<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
ANNUAL REPORT
November 14, 1997
Dear Shareholder,
We are pleased to present the annual report for Investment Grade Municipal
Income Fund Inc. for the fiscal year ended September 30, 1997.
GENERAL MARKET OVERVIEW
================================================================================
[GRAPHIC]
Early in the fiscal year, the release of new economic data indicated a
moderation in economic activity, and a 28-basis point rally ensued. The rally,
which derived further strength from an unchanged Federal Reserve policy and the
fact that economic statistics continued to indicate moderate growth and low
inflation, effectively positioned municipal bonds ahead of most other fixed
income securities. The rally, however, was short-lived, as the release of
unexpectedly strong economic data caused a correction in yields that lasted well
into February 1997.
Inflation fears that grew in the wake of the stronger-than-expected
economic growth prompted the Federal Reserve to raise interest rates by 25 basis
points in March 1997. This move contributed to negative returns in virtually
every bond sector for the first quarter of 1997. Good news, however, came on
April 28, when the report of the Employment Cost Index--considered the most
comprehensive wage-inflation indicator, and critical to Fed policy--presented a
very positive inflation picture. This information, combined with other factors,
turned market sentiment extremely bullish. Bonds entered a prolonged rally that,
supported by additional favorable data, continued through July and into the
beginning of August. Municipal bonds generally outperformed during this rally,
as new issue supply withered and demand increased from the June/July rollover of
maturing municipal bonds.
September ended the fiscal period on a positive note, as the prevailing
theme in the market was that above-trend economic growth could occur without
generating higher inflation. The final result: the yield on the 30-year Treasury
bond declined by almost 40 basis points from where it had been three months
prior, which coincided with a compression of municipal credit spreads.
INVESTMENT GRADE
MUNICIPAL INCOME
FUND INC.
Top Five Sectors
(as a % of portfolio assets
as of September 30, 1997)
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Water 17.8%
Power 17.3%
General Obligations 11.7%
Hospital Obligations 11.0%
Sales Tax 7.5%
<PAGE>
ANNUAL REPORT
PORTFOLIO REVIEW
================================================================================
INVESTMENT GRADE MUNICIPAL
INCOME FUND INC.
FUND PROFILE
[ARROW] Goal:
High current income exempt from Federal income tax, consistent with the
preservation of capital
[ARROW] Portfolio Managers:
Elbridge T. Gerry III and Cynthia Bow, MH Asset Management Inc.
[ARROW] Total Net Assets:
$253.8 million as of September 30, 1997
[ARROW] Dividend Payments:
Monthly
================================================================================
[GRAPHIC]
Performance--The Fund's total return for the 12 months ended September 30,
1997, based on the Fund's common stock net asset value was 10.03%, while the
Fund's total return for the same time period based on the Fund's common stock
market value was 17.76%. As of September 30, 1997, the Fund's net asset value
per share was $16.78, and its share price on the New York Stock Exchange was
$15.06.
The Fund paid dividends from net investment income to common shareholders,
which totaled $0.90 per share of common stock during the 12 months ended
September 30, 1997. The Fund has paid a monthly dividend of $0.075 per share of
common stock since July 1995. Given the current interest rate environment, we
anticipate that the monthly dividend will remain unchanged for the remainder of
1997.
Over the 12-month period ended September 30, 1997, the Fund performed in
line with the 10.02% return of its Lipper General Municipal Debt peer group.
Portfolio Highlights--Early in the period, premium callable bonds rolled
down the yield curve to trade at a spread off of pre-refunded bonds. In other
words, as the market rallied, the Fund's coupon premiums grew correspondingly.
This encouraged issuers of these bonds to refund this older and more costly debt
with cheaper current rates, thus accelerating price appreciation. The resulting
price gains were primarily responsible for the Fund's strong performance during
this period; however performance was further abetted by the portfolio's longer
duration stance (compared to its peers) and better call protection.
Mid-period, we sold Illinois Health for Glen Oaks Medical Center, Hinsdale
Hospital and Philadelphia Hospital-Chestnut Hill. The hospital sector has
weathered, and will continue to face, changes and challenges. After a
comprehensive study of our credits in this environment, the aforementioned were
identified as sales candidates due to their weak performances and our
expectations that they would continue to be vulnerable to events occurring in
the hospital sector. These positions were replaced with Colorado Transportation
bonds, which benefited Fund performance later in the fiscal year when they were
pre-refunded.
Toward the end of the fiscal year, the Fund's longer duration stance,
combined with better call protection, continued to help the Fund during a period
characterized by market buoyancy.
As of September 30, 1997, the Fund was fully invested in long-term
municipal securities with an average maturity of 17 years and was fully
diversified among municipal sectors.
2
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
ANNUAL REPORT
OUTLOOK
================================================================================
[ARROW]
Relative to other taxable securities, we believe that municipal bonds will
remain attractive. Given the municipal markets' correlation to technical factors
such as supply and demand, we will continue to take advantage of inefficiencies
as they arise. As always, we will monitor the municipal environment on a
state-by-state basis, as well as the relative value relationships between
municipal sectors. Additionally, we will seek municipal bonds that provide more
upside potential with relatively less downside risk.
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.
/s/MARGO N. ALEXANDER /s/ELBRIDGE T. GERRY III
- ------------------------------------- ---------------------------------------
MARGO N. ALEXANDER ELBRIDGE T. GERRY III
President, Senior Vice President,
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
Portfolio Manager, Investment Grade
Municipal Income Fund Inc.
/s/CYNTHIA BOW
- ---------------------------------------
CYNTHIA BOW
Vice President,
Mitchell Hutchins Asset Management Inc.
Portfolio Manager, Investment Grade
Municipal Income Fund Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended September 30, 1997 and reflects our views
at the time we are writing this report. Of course, these views may change in
response to changing circumstances. We encourage you to consult your investment
executive regarding your personal investment program.
INVESTMENT GRADE
MUNICIPAL INCOME
FUND INC.
Credit Quality(as a
% of portfoloi assets as of
September 30, 1997)
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
AAA/Aaa 44.6%
AA/Aa 29.4%
AA 15.5%
BBB/Baa 6.6%
Cash 3.9%
3
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997
<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--94.63%
Alaska--2.85%
$6,540 Valdez Marine Terminal British Petroleum Company
Sohio Pipeline Project ............................... Aa2 AA 12/01/25 7.000% $ 7,234,548
------------
California--1.49%
3,500 California Public Works Board
California State University (Pre-refunded with U.S.
Government Securities to 09/01/00 @ 102) ............. Aaa A 09/01/16 6.250 3,777,165
------------
Colorado--3.40%
5,950 Arapahoe County Capital Improvement
Trust Fund Highway Revenue ........................... Baa BB 08/31/26 7.000 7,056,700
1,500 Denver City & County
Excise Tax Revenue Bonds (MBIA Insured) .............. Aaa AAA 09/01/14 6.500 1,564,335
------------
8,621,035
------------
Connecticut--3.59%
8,590 Connecticut Housing Finance Authority .................. Aa AA 05/15/14 to 6.200 to 9,117,021
11/15/23 6.750 ------------
Georgia--0.21%
500 Municipal Electric Authority of Georgia ................ A3 A 01/01/16 6.375 527,660
------------
Illinois--12.24%
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 1,118,210
1,890 Illinois Toll & Highway Authority (FGIC Insured) ....... Aaa AAA 01/01/16 6.200 2,024,436
7,380 Chicago Gas Supply Revenue People's Gas ................ Aa3 AA- 03/01/15 6.875 8,030,178
4,000 Chicago Water Works .................................... A1 AA- 11/15/19 6.000 4,153,760
250 Metropolitan Pier & Exposition Authority ............... A2 AA- 06/15/27 6.500 271,003
11,350 Metropolitan Pier & Exposition Authority
(Pre-refunded with U.S. Government Securities to
06/15/03 @ 102) ...................................... Aaa A+ 06/15/27 6.500 12,760,691
2,650 University of Illinois ................................. Aa AA- 04/01/22 5.750 2,702,470
------------
31,060,748
------------
Indiana--10.91%
5,320 Indiana Transportation Finance Authority
(Pre-refunded with U.S. Government Securities
to 11/01/02 @ 102) ................................... Aaa A 11/01/16 6.250 5,867,162
1,430 Indiana Transportation Finance Authority ............... A2 A 11/01/16 6.250 1,517,974
6,000 Indianapolis Gas Utility (FGIC Insured) ................ Aaa AAA 06/01/23 6.200 6,427,680
</TABLE>
4
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
<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)
Indiana--10.91% (concluded)
$2,000 Indianapolis Local Public Improvement Bond Bank ........ Aa AA- 07/01/10 6.000% $ 2,119,140
4,000 Marion County Hospital Authority
Methodist Hospital of Indiana ........................ Aa3 AAA 09/01/13 6.500 4,374,440
5,725 Petersburg County Pollution Control
Indianapolis Power & Light Company ................... Aa2 AA- 12/01/24 6.625 6,261,547
1,000 Purdue University ...................................... Aa2 AA- 07/01/15 6.700 1,114,760
------------
27,682,703
------------
Kentucky--3.31%
7,750 Boone County Pollution Control
Dayton Power & Light Company ......................... Aa3 AA- 11/15/22 6.500 8,407,975
------------
Massachusetts--7.47%
8,500 Massachusetts Bay Transportation Authority ............. A1 A+ 03/01/23 6.100 9,250,380
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 6,669,000
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 3,035,670
------------
18,955,050
------------
Nevada--2.93%
6,750 Clark County Pollution Control Nevada Power
(FGIC Insured) ....................................... Aaa AAA 06/01/19 6.600 7,432,087
------------
New York--12.31%
3,075 New York City General Obligation ....................... Baa1 BBB+ 02/01/16 to 7.000 3,369,218
08/01/17
3,035 New York City General Obligation
(Pre-refunded with U.S. Government Securities to
02/01/02 @ 1011/2) ................................... Baa1 BBB 02/01/16 7.000 3,316,648
40 New York City General Obligation
(Pre-refunded with U.S. Government Securities to
08/01/02 @ 1011/2) ................................... Aaa BBB+ 08/01/17 7.000 45,287
6,000 New York State Local Government Assistance Corporation.. A3 A+ 04/01/21 6.250 6,387,600
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 5,986,115
1,500 New York State Medical Care Facilities
(FHA Insured) ........................................ NR AAA 02/15/31 6.600 1,627,395
10,070 New York City Municipal Water Finance .................. A2 A- 06/15/17 to 6.000 to 10,491,805
06/15/21 6.250 ------------
31,224,068
------------
</TABLE>
5
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
<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)
North Carolina--2.16%
$2,700 North Carolina Eastern Municipal Power Agency .......... Baa1 BBB 01/01/21 6.400% $ 2,822,094
2,550 North Carolina Municipal Power Agency
Catawba Electric Revenue ............................. A3 A- 01/01/17 6.250 2,648,966
------------
5,471,060
------------
Rhode Island--2.55%
6,175 Rhode Island Housing Finance Authority ................. Aa2 AA+ 04/01/27 6.500 6,471,462
------------
South Carolina--4.89%
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 5,619,815
6,290 Richland County Pollution Control
Union Camp Project Series C .......................... A1 A- 11/01/20 6.550 6,800,811
------------
12,420,626
------------
Texas--12.41%
5,000 Texas Health Facilities Development Corporation-
All Saints Episcopal Hospital (MBIA Insured) ......... Aaa AAA 08/15/22 6.250 5,325,400
4,000 Coastal Bend Health Facilities
Incarnate Word Health System (AMBAC Insured) ......... Aaa AAA 01/01/17 6.300 4,291,280
4,750 Harris County Subordinated Lien Revenue ................ Aa2 AA 08/01/14 6.750 5,195,360
915 Harris County Toll Road Authority Senior Lien
(AMBAC Insured) ...................................... Aaa AAA 08/15/17 6.500 1,006,436
1,000 Houston Water & Sewer System ........................... A A 12/01/14 6.375 1,076,420
6,180 Houston Water & Sewer System (AMBAC Insured) ........... Aaa AAA 12/01/17 6.375 6,708,390
395 Houston Water & Sewer System
(Pre-refunded with U.S. Government
Securities @ 102) (AMBAC Insured) .................... Aaa AAA 12/01/17 6.375 434,160
6,750 Sabine River Authority Pollution Control Revenue
(FGIC Insured) ....................................... Aaa AAA 10/01/22 6.550 7,452,540
------------
31,489,986
------------
Virginia--4.37%
4,500 Virginia Beach Development Authority
Sentara Bayside Hospital ............................. Aa2 AA 11/01/21 6.300 4,764,780
5,815 Virginia Transportation Board Revenue
Route 28 Project ....................................... Aa AA 04/01/18 6.500 6,334,628
------------
11,099,408
------------
Washington--4.73%
4,500 Metropolitan Seattle Sewer (MBIA Insured) .............. Aaa AAA 01/01/33 6.300 4,862,385
6,625 Metropolitan Seattle Sewer
(Pre-refunded with U.S. Government Securities to
01/01/00 @ 102) ...................................... Aaa AA- 01/01/31 6.875 7,141,617
------------
12,004,002
------------
</TABLE>
6
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
<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)
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% $ 7,136,775
------------
Total Long-Term Municipal Bonds (cost--$220,517,081) 240,133,379
------------
Short-Term Municipal Notes--3.86%
Arizona--1.18%
800 Maricopa County Pollution Control Revenue
Public Service Company Series P1 A1+ 10/01/97 4.000* 800,000
500 Phoenix General Obligation Bonds VMIG1 A1+ 10/01/97 3.800* 500,000
1,700 Pinal County Pollution Control Revenue P1 A1+ 10/01/97 3.800* 1,700,000
------------
3,000,000
------------
Florida--0.08%
200 Hillsborough County Pollution Control Revenue VMIG1 A1+ 10/01/97 4.000* 200,000
------------
Louisiana--0.04%
100 Parish of East Baton Rouge Pollution Control Revenue P1 A1+ 10/01/97 3.800* 100,000
------------
New York--2.17%
1,600 New York City VMIG1 A1+ 10/01/97 3.800 to 1,600,000
4.000*
700 New York City (AMBAC Insured) VMIG1 A1+ 10/01/97 3.850* 700,000
1,200 New York City (MBIA Insured) VMIG1 A1+ 10/01/97 3.800 to 1,200,000
3.850*
100 New York City Series B VMIG1 A1+ 10/01/97 4.000* 100,000
300 New York City Series B (MBIA Insured) VMIG1 A1+ 10/01/97 3.750* 300,000
100 New York State Dormitory Authority
(Cornell University) VMIG1 A1+ 10/01/97 3.800* 100,000
1,000 New York State Energy Research And Development
Authority Pollution Control Revenue VMIG1 A1+ 10/01/97 3.700 to 1,000,000
3.900*
500 Port Authority of New York and New Jersey VMIG1 A1+ 10/01/97 3.800 to 500,000
4.000* ------------
5,500,000
------------
Wyoming--0.39%
1,000 Lincoln County Pollution Control Revenue
(Exxon Project) P1 A1+ 10/01/97 3.800* 1,000,000
------------
Total Short-Term Municipal Notes (cost--$9,800,000) 9,800,000
------------
Total Investments (cost -- $230,317,081)--98.49% 249,933,379
Other assets in excess of liabilities--1.51% 3,833,163
------------
Net Assets--100.00% $253,766,542
============
</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 September 30, 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>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1997
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost--$230,317,081) ....................................................... $ 249,933,379
Cash ........................................................................................................... 60,222
Interest receivable ............................................................................................ 4,201,206
Deferred organizational expenses ............................................................................... 3,898
-------------
Total assets ................................................................................................... 254,198,705
-------------
Liabilities
Payable to investment adviser and administrator ................................................................ 161,223
Dividends payable to preferred shareholders .................................................................... 54,249
Accrued expenses and other liabilities ......................................................................... 216,691
-------------
Total liabilities .............................................................................................. 432,163
-------------
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
819,982
Accumulated net realized losses from investment transactions ................................................... (343,878)
Net unrealized appreciation of investments ..................................................................... 19,616,298
-------------
Net assets applicable to common shareholders ................................................................ 173,766,542
-------------
Total net assets ............................................................................................ $ 253,766,542
=============
Net asset value per common share ($173,766,542 applicable to 10,356,667 common shares outstanding) .......... $ 16.78
=============
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year
Ended
September 30, 1997
------------------
<S> <C>
Investment income:
Interest ............................................................................................... $ 14,756,317
------------
Expenses:
Investment advisory and administration ................................................................. 2,243,523
Auction Preferred Shares expenses ...................................................................... 284,496
Custody and accounting ................................................................................. 151,873
Legal and audit ........................................................................................ 109,978
Reports and notices to shareholders .................................................................... 97,743
Amortization of organizational expenses ................................................................ 38,372
Transfer agency and service fees ....................................................................... 34,068
Directors' fees ........................................................................................ 12,250
Other expenses ......................................................................................... 33,557
------------
3,005,860
Less: Fee waivers from adviser ......................................................................... (570,371)
------------
Net expenses ........................................................................................... 2,435,489
------------
Net investment income .................................................................................. 12,320,828
------------
Realized and unrealized gains from investment activities:
Net realized gains from investment transactions ........................................................ 106,492
Net change in unrealized appreciation/depreciation of investments ...................................... 6,678,013
------------
Net realized and unrealized gains from investment activities ........................................... 6,784,505
------------
Net increase in net assets resulting from operations ................................................... $ 19,105,333
============
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
------------------------------------
1997 1996
------------- -------------
<S> <C> <C>
From operations:
Net investment income ................................................................ $ 12,320,828 $ 12,582,599
Net realized gains from investment transactions ...................................... 106,492 --
Net change in unrealized appreciation/depreciation of investments .................... 6,678,013 3,503,278
------------- -------------
Net increase in net assets resulting from operations ................................. 19,105,333 16,085,877
------------- -------------
Dividends to shareholders from:
Net investment income--common stockholders ........................................... (9,321,000) (9,321,000)
Net investment income--preferred stockholders ........................................ (2,821,607) (2,866,596)
------------- -------------
Total dividends to stockholders ...................................................... (12,142,607) (12,187,596)
------------- -------------
Net increase in net assets ........................................................... 6,962,726 3,898,281
Net assets:
Beginning of year .................................................................... $ 246,803,816 $ 242,905,535
------------- -------------
End of year (including undistributed net investment income of $819,982
and $641,761, respectively) ....................................................... $ 253,766,542 $ 246,803,816
============= =============
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year
Ended
September 30, 1997
------------------
<S> <C>
Cash flows provided (used) by operating activities:
Interest received ......................................................................................... $ 14,903,118
Expenses paid (net of fee waivers) ........................................................................ (2,232,893)
Purchase of short-term portfolio investments, net ......................................................... (2,400,000)
Purchase of long-term portfolio investments ............................................................... (6,574,809)
Sale of long-term portfolio investments ................................................................... 8,507,428
------------
Net cash provided by operating activities ................................................................. 12,202,844
------------
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 ....................................... (2,893,680)
------------
Net cash used for financing activities .................................................................... (12,214,680)
------------
Net decrease in cash ...................................................................................... (11,836)
Cash at beginning of year ................................................................................. 72,058
------------
Cash at end of year ....................................................................................... $ 60,222
============
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 ...................................................... $ 19,105,333
------------
Increase in investments, at value ......................................................................... (7,276,598)
Decrease in interest receivable ........................................................................... 171,513
Amortization of deferred organizational expenses .......................................................... 38,372
Increase in payable to investment adviser and administrator ............................................... 30,938
Increase in accrued expenses and other liabilities ........................................................ 133,286
------------
Total adjustments ......................................................................................... (6,902,489)
------------
Net cash provided by operating activities ................................................................. $ 12,202,844
============
</TABLE>
See accompanying notes to financial statements
11
<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.
Organizational costs have been deferred and are being amortized on the straight
line method over a period not to exceed 60 months from the date the Fund
commenced operations.
The preparation of financial statements in accordance with generally
accepted accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies:
Valuation of Investments--Where market quotations are readily available,
portfolio securities are valued thereon, provided such quotations adequately
reflect the fair value of the securities, in the judgment of Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned asset management
subsidiary of PaineWebber Incorporated, investment adviser and administrator of
the Fund. When market quotations are not readily available, securities are
valued based upon appraisals received from a pricing service which utilizes a
computerized matrix pricing system, or based upon appraisals derived from
information concerning those securities or similar securities received from
recognized dealers in those securities. All other securities are valued at fair
value as determined in good faith by or under the direction of the Fund's board
of directors. The amortized cost method of valuation, which approximates market
value, is used to value certain debt obligations with 60 days or less remaining
to maturity, unless the Fund's board of directors determines that this does not
represent fair value.
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis. Discounts are accreted and premiums are amortized
as adjustments to interest income and the identified cost of securities.
Dividends and Distributions--The Fund intends to pay monthly dividends to
common stockholders at a level rate that over time will result in the
distribution of all of the Fund's net investment income remaining after the
payment of dividends on any outstanding preferred stock. Dividends and
distributions to common stockholders are recorded on the ex-dividend date.
Dividends to preferred stockholders are accrued daily. Dividends from net
investment income and distributions from realized capital gains from investment
transactions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification.
CONCENTRATION OF RISK
The Fund follows an investment policy of investing primarily in municipal
obligations of various states. Economic changes affecting those states and
certain of their public bodies and municipalities may affect the ability of the
issuers within those states to pay interest on, or repay principal of, municipal
obligations held by the Fund.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
INVESTMENT ADVISOR 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, 1997, Mitchell Hutchins voluntarily waived $570,371 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, 1997 was substantially the same as the cost of securities for financial
statement purposes.
At September 30, 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) ....... $ 19,616,298
Gross depreciation (from investments having an excess of cost over value) ....... --
------------
Net unrealized appreciation of investments ...................................... $ 19,616,298
============
</TABLE>
For the year ended September 30, 1997, total aggregate purchases and sales
of portfolio securities, excluding short-term securities, were $6,574,809 and
$8,507,428, 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, 1997, the Fund had a net capital loss carryforward of
$343,878 available as a reduction, to the extent provided in the regulations, of
future net realized capital gains, and will expire by September 30, 2004. To the
extent that such losses are used to offset future capital gains, it is probable
that the gains so offset will not be distributed.
CAPITAL STOCK
Common Stock--There are 199,998,400 shares of $0.001 par value common stock
authorized. Of the 10,356,667 common shares outstanding, 7,551 shares are owned
by Mitchell Hutchins.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Auction Preferred Shares--The Fund has issued 800 shares of Auction
Preferred Shares Series A and 800 shares of Auction Preferred Shares Series B,
which are referred to herein collectively as the "APS." All shares of each
series of APS have a liquidation preference of $50,000 per share plus an amount
equal to accumulated but unpaid dividends upon liquidation.
Dividends, which are cumulative, are generally reset every 28 days for APS
Series A and 90 days for APS Series B. Dividend rates ranged from 3.31% to 3.74%
for the year ended September 30, 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>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
For the Period
For the Years Ended November 6,
September 30, 1992+
------------------------------------------- through
September 30,
1997 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 ....................................... 1.19 1.21 1.18 1.17 0.94
Net realized and unrealized gains (losses)
from investments ......................................... 0.65 0.35 1.03 (2.28) 2.13
------ ------ ------ ------ ------
Net increase (decrease) from investment operations .......... 1.84 1.56 2.21 (1.11) 3.07
------ ------ ------ ------ ------
Dividends from net investment income:
Common stockholders ...................................... (0.90) (0.90) (0.90) (0.98) (0.73)
Common share equivalent of dividends paid
to preferred stockholders ............................. (0.27) (0.28) (0.30) (0.21) (0.14)
Distributions from net realized gains
from investment transactions ............................. -- -- -- (0.02) --
------ ------ ------ ------ ------
Total dividends and distributions to stockholders ........... (1.17) (1.18) (1.20) (1.21) (0.87)
------ ------ ------ ------ ------
Underwriting and offering costs incurred with the
preferred stock offering charged to common stock ......... -- -- -- -- (0.16)
------ ------ ------ ------ ------
Net asset value, end of period .............................. $16.78 $16.11 $15.73 $14.72 $17.04
====== ====== ====== ====== ======
Per share market value, end of period ....................... $15.06 $13.63 $13.00 $12.38 $15.63
====== ====== ====== ====== ======
Total investment return (1) ................................. 17.76% 12.03% 12.63% (15.21)% 9.10%
====== ====== ====== ====== ======
Ratios to average net assets attributable to common shares:
Total expenses, net of waivers from adviser ........... 1.44% 1.34% 1.69% 1.70% 1.55%*
Total expenses, before waivers from adviser .............. 1.77% 1.71% 1.82% 1.70% 1.55%*
Net investment income before preferred stock dividends ... 7.27% 7.61% 7.87% 7.32% 6.55%*
Preferred stock dividends ................................ 1.66% 1.73% 2.02% 1.33% 0.95%*
Net investment income available to common stockholders ... 5.61% 5.88% 5.85% 5.99% 5.60%*
Supplemental data:
Net assets, end of period (000's) ........................ $253,767 $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 ......................................... $158,604 $154,252 $151,816 $145,254 $160,291
</TABLE>
- ---------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a purchase of common stock
at the current market price on the first day and a sale at the current
market price on the last day of each period reported and assuming
reinvestment of dividends and other distributions to common stockholders at
prices obtained under the Fund's Dividend Reinvestment Plan. Total
investment return for periods of less than one year has not been
annualized. Total investment return does not reflect brokerage commissions.
15
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
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, 1997, 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 four years in the period then ended and for the
period November 6, 1992 (commencement of operations) through September 30, 1993,
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, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
November 17, 1997
16
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
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, 1997), 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 1997. 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 1998. Stockholders are advised to consult their
own tax advisers with respect to the tax consequences of their investment in the
Fund.
17
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
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 $47 billion in
assets under management as of October 31, 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.
An annual meeting of shareholders of the Fund was held on January 6, 1997.
At the meeting, Margo N. Alexander, Richard Q. Armstrong, E. Garrett Bewkes,
Jr., Richard R. Burt, Mary C. Farrell, Meyer Feldberg, George W. Gowen,
Frederick V. Malek, Carl W. Schafer and John R. Torell III were elected to serve
as directors until the next annual meeting of shareholders, or until their
successors are elected and qualified; and Price Waterhouse LLP was ratified as
independent accountants for the Fund for fiscal year ended September 30, 1997.
COMMON STOCK AND APS SHARES VOTING AS A SINGLE CLASS:
PROPOSAL 1
<TABLE>
<CAPTION>
Shares
Shares Withhold
To vote for or against the election of: for Voted Authority
------------- ----------
<S> <C> <C>
Richard Q. Armstrong .......................................................... 9,507,468.746 74,102.353
E. Garrett Bewkes, Jr. ........................................................ 9,508,686.746 72,594.353
Richard R. Burt ............................................................... 9,507,178.746 74,102.353
Mary C. Farrell ............................................................... 9,507,178.746 74,102.353
George W. Gowen ............................................................... 9,507,178.746 74,102.353
Frederick V. Malek ............................................................ 9,507,178.746 74,102.353
Carl W. Schafer ............................................................... 9,507,178.146 74,102.353
John R. Torell III* ........................................................... 9,507,680.746 73,600.353
</TABLE>
*Mr. Torrell subsequently resigned from the Board in March 1997.
PROPOSAL 2
<TABLE>
<CAPTION>
Shares
Shares Withhold Shares
For Voted Authority Against
--------- --------- -------
<S> <C> <C> <C>
Ratification of the selection of
Price Waterhouse LLP as independent accountants
for the fiscal year ending September 30, 1997 ....................... 9,511,256.327 35,438.375 34,586.397
</TABLE>
AUCTION PREFERRED SHARES:
PROPOSAL 1
Shares
Shares Withhold
To vote for or against the election of: for Voted Authority
--------- ---------
Margo N. Alexander .................................. 710.000 100.000
Meyer Feldberg ...................................... 710.000 100.000
(Broker non-votes and abstentions are included within
the "Shares Withhold Authority" Totals)
18
<PAGE>
I N V E S T M E N T G R A D E M U N I C I P A L I N C O M E F U N D I N C .
GENERAL INFORMATION
DISTRIBUTION POLICY
The Fund's Board of Directors has established a Dividend Reinvestment Plan
(the "Plan") under which all common stockholders whose shares are registered in
their own names, or in the name of PaineWebber or its nominee, will have all
dividends and other distributions on their shares of common stock automatically
reinvested in additional shares of common stock, unless such common stockholders
elect to receive cash. Common stockholders who elect to hold their shares in the
name of another broker or nominee should contact such broker or nominee to
determine whether, or how, they may participate in the Plan. The ability of such
stockholders to participate in the Plan may change if their shares are
transferred into the name of another broker or nominee.
A stockholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and stockholders who have
previously terminated participation in the Plan may rejoin it at any time.
Changes in elections must be made in writing to the Fund's transfer agent and
should include the stockholder's name and address as they appear on that share
certificate or in the transfer agent's records. An election to terminate
participation in the Plan, until such election is changed, will be deemed an
election by a stockholder to take all subsequent distributions in cash. An
election will be effective only for distributions declared and having a record
date at least ten days after the date on which the election is received.
Additional shares of common stock acquired under the Plan will be purchased
in the open market, on the NYSE, at prices that may be higher or lower than the
net asset value per share of the common stock at the time of the purchase. The
number of shares of common stock purchased with each dividend will be equal to
the result obtained by dividing the amount of the dividend payable to a
particular stockholder by the average price per share (including applicable
brokerage commissions) that the transfer agent was able to obtain in the open
market. The Fund will not issue any new shares of common stock in connection
with the Plan. There is no charge to participants for reinvesting dividends or
other distributions. The transfer agent's fees for handling the reinvestment of
distributions will be paid by the Fund. However, each participant pays a pro
rata share of brokerage commissions incurred with respect to the transfer
agent's open market purchases of common stock in connection with the
reinvestment of distributions. The automatic reinvestment of dividends and other
distributions in shares of common stock does not relieve participants of any
income tax that may be payable on such distributions. See "Tax Information."
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.
19
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
===============================================================================
DIRECTORS
E. Garrett Bewkes, Jr. Mary C. Farrell
Chairman Meyer Feldberg
George W. Gowen
Margo N. Alexander Frederic V. Malek
Richard Q. Armstrong Carl W. Schafer
Richard R. Burt
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.
1285 Avenue of the Americas
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>
[GRAPHIC]
SEPTEMBER 30, 1997
================================================================================
INVESTMENT
GRADE MUNICIPAL
INCOME FUND
INC.
A N N U A L R E P O R T
[LOGO]
(C)1997 PaineWebber Incorporated
Member SIPC
