<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC. SEMIANNUAL REPORT
May 14, 1997
Dear Shareholder,
We are pleased to present the semiannual report for Investment Grade Municipal
Income Fund Inc. for the six months ended March 31, 1997.
PERFORMANCE
- --------------------------------------------------------------------------------
For the period, Investment Grade Municipal Income Fund recorded a total return
of 2.4%, based on the Fund's common stock net asset value. The Fund's total
return for the same time period based on its common stock market value was 4.7%.
As of March 31, 1997, the Fund's net asset value per share was $16.05, and its
share price on the New York Stock Exchange was $13.81.
During the period, the Fund paid dividends from net investment income to
common shareholders totalling $0.45 per share of common stock. Since July 1995,
the Fund has paid a monthly dividend of $0.075 per share of common stock. Given
the current interest rate environment, we anticipate that the monthly dividend
will remain unchanged for the remainder of 1997.
GENERAL MARKET OVERVIEW
- --------------------------------------------------------------------------------
Early in the period, the economy grew moderately, which kept long-term interest
rates relatively stable and pushed bond prices higher. Only Federal Reserve
Chairman Alan Greenspan's "irrational exuberance" speech late in 1996 put a
damper on the bond market. In February and March, the economy began showing
clear signs of strength, which pushed long-term interest rates higher and bond
prices lower. Some of the most visible signs of an overheating economy included
a marked increase in employment, wages and consumer spending. On March 25th, in
a preemptive strike against inflation, the Federal Reserve raised the federal
funds rate to 5.50%, from 5.25%. The fed funds rate is the rate banks charge
each other for overnight loans.
In late 1996, municipal bond prices rose strongly in tandem with Treasury
securities due largely to the favorable economic environment. The continuing
slowdown in the supply of new municipal issues also contributed to the
attractiveness of these securities. When fewer bonds are on the market, demand
outstrips supply, and buyers are willing to pay more for existing bonds. When
interest rates edged higher, the municipal market outperformed the Treasury
market. This is not uncommon, since municipal bonds tend to be less interest-
rate sensitive than Treasurys due to their tax-exempt status.
1
<PAGE>
SEMIANNUAL REPORT
[CHART]
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
The Fund enjoyed strong performance during this period due to price gains
realized when premium callable bonds rolled down the yield curve to trade at a
spread off of prerefunded bonds. The Fund's decision to maintain a longer
effective duration than its benchmark when interest rates began to fall, a
bullish stance, that also contributed favorably to performance. As interest
rates began to rise in early 1997, we shortened our duration to bring it
virtually back in line with our benchmark, a defensive measure. This decision
helped to protect shareholder capital during a difficult period for bond prices.
Relationships between sectors were little changed throughout the period.
However, in April we sold three positions in the health care sector due to their
deteriorating credit ratings: Illinois Health for Glen Oaks Medical Center,
Hinsdale Hospital and Philadelphia Hospital-Chestnut Hill. The proceeds from the
sale of these bonds were used to purchase Colorado transportation bonds.
As of March 31, 1997, the Fund was fully invested in a well-diversified
portfolio of long-term municipal securities with an average weighted maturity of
18.8 years.
As of March 31, 1997, the largest percentages of the Fund's portfolio
assets, were invested in securities of New York (14.0%), Texas (12.6%), Illinois
(12.5%), Indiana (11.1%) and Massachusetts (7.5%). Three of the larger sector
holdings were water revenue (17.9%), power revenue (16.9%), and general
obligations (11.5%).
OUTLOOK
- --------------------------------------------------------------------------------
Given the Federal Reserve's track record under Chairman Alan Greenspan, we are
likely to witness one or perhaps two more rate increases during the next
reporting period. Our opinion is not only widely held, but we firmly believe the
bond market has already priced another Federal Reserve rate hike into the
market. Thus, any signs of economic weakness in the coming weeks could ignite a
bond market rally. While our near-term expectation is that interest rates will
probably edge slightly higher due to the current strength of the U.S. economy,
our longer-term outlook is favorable because real returns on bonds
2
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC. SEMIANNUAL REPORT
(current yield minus inflation) are currently at historically attractive levels.
Thus, any significant rise in interest rates due to further stronger-than-
expected economic news should present, in our opinion, an excellent long-term
buying opportunity.
OUR STRATEGY.
Given our economic forecast, we expect continued volatility in the bond
markets near-term. We will attempt to take advantage of a flat yield curve by
implementing a barbell approach--selling intermediate maturities and buying a
combination of longer and shorter maturities. This will potentially enhance
performance when the yield curve returns to its normal shape.
Additionally, we see opportunities in select spots on the yield curve,
specifically issues in the 15- to 20-year maturity range. We expect to continue
to diversify across the yield curve and credit spectrum and will keep the fund
diversified to enhance its potential to enhance returns and limit portfolio
risk.
As always, we will continue to monitor the supply and demand environment,
state-by-state, searching for possible swap opportunities, and will monitor
relative value relationships between municipal sectors. From an individual
security and credit analysis standpoint, we will seek complex structures (e.g.,
call features and sinking funds), in our effort to find undervalued bonds and
buying opportunities among issues with potential improvements in their
underlying credits.
Thank you for your investment in Investment Grade Municipal Income Fund
Inc. We appreciate the opportunity to serve your investment needs and hope that
you will contact us whenever you have any questions.
Sincerely,
/s/ Margo N. Alexander /s/ Elbridge T. Gerry III /s/ Cynthia Bow
MARGO N. ALEXANDER ELBRIDGE T. GERRY III CYNTHIA BOW
President, Senior Vice President Portfolio Manager
Mitchell Hutchins Mitchell Hutchins Investment Grade
Asset Management Inc. Asset Management Inc. Municipal Income Fund Inc.
Portfolio Manager,
Investment Grade
Municipal Income Fund Inc.
3
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- --------- ----------- ----------- -------------------- -------------- -------------
<C> <S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS--94.78%
ALASKA--2.90%
$ 6,540 Valdez Marine Terminal
British Petroleum Company
Sohio Pipeline Project...... Aa2 AA 12/01/25 7.000% $ 7,141,680
-------------
CALIFORNIA--1.52%
3,500 California Public Works Board
California State University
(Pre-refunded with U.S.
Government Securities to
09/01/00 @ 102)............. A A 09/01/16 6.250 3,748,500
-------------
COLORADO--3.20%
5,950 Arapahoe County Capital
Improvement
Trust Fund Highway
Revenue..................... Baa BB 08/31/26 7.000 6,319,911
1,500 Denver City & County
Excise Tax Revenue Bonds
(MBIA Insured).............. Aaa AAA 09/01/14 6.500 1,558,500
-------------
7,878,411
-------------
CONNECTICUT--3.92%
9,360 Connecticut Housing Finance
Authority................... Aa AA 05/15/14 to 11/15/23 6.200 to 6.750 9,648,955
-------------
GEORGIA--0.21%
500 Municipal Electric Authority
of Georgia.................. A A 01/01/16 6.375 511,425
-------------
ILLINOIS--12.26%
1,000 Illinois Educational
Facilities Authority
Northwestern University
(Pre-refunded
with U.S. Government
Securities to 12/01/01 @
102)........................ A AA 12/01/21 6.900 1,102,810
1,890 Illinois Toll & Highway
Authority (FGIC Insured).... Aaa AAA 01/01/16 6.200 1,916,441
7,380 Chicago Gas Supply Revenue
People's Gas................ Aa3 AA- 03/01/15 6.875 7,880,069
4,000 Chicago Water Works........... A1 AA- 11/15/19 6.000 4,000,640
250 Metropolitan Pier & Exposition
Authority................... A A+ 06/15/27 6.500 262,602
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 12,478,644
2,650 University of Illinois........ Aa AA- 04/01/22 5.750 2,554,812
-------------
30,196,018
-------------
INDIANA--10.91%
1,430 Indiana Transportation
Financing Authority......... A2 BBB 11/01/16 6.250 1,468,067
5,320 Indiana Transportation
Financing Authority
(Pre-refunded with U.S.
Government Securities to
11/01/02 @ 102)............. A2 BBB 11/01/16 6.250 5,750,760
6,000 Indianapolis Gas Utility (FGIC
Insured).................... Aaa AAA 06/01/23 6.200 6,099,840
2,000 Indianapolis Local Public
Improvement Bond Bank....... Aa AA- 07/01/10 6.000 2,058,720
</TABLE>
4
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- --------- ----------- ----------- -------------------- -------------- -------------
<C> <S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS -- (CONTINUED)
INDIANA -- (CONCLUDED)
$ 4,000 Marion County Hospital
Authority
Methodist Hospital of
Indiana..................... Aa3 AA- 09/01/13 6.500% $ 4,268,200
5,725 Petersburg County Pollution
Control
Indianapolis Power & Light
Company..................... Aa2 AA- 12/01/24 6.625 6,123,517
1,000 Purdue University............. Aa2 AA- 07/01/15 6.700 1,088,500
-------------
26,857,604
-------------
KENTUCKY--3.31%
7,750 Boone County Pollution Control
Dayton Power & Light
Company..................... Aa3 AA- 11/15/22 6.500 8,157,185
-------------
MASSACHUSETTS--7.38%
8,500 Massachusetts Bay
Transportation Authority.... A1 A+ 03/01/23 6.100 8,599,705
6,000 Massachusetts Water Resources
Authority
(Pre-refunded with U.S.
Government Securities to
07/15/02 @ 102)............. Aaa AAA 07/15/21 6.500 6,570,180
2,750 Massachusetts Water Resources
Authority
(Pre-refunded with U.S.
Government Securities to
12/01/01 @ 102)............. Aaa AAA 12/01/19 6.500 2,998,105
-------------
18,167,990
-------------
NEVADA--2.93%
6,750 Clark County Pollution Control
Nevada Power (FGIC
Insured).................... Aaa AAA 06/01/19 6.600 7,212,847
-------------
NEW YORK--12.28%
6,110 New York City General
Obligation.................. Baa1 BBB+ 02/01/16 to 08/01/17 7.000 6,456,373
40 New York City General
Obligation
(Pre-refunded with U.S.
Government Securities to
08/01/02 @ 101 1/2)......... Aaa BBB+ 08/01/17 7.000 44,660
6,000 New York State Local
Government Assistance
Corporation................. A3 A 04/01/21 6.250 6,150,060
5,350 New York State Local
Government Assistance
Corporation (Pre-refunded
with U.S. Government
Securities to 04/01/02 @
102)........................ Aaa AAA 04/01/21 6.750 5,905,865
1,500 New York State Medical Care
Facilities
(FHA Insured)............... Aa AAA 02/15/31 6.600 1,571,955
10,070 New York City Municipal Water
Finance..................... A2 A- 06/15/17 to 06/15/21 6.000 to 6.250 10,112,056
-------------
30,240,969
-------------
NORTH CAROLINA--2.14%
2,700 North Carolina Eastern
Municipal Power Agency...... Baa1 BBB 01/01/21 6.400 2,712,744
</TABLE>
5
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- --------- ----------- ----------- -------------------- -------------- -------------
<C> <S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS -- (CONTINUED)
NORTH CAROLINA -- (CONCLUDED)
$ 2,550 North Carolina Municipal Power
Agency
Catawba Electric Revenue.... A3 A- 01/01/17 6.250% $ 2,559,002
-------------
5,271,746
-------------
RHODE ISLAND--2.58%
6,175 Rhode Island Housing
Finance..................... Aa2 AA+ 04/01/27 6.500 6,344,319
-------------
SOUTH CAROLINA--4.95%
5,035 South Carolina Public Service
Authority
Santee Cooper (Pre-refunded
with U.S. Government
Securities to 07/01/02 @
102)........................ Aaa AAA 07/01/31 6.625 5,538,702
6,290 Richland County Pollution
Control
Union Camp Project Series
C........................... A1 A- 11/01/20 6.550 6,640,856
-------------
12,179,558
-------------
TEXAS--12.39%
5,000 Texas Health Facilities
Development Corporation--
All Saints Episcopal
Hospital (MBIA Insured)..... Aaa AAA 08/15/22 6.250 5,137,150
4,000 Coastal Bend Health Facilities
Incarnate Word Health System
(AMBAC Insured)............. Aaa AAA 01/01/17 6.300 4,145,720
4,750 Harris County Subordinated
Lien Revenue................ Aa3 AA 08/01/14 6.750 5,123,350
915 Harris County Toll Road
Authority
Senior Lien (AMBAC
Insured).................... Aaa AAA 08/15/17 6.500 978,611
1,000 Houston Water & Sewer
System...................... A A 12/01/14 6.375 1,045,140
6,180 Houston Water & Sewer System
(AMBAC Insured)............. Aaa AAA 12/01/17 6.375 6,435,852
395 Houston Water & Sewer System
(Pre-refunded with U.S.
Government Securities @ 102)
(AMBAC Insured)............. Aaa AAA 12/01/17 6.375 428,417
6,750 Sabine River Authority
Pollution Control
(FGIC Insured).............. Aaa AAA 10/01/22 6.550 7,215,885
-------------
30,510,125
-------------
VIRGINIA--4.36%
4,500 Virginia Beach Development
Authority
Sentara Bayside Hospital.... Aa2 AA 11/01/21 6.300 4,577,130
5,815 Virginia Transportation Board
Revenue
Route 28 Project............ Aa AA 04/01/18 6.500 6,162,970
-------------
10,740,100
-------------
WASHINGTON--4.76%
4,500 Metropolitan Seattle Sewer
(MBIA Insured).............. Aaa AAA 01/01/33 6.300 4,593,060
6,625 Metropolitan Seattle Sewer
(Pre-refunded with U.S.
Government Securities to
01/01/00 @ 102)............. Aaa AA- 01/01/31 6.875 7,133,601
-------------
11,726,661
-------------
</TABLE>
6
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- --------- ----------- ----------- -------------------- -------------- -------------
<C> <S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS--(CONCLUDED)
WISCONSIN--2.78%
$ 6,750 Wisconsin Health and
Educational Facilities
Authority--Sisters of
Sorrowful Mother Health Care
System (MBIA-Insured)....... Aaa AAA 06/01/20 6.250% $ 6,854,287
-------------
Total Long-Term Municipal Bonds
(cost--$221,276,425)...................... 233,388,380
-------------
SHORT-TERM MUNICIPAL NOTES--3.62%
ARIZONA--0.89%
$ 500 Phoenix General Obligation
Bonds....................... VMIG1 A1+ 04/01/97 3.850* 500,000
1,700 Pinal County Pollution Control
Revenue..................... P1 A1+ 04/01/97 3.850* 1,700,000
-------------
2,200,000
-------------
CALIFORNIA--0.04%
100 California Pollution Control
Financing
Authority (Southern
California Edison).......... VMIG1 A1+ 04/01/97 3.550* 100,000
-------------
FLORIDA--0.33%
800 Hillsborough County Pollution
Control..................... VMIG1 A1+ 04/01/97 4.000* 800,000
-------------
NEW YORK--1.63%
1,600 New York City................. VMIG1 A1+ 04/01/97 3.700 to 1,600,000
4.000*
600 New York City Series B (AMBAC
Insured).................... VMIG1 A1+ 04/01/97 4.000* 600,000
1,300 New York City Series B (MBIA
Insured).................... VMIG1 A1+ 04/01/97 3.800 to 1,300,000
4.000*
200 New York State Dormitory
Authority
(Cornell University)........ VMIG1 A1+ 04/01/97 3.750* 200,000
300 Port Authority of New York and
New Jersey.................. VMIG1 A1+ 04/01/97 3.750 to 300,000
4.000*
-------------
4,000,000
-------------
WYOMING--0.73%
1,800 Lincoln County Pollution
Control Revenue (Exxon
Project).................... P1 A1+ 04/01/97 3.900* 1,800,000
-------------
Total Short-Term Municipal Notes
(cost--$8,900,000)........................ 8,900,000
-------------
Total Investments
(cost--$230,176,425)--98.40%.............. 242,288,380
Other assets in excess of
liabilities--1.60%......................... 3,948,571
-------------
Net Assets --100.00%....................... $ 246,236,951
-------------
-------------
</TABLE>
- ----------------------------------
*Variable rate demand notes are payable on demand. The maturity dates shown are
the next interest rate reset dates. The interest rates shown are the current
rates as of March 31, 1997.
AMBAC--American Municipal Bond Assurance Corporation
FGIC--Financial Guaranty Insurance Company
FHA--Federal Housing Authority
MBIA--Municipal Bond Investors Assurance
See accompanying notes to financial statements
7
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost--$230,176,425)............................................ $242,288,380
Cash................................................................................................ 97,362
Interest receivable................................................................................. 4,214,407
Deferred organizational expenses.................................................................... 21,135
Other assets........................................................................................ 4,756
------------
Total assets...................................................................................... 246,626,040
------------
LIABILITIES:
Dividends payable to preferred shareholders......................................................... 149,458
Payable to investment adviser and administrator..................................................... 137,245
Accrued expenses and other liabilities.............................................................. 102,386
------------
Total liabilities................................................................................. 389,089
------------
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................................................................. 794,734
Accumulated net realized losses from investment transactions........................................ (343,878)
Net unrealized appreciation of investments.......................................................... 12,111,955
------------
Net assets applicable to common shareholders...................................................... 166,236,951
------------
Total net assets.................................................................................. $246,236,951
------------
------------
Net asset value per common share ($166,236,951 applicable to 10,356,667 common shares $16.05
outstanding)...................................................................................... ------------
------------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
MARCH 31, 1997
(UNAUDITED)
-------------------
<S> <C>
INVESTMENT INCOME:
Interest.......................................................................................... $ 7,376,798
----------
EXPENSES:
Investment advisory and administration............................................................ 1,116,352
Auction Preferred Shares expenses................................................................. 147,484
Custody and accounting............................................................................ 75,834
Legal and audit................................................................................... 55,921
Reports and notices to shareholders............................................................... 53,384
Amortization of organizational expenses........................................................... 21,135
Transfer agency and service fees.................................................................. 17,328
Directors' fees................................................................................... 6,125
Other expenses.................................................................................... 14,439
----------
1,508,002
Less: Fee waivers from adviser...................................................................... (311,797)
----------
Net expenses........................................................................................ 1,196,205
----------
NET INVESTMENT INCOME............................................................................... 6,180,593
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gains from investment transactions................................................... 106,492
Net change in unrealized appreciation/depreciation of investments................................. (826,330)
----------
NET REALIZED AND UNREALIZED LOSS FROM INVESTMENT ACTIVITIES......................................... (719,838)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................ $ 5,460,755
----------
----------
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED FOR THE YEAR
MARCH 31, 1997 ENDED
(UNAUDITED) SEPTEMBER 30, 1996
------------------ --------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income..................................... $ 6,180,593 $ 12,582,599
Net realized gains from investment transactions........... 106,492 --
Net change in unrealized appreciation/depreciation of
investments............................................... (826,330) 3,503,278
------------------ --------------------
Net increase in net assets resulting from operations...... 5,460,755 16,085,877
------------------ --------------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income--common stockholders................ (4,660,500) (9,321,000)
Net investment income--preferred stockholders............. (1,367,120) (2,866,596)
------------------ --------------------
Total dividends to stockholders......................... (6,027,620) (12,187,596)
------------------ --------------------
Net increase (decrease) in net assets..................... (566,865) 3,898,281
NET ASSETS:
Beginning of period....................................... 246,803,816 242,905,535
------------------ --------------------
End of period (including undistributed net investment
income of $794,734 and $641,761, respectively).......... $246,236,951 $ 246,803,816
------------------ --------------------
------------------ --------------------
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
MARCH 31, 1997
(UNAUDITED)
-------------------
<S> <C>
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Interest received....................................................................... $ 7,521,054
Expenses paid (net of fee waivers)...................................................... (1,153,885)
Purchase of short-term portfolio investments, net....................................... (1,500,000)
Purchase of long-term portfolio investments............................................. (6,574,809)
Sale of long-term portfolio investments................................................. 7,737,428
-------------------
Net cash provided by operating activities............................................... 6,029,788
-------------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Dividends paid from net investment income to common stockholders........................ (4,660,500)
Dividends paid from net investment income to preferred stockholders..................... (1,343,984)
-------------------
Net cash used for financing activities.................................................. (6,004,484)
-------------------
Net increase in cash...................................................................... 25,304
Cash at beginning of period............................................................... 72,058
-------------------
Cash at end of period..................................................................... $ 97,362
-------------------
-------------------
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.................................... $ 5,460,755
-------------------
Decrease in investments, at value....................................................... 368,401
Decrease in interest receivable......................................................... 158,312
Amortization of deferred organizational expenses........................................ 21,135
Increase in other assets................................................................ (4,756)
Increase in payable to investment adviser and administrator............................. 6,960
Increase in accrued expenses and other liabilities...................................... 18,981
-------------------
Total adjustments..................................................................... 569,033
-------------------
Net cash provided by operating activities............................................... $ 6,029,788
-------------------
-------------------
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (UNAUDITED)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Investment Grade Municipal Income Fund Inc. (the "Fund") was incorporated in
Maryland on August 6, 1992, and is registered with the Securities and Exchange
Commission as a closed-end diversified management investment company.
Organizational costs have been deferred and are being amortized on the straight
line method over a period not to exceed 60 months from the date the Fund
commenced operations.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies:
VALUATION OF INVESTMENTS--Where market quotations are readily available,
portfolio securities are valued thereon, provided such quotations adequately
reflect the fair value of the securities, in the judgment of Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of
PaineWebber Incorporated, investment adviser and administrator of the Fund. When
market quotations are not readily available, securities are valued based upon
appraisals received from a pricing service which utilizes a computerized matrix
pricing system, or based upon appraisals derived from information concerning
those securities or similar securities received from recognized dealers in those
securities. All other securities are valued at fair value as determined in good
faith by or under the direction of the Fund's board of directors. The amortized
cost method of valuation, which approximates market value, is used to value
certain debt obligations with 60 days or less remaining to maturity, unless the
Fund's board of directors determines that this does not represent fair value.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis. Discounts are accreted and premiums are amortized
as adjustments to interest income and the identified cost of securities.
DIVIDENDS AND DISTRIBUTIONS--The Fund intends to pay monthly cash dividends to
common stockholders at a level rate that over time will result in the
distribution of all of the Fund's net investment income remaining after the
payment of dividends on any outstanding preferred stock. Dividends and
distributions to common stockholders are recorded on the ex-dividend date.
Dividends to preferred stockholders are accrued daily. Dividends from net
investment income and distributions from realized capital gains from investment
transactions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (UNAUDITED)
CONCENTRATION OF RISK
The Fund follows an investment policy of investing primarily in municipal
obligations of various states. Economic changes affecting those states and
certain of their public bodies and municipalities may affect the ability of the
issuers within those states to pay interest on, or repay principal of, municipal
obligations held by the Fund.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund's board of directors has approved an investment advisory and
administration contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Fund. In accordance with the Advisory Contract, Mitchell Hutchins receives
compensation from the Fund, computed weekly and paid monthly, at the annual rate
of 0.90% of the Fund's average weekly net assets. For the six months ended March
31, 1997, Mitchell Hutchins voluntarily waived $311,797 in investment advisory
and administration fees from the Fund.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at March 31,
1997, was substantially the same as the cost of securities for financial
statement purposes.
At March 31, 1997, 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)............ $ 12,366,042
Gross depreciation (from investments having an excess of cost over value)............ (254,087)
-------------
Net unrealized appreciation of investments........................................... $ 12,111,955
-------------
-------------
</TABLE>
For the six months ended March 31, 1997, total aggregate purchases and sales
of portfolio securities, excluding short-term securities were $6,574,809 and
$7,737,428, 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, 1996, the Fund had a net capital loss carryforward of
$450,370 which is available as a reduction, to the extent provided in the
regulations, of future net realized capital gains, and will expire by September
30, 2004. To the extent that such losses are used to offset future capital
gains, it is probable that the gains so offset will not be distributed.
CAPITAL STOCK
COMMON STOCK--There are 199,998,400 shares of $0.001 par value common stock
authorized. Of the 10,356,667 common shares outstanding, 7,320 shares are owned
by Mitchell Hutchins.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (UNAUDITED)
AUCTION PREFERRED SHARES--The Fund has issued 800 shares of Auction Preferred
Shares Series A and 800 shares of Auction Preferred Shares Series B, which are
referred to herein collectively as the "APS." All shares of each series of APS
have a liquidation preference of $50,000 per share plus an amount equal to
accumulated but unpaid dividends upon liquidation.
Dividends, which are cumulative, are generally reset every 28 days for APS
Series A and 90 days for APS Series B. Dividend rates ranged from 3.310% to
3.624% for the six months ended March 31, 1997.
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.
14
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH PERIOD IS
PRESENTED BELOW:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE NOVEMBER 6,
SIX MONTHS FOR THE YEARS ENDED 1992+
ENDED SEPTEMBER 30, THROUGH
MARCH 31, 1997 ------------------------------- SEPTEMBER 30,
(UNAUDITED) 1996 1995 1994 1993
-------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 16.11 $ 15.73 $ 14.72 $ 17.04 $ 15.00
-------------- --------- --------- --------- -------------
Net investment income....................................... 0.60 1.21 1.18 1.17 0.94
Net realized and unrealized gains (losses) from
investments............................................... (0.08) 0.35 1.03 (2.28) 2.13
-------------- --------- --------- --------- -------------
Net increase (decrease) from investment operations.......... 0.52 1.56 2.21 (1.11) 3.07
-------------- --------- --------- --------- -------------
Dividends from net investment income to:
Common stockholders....................................... (0.45) (0.90) (0.90) (0.98) (0.73)
Common share equivalent of dividends paid to preferred
stockholders............................................. (0.13) (0.28) (0.30) (0.21) (0.14)
Distributions from net realized gains from investment
transactions.............................................. -- -- -- (0.02) --
-------------- --------- --------- --------- -------------
Total dividends and distributions to stockholders........... (0.58) (1.18) (1.20) (1.21) (0.87)
-------------- --------- --------- --------- -------------
Underwriting and offering costs incurred with the preferred
stock offering charged to common stock.................... -- -- -- -- (0.16)
-------------- --------- --------- --------- -------------
Net asset value, end of period.............................. $ 16.05 $ 16.11 $ 15.73 $ 14.72 $ 17.04
-------------- --------- --------- --------- -------------
-------------- --------- --------- --------- -------------
Per share market value, end of period....................... $ 13.81 $ 13.63 $ 13.00 $ 12.38 $ 15.63
-------------- --------- --------- --------- -------------
-------------- --------- --------- --------- -------------
Total investment return(1).................................. 4.74% 12.03% 12.63% (15.21)% 9.10%
-------------- --------- --------- --------- -------------
-------------- --------- --------- --------- -------------
Ratios to average net assets attributable to common shares:
Total expenses, net of waivers from adviser............... 1.42%* 1.34% 1.69% 1.70% 1.55%*
Total expenses, before waivers from adviser............... 1.79%* 1.71% 1.82% 1.70% 1.55%*
Net investment income before preferred stock dividends.... 7.34%* 7.61% 7.87% 7.32% 6.55%*
Preferred stock dividends................................. 1.62%* 1.73% 2.02% 1.33% 0.95%*
Net investment income available to common stockholders.... 5.72%* 5.88% 5.85% 5.99% 5.60%*
Supplemental data:
Net assets, end of period (000's)......................... $ 246,237 $ 246,804 $ 242,906 $ 232,406 $ 256,466
Portfolio turnover rate................................... 3% 0% 7% 0% 6%
Asset coverage per share of preferred stock, end of
period................................................... $ 153,898 $ 154,252 $ 151,816 $ 145,254 $ 160,291
</TABLE>
- ----------------------------------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day and a sale at the current market
price on the last day of each period reported and assuming reinvestment of
dividends and other distributions to common stockholders at prices obtained
under the Fund's Dividend Reinvestment Plan. Total investment return for
periods of less than one year has not been annualized. Total investment
return does not reflect brokerage commissions.
15
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION
THE FUND
Investment Grade Municipal Income Fund Inc. (the "Fund") is a
diversified closed-end management investment company whose shares
trade on the New York Stock Exchange, Inc. ("NYSE"). The Fund's
investment objective is to achieve a high level of current income
that is exempt from federal income tax, consistent with the
preservation of capital. The Fund's investment adviser and
administrator is Mitchell Hutchins Asset Management Inc., a wholly
owned subsidiary of PaineWebber Incorporated, which has over $43
billion in assets under management as of April 30, 1997.
SHAREHOLDER INFORMATION
The Fund's NYSE trading symbol is "PPM." Weekly comparative net
asset value and market price information about the Fund is
published each Monday in THE WALL STREET JOURNAL, each Sunday in
THE NEW YORK TIMES and each week in BARRON'S, as well as in
numerous other newspapers.
DISTRIBUTION POLICY
The Fund's Board of Directors has established a Dividend
Reinvestment Plan (the "Plan") under which all common stockholders
whose shares are registered in their own names, or in the name of
PaineWebber or its nominee, will have all dividends and other
distributions on their shares of common stock automatically
reinvested in additional shares of common stock, unless such common
stockholders elect to receive cash. Common stockholders who elect
to hold their shares in the name of another broker or nominee
should contact such broker or nominee to determine whether, or how,
they may participate in the Plan. Additional shares of common stock
acquired under the Plan will be purchased in the open market, on
the NYSE, at prices that may be higher or lower than the net asset
value per share of the common stock at the time of the purchase.
The Fund will not issue any new shares of common stock in
connection with the Plan.
16
<PAGE>
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<PAGE>
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<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS
E. Garrett Bewkes, Jr. Mary C. Farrell
CHAIRMAN Meyer Feldberg
Margo N. Alexander George W. Gowen
Richard Q. Armstrong Frederic V. Malek
Richard R. Burt Carl W. Schafer
PRINCIPAL OFFICERS
Margo N. Alexander Julian F. Sluyters
PRESIDENT VICE PRESIDENT AND TREASURER
Victoria E. Schonfeld Elbridge T. Gerry III
VICE PRESIDENT VICE PRESIDENT
Dianne E. O'Donnell Cynthia Bow
VICE PRESIDENT AND SECRETARY VICE PRESIDENT
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
THE FINANCIAL INFORMATION INCLUDED HEREIN IS TAKEN FROM THE RECORDS OF THE FUND
WITHOUT EXAMINATION BY INDEPENDENT AUDITORS WHO DO NOT EXPRESS AN OPINION
THEREON.
NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(C) OF THE INVESTMENT
COMPANY ACT OF 1940 THAT FROM TIME TO TIME THE FUND MAY PURCHASE SHARES OF ITS
COMMON STOCK IN THE OPEN MARKET AT MARKET PRICES.
THIS REPORT IS SENT TO THE SHAREHOLDERS OF THE FUND FOR THEIR INFORMATION. IT IS
NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR THE USE IN THE
PURCHASE OR SALE OF SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THIS
REPORT.
<PAGE>
MARCH 31, 1997
SEMIANNUAL REPORT
-----------------
INVESTMENT
GRADE MUNICIPAL
INCOME FUND
INC.
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