightly tighter money supply should
prove benign for municipal bonds.
Regardless of whether we see another increase in short-term rates before
year-end, municipal bond yields remain historically high compared to U.S.
Treasury yields, at approximately 93% of corresponding U.S. Treasurys. The
historical five-year average yield is about 85% of Treasurys, which
1
<PAGE>
points out that municipals now appear cheap relative to Treasurys. Excess
supply, increased cash positions by mutual fund companies and Y2K-related
liquidity premiums are partly responsible. Additionally, "crossover" buyers that
move between the municipal and corporate bond markets have been shifting out of
municipal bonds.
PORTFOLIO REVIEW
- -------------------------------------------------------------------------------
AVERAGE ANNUAL % RETURNS, PERIODS ENDED 9/30/99
Since Inception
6 Mos.1 1 Yr. 5 Yrs. 11/6/92
- --------------------------------------------------------------------------
Net Asset Value Return2 -1.98 -0.65 7.62 6.82
Market Price Return3 -9.90 -7.68 9.02 5.27
- --------------------------------------------------------------------------
SHARE PRICE, DIVIDEND AND YIELD, 9/30/99
- ----------------------------------------
Net Asset Value $16.09
Market Price $13.88
12-Mo. Dividend $0.90
Market Yield4 6.48%
IPO Yield4 6.00%
- ----------------------------------------
1 NAV and market price returns for periods of less than one year are not
annualized.
2 NAV return assumes, for illustration only, that dividends were reinvested at
the net asset value on the payable dates.
3 Market price return assumes dividends were reinvested under the Dividend
Reinvestment Plan. It does not reflect any commissions and is not
representative of the performance of an individual investment. The Fund's
share price and investment return will vary so that an investor's shares may
be worth more or less than their original cost. Past performance is no
guarantee of future results.
4 IPO yield is calculated by multiplying the September distribution by 12 and
dividing by the initial public offering price. Market yield is calculated by
multiplying the September distribution by 12 and dividing by the Fund's
closing price on September 30, 1999. Yields will fluctuate.
CHARACTERISTICS* 9/30/99 3/31/99
- ----------------------------------------------------
Total Net Assets ($mm) $246.6 $254.7
Weighted Avg Maturity 14.03 yrs 14.09 yrs
Weighted Avg Duration 4.29 yrs 3.37 yrs
Weighted Avg Coupon 6.69% 6.38%
AMT Paper 0.00% 0.00%
Leverage (% of total assets) 32.4% 31.4%
- ----------------------------------------------------
2
<PAGE>
HIGHLIGHTS
During the latest fiscal year we took advantage of several market opportunities
to acquire bonds that were priced with attractive structures and optimal
maturity ranges. Typical of these purchases were general obligation bonds for
Houston, Texas (0.7%) and New Jersey Transportation Fund (0.8%).* The bonds were
priced cheaply relative to the size of the premiums above par value.
CREDIT QUALITY* 9/30/99 3/31/99
- ---------------------------------------------
Cash 1.2% 0.5%
AAA/Aaa 48.2 52.2
AA/Aa 31.1 32.7
A/A 11.0 11.0
BBB/Baa 5.4 3.6
Nonrated 3.1 0.0
- ---------------------------------------------
Total 100.0 100.0
In the BBB credit range, we purchased bonds for California Educational
Facilities (Los Angeles Chiropractic) (0.4%) and Fontana Redevelopment Agency
(Jurupa Hills) (0.8%). In both cases the Fund benefited from higher yields than
one would expect for these issues' levels of credit quality.
Lastly, we purchased a private placement lease for Harris County, Texas
(Murworth project) (3.2%). Private placements offer above-market yields to
compensate for their limited market penetration and consequent lower liquidity.
The placement's incremental yield was 1.65% above its average life. We consider
these securities the equivalent of an "A+" credit rating. The Murworth project
consists of improvements to an existing building to provide needed space to the
Harris County Community Development Agency, the Attorney's Office, the Health
and Human Services Bureau, and the Juvenile Justice Department. We believe these
facilities are essential for the proper operation of the County, which is why we
rated the placement a solid, A+ equivalent.
TOP TEN STATES*
As of 9/30/99 % As of 3/31/99 %
- --------------------------------------------------------------------------
Texas 19.5 New York 13.7
New York 11.7 Texas 13.3
Illinois 10.5 Illinois 11.2
Indiana 10.5 Indiana 11.1
Massachusetts 7.1 Massachusetts 8.3
South Carolina 4.6 South Carolina 5.0
Virginia 4.2 Virginia 4.5
California 3.7 Connecticut 3.7
Connecticut 3.5 Washington 3.5
Kentucky 3.2 Colorado 3.4
- --------------------------------------------------------------------------
Total 78.5 Total 77.7
- -----------
* Weightings represent percentages of portfolio assets as of September 30, 1999,
unless noted otherwise. The Fund's portfolio is actively managed and its
composition will vary over time.
3
<PAGE>
ANNUAL REPORT
TOP TEN SECTORS*
As of 9/30/99 % As of 3/31/99 %
- --------------------------------------------------------------------------
Power 18.7 Power 17.1
Water 11.7 Water 15.5
General Obligations 10.4 Healthcare 11.1
Healthcare 10.2 General Obligations 11.1
Sales Tax 7.0 Sales Tax 7.4
Housing 5.9 Housing 6.3
Gas Distribution 5.4 Gas Distribution 5.8
Excise Tax 4.8 Excise Tax 5.8
University 3.9 University 3.9
Oil 3.4 Oil 3.8
- --------------------------------------------------------------------------
Total 81.4 Total 87.8
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 a
fund in the PaineWebber Family of Funds,5 please contact your Financial Advisor.
Sincerely,
/s/ MARGO ALEXANDER /s/ ELBRIDGE T. GERRY, III
- ------------------- --------------------------
MARGO ALEXANDER ELBRIDGE T. GERRY, III
Chairman and Chief Executive Officer Senior Vice President
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
Portfolio Manager, Investment Grade
Municipal Income Fund Inc.
/s/ BRIAN M. STORMS /s/ CYNTHIA N. BOW
- ------------------- ------------------
BRIAN M. STORMS CYNTHIA N. BOW
President and Chief Operating Officer Vice President
Mitchell Hutchins Asset Management Inc. 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 September 30, 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 September 30, 1999,
unless noted otherwise. The Fund's portfolio is actively managed and its
composition will vary over time.
5 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 before investing.
4
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Principal Moody's S&P~
Amount Rating Rating Maturity Interest
(000) (unaudited) (unaudited) Dates Rates Value
-------- --------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS--103.17%
ALASKA--2.81%
$ 6,540 Valdez Marine Terminal British Petroleum Company
Sohio Pipeline Project .................... Aa2 AA+ 12/01/25 7.000% $ 6,939,202
-----------
CALIFORNIA--3.86%
1,000 California Educational Facilities Authority
College Chiropractic....................... Baa2 NR 11/01/17 5.600 965,780
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 3,655,540
3,000 California Statewide Communities
Development Authority Irvine Apartment
Communities Series A-3..................... Baa2 BBB 05/17/10(1) 5.100+ 2,844,000
2,150 Fontana California Redevelopment~.............
Agency Tax Allocation Refunding
Jurupa Hills Redevelopment Project A ...... NR BBB+ 10/01/17 5.500 2,046,262
-----------
9,511,582
-----------
COLORADO--2.76%
5,950 Arapahoe County Capital Improvement
Trust Fund Highway Revenue~................
(Pre-refunded with U.S. Government
Securities to 08/31/05 @103) Aaa AAA 08/31/26 7.000 6,808,406
-----------
CONNECTICUT--3.67%
8,590 Connecticut Housing Finance Authority Series A & B Aa AA 05/15/14 to 11/15/23 6.200 to 6.750 9,056,500
-----------
GEORGIA--0.21%
500 Municipal Electric Authority of Georgia Series B A3 A 01/01/16 6.375 514,850
----------
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 1,074,380
1,890 Illinois Toll & Highway Authority
Series A (FGIC Insured).................... Aaa AAA 01/01/16 6.200 2,025,305
2,650 University of Illinois Auxiliary Facilities... Aa3 AA- 04/01/22 5.750 2,653,313
7,380 Chicago Gas Supply Revenue People's Gas....... Aa3 AA- 03/01/15 6.875 7,810,106
250 Metropolitan Pier & Exposition Authority...... Aa3 AA- 06/15/27 6.500 264,420
5
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<CAPTION>
PRINCIPAL MOODY'S S&P~
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-------- --------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
ILINOIS--(CONCLUDED)
$ 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% $ 12,341,422
1,000 Naperville Electric Revenue................... Aa2 AA 05/01/12 5.700 1,016,940
------------
27,185,886
------------
INDIANA--10.98%
1,430 Indiana Transportation Finance Authority
Airport Facilities Series A................ A1 A+ 11/01/16 6.250 1,491,090
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 5,708,785
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 6,391,320
2,000 Indianapolis Local Public Improvement Bond Bank Aa2 AA- 07/01/10 6.000 2,121,940
4,000 Marion County Hospital Authority
Methodist Hospital of Indiana
(Escrowed to maturity) Aa3 AAA 09/01/13 6.500 4,089,000
5,725 Petersburg County Pollution Control Revenue
Indianapolis Power & Light Company......... Aa2 AA- 12/01/24 6.625 6,167,142
1,000 Purdue University Series B (Pre-refunded with
U.S. Government Securities
to 01/01/05 @ 103)......................... Aa2 A 07/01/15 6.700 1,116,050
------------
27,085,327
------------
KENTUCKY--3.32%
7,750 Boone County Pollution Control Revenue
Dayton Power & Light Company............... Aa3 AA- 11/15/22 6.500 8,196,245
------------
MASSACHUSETTS--7.46%
8,500 Massachusetts Bay Transportation Authority
Series C (Pre-refunded with U.S. Government
Securities to 03/01/02 @ 102).............. Aa3 A 03/01/23 6.100 9,003,030
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 2,933,755
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 6,454,620
------------
18,391,405
------------
6
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<CAPTION>
PRINCIPAL MOODY'S S&P~
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-------- --------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
NEVADA--2.91%
$ 6,750 Clark County Pollution Control Revenue
Nevada Power Company (FGIC Insured)........ Aaa AAA 06/01/19 6.600% $ 7,162,898
-----------
NEW JERSEY--0.83%
2,000 New Jersey St Transportation Trust Fund
Authority Transportation Systems Series A.. Aa2 AA- 06/15/11 5.500 2,055,500
-----------
NEW YORK--12.22%
400 New York City General Obligation Series H..... A3 A- 02/01/16 7.000 425,020
4,600 New York City General Obligation Series H
(Pre-refunded with U.S. Government
Securities to 02/01/02 @ 1011/2)........... NR A- 02/01/16 7.000 4,940,676
1,150 New York City General Obligation Subseries C-1
(Pre-refunded with U.S. Government
Securities to 08/01/02 @ 1011/2)........... Aaa A- 08/01/17 7.000 1,249,141
1,000 New York State Dormitory Authority
Revenue Series 2 2nd City University
Series 2................................... Baa1 BBB+ 07/01/28 5.000 864,920
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 6,391,560
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 5,762,004
750 New York State Medical Care Facilities Finance
Unrefunded Balance Hospital Series D....... Aa AAA 02/15/31 6.600 791,685
750 New York State Medical Care Facilities
Finance Agency Revenue Prerefunded
Hospital Series D Hospital And Nursing Homes
(FHA Insured) ............................. Aa AAA 02/15/31 6.600 814,748
8,695 New York City Municipal Water Finance Authority
Water & Sewer System Series A.............. A1 A 06/15/17 to 06/15/21 6.000 to 6.250 8,898,436
-----------
30,138,190
-----------
NORTH CAROLINA--2.15%
2,700 North Carolina Eastern Municipal Power
Agency Series A............................ Baa3 BBB 01/01/21 6.400 2,693,439
1,630 North Carolina Municipal Power Agency
Catawba Electric Revenue................... Baa1 BBB+ 01/01/17 6.250 1,617,922
920 North Carolina Municipal Power Agency
Catawba Electric Revenue (Pre-refunded
with U.S. Government Securities
to 01/01/03 @ 102)......................... Baa1 BBB+ 01/01/17 6.250 985,504
-----------
5,296,865
-----------
7
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<CAPTION>
PRINCIPAL MOODY'S S&P~
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-------- --------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
PENNSYLVANIA--2.03%
$ 2,500 Pennsylvania State Turnpike Commission
Turnpike Revenue Series N (FGIC Insured) Aaa AAA 12/01/19 5.500% $ 2,422,825
2,680 Philadelphia School District Series A
(MBIA Insured)............................. Aaa AAA 04/01/15 5.250 2,578,267
- -----------
5,001,092
-----------
RHODE ISLAND--2.58%
6,175 Rhode Island Housing Finance Authority
Homeownership Opportunity Series 10-A..... Aa2 AA+ 04/01/27 6.500 6,352,284
-----------
SOUTH CAROLINA--4.82%
6,290 Richland County Pollution Control Revenue
Union Camp Cororation Project Series C..... A3 BBB+ 11/01/20 6.550 6,469,768
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 5,427,730
-----------
11,897,498
-----------
TEXAS--20.36%
4,000 Coastal Bend Health Facilities
Incarnate Word Health System
(AMBAC Insured)............................ Aaa AAA 01/01/17 6.300 4,287,000
8,029 Harris County Texas Lease (WI)................ NR NR 05/01/20 6.750 8,167,479
4,750 Harris County Subordinate Lien Revenue........ Aa2 AA 08/01/14 6.750 5,008,020
915 Harris County Toll Road Authority Senior Lien
(AMBAC Insured)............................ Aaa AAA 08/15/17 6.500 972,215
2,000 Houston Texas Refunding & Public Improvement
Series A................................... Aa3 AA- 03/01/15 5.250 1,916,300
1,000 Houston Water & Sewer System Series B
(Pre-refunded with U.S. Government
Securities to 12/01/02 @ 102).............. A3 A+ 12/01/14 6.375 1,057,520
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 6,469,162
7,500 Lower Colorado River Authority Texas Revenue
Refunding Series B......................... Aaa AAA 05/15/11 6.000 7,928,025
2,350 Port Corpus Christi Industrial
Development Revenue
Valero Energy Corporation Series C ....... Baa3 BBB- 04/01/18 5.400 2,116,081
6,750 Sabine River Authority Pollution Control Revenue
Texas Utilities Electric Company
(FGIC Insured)............................. Aaa AAA 10/01/22 6.550 7,131,712
8
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<CAPTION>
PRINCIPAL MOODY'S S&P~
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-------- --------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
TEXAS--(CONCLUDED)
$ 5,000 Texas Health Facilities Development Corporation
All Saints Episcopal Hospital
(MBIA Insured)............................. Aaa AAA 08/15/22 6.250% $ 5,135,250
-----------
50,188,764
-----------
VIRGINIA--4.42%
4,500 Virginia Beach Development Authority
Sentara Bayside Hospital
(Pre-refunded with U.S. Government
Securities to 11/01/01 @102)............... Aa2 AA 11/01/21 6.300 4,769,190
5,815 Virginia Transportation Board Revenue
Route 28 Project .......................... Aa AA 04/01/18 6.500 6,141,745
-----------
10,910,935
-----------
WASHINGTON--1.96%
4,500 Metropolitan Seattle Sewer Series W
(MBIA Insured)
(Pre-refunded with U.S. Government
Securities to 01/01/03 @ 102).............. Aaa AAA 01/01/33 6.300 4,837,095
-----------
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 6,899,648
-----------
Total Long-Term Municipal Bonds (cost--$242,622,723)...... 254,430,172
-----------
SHORT-TERM MUNICIPAL NOTES--1.38%
ARIZONA--0.16%
400 Maricopa County Pollution Control Revenue Communities
Development Authority Irvine Apartment
Communities Series A-3 .................. VMIG A1+ 10/01/99 5.100* 400,000
-----------
MICHIGAN--0.49%
1,200 Delta County Michigan Economic
Development Corporation Environmental
Improvement Revenue
(Mead Escambia Paper D) ................... VMIG A1+ 10/01/99 3.900* 1,200,000
-----------
9
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<CAPTION>
PRINCIPAL MOODY'S S&P~
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-------- --------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
SHORT-TERM MUNICIPAL BONDS--(CONTINUED)
NEW JERSEY--0.73%
$ 1,800 Port Authority of New York and New Jersey..... VMIG-1 A1+ 10/01/99 3.850%* $ 1,800,000
------------
Total Short-Term Municipal Notes (cost--$3,400,000)....... 3,400,000
------------
Total Investments (cost--$246,022,723)--104.55%............ 257,830,172
Liabilities in excess of other assets--(4.55)%............ (11,212,528)
------------
NET ASSETS--100.00%....................................... $246,617,644
============
</TABLE>
- -----------------
* -Variable rate demand note is payable on demand. The maturity dates shown are
the next interest rate reset dates. The interest rates shown are the current
rates as of September 30, 1999.
+ Variable rate demand note is payable on demand. The interest shown is the
rate at September 30, 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.
WI -- When Issued Security.
(1) -- Maturity date reflects earliest date bond will be put back to issuer.
See accompanying notes to financial statements
10
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments in securities, at value (cost--$246,022,723)........................................................... $257,830,172
Cash............................................................................................................... 71,746
Interest receivable................................................................................................ 4,405,091
Receivable for investments sold.................................................................................... 2,766,606
Other assets....................................................................................................... 5,800
------------
Total assets....................................................................................................... 265,079,415
------------
Liabilities:
Payable for investments purchased.................................................................................. 18,024,378
Payable to investment adviser and administrator.................................................................... 157,487
Dividends payable to preferred shareholders........................................................................ 134,469
Accrued expenses and other liabilities............................................................................. 145,437
------------
Total liabilities.................................................................................................. 18,461,771
------------
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................................................................................ 1,188,079
Accumulated net realized loss from investment transactions......................................................... (52,024)
Net unrealized appreciation of investments......................................................................... 11,807,449
------------
Net assets applicable to common shareholders....................................................................... 166,617,644
------------
Total net assets................................................................................................... $246,617,644
============
Net asset value per common share ($166,617,644 applicable to 10,356,667 common shares outstanding)................. $16.09
======
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the
Year Ended
September 30, 1999
------------------
<S> <C>
Investment income:
Interest .......................................................................................................... $14,798,817
----------
Expenses:
Investment advisory and administration............................................................................. 2,281,147
Auction Preferred Shares expenses.................................................................................. 308,215
Custody and accounting............................................................................................. 154,617
Legal and audit ................................................................................................... 79,697
Reports and notices to shareholders................................................................................ 64,911
Transfer agency and service fees................................................................................... 38,561
Directors' fees.................................................................................................... 10,500
Other expenses..................................................................................................... 21,991
-----------
2,959,639
Less: Fee waivers from adviser..................................................................................... (316,831)
-----------
Net expenses....................................................................................................... 2,642,808
-----------
Net investment income.............................................................................................. 12,156,009
-----------
Realized and unrealized gains (losses) from investment activities:
Net realized gains from investment transactions.................................................................... 291,854
Net change in unrealized appreciation/depreciation of investments.................................................. (10,889,703)
-----------
Net realized and unrealized loss from investment activities........................................................ (10,597,849)
-----------
Net increase in net assets resulting from operations............................................................... $ 1,558,160
===========
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
----------------------------
1999 1998
----------- ------------
From operations:
<S> <C> <C>
Net investment income.............................................................................. $ 12,156,009 $ 12,294,764
Net realized gain from investment transactions..................................................... 291,854 --
Net change in unrealized appreciation/depreciation of investments.................................. (10,889,703) 3,080,854
------------ ------------
Net increase in net assets resulting from operations............................................... 1,558,160 15,375,618
------------ ------------
Dividends to shareholders from:
Net investment income--common stockholders.......................................................... (9,321,000) (9,321,000)
Net investment income--preferred stockholders....................................................... (2,602,066) (2,838,610)
------------ ------------
Total dividends to stockholders.................................................................... (11,923,066) (12,159,610)
------------ ------------
Net increase (decrease) in net assets.............................................................. (10,364,906) 3,216,008
Net assets:
Beginning of year.................................................................................. 256,982,550 253,766,542
------------ ------------
End of year (including undistributed net investment income of $1,188,079 and $955,136, respectively) $246,617,644 $256,982,550
============ ============
</TABLE>
See accompanying notes to financial statements
13
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year
Ended
September 30, 1999
-----------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
<S> <C>
Interest received ................................................................................................. $14,765,541
Expenses paid (net of fee waivers)................................................................................. (2,811,843)
Sale of short-term portfolio investments, net ..................................................................... (3,400,000)
Purchase of long-term portfolio investments ....................................................................... (14,426,151)
Sale of long-term portfolio investments ........................................................................... 17,808,971
-----------
Net cash provided by operating activities ......................................................................... 11,936,518
-----------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Dividends paid from net investment income to common stockholders................................................... (9,321,000)
Dividends paid from net investment income to preferred stockholders................................................ (2,543,772)
-----------
Net cash used for financing activities............................................................................. (11,864,772)
-----------
Net increase in cash............................................................................................... 71,746
Cash at beginning of year.......................................................................................... 0
-----------
Cash at end of year................................................................................................ $ 71,746
===========
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............................................................... $ 1,558,160
-----------
Increase in investments, at value.................................................................................. (4,681,612)
Increase in interest receivable.................................................................................... (28,765)
Increase in receivable for investments sold ....................................................................... (2,766,606)
Increase in other assets .......................................................................................... (5,456)
Decrease in payable to investment adviser and administrator ....................................................... (5,594)
Increase in payable for investments purchased ..................................................................... 18,024,378
Decrease in accrued expenses and other liabilities ................................................................ (157,987)
-----------
Total adjustments ................................................................................................. 10,378,358
-----------
Net cash provided by operating activities ......................................................................... $11,936,518
===========
</TABLE>
See accompanying notes to financial statements
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 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 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--The Fund calculates its net asset value based on
the current market value for its portfolio securities. The Fund normally obtains
market values for its securities from independent pricing sources. Independent
pricing sources may use reported last sale prices, current market quotations or
valuations from computerized "matrix" systems that derive values based on
comparable securities. Securities traded in the over the counter ("OTC") market
and listed on The Nasdaq Stock Market, Inc. ("Nasdaq") normally are valued at
the last sale price on Nasdaq prior to valuation. Other OTC securities are
valued at the last bid price available prior to valuation. Securities which are
listed on U.S. and foreign stock exchanges normally are valued at the last sale
price on the day the securities are valued or, lacking any sales on such day, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are valued on the exchange designated as the
primary market by Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"),
a wholly owned asset management subsidiary of PaineWebber Incorporated
("PaineWebber") and investment adviser and administrator of the Fund. If a
market value is not available from an independent pricing source for a
particular security, that security is valued at fair value as determined in good
faith by or under the direction of the Fund's board of trustees (the "board").
The amortized cost method of valuation, which approximates market value,
generally is used to value short-term debt instruments with sixty days or less
remaining to maturity, unless the board 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.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund's board of directors has approved an investment advisory and
administration contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Fund. In accordance with the Advisory Contract, Mitchell Hutchins receives
compensation from the Fund, computed weekly and paid monthly, at the annual rate
of 0.90% of the Fund's average weekly net assets. For the year ended September
30, 1999, Mitchell Hutchins voluntarily waived $316,831 in investment advisory
and administration fees from the Fund.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at September
30, 1999 was substantially the same as the cost of securities for financial
statement purposes.
At September 30, 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)..... $12,942,849
Gross depreciation (from investments having an excess of cost over value)..... (1,135,400)
-----------
Net unrealized appreciation of investments.................................... $11,807,449
===========
</TABLE>
For the year ended September 30, 1999, total aggregate purchases and sales
of portfolio securities, excluding short-term securities, were $32,450,529 and
$20,575,577, 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, 1999, the Fund had a net capital loss carryforward of
$52,024 available as a reduction, to the extent provided in the regulations, of
future net realized capital gains, which 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, 8,483 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
3.60% for the year ended September 30, 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.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
year is presented below:
<TABLE>
<CAPTION>
For the Years Ended September 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year..................... $ 17.09 $ 16.78 $ 16.11 $ 15.73 $ 14.72
------- ------- ------- ------- -------
Net investment income ................................. 1.17 1.19 1.19 1.21 1.18
Net realized and unrealized gains (losses) from investments (1.02) 0.29 0.65 0.35 1.03
------- ------- ------- ------- -------
Net increase (decrease) from investment operations..... 0.15 1.48 1.84 1.56 2.21
------- ------- ------- ------- -------
Dividends from net investment income:
Common stockholders ................................. (0.90) (0.90) (0.90) (0.90) (0.90)
Common share equivalent of dividends
paid to preferred stockholders..................... (0.25) (0.27) (0.27) (0.28) (0.30)
------- ------- ------- ------- -------
Total dividends to stockholders........................ (1.15) (1.17) (1.17) (1.18) (1.20)
------- ------- ------- ------- -------
Net asset value, end of year........................... $ 16.09 $ 17.09 $ 16.78 $ 16.11 $ 15.73
======= ======= ======= ======= =======
Per share market value, end of year.................... $ 13.88 $ 15.94 $ 15.06 $ 13.63 $ 13.00
======= ======= ======= ======= =======
Total investment return(1)............................. (7.68)% 12.21% 17.76% 12.03% 12.63%
======= ======= ======= ======= =======
Ratios to average net assets attributable to common shares:
Total expenses, net of waivers from adviser.......... 1.52% 1.44% 1.44% 1.34% 1.69
Total expenses, before waivers from adviser.......... 1.71% 1.62% 1.77% 1.71% 1.82%
Net investment income before preferred stock dividends 7.01% 7.03% 7.27% 7.61% 7.87%
Preferred stock dividends............................ 1.50% 1.62% 1.66% 1.73% 2.02%
Net investment income available to common stockholders 5.51% 5.41% 5.61% 5.88% 5.85%
Supplemental data:
Net assets, end of year (000's)...................... $246,618 $256,983 $253,767 $246,804 $242,906
Portfolio turnover rate.............................. 8% 0% 3% 0% 7%
Asset coverage per share of preferred stock, end of year $154,136 $160,614 $158,604 $154,252 $151,816
</TABLE>
(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 year 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 does not reflect brokerage commissions.
17
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Investment Grade Municipal Income Fund Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of Investment Grade
Municipal Income Fund Inc. (the "Fund") at September 30, 1999, the results of
its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
November 9, 1999
18
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
TAX INFORMATION
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended to advise you within 60 days of the Fund's fiscal year end (September
30, 1999), as to the federal tax status of distributions received by
stockholders during such fiscal year. Accordingly, we are advising you that all
dividends paid during the fiscal year were federal tax-exempt interest
dividends.
The Fund did not invest in any securities which paid interest subject to the
federal alternative minimum tax for individual taxpayers during its fiscal year.
Therefore, none of the dividends paid by the Fund were subject to such tax.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1999. The second
notification, which reflects the amount to be used by calendar year taxpayers on
their federal income tax returns, will be made in conjunction with Form 1099 DIV
and will be mailed in January 2000. Stockholders are advised to consult their
own tax advisers with respect to the tax consequences of their investment in the
Fund.
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 $60 billion in
assets under management as of October 31, 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 numerous other newspapers. 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
19
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC
GENERAL INFORMATION (CONCLUDED)
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.
20
<PAGE>
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21
<PAGE>
[This Page Intentionally Left Blank]
22
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
DIRECTORS
E. Garrett Bewkes, Jr. Meyer Feldberg
Chairman George W. Gowen
Margo N. Alexander Frederic V. Malek
Richard Q. Armstrong Carl W. Schafer
Richard R. Burt Brian M. Storms
Mary C. Farrell
PRINCIPAL OFFICERS
Margo N. Alexander Paul H. Schubert
President VICE PRESIDENT AND TREASURER
Victoria E. Schonfeld Elbridge T. Gerry, III
VICE PRESIDENT VICE PRESIDENT
Dianne E. O'Donnell~Vice
PRESIDENT AND SECRETARY
Dennis L. McCauley
VICE PRESIDENT
INVESTMENT ADVISER AND
ADMINISTRATOR
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
51 WEST 52ND STREET
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 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>
INVESTMENT
GRADE
MUNICIPAL
INCOME
FUND INC.
September 30, 1999
A N N U A L R E P O R T
PaineWebber
c 1999 PaineWebber Incorporated
Member SPIC
All rights reserved
