INVESTMENT GRADE MUNICIPAL INCOME FUND INC. ANNUAL REPORT
November 15, 2000
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,
2000.
MARKET REVIEW
================================================================================
[Graphic Omitted] The first six months of the fiscal year saw the virtual
reversal of the price depreciation of corporate bonds seen
in the prior six months. Though the fixed income markets
languished in a state of inflationary uncertainty amidst robust economic growth,
events focused on the continued proactive posture taken by the Federal Reserve
(the "Fed"), which intervened three times since September 1999 with Fed Funds
rate hikes of 25 basis points each (a basis point equals 1/100 of one percent).
The Treasury's announcement of a $30 billion buyback of longer maturities
triggered fears of a potential squeeze in long-end supply, and the market
responded by hoarding the 30-year bond and creating an inverted yield curve.
Municipal prices also rallied during the period, though they remained
historically cheap relative to taxable bonds.
In the second half of the fiscal year, conditions remained strong for the
municipal market, with five- to ten-year maturities serving as the best
performing area of the municipal curve. During the past quarter, the municipal
yield curve steepened on a relative basis due to the outperformance of the
shorter end of the curve.
The lack of supply in the municipal market, coupled with a strong retail demand,
where the focus is generally on 10 years or less, created favorable conditions
from a sellers standpoint. Therefore, we believe the 10-year area of the curve
continues to remain unattractive from a total return standpoint.
PORTFOLIO REVIEW
================================================================================
AVERAGE ANNUAL RETURNS, PERIODS ENDED 9/30/00
[Graphic Omitted]
NET ASSET VALUE RETURNS FUND LIPPER MEDIAN(1)
--------------------------------------------------------------------------------
6 Months 3.93% 4.02%
1 Year 4.79 5.73
5 Years 5.91 5.40
Since Inception 11/6/92 6.56 7.05
--------------------------------------------------------------------------------
MARKET PRICE RETURNS FUND LIPPER MEDIAN(1)
--------------------------------------------------------------------------------
6 Months 9.87% 7.72%
1 Year 5.90 5.60
5 Years 7.73 6.68
Since Inception 11/6/92 5.38 6.07
--------------------------------------------------------------------------------
(1) Lipper General Leveraged Municipal Debt Funds Median.
Past performance is no guarantee of future results. 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. NAV and market price returns for
periods of less than one year are not annualized. NAV return assumes, for
illustration only, that dividends were reinvested at the net asset value on
the payable dates. Market price return assumes dividends were reinvested
under the Dividend Reinvestment Plan.
-----------------------------
INVESTMENT GRADE MUNICIPAL
INCOME FUND INC.
INVESTMENT GOAL:
HIGH LEVEL OF CURRENT
INCOME EXEMPT FROM
FEDERAL INCOME TAX,
CONSISTENT WITH
PRESERVATION OF CAPITAL
PORTFOLIO MANAGER:
ELBRIDGE T. GERRY, III
MITCHELL HUTCHINS
ASSET MANAGEMENT INC.
COMMENCEMENT:
NOVEMBER 6, 1992
NYSE SYMBOL:
PPM
DIVIDEND PAYMENTS:
MONTHLY
-----------------------------
1
<PAGE>
ANNUAL REPORT
Share Price, Dividend and Yield 9/30/00
--------------------------------------------------------------------------------
Market Price $13.75
Net Asset Value $15.91
12-Month Dividend $0.90
Current Month Dividend $0.075
Market Yield 6.55%
NAV Yield 5.66%
IPO Yield 6.00%
--------------------------------------------------------------------------------
Market yield is calculated by multiplying the current month's distribution by 12
and dividing by the month-end market price. NAV yield is calculated by
multiplying the current month's distribution by 12 and dividing by the month-end
net asset value. IPO yield is calculated by multiplying the current month's
distribution by 12 and dividing by the initial public offering price. Prices and
yields will vary.
PORTFOLIO HIGHLIGHTS
We have continued our program of identifying relative value in sectors, bond
structures and credit. Accordingly, we sold some of our pre-refunded bonds and
moved into bond structures that provided a premium coupon with a limited premium
penalty. These bond maturities also represented value spots on the yield curve.
During a significant market downdraft early in the calendar year, we noted that
deeper-discounted bonds were having a particularly hard time. Their after-tax
yields rose about 10 basis points above comparable, current-coupon bonds, due to
their 4.75% coupons and DE MINIMUS tax ramifications.
We purchased some of these bonds, including New York City Transitional Finance
Authority revenue bonds (1.9%). By the middle of the calendar year, the
discounted bonds' yield spread to current-coupon bonds had narrowed
significantly, contributing to fund performance.
In the second quarter of the calendar year we had opportunities to capture
incremental yield as structure spreads widened. Bonds trading at a discount
cheapened exponentially as they fell out of favor. However, municipal bonds did
correct in late May, leaving yields virtually unchanged. The Fund purchased
Colorado River Texas Municipal Water (3.8%), with 14 additional basis points,
attracted to its discount structure and we believed mispriced 2003 call.
We continue to avoid the intermediate area of the curve. Strong demand for
municipal bonds among individual investors--who generally focus on maturities of
10 years or less--created ideal conditions for sellers and has made the 10-year
area of the curve unattractive from a risk-reward perspective. We kept portfolio
duration shorter than the benchmark, which aided performance as yields rose
slightly on the long end of the curve.
2
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC. ANNUAL REPORT
PORTFOLIO STATISTICS
CHARACTERISTICS* 9/30/00 3/31/00
--------------------------------------------------------------------------------
Net Assets ($mm) $244.8 $243.2
Weighted Avg Maturity 14.8 yrs 14.8 yrs
Weighted Avg Duration 4.5 yrs 4.6 yrs
Weighted Avg Coupon 6.2% 6.3%
AMT Paper 0% 0%
Leverage 32.7% 32.9%
Callable/Maturing Within Five Years 24.9% 20.2%
Callable/Maturing Beyond Five Years 75.1% 79.8%
--------------------------------------------------------------------------------
CREDIT QUALITY* 9/30/00 3/31/00
--------------------------------------------------------------------------------
Cash and Other Assets in Excess of Liabilities 5.0% 1.8%
AAA/Aaa 42.4 46.6
AA/Aa 33.0 30.8
A/A 7.4 12.0
BBB/Baa 5.6 5.4
Non-Rated 6.6 3.4
--------------------------------------------------------------------------------
Total 100.0 100.0
TOP TEN STATES* 9/30/00 3/31/00
--------------------------------------------------------------------------------
Texas 24.0% Texas 21.5%
New York 12.5 New York 14.0
Illinois 10.5 Illinois 10.6
Indiana 6.1 Indiana 8.6
Virginia 4.4 South Carolina 4.8
Pennsylvania 4.1 Virginia 4.4
Connecticut 3.6 Connecticut 3.7
Kentucky 3.2 Kentucky 3.3
Wisconsin 3.1 Nevada 2.9
Nevada 2.9 Alaska 2.8
--------------------------------------------------------------------------------
Total 74.4 Total 76.6
TOP FIVE SECTORS* 9/30/00 3/31/00
--------------------------------------------------------------------------------
Water 16.6% Power 19.7%
Power 13.1 Water 12.7
Hospital 10.9 Hospital 10.9
Lease 6.6 General Obligation 8.0
General Obligation 6.2 Sales Tax 6.8
--------------------------------------------------------------------------------
Total 53.4 Total 58.1
* Weightings represent percentages of net assets as of the dates indicated. The
Fund's portfolio is actively managed and its composition will vary over time.
3
<PAGE>
ANNUAL REPORT
OUTLOOK
================================================================================
We continue to purchase structures that offer good return attributes. Currently,
we prefer the 18- to 25-year part of the yield curve and the premium structure.
Absent those opportunities, we look for value within our duration, sector and
security framework.
We continue to avoid the healthcare, resource recovery and (more recently) the
airline sector.
Technicals continue to look good for municipals: issuance has and is expected to
remain light through the end of 2000. We look for moderating economic growth
going forward and believe interest rates will remain relatively stable in
response to slowing growth and the absence of real inflationary pressure. If an
economic slowdown becomes more evident, we may consider extending duration.
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,(2) please contact your Financial Advisor. For
additional information, visit us at www.painewebber.com.
Sincerely,
/s/ BRIAN M. STORMS /s/ ELBRIDGE T. GERRY, III
------------------- ---------------------------
BRIAN M. STORMS Elbridge T. Gerry, III
Chief Executive Officer and President Chief Investment Officer - Municipals
Mitchell Hutchins Asset Management Inc. and Short-Term Investment Strategies
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 fiscal year ended September 30, 2000, 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.
(2) 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.
4
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000
<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--95.02%
ALABAMA--1.79%
$ 4,600 Jefferson County Sewer Revenue
Refunding Series A (FGIC Insured) .... Aaa AAA 02/01/27 5.375% $ 4,367,010
-----------
ALASKA--2.79%
6,540 Valdez Marine Terminal British Petroleum
Company Sohio Pipeline Project ....... Aa1 AA+ 12/01/25 7.000 6,822,463
-----------
CALIFORNIA--2.43%
1,000 California Educational Facilities
Authority College Chiropractic ....... Baa2 NR 11/01/17 5.600 964,790
3,000 California Statewide Communities
Development Authority Irvine Apartment
Communities Series A-3 ............... Baa2 BBB 05/17/10+ 5.100 2,917,530
2,150 Fontana Redevelopment Agency Tax
Allocation Refunding Jurupa Hills
Redevelopment Project A .............. NR BBB+ 10/01/17 5.500 2,065,140
-----------
5,947,460
-----------
COLORADO--2.74%
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 6,709,101
-----------
CONNECTICUT--3.64%
8,590 Connecticut Housing Finance Authority
Series A & B ......................... Aa2 AA 05/15/14 to 11/15/23 6.200 to 6.750 8,906,364
-----------
GEORGIA--0.21%
500 Municipal Electric Authority of Georgia
Series B ............................. A3 A 01/01/16 6.375 515,965
-----------
ILLINOIS--10.47%
1,890 Illinois Toll & Highway Authority
Series A (Pre-refunded with U.S.
Government Securities to
01/01/03 @ 102)
(FGIC Insured) ....................... Aaa AAA 01/01/16 6.200 1,989,716
2,650 University of Illinois Auxiliary
Facilities ........................... Aa3 AA- 04/01/22 5.750 2,653,657
7,380 Chicago Gas Supply Revenue People's Gas. Aa3 AA- 03/01/15 6.875 7,714,240
5,000 Chicago Park District Parking Facility . Baa1 A 01/01/14 6.250 5,206,100
</TABLE>
5
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<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--(CONTINUED)
ILLINOIS--(CONCLUDED)
$ 250 Metropolitan Pier & Exposition Authority. Aa3 AA- 06/15/27 6.500% $ 258,603
6,350 Metropolitan Pier & Exposition Authority
(Pre-refunded with U.S. Government
Securities to 06/15/03 @ 102) ......... Aaa AAA 06/15/27 6.500 6,772,656
1,000 Naperville Electric Revenue ............. Aa2 AA 05/01/12 5.700 1,025,200
-----------
25,620,172
-----------
INDIANA--6.12%
1,430 Indiana Transportation Finance Authority
Airport Facilities Series A ........... A1 AA 11/01/16 6.250 1,456,155
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 6,276,480
2,000 Indianapolis Local Public Improvement
Bond Bank ........................... Aa2 AA- 07/01/10 6.000 2,097,240
4,000 Marion County Hospital Authority Methodist
Hospital of Indiana (Escrowed to
maturity) ............................. Aa3 AAA 09/01/13 6.500 4,045,320
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 1,103,310
-----------
14,978,505
-----------
KENTUCKY--3.24%
7,750 Boone County Pollution Control Revenue
Dayton Power & Light Company .......... A2 BBB+ 11/15/22 6.500 7,940,262
-----------
MASSACHUSETTS--2.58%
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 6,323,460
-----------
NEVADA--2.89%
6,750 Clark County Pollution Control Revenue
Nevada Power Company (FGIC Insured) ... Aaa AAA 06/01/19 6.600 7,071,570
-----------
NEW JERSEY--0.85%
2,000 New Jersey Transportation Trust Fund
Authority Transportation Systems
Series A .............................. Aa2 AA 06/15/11 5.500 2,088,740
-----------
</TABLE>
6
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<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--(CONTINUED)
NEW YORK--10.64%
$ 400 New York City General Obligation Series H ...... A2 A 02/01/16 7.000% $ 416,824
2,000 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 2,095,120
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 1,217,885
1,000 New York State Dormitory Authority Revenue
2nd City University Series 2 ................. Baa1 A 07/01/28 5.000 865,300
6,000 New York State Local Government Assistance
Corporation Series B (Pre-refunded with
U.S. Government Securities to 04/01/02 @ 102) Aaa AA- 04/01/21 6.250 6,272,400
1,500 New York State Medical Care Facilities Finance
Agency Revenue Hospital and Nursing Homes
Series D (Pre-refunded with U.S. Government
Securities to 2/15/03 @ 102) (FHA Insured) ... NR AAA 02/15/31 6.600 1,597,530
8,695 New York City Municipal Water Finance Authority
Water & Sewer System Series A ................ Aa3 AA 06/15/17 to 06/15/21 6.000 to 6.250 8,837,693
5,500 New York City Transitional Finance Authority
Revenue Future Tax Secured Series B .......... Aa3 AA 11/15/23 4.750 4,737,975
------------
26,040,727
------------
NORTH CAROLINA--2.27%
2,700 North Carolina Eastern Municipal Power Agency
Series A (Escrowed to maturity) .............. Baa3 BBB 01/01/21 6.400 2,957,310
1,630 North Carolina Municipal Power Agency
Catawba Electric Revenue ..................... Baa1 BBB+ 01/01/17 6.250 1,631,614
920 North Carolina Municipal Power Agency
Catawba Electric Revenue (Pre-refunded with
U.S. Government Securities to 01/01/03 @102) . NR BBB+ 01/01/17 6.250 968,088
------------
5,557,012
------------
PENNSYLVANIA--4.11%
2,500 Pennsylvania Turnpike Commission
Turnpike Revenue Series N (FGIC Insured) ..... Aaa AAA 12/01/19 5.500 2,459,100
2,680 Philadelphia School District Series A
(MBIA Insured) ............................... Aaa AAA 04/01/15 5.250 2,639,907
5,000 Northumberland County Authority Guaranteed Lease
Revenue Mountain View Manor Project .......... NR NR 10/01/20 7.000 4,962,800
------------
10,061,807
------------
</TABLE>
7
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<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--(CONTINUED)
RHODE ISLAND--2.57%
$ 6,175 Rhode Island Housing Finance Authority
Homeownership Opportunity Series 10-A ...... Aa2 AA+ 04/01/27 6.500% $ 6,290,040
-----------
SOUTH CAROLINa--2.59%
6,290 Richland County Pollution Control Revenue
Union Camp Corporation Project Series C ..... Baa1 BBB+ 11/01/20 6.550 6,340,949
-----------
TEXAS--23.97%
5,000 Texas Health Facilities Development Corporation
All Saints Episcopal Hospital Series B
(MBIA Insured) .............................. Aaa AAA 08/15/22 6.250 5,115,300
4,000 Coastal Bend Health Facilities
Incarnate Word Health System
(Escrowed to maturity) (AMBAC Insured) ...... Aaa AAA 01/01/17 6.300 4,321,680
10,000 Colorado River Texas Municipal Water District
Water Revenue Refunding (AMBAC Insured) ..... Aaa AAA 01/01/21 5.150 9,212,500
4,750 Harris County Subordinated Lien Revenue ....... Aa1 AA+ 08/01/14 6.750 4,922,568
7,949 Harris County Texas Lease++ ................... NR NR 05/01/20 6.750 8,129,082
915 Harris County Toll Road Authority Senior Lien
(AMBAC Insured) ............................. Aaa AAA 08/15/17 6.500 959,963
3,007 Houston Community College Systems
Participation++ ............................. NR NR 06/15/25 7.875 3,136,219
2,000 Houston Refunding & Public Improvement Series A Aa3 AA- 03/01/15 5.250 1,958,360
3,000 Houston Water & Sewer System Revenue
Junior Lien Series C (FGIC Insured) ......... Aaa AAA 12/01/22 5.250 2,823,840
1,000 Houston Water & Sewer System Series B
(Pre-refunded with U.S. Government
Securities to 12/01/01 @ 102) ............... Aaa A+ 12/01/14 6.375 1,040,170
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 6,416,110
2,350 Port Corpus Christi Industrial Development
Revenue Valero Energy Corporation Series C . Baa3 BBB- 04/01/18 5.400 2,057,613
6,750 Sabine River Authority Pollution Control Revenue
Texas Utilities Electric Company (FGIC
Insured) .................................... Aaa AAA 10/01/22 6.550 7,010,685
1,875 San Antonio Electric & Gas Revenue
Refunding Series A .......................... Aa1 AA 02/01/21 4.500 1,564,350
-----------
58,668,440
-----------
</TABLE>
8
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<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--(CONCLUDED)
VIRGINIA--4.37%
$ 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% $ 4,678,155
5,815 Virginia Transportation Board Revenue
Route 28 Project ............................ Aa1 AA 04/01/18 6.500 6,017,885
------------
10,696,040
------------
WASHINGTON--1.94%
4,500 Metropolitan Seattle Sewer Series W
(Pre-refunded with U.S. Government Securities
to 01/01/03 @ 102) (MBIA Insured) ........... Aaa AAA 01/01/33 6.300 4,748,940
------------
WISCONSIN--2.81%
6,750 Wisconsin Health and Educational Facilities
Authority-Sisters of Sorrowful Mother Health
Care System (MBIA Insured) .................. Aaa AAA 06/01/20 6.250 6,870,757
------------
Total Long-Term Municipal Bonds (cost--$224,893,779) 232,565,784
------------
SHORT-TERM MUNICIPAL NOTES--3.50%
CALIFORNIA--0.04%
100 Irvine Ranch Water District Improvement
District Number 182 Series A ................ NR A1+ 10/02/00 5.000* 100,000
------------
GEORGIA--0.12%
300 Burke County Development Authority Pollution
Control Revenue Georgia Power
Company Vogtle 4th Series ................... VMIG-1 A1 10/02/00 5.600* 300,000
------------
MASSACHUSETTS--0.08%
200 Massachusetts Health & Education Facilities
Series D (MBIA Insured) ..................... VMIG-1 A1+ 10/02/00 5.550* 200,000
------------
</TABLE>
9
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<TABLE>
<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 NOTES--(CONCLUDED)
NEW JERSEY--1.10%
$ 1,300 New Jersey Economic Development Authority R
evenue El Dorado Terminals A ............... P1 NR 10/02/00 5.450%* $ 1,300,000
1,100 New Jersey Economic Development Authority
Revenue El Dorado Terminals B ............. VMIG-1 NR 10/02/00 5.350* 1,100,000
300 Union County Industrial Pollution Control
Financing Authority Exxon Project .......... P1 A1+ 10/02/00 4.650* 300,000
------------
2,700,000
------------
NEW YORK--1.83%
1,200 New York City Series B (MBIA Insured) ........ VMIG-1 A1 10/02/00 5.550* 1,200,000
2,000 Port Authority of New York & New Jersey
Special Obligation Versatile Structure
Series 2 ................................... VMIG-1 A1+ 10/02/00 5.450* 2,000,000
275 New York State Dormitory Authority Revenues
Metropolitan Museum of Art Series A ........ VMIG-1 A1+ 10/04/00 5.300* 275,000
1,000 New York City Municipal Water Finance Authority
(FGIC Insured) ............................. VMIG-1 A1+ 10/02/00 5.550* 1,000,000
------------
4,475,000
------------
WISCONSIN--0.33%
200 Louisiana Crosse Industrial Development Revenue
Refunding Dairyland Power Cooperative C
(AMBAC Insured) ............................ VMIG-1 A1+ 10/02/00 5.550* 200,000
600 Louisiana Crosse Pollution Control Revenue
Dairyland Power Cooperative B
(AMBAC Insured) ............................. VMIG-1 A1+ 10/02/00 5.550* 600,000
------------
800,000
------------
Total Short-Term Municipal Notes (cost--$8,575,000) .... 8,575,000
------------
Total Investments (cost--$233,468,779)--98.52% ......... 241,140,784
Other assets in excess of liabilities--1.48% ........... 3,627,857
------------
Net Assets--100.00% .................................... $244,768,641
============
</TABLE>
-------------------------
+ The maturity date reflects the mandatory date bond will be put back to
issuer.
++ Illiquid securities representing 4.60% of net assets.
* 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, 2000.
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
10
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value (cost--$233,468,779) ......................................... $241,140,784
Cash ............................................................................................. 45,104
Interest receivable .............................................................................. 4,068,016
Other assets ..................................................................................... 3,683
------------
Total assets ..................................................................................... 245,257,587
------------
LIABILITIES:
Dividends payable to preferred shareholders ...................................................... 189,974
Payable to investment adviser and administrator .................................................. 156,299
Accrued expenses and other liabilities ........................................................... 142,673
------------
Total liabilities ................................................................................ 488,946
------------
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 .................................................................. 153,674,147
Undistributed net investment income .............................................................. 818,946
Accumulated net realized gain from investment transactions ....................................... 2,603,543
Net unrealized appreciation of investments ....................................................... 7,672,005
------------
Net assets applicable to common shareholders ..................................................... 164,768,641
------------
Total net assets ................................................................................. $244,768,641
============
Net asset value per common share ($164,768,641 applicable to 10,356,667 common shares outstanding) $15.91
======
</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, 2000
----------------
<S> <C>
INVESTMENT INCOME:
Interest ......................................................... $ 14,679,520
------------
EXPENSES:
Investment advisory and administration ........................... 2,188,076
Auction Preferred Shares expenses ................................ 269,301
Custody and accounting ........................................... 148,305
Professional fees ................................................ 67,702
Reports and notices to shareholders .............................. 50,480
Transfer agency and service fees ................................. 30,646
Directors' fees .................................................. 10,500
Other expenses ................................................... 25,261
------------
2,790,271
Less: Fee waivers from adviser ................................... (303,899)
------------
Net expenses ..................................................... 2,486,372
------------
Net investment income ............................................ 12,193,148
------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gains from investment transactions .................. 2,857,743
Net change in unrealized appreciation/depreciation of investments (4,135,444)
------------
NET REALIZED AND UNREALIZED LOSS FROM INVESTMENT ACTIVITIES ...... (1,277,701)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............. $ 10,915,447
============
</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,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ........................................... $ 12,193,148 $ 12,156,009
Net realized gains from investment transactions ................. 2,857,743 291,854
Net change in unrealized appreciation/depreciation of investments (4,135,444) (10,889,703)
------------- -------------
Net increase in net assets resulting from operations ............ 10,915,447 1,558,160
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO STOCKHOLDERS FROM:
Net investment income--common stockholders ...................... (9,321,000) (9,321,000)
Net investment income--preferred stockholders ................... (3,241,281) (2,602,066)
Net realized gain on investments--common stockholders ........... (158,457) --
Net realized gain on investments--preferred stockholders ........ (43,712) --
------------- -------------
Total dividends and distributions to stockholders ............... (12,764,450) (11,923,066)
------------- -------------
Net decrease in net assets ...................................... (1,849,003) (10,364,906)
NET ASSETS:
Beginning of year ............................................... 246,617,644 256,982,550
------------- -------------
End of year (including undistributed net investment income of
$818,946 and $1,188,079, respectively) ......................... $ 244,768,641 $ 246,617,644
============= =============
</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, 2000
----------------
<S> <C>
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Interest received ........................................................... $ 15,009,146
Expenses paid (net of fee waivers) .......................................... (2,488,207)
Purchase of short-term portfolio investments, net ........................... (5,175,000)
Purchase of long-term portfolio investments ................................. (52,705,544)
Sale of long-term portfolio investments ..................................... 58,041,908
------------
Net cash provided by operating activities ................................... 12,682,303
------------
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 ......... (3,185,776)
Distribution paid from capital gains to common stockholders ................. (158,457)
Distribution paid from capital gains to preferred stockholders .............. (43,712)
------------
Net cash used for financing activities ...................................... (12,708,945)
------------
Net decrease in cash ........................................................ (26,642)
Cash at beginning of year ................................................... 71,746
------------
Cash at end of year ......................................................... $ 45,104
============
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 ........................ $ 10,915,447
------------
Decrease in investments, at value ........................................... 16,689,388
Decrease in receivable for investments sold ................................. 2,766,606
Decrease in interest receivable ............................................. 337,075
Decrease in other assets .................................................... 2,117
Decrease in payable for investments purchased ............................... (18,024,378)
Decrease in payable to investment adviser and administrator ................. (1,188)
Decrease in accrued expenses and other liabilities .......................... (2,764)
------------
Total adjustments ........................................................... 1,766,856
------------
Net cash provided by operating activities ................................... $ 12,682,303
============
</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., the investment
adviser and administrator of the Fund ("Mitchell Hutchins"), a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber"), which is a wholly owned
indirect subsidiary of UBS AG. 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 directors (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.
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 (concluded)
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, 2000, Mitchell Hutchins voluntarily waived $303,899 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, 2000 was substantially the same as the cost of securities for financial
statement purposes.
At September 30, 2000, the components of net unrealized appreciation of
investments were as follows:
Gross appreciation (from investments having an
excess of value over cost) ....................... $8,644,983
Gross depreciation (from investments having an
excess of cost over value) ....................... (972,978)
----------
Net unrealized appreciation of investments .......... $7,672,005
==========
For the year ended September 30, 2000, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $34,681,166 and
$55,275,302, 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.
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, 9,080 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 3.25% to
5.75% for the year ended September 30, 2000.
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>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each year is
presented below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............... $ 16.09 $ 17.09 $ 16.78 $ 16.11 $ 15.73
------- ------- ------- ------- -------
Net investment income ............................ 1.18 1.17 1.19 1.19 1.21
Net realized and unrealized gains (losses)
from investments ............................... (0.13) (1.02) 0.29 0.65 0.35
------- ------- ------- ------- -------
Net increase from investment operations .......... 1.05 0.15 1.48 1.84 1.56
------- ------- ------- ------- -------
Dividends and distributions:
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 ............. (0.31) (0.25) (0.27) (0.27) (0.28)
From net realized gain on investments:
Common stockholders .......................... (0.02) -- -- -- --
Common share equivalent of distributions
paid to preferred stockholders ............. (0.00)(1) -- -- -- --
------- ------- ------- ------- -------
Total dividends and distributions to stockholders (1.23) (1.15) (1.17) (1.17) (1.18)
------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 15.91 $ 16.09 $ 17.09 $ 16.78 $ 16.11
======= ======= ======= ======= =======
Per share market value, end of year .............. $ 13.75 $ 13.88 $ 15.94 $ 15.06 $ 13.63
======= ======= ======= ======= =======
Total investment return(2) ....................... 5.90% (7.68)% 12.21% 17.76% 12.03%
======= ======= ======= ======= =======
Ratios to average net assets attributable to
common shares:
Total expenses, net of waivers from adviser . 1.52% 1.52% 1.44% 1.44% 1.34%
Total expenses, before waivers from adviser . 1.71% 1.71% 1.62% 1.77% 1.71%
Net investment income before preferred
stock dividends ............................ 7.48% 7.01% 7.03% 7.27% 7.61%
Preferred stock dividends ................... 1.99% 1.50% 1.62% 1.66% 1.73%
Net investment income available to common
stockholders ............................... 5.49% 5.51% 5.41% 5.61% 5.88%
Supplemental data:
Net assets, end of year (000's) ............... $244,769 $246,618 $256,983 $253,767 $246,804
Portfolio turnover rate ....................... 14% 8% 0% 3% 0%
Asset coverage per share of preferred
stock, end of year ........................... $152,980 $154,136 $160,614 $158,604 $154,252
</TABLE>
----------------
(1) Distribution equal to $0.0042 per share.
(2) 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, 2000, 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 accounting principles generally accepted in the United States of America.
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 auditing standards generally accepted in the United States of America 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, 2000 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
November 22, 2000
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, 2000), as to the federal tax status of distributions received by
stockholders during such fiscal year. Accordingly, we are advising you that,
with the exception of a long-term capital gain distribution to common
shareholders of $0.0153 per common share, 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 2000. 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 2001. 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 $67.8 billion
in assets under management as of October 31, 2000.
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.
DISTRIBUTION POLICY
The Fund's Board of Directors has established a Dividend Reinvestment Plan
(the "Plan") under which all common stockholders whose shares are registered in
their own names, or in the name of PaineWebber or its nominee, will have all
dividends and other distributions on their shares of common stock automatically
reinvested in additional shares of common stock, unless such common stockholders
elect to receive cash. Common stockholders who elect to hold their shares in the
name of another broker or nominee should contact such broker or nominee to
determine whether, or how, they may participate in the Plan. The ability of such
stockholders to participate in the Plan may change if their shares are
transferred into the name of another broker or nominee.
A stockholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and stockholders who have
previously terminated participation in the Plan may rejoin it at any time.
Changes in elections must be made in writing to the Fund's transfer agent and
should include the stockholder's name and address as they appear on that share
certificate or in the transfer agent's records. An election to terminate
participation in the Plan, until such election is changed, will be deemed an
election by a stockholder to take all subsequent distributions in cash. An
election will be effective only for distributions declared and having a record
date at least ten days after the date on which the election is received.
19
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (concluded)
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, N.A., c/o PFPC Inc., P.O. Box 8030, Boston, Massachusetts 02266-8030.
20
<PAGE>
[This Page Intentionally Left Blank]
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
PRINCIPAL OFFICERS
Brian M. Storms Paul H. Schubert
PRESIDENT VICE PRESIDENT AND TREASURER
Amy R. Doberman Elbridge T. Gerry, III
VICE PRESIDENT VICE PRESIDENT
Dianne E. O'Donnell
VICE PRESIDENT AND SECRETARY
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>
A N N U A L R E P O R T
======================
INVESTMENT
GRADE
MUNICIPAL
INCOME
FUND INC.
(c)2000 PaineWebber Incorporated SEPTEMBER 30, 2000
All rights reserved.
