UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07096
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Investment Grade Municipal Income Fund Inc.
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(Exact name of registrant as specified in charter)
51 West 52nd Street, New York, New York 10019-6114
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(Address of principal executive offices) (Zip code)
Amy R. Doberman
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, NY 10019-6114
(Name and address of agent for service)
Copy to:
Jack W. Murphy, Esq.
Dechert
1775 I Street, N.W.
Washington, DC 20006-2401
Registrant's telephone number, including area code: 212-882 5000
Date of fiscal year end: September 30
Date of reporting period: September 30, 2003
Item 1. Reports to Stockholders.
[LOGO] UBS Global Assets
Management
Investment Grade Municipal
Income Fund Inc.
Annual Report
September 30, 2003
Investment Grade Municipal Income Fund Inc.
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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:
William Veronda, UBS Global Asset Management (US) Inc.
Commencement:
November 6, 1992
NYSE Symbol:
PPM
Dividend Payments:
Monthly
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November 14, 2003
Dear Shareholder,
We present you with the annual report for Investment Grade Municipal Income Fund
Inc. for the fiscal year ended September 30, 2003.
Performance
For the fiscal year ended September 30, 2003, Investment Grade Municipal Income
Fund Inc.'s net asset value return was 6.31%. On a market price basis, the
Fund's return was 2.76%. Over the same period, the Lipper General Municipal Debt
Fund (Leveraged) Median's net asset value and market price returns were 4.52%
and 3.47%, respectively. (For more performance information, please refer to
"Performance At A Glance" on page 6).
The Fund used leverage during the fiscal year, which was 32.1% of total assets
as of September 30, 2003. Leverage can magnify returns on the upside and on the
downside, and can create wider dispersions of returns within the Fund's peer
group.
An Interview with Portfolio Manager William Veronda
Q. Can you describe the economic environment during the reporting period?
A. Economic growth was mixed during the fiscal year. Fourth quarter 2002 gross
domestic product (GDP) growth came in at 1.4%, a substantial decline from the
4.0% figure posted in the prior quarter. It was clear that the prospect of a
war in Iraq, ongoing threats of terrorism, turmoil in the Middle East, tepid
corporate spending and a weak stock market had all served to undermine the
economy.
This figure would remain unchanged in the first quarter of 2003, but the news
was more positive in the second quarter. Significantly higher military
spending, an increase in exports and a stronger manufacturing sector fueled
an up-tick in economic growth that ultimately resulted in a final second
quarter 2003 GDP figure of 3.3%. This was followed by a preliminary third
quarter 2003 GDP estimate of
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1
Investment Grade Municipal Income Fund Inc.
7.2%--far higher than anticipated, and the sharpest recorded advance since
1984. Consumer and business spending provided significant impetus behind this
figure; consumer spending rose 6.6%, its highest rate since 1988, while
business spending surged 11.1%, its best posting since the first quarter of
2000.
Q. What were some other notable factors affecting the economy?
A. Consumer spending played an integral role in propping up the economy during
the period, as the lower interest rate environment engendered a surge in
mortgage refinancing. The Bush Administration's tax cut package also appeared
to spur on consumers, who now had more disposable income on hand.
Conversely, for much of the period, corporations postponed major purchases as
they waited for clearer indications of a sustainable economic upturn. More
recently, there have been early signs that business spending is slowly
improving, although it's not yet clear if spending will increase to the point
that it will create new jobs.
Q. How did the Federal Reserve Board (the "Fed") react in this environment?
A. As the fiscal year began, the federal funds rate was at 1.25%--unchanged
since November 2002. The Fed had taken the position that it would not
implement any further rate cuts, although it would maintain a "heightened
surveillance" of the economy in light of the conflict with Iraq. After the
war's start, however, and absent any lift in the economy, the Fed made it
clear that a future rate cut was likely, citing its view that economic
weakness was a greater risk than inflation. This cut occurred during the
Fed's June 25, 2003 Federal Open Market Committee meeting, at which time the
federal funds rate was lowered by a quarter of a percentage point to
1.0%--its lowest level since 1958.
Since that time, the Fed has remained "on hold." More recently, at its
September 16, 2003 meeting, the Fed rationalized this stance by noting "an
accommodative stance on monetary policy, coupled with robust underlying
growth in productivity, is providing important ongoing support to economic
activity."
Q. How did the overall municipal market perform during the fiscal year?
A. During the first eight months of the period, yields fell and prices rose as
investors were drawn to the relative safety offered by fixed income
securities, including municipal bonds, amid ongoing economic and geopolitical
uncertainty. This scenario changed when, beginning in June 2003, fixed income
prices began to fall.
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2
Investment Grade Municipal Income Fund Inc.
The combined forces that triggered this selloff were a less-than-hoped-for
cut in the fed funds rate, a lessening of concerns regarding the potential
for widespread deflation, and increasing fears that an improving economy
would lead to higher inflation and a less accommodative fiscal policy. The
selloff gained momentum in July before stabilizing during August and
September of 2003. Mixed signals in terms of the economy--including
stubbornly high unemployment--coupled with heightened geopolitical concerns,
helped the bond market recoup some of its losses late in the review period.
Q. Much has been said about the country's rising budget deficit. How has this
affected the municipal bond market?
A. At the federal level, the US Treasury Department estimates that the federal
budget deficit was between $370 and $380 billion as of the fiscal year ended
September 30, 2003. On a state and local level, budgets that were developed
using a "best case" scenario that factored in a strong economy and robust
capital gains revenues, operated in an environment characterized by an uneven
economy and a lengthy bear market. As a result, tax revenues were less than
projected. Although the final numbers have not yet been released, it is
projected that over 90% of the states are experiencing shortfalls, and state
and local budget deficits could ultimately come in at $50 billion for the
fiscal year. Furthermore, many states expect budget shortfalls for fiscal
year 2004. While a portion of the state and local shortfalls has been met by
drawing down on previous surpluses, these have now been largely depleted. As
a result, federal, state and local governments have increased their debt
issuance. To a great extent, the marketplace has thus far absorbed this added
supply.
Q. How did you position the Fund's portfolio during the reporting period?
A. The Fund's duration was generally in line with that of the Lehman Municipal
Bond Index during the period. In terms of sector positioning, we continued to
emphasize essential service revenue bonds, including those issued by
revenue-producing utilities such as water and sewer authorities. We also
liked the fundamentals of certain airport revenue bonds. While there continue
to be problems with the airline industry, the need for airfreight and
transportation remains, and demand should increase as the economy
strengthens.
We selectively purchased some lower medium-grade bonds that pay superior
yields and, in our opinion, also have excellent prospects for credit
improvement in the future. Two examples are North Carolina Eastern Municipal
Power Authority, with a 5.50% coupon maturing in 2012, and Susquehanna
Regional Airport, which yields 5.40% and matures in 2018.
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3
Investment Grade Municipal Income Fund Inc.
Q. Can you give an example of a noteworthy performer during the period?
A. We had a number of holdings that appreciated significantly in price during
the period, which we subsequently sold because we felt they had become
overvalued. One of these was Triborough Bridge and Tunnel Authority, a New
York revenue bond.
Q. Can you provide some examples of holdings that did not meet your
expectations?
A. Securities in the portfolio are constantly monitored in order to identify
possible signs of deteriorating underlying credits. During the period, we
sold several holdings that fell into this category. For example, we sold
Delta, Michigan bonds that were secured by the Meade Westvaco Company--a
leading global paper producer that owns and operates a Delta-based
papermill--after diminishing demand in the paper industry resulted in
declining profitability.
Q. Were there any material changes to your investment strategy during the
period?
A. Up until recently, the Fund had a policy of investing substantially all of
its assets in municipal obligations having maturities in excess of 10 years
at the time of purchase. In July 2003, the Fund's Board of Directors approved
the elimination of this restriction, allowing the Fund increased freedom to
invest in shorter-term securities. As a result, while we anticipate that the
majority of the Fund's portfolio will retain its longer-term bias, this
change will allow us greater flexibility in pursuing compelling opportunities
in the marketplace. For example, in the time since the policy change went
into effect, we purchased a block of Chicago Park District bonds, which are
due in 2021 and offer a very attractive 5.70% coupon. We also added San
Antonio Texas Electric and Gas revenue bonds, which are due in 2010 and are
yielding 5.25%, and Kansas Water Pollution bonds, which are due in 2011 and
have a 5.00% coupon.
Q. How do you anticipate positioning the Fund's portfolio going forward?
A. Looking ahead, we anticipate keeping the Fund's duration close to that of the
Lehman Municipal Bond Index. As we've seen in recent months, interest rate
movements can occur rapidly. Given the mixed signals in terms of the economy,
we expect that this type of volatility will continue in the months ahead. In
terms of the underlying portfolio, we expect to continue our long-held
emphasis on essential service revenue bonds, especially in light of the
mounting budget deficits. We also expect to maintain our high-quality bias,
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4
Investment Grade Municipal Income Fund Inc.
and to continue to employ careful credit analysis on securities being
considered for the Fund, as well as on those currently held in the portfolio.
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 additional information on UBS
funds,* please contact your financial advisor, or visit us at www.ubs.com.
Sincerely,
/s/ JOSEPH A. WARNAS
Joseph A. Varnas
President
Investment Grade Municipal Income Fund Inc.
Managing Director
UBS Global Asset Management (US) Inc.
/s/ WILLIAM VERONDA
William Veronda
Portfolio Manager
Investment Grade Municipal Income Fund Inc.
Executive Director
UBS Global Asset Management (US) Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended September 30, 2003, and reflects our
views at the time of its writing. Of course, these views may change in response
to changing circumstances, and they do not guarantee the future performance of
the markets or the Fund. We encourage you to consult your financial advisor
regarding your personal investment program.
* 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.
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5
Investment Grade Municipal Income Fund Inc.
Performance At A Glance
Average Annual Return, Periods Ended 9/30/03
Net Asset Value Return 6 months 1 year 5 years 10 years
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Investment Grade Municipal Income Fund Inc. 3.44% 6.31% 5.40% 5.73%
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Lipper General Municipal Debt Funds (Leveraged) Median 3.80% 4.52% 5.74% 6.10%
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Market Price Return
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Investment Grade Municipal Income Fund Inc. 4.21% 2.76% 5.54% 6.36%
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Lipper General Municipal Debt Funds (Leveraged) Median 4.21% 3.47% 5.57% 5.81%
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Past performance does not predict future performance. The return and principal
value of an investment will fluctuate, so that an investor's shares, when sold,
may be worth more or less than their original cost. NAV return assumes, for
illustration only, that dividends were reinvested at the net asset value on the
ex-dividend dates. Market price return assumes dividends were reinvested under
the Dividend Reinvestment Plan. NAV and market price returns for periods less
than one year are cumulative.
Lipper peer group data calculated by Lipper Inc.; used with permission. The
Lipper Median is the return of the fund that places in the middle of the peer
group.
Share Price, Dividend and Yields as of 9/30/03
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Market Price $14.86
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Net Asset Value (per share applicable to common shareholders) $16.31
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12-Month Net Investment Income Dividend (ended 9/30/03) $0.96
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September 2003 Dividend $0.08
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Market Yield* 6.46%
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NAV Yield* 5.89%
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IPO Yield* 6.40%
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* Market yield is calculated by multiplying the September dividend by 12 and
dividing by the month-end market price. NAV yield is calculated by
multiplying the September dividend by 12 and dividing by the month-end net
asset value. IPO yield is calculated by multiplying the September dividend
by 12 and dividing by the initial public offering price. Prices and yields
will vary.
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6
Investment Grade Municipal Income Fund Inc.
Portfolio Statistics
Characteristics 9/30/03 3/31/03 9/30/02
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Net Assets Applicable to
Common Shareholders (mm) $168.9 $168.2 $170.5
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Weighted Average Maturity* 13.0 yrs 13.4 yrs 13.7 yrs
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Weighted Average Duration* 6.3 yrs 5.5 yrs 4.7 yrs
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Weighted Average Coupon* 5.4% 5.6% 5.8%
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AMT Paper** 0% 0% 0%
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Leverage** 32.1% 32.1% 31.3%
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Callable/Maturing Within
Five Years* 5.8% 13.9% 19.1%
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Callable/Maturing Beyond
Five Years* 94.2% 86.1% 80.9%
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Credit Quality*** 9/30/03 3/31/03 9/30/02
====================================================================================================
AAA/Aaa 50.7% 63.7% 66.6%
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AA/Aa 37.3 31.9 30.2
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A/A 16.0 16.8 12.5
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BBB/Baa 18.8 13.1 14.4
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BB/Ba 0.9 -- 0.4
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SP-1/MIG-1 6.9 7.3 7.1
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A1/P1 -- -- 4.3
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Nonrated 12.9 13.3 12.4
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Other Assets in Excess
of Liabilities 3.8 1.5 --
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Liabilities in Excess of Cash
and Other Assets -- -- (1.0)
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Liquidation Value of
Auction Preferred Shares (47.3) (47.6) (46.9)
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Total 100.0% 100.0% 100.0%
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Top 10 States*** 9/30/03 3/31/03 9/30/02
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Texas 23.0% Texas 27.6% Texas 30.1%
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California 16.2 California 12.3 Illinois 19.5
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New York 11.8 Indiana 11.3 Indiana 11.3
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Illinois 10.4 Illinois 10.7 New York 7.2
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Indiana 10.1 North Carolina 9.7 California 6.1
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North Carolina 8.9 Florida 6.7 North Carolina 5.7
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Florida 7.9 Colorado 5.4 Colorado 5.4
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Pennsylvania 6.5 Massachusetts 5.2 Connecticut 5.2
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Kentucky 6.2 Michigan 4.9 Washington 4.8
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Louisiana 4.1 Pennsylvania 4.7 Pennsylvania 4.7
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Total 105.1% 98.5% 100.0%
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Top Five Sectors*** 9/30/03 3/31/03 9/30/02
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Power 36.3% Power 32.4% Lease 19.7%
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Water & Sewer 25.6 Lease 20.2 Hospital 19.5
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Lease 21.3 Pre-refunded 13.7 Power 14.2
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Hospital 6.6 Sewer 10.5 Water 11.7
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Tolls 6.3 Water 7.6 Housing 8.4
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Total 96.1% 84.4% 73.5%
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* Weightings represent percentages of portfolio assets as of the dates
indicated. The Fund's portfolio is actively managed and its composition
will vary over time.
** As a percentage of total assets as of the dates indicated.
*** As a percentage of net assets applicable to common shareholders as of the
dates indicated. Credit quality ratings designated by Standard & Poor's
Rating Group and Moody's Investor Services, Inc. Both are independent
rating agencies.
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7
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--September 30, 2003
Principal Moody's S&P
Amount Rating Rating Maturity Interest
(000) (unaudited) (unaudited) Dates Rates Value
====================================================================================================================================
Long-Term Municipa Bonds-135.78%
====================================================================================================================================
Alabama-0.81%
$1,300 Jefferson-County Sewer Revenue-
Series A (FGIC Insured) Aaa AAA 02/01/27 5.375% $1,366,612
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Arizona-1.55%
2,380 Arizona State Transportation Board
Highway Revenue-Series B Aa1 AAA 07/01/18 5.250 2,614,335
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Arkansas-1.09%
1,790 Little Rock Capital Improvement
Revenue Parks & Recreation
Projects-Series A NR NR 01/01/18 5.700 1,839,601
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California-15.92%
5,000 California State Department Water
Resources Revenue-Series A A3 BBB+ 05/01/16 5.875 5,608,300
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3,000 California Statewide Communities
Development Authority Irvine
Apartment Communities-
Series A-3 Baa2 BBB 05/15/25+ 5.100 3,175,710
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2,150 Fontana Redevelopment Agency
Tax Allocation Jurupa Hills
Redevelopment Project A NR BBB+ 10/01/17 5.500 2,254,167
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5,000 Los Angeles County Sanitation
Funding Authority Revenue-
Series A (FSA Insured) Aaa AAA 10/01/18 5.000 5,353,500
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3,000 Los Angeles Water & Power
Revenue Power Systems-Series A
(MBIA Insured) Aaa AAA 07/01/16 5.000 3,257,790
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3,200 Los Angeles Water & Power
Revenue Power Systems-Series
A-A-1 Aaa AAA 07/01/21 5.250 3,410,080
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3,500 Metropolitan Water District of
Southern California Waterworks-
Series A Aaa AAA 03/01/18 5.250 3,830,715
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26,890,262
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Colorado-1.19%
1,874 University of Colorado Participation
Interests NR A- 12/01/13 6.000 2,012,391
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Florida-7.90%
2,540 First Governmental Financing
Commission Revenue-Series B
(AMBAC Insured) Aaa NR 07/01/15 5.500 2,935,630
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1,175 Gainesville Utilities Systems
Revenue-Series A Aa2 AA 10/01/20 5.250 1,275,921
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2,000 Orlando Utilities Commission Water
& Electric Revenue-Series A Aa2 AA- 10/01/19 5.000 2,117,880
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6,425 Orlando Utilities Commission Water
& Electric Revenue-Series C Aa2 AA- 10/01/18 5.250 7,011,924
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13,341,355
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8
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--September 30, 2003
Principal Moody's S&P
Amount Rating Rating Maturity Interest
(000) (unaudited) (unaudited) Dates Rates Value
====================================================================================================================================
Long-Term Municipal Bonds-(continued)
====================================================================================================================================
Georgia-0.02%
$ 30 Georgia Municipal Electric Authority
Power Revenue-Series B A2 A+ 01/01/16 6.375% $30,652
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Illinois-8.86%
3,000 Chicago Parking District Harbor
Facilities Revenue A2 A 01/01/21 5.700 3,477,660
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5,000 Chicago Parking District Parking
Facility Revenue Baa1 A 01/01/14 6.250 5,935,600
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1,200 Illinois Educational Facilities
Authority Revenue Augustana
College-Series A Baa1 NR 10/01/22 5.625 1,228,500
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250 Metropolitan Pier & Exposition
Authority A1 AA- 06/15/27 6.500 255,403
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2,875 Metropolitan Pier & Exposition
Authority-Series A (MBIA Insured) Aaa AAA 06/15/42 5.250 2,960,531
1,000 Naperville Electric Revenue (Pre-
refunded with U.S. Government
Securities to 5/1/2006 @ 100) Aa2 AA 05/01/12 5.700 1,109,640
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14,967,334
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Indiana-10.06%
1,000 Clark Pleasant Community School
Building Corp. First Mortgage
(AMBAC Insured) Aaa AAA 07/15/17 5.500 1,110,120
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3,305 Indiana Transportation Financing
Authority Airport Facilities Lease
Revenue-Series A A1 AA 11/01/12 5.500 3,464,003
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1,430 Indiana Transportation Financing
Authority Airport Facilities Lease
Revenue-Series A A1 AA 11/01/16 6.250 1,464,549
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2,000 Indiana Transportation Financing
Authority Airport Facilities Lease
Revenue-Series A A1 AA 11/01/17 5.500 2,081,060
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3,400 Marion County Convention &
Recreational Facilities Authority
Excise Tax Revenue-Series A
(MBIA Insured) Aaa AAA 06/01/17 5.500 3,803,206
1,000 Purdue University Student Fee
Revenue-Series B (Pre-refunded
with U.S. Government Securities
to 1/1/2005 @ 103) Aa2 AA 07/01/15 6.700 1,099,450
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1,865 Wayne Township Marion County
School Building Corp.-First
Mortgage NR A+ 01/15/15 5.250 1,959,649
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1,915 Wayne Township Marion County
School Building Corp.-First
Mortgage NR A+ 07/15/15 5.250 2,012,186
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16,994,223
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9
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--September 30, 2003
Principal Moody's S&P
Amount Rating Rating Maturity Interest
(000) (unaudited) (unaudited) Dates Rates Value
====================================================================================================================================
Long-Term Municipal Bonds-(continued)
====================================================================================================================================
Iowa-3.07%
$4,880 Polk County-Series A Aa1 AA+ 06/01/19 5.000% $5,186,464
====================================================================================================================================
Kansas-1.22%
1,840 Kansas State Development Finance
Authority Revenue Water
Pollution Control Aa1 AA+ 05/01/11 5.000 2,061,076
====================================================================================================================================
Kentucky-4.72%
7,750 Boone County Pollution Control
Revenue Dayton Power &
Light Co.-Series A Baa1 BBB 11/15/22 6.500 7,973,975
====================================================================================================================================
Louisiana-4.14%
3,110 New Orleans Sewage Service
Revenue Aaa AAA 06/01/15 5.000 3,420,067
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3,280 New Orleans Sewage Service
Revenue Aaa AAA 06/01/16 5.000 3,576,446
------------------------------------------------------------------------------------------------------------------------------------
6,996,513
====================================================================================================================================
Massachusetts-2.72%
2,260 Massachusetts State Water Pollution
Abatement-Series 8 Aaa AAA 08/01/17 5.000 2,437,184
------------------------------------------------------------------------------------------------------------------------------------
2,000 Massachusetts State Water Pollution
Abatement-Series A Aaa AAA 08/01/20 5.250 2,158,160
------------------------------------------------------------------------------------------------------------------------------------
4,595,344
====================================================================================================================================
Michigan-3.41%
1,750 Michigan Municipal Bond Authority
Clear Water Revenue Aaa AAA 10/01/19 5.250 1,909,863
------------------------------------------------------------------------------------------------------------------------------------
3,425 Michigan State Building Authority
Revenue Program-Series III Aa1 AA+ 10/15/16 5.375 3,840,041
------------------------------------------------------------------------------------------------------------------------------------
5,749,904
====================================================================================================================================
Nevada-4.12%
6,750 Clark County Pollution Control
Revenue Nevada Power Co.
Project-Series B (FGIC Insured) Aaa AAA 06/01/19 6.600 6,962,963
====================================================================================================================================
New Mexico-0.65%
1,000 University of New Mexico Revenues
Sub Lien-Series A Aa3 AA 06/01/16 5.250 1,102,310
====================================================================================================================================
New York-11.58%
4,030 Long Island Power Authority Electric
Systems Revenue-Series C Baa1 A- 09/01/17 5.500 4,379,683
------------------------------------------------------------------------------------------------------------------------------------
2,000 New York City Municipal Water
Finance Authority Revenue-Water
& Sewer Systems-Series D Aa2 AA 06/15/17 5.250 2,189,880
------------------------------------------------------------------------------------------------------------------------------------
1,150 New York State Dormitory Authority
Revenue Columbia University-
Series A Aaa AAA 07/01/14 5.125 1,290,082
------------------------------------------------------------------------------------------------------------------------------------
1,000 New York State Dormitory Authority
Revenue Columbia University-
Series A Aaa AAA 07/01/16 5.125 1,108,800
------------------------------------------------------------------------------------------------------------------------------------
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10
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--September 30, 2003
Principal Moody's S&P
Amount Rating Rating Maturity Interest
(000) (unaudited) (unaudited) Dates Rates Value
====================================================================================================================================
Long-Term Municipal Bonds-(continued)
====================================================================================================================================
New York-(continued)
$1,625 Triborough Bridge & Tunnel
Authority Revenue-Series B Aa3 AA- 11/15/18 5.250% $ 1,771,152
------------------------------------------------------------------------------------------------------------------------------------
8,155 Triborough Bridge & Tunnel
Authority Revenue-Series B Aa3 AA- 11/15/19 5.250 8,823,792
------------------------------------------------------------------------------------------------------------------------------------
19,563,389
====================================================================================================================================
North Carolina-8.91%
3,155 Charlotte Water & Sewer System
Revenue-Series A Aa1 AAA 07/01/15 5.500 3,685,545
------------------------------------------------------------------------------------------------------------------------------------
5,000 North Carolina Eastern Municipal
Power Agency-Series A (Escrowed
to Maturity) Baa3 BBB 01/01/11 5.500 5,389,450
------------------------------------------------------------------------------------------------------------------------------------
2,000 North Carolina Eastern Municipal
Power Agency-Series A (Escrowed
to Maturity) Baa3 BBB 01/01/12 5.500 2,147,860
------------------------------------------------------------------------------------------------------------------------------------
3,065 North Carolina Eastern Municipal
Power Agency-Series A (Escrowed
to Maturity) Baa3 BBB 01/01/21 6.400 3,824,446
------------------------------------------------------------------------------------------------------------------------------------
15,047,301
====================================================================================================================================
Ohio-2.81%
2,185 Ohio State Higher Education-
Series B Aa1 AA+ 11/01/17 5.250 2,415,823
------------------------------------------------------------------------------------------------------------------------------------
1,000 Ohio State Water Development
Authority Revenue-Fresh Water-
Series B (FSA Insured) Aaa AAA 06/01/16 5.500 1,160,880
------------------------------------------------------------------------------------------------------------------------------------
1,000 Ohio State Water Development
Authority Revenue-Fresh Water-
Series B (FSA Insured) Aaa AAA 12/01/17 5.500 1,164,530
------------------------------------------------------------------------------------------------------------------------------------
4,741,233
====================================================================================================================================
Oregon-0.65%
1,000 Portland Sewer Systems Revenue-
Series A Aaa AAA 06/01/18 5.250 1,100,210
====================================================================================================================================
Pennsylvania-6.40%
5,000 Northumberland County Authority-
Guaranteed Lease Revenue-
Mountain View Manor Project NR NR 10/01/20 7.000 4,893,250
------------------------------------------------------------------------------------------------------------------------------------
2,680 Philadelphia School District-Series A
(MBIA Insured) Aaa AAA 04/01/15 5.250 2,949,501
------------------------------------------------------------------------------------------------------------------------------------
3,000 Susquehanna Area Regional Airport
Authority Airport Systems
Revenue-Sub Series D Baa2 NR 01/01/18 5.375 2,965,920
------------------------------------------------------------------------------------------------------------------------------------
10,808,671
====================================================================================================================================
Puerto Rico-1.66%
2,425 Puerto Rico Public Buildings
Authority Revenue-Guaranteed
Government Facilities-Series D Baa1 A- 07/01/13 5.375 2,802,694
------------------------------------------------------------------------------------------------------------------------------------
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11
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--September 30, 2003
Principal Moody's S&P
Amount Rating Rating Maturity Interest
(000) (unaudited) (unaudited) Dates Rates Value
====================================================================================================================================
Long-Term Municipal Bonds-(continued)
====================================================================================================================================
Rhode Island-0.74%
$1,240 Rhode Island Housing & Mortgage
Finance Corp. Homeownership
Opportunity-Series 10-A Aa2 AA+ 04/01/27 6.500% $1,252,400
====================================================================================================================================
South Carolina-0.64%
1,000 Greenville Waterworks Revenue Aa1 AAA 02/01/20 5.250 1,081,950
====================================================================================================================================
South Dakota-2.95%
3,657 Lower Brule Sioux Tribe++ NR NR 08/15/15 6.000 3,549,644
------------------------------------------------------------------------------------------------------------------------------------
1,449 Standing Rock South Dakota
New Public Housing++ NR NR 08/07/13 6.000 1,424,093
------------------------------------------------------------------------------------------------------------------------------------
4,973,737
====================================================================================================================================
Tennessee-1.63 %
2,500 Memphis-Shelby County Airport
Authority Special Facilities
Revenue-Federal Express Corp. Baa2 BBB 09/01/09 5.000 2,745,100
====================================================================================================================================
Texas-22.23%
2,475 Alvin Independent School District
School House-Series A Aaa AAA 02/15/17 5.375 2,726,138
------------------------------------------------------------------------------------------------------------------------------------
4,000 Coastal Bend Health Facilities
Development-Incarnate Word
Health System (Escrowed to
Maturity) (AMBAC Insured) Aaa AAA 01/01/17 6.300 4,929,640
------------------------------------------------------------------------------------------------------------------------------------
1,335 Eagle Mountain & Saginaw
Independent School District
Unlimited Tax-School Building Aaa AAA 08/15/14 5.375 1,490,648
------------------------------------------------------------------------------------------------------------------------------------
2,825 Fort Worth Water & Sewer Revenue Aa2 AA 02/15/16 5.625 3,187,419
------------------------------------------------------------------------------------------------------------------------------------
7,299 Harris County Texas Lease++ NR NR 05/01/20 6.750 7,212,067
------------------------------------------------------------------------------------------------------------------------------------
3,007 Houston Community College
System Certificates of
Participation++ NR NR 06/15/25 7.875 3,052,111
------------------------------------------------------------------------------------------------------------------------------------
2,000 Houston Refunding & Public
Improvement-Series A Aa3 AA- 03/01/15 5.250 2,194,580
------------------------------------------------------------------------------------------------------------------------------------
3,000 Houston Water & Sewer System
Revenue-Junior Lien-Series C
(FGIC Insured) Aaa AAA 12/01/22 5.250 3,156,150
------------------------------------------------------------------------------------------------------------------------------------
1,485 Lower Colorado River Authority
Transmission Contract Revenue Aaa AAA 05/15/20 5.250 1,591,222
------------------------------------------------------------------------------------------------------------------------------------
3,000 San Antonio Electric & Gas Revenue Aa1 AA+ 02/01/20 5.375 3,239,010
------------------------------------------------------------------------------------------------------------------------------------
4,250 San Antonio Electric & Gas
Revenue-Series A Aa1 AA+ 02/01/10 5.250 4,765,313
------------------------------------------------------------------------------------------------------------------------------------
37,544,298
====================================================================================================================================
Utah-1.31%
2,000 Utah Assisted Municipal Power
Systems Revenue Payson Power
Project-Series A Aaa AAA 04/01/16 5.250 2,217,720
====================================================================================================================================
--------------------------------------------------------------------------------
12
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--September 30, 2003
Principal Moody's S&P
Amount Rating Rating Maturity Interest
(000) (unaudited) (unaudited) Dates Rates Value
====================================================================================================================================
Long-Term Municipal Bonds-(concluded)
====================================================================================================================================
Virginia-0.71%
$1,050 Chesapeake Public Improvement Aa2 AA 12/01/14 5.500% $1,189,272
====================================================================================================================================
Washington-2.11%
1,920 Metropolitan Park District Tacoma
(AMBAC Insured) Aaa AAA 12/01/14 6.000 2,249,817
------------------------------------------------------------------------------------------------------------------------------------
1,115 Metropolitan Park District Tacoma
(AMBAC Insured) Aaa AAA 12/01/16 6.000 1,304,606
------------------------------------------------------------------------------------------------------------------------------------
3,554,423
====================================================================================================================================
Total Long-Term Municipal Bonds (cost-$219,981,909) 229,307,712
====================================================================================================================================
Short-Term Municipal Notes-7.80%
====================================================================================================================================
California-0.29%
500 Metropolitan Water District of
Southern California Waterworks
Revenue-Series C-1 VMIG-1 A1+ 10/01/03 1.190* 500,000
====================================================================================================================================
Georgia-0.65%
1,100 Hapeville Development Authority
Industrial Development Revenue-
Hapeville Hotel Ltd. P1 NR 10/01/03 1.150* 1,100,000
====================================================================================================================================
Illinois-1.54%
1,300 Illinois Health Facilities Authority
Revenue-Resurrection Health-
Series A (FSA Insured) VMIG-1 A-1 10/01/03 1.200* 1,300,000
------------------------------------------------------------------------------------------------------------------------------------
1,300 Illinois Health Facilities Authority
Revenue-University of Chicago
Hospitals Project-Series C
(MBIA Insured) Aaa A1+ 10/01/03 1.150* 1,300,000
------------------------------------------------------------------------------------------------------------------------------------
2,600,000
====================================================================================================================================
Kentucky-1.45%
2,450 Breckinridge County Kentucky
Lease Program Revenue VMIG-1 NR 10/01/03 1.250* 2,450,000
====================================================================================================================================
Massachusetts-0.59%
1,000 Massachusetts State Water
Resources Authority-Series C VMIG-1 A1+ 10/01/03 1.200* 1,000,000
====================================================================================================================================
Michigan-0.24%
400 University of Michigan Revenues
Refunding Medical Service Plan
A-1 VMIG-1 A1+ 10/01/03 1.150* 400,000
====================================================================================================================================
Missouri-0.94%
1,600 Missouri State Health & Educational-
Authority Health Facilities
Revenue (AMBAC Insured) VMIG-1 A-1 10/01/03 1.230* 1,600,000
====================================================================================================================================
New York-0.24%
400 Port Authority of New York and
New Jersey Versatile Structure
Obligation-5 VMIG-1 A1+ 10/01/03 1.200* 400,000
====================================================================================================================================
--------------------------------------------------------------------------------
13
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--September 30, 2003
Principal Moody's S&P
Amount Rating Rating Maturity Interest
(000) (unaudited) (unaudited) Dates Rates Value
====================================================================================================================================
Short-Term Municipal Notes-(concluded)
====================================================================================================================================
Pennsylvania-0.06%
$100 Lehigh County General Purpose
Authority Revenue-St. Lukes
Hospital Project NR A-1 10/01/03 1.250%* $100,000
====================================================================================================================================
Texas-0.79%
330 Bell County Health Facilities
Development Corp. Revenue
Scott & White Memorial Hospital
(MBIA Insured) VMIG-1 A1+ 10/01/03 1.250* 330,000
------------------------------------------------------------------------------------------------------------------------------------
1,000 Lower Neches Valley Authority
Development Corp.-ExxonMobil
Project-Series A VMIG-1 A1+ 10/01/03 1.100* 1,000,000
------------------------------------------------------------------------------------------------------------------------------------
1,330,000
====================================================================================================================================
Virginia-0.83%
1,400 Loudoun County Industrial
Development Authority Revenue-
Howard Hughes Medical-Series E VMIG-1 A1+ 10/01/03 1.150* 1,400,000
====================================================================================================================================
Wyoming-0.18%
300 Uinta County Pollution Control
Revenue-Refunding Amoco
Project NR A1+ 10/01/03 1.100* 300,000
------------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Notes (cost-$13,180,000) 13,180,000
------------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost-$233,161,909)-143.58% 242,487,712
------------------------------------------------------------------------------------------------------------------------------------
Other assets in excess of liabilities-3.79% 6,400,035
------------------------------------------------------------------------------------------------------------------------------------
Liquidation value of auction preferred shares-(47.37)% (80,000,000)
------------------------------------------------------------------------------------------------------------------------------------
Net Assets applicable to common shareholders-100.00% $168,887,747
====================================================================================================================================
+ The maturity date reflects the mandatory date bond will be put back to
issuer.
++ Illiquid securities representing 9.02% 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, 2003.
AMBAC - American Municipal Bond Assurance Corporation
FGIC - Financial Guaranty Insurance Company
FSA - Financial Security Assurance
MBIA - Municipal Bond Investors Assurance
See accompanying notes to financial statements
--------------------------------------------------------------------------------
14
Investment Grade Municipal Income Fund Inc.
Statement of Assets and Liabilities--September 30, 2003
Assets:
Investments in securities, at value (cost--$233,161,909) $242,487,712
----------------------------------------------------------------------------------------
Cash 2,882,112
----------------------------------------------------------------------------------------
Interest receivable 3,683,743
----------------------------------------------------------------------------------------
Receivable for investments sold 103,134
----------------------------------------------------------------------------------------
Other assets 9,480
----------------------------------------------------------------------------------------
Total assets 249,166,181
----------------------------------------------------------------------------------------
Liabilities:
Payable to investment advisor and administrator 141,111
----------------------------------------------------------------------------------------
Dividends payable to auction preferred shareholders 47,426
----------------------------------------------------------------------------------------
Accrued expenses and other liabilities 89,897
----------------------------------------------------------------------------------------
Total liabilities 278,434
----------------------------------------------------------------------------------------
Auction Preferred Shares Series A & B--1,600 non-participating shares
authorized, issued and outstanding; $0.001 par value; $50,000 liquidation
value per share 80,000,000
----------------------------------------------------------------------------------------
Net assets applicable to common shareholders $168,887,747
----------------------------------------------------------------------------------------
Net assets applicable to common shareholders:
Common Stock--$0.001 par value; 199,998,400 shares authorized;
10,356,667 shares issued and outstanding 153,674,147
----------------------------------------------------------------------------------------
Undistributed net investment income 1,065,095
----------------------------------------------------------------------------------------
Accumulated net realized gain from investment transactions 4,822,702
----------------------------------------------------------------------------------------
Net unrealized appreciation of investments 9,325,803
----------------------------------------------------------------------------------------
Net assets applicable to common shareholders $168,887,747
----------------------------------------------------------------------------------------
Net asset value per common share ($168,887,747 applicable to 10,356,667
common shares outstanding) $16.31
----------------------------------------------------------------------------------------
See accompanying notes to financial statements
--------------------------------------------------------------------------------
15
Investment Grade Municipal Income Fund Inc.
Statement of Operations
For the Year
Ended
September 30,
2003
========================================================================================
Investment income:
Interest $12,313,375
----------------------------------------------------------------------------------------
Expenses:
Investment advisory and administration fees 2,239,990
----------------------------------------------------------------------------------------
Auction Preferred Shares expenses 213,051
----------------------------------------------------------------------------------------
Custody and accounting fees 148,672
----------------------------------------------------------------------------------------
Professional fees 61,408
----------------------------------------------------------------------------------------
Reports and notices to shareholders 55,975
----------------------------------------------------------------------------------------
Transfer agency fees 13,744
----------------------------------------------------------------------------------------
Directors' fees 4,981
----------------------------------------------------------------------------------------
Other expenses 38,499
----------------------------------------------------------------------------------------
2,776,320
----------------------------------------------------------------------------------------
Less: Fee waivers from investment advisor and administrator (344,355)
----------------------------------------------------------------------------------------
Net expenses 2,431,965
----------------------------------------------------------------------------------------
Net investment income 9,881,410
----------------------------------------------------------------------------------------
Realized and unrealized gains (losses) from investment activities:
Net realized gain from investment transactions 4,823,139
----------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of investments (3,488,907)
----------------------------------------------------------------------------------------
Net realized and unrealized gain from investment activities 1,334,232
----------------------------------------------------------------------------------------
Dividends and distributions to auction preferred shareholders from:
Net investment income (742,743)
----------------------------------------------------------------------------------------
Net realized gain from investment transactions (203,712)
----------------------------------------------------------------------------------------
Total dividends and distributions to auction preferred shareholders (946,455)
----------------------------------------------------------------------------------------
Net increase in net assets applicable to common shareholders resulting
from operations $10,269,187
========================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
16
Investment Grade Municipal Income Fund Inc.
Statement of Changes in Net Assets Applicable to
Common Shareholders
For the Years Ended
September 30,
-------------------------------
2003 2002
================================================================================================
From operations:
Net investment income $9,881,410 $11,453,707
------------------------------------------------------------------------------------------------
Net realized gains from investment transactions 4,823,139 2,096,508
------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of
investments (3,488,907) 892,716
------------------------------------------------------------------------------------------------
Dividends and distributions to preferred shareholders (946,455) (1,300,511)
------------------------------------------------------------------------------------------------
Net increase in net assets applicable to common shareholders
resulting from operations 10,269,187 13,142,420
------------------------------------------------------------------------------------------------
Dividends and distributions to common shareholders from:
Net investment income (9,942,400) (9,631,700)
------------------------------------------------------------------------------------------------
Net realized gains on investments (1,893,199) (351,091)
------------------------------------------------------------------------------------------------
Total dividends and distributions to common shareholders (11,835,599) (9,982,791)
------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to
common shareholders (1,566,412) 3,159,629
------------------------------------------------------------------------------------------------
Net assets applicable to common shareholders:
Beginning of year 170,454,159 167,294,530
------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income of
$1,065,095 and $1,868,828, respectively) $168,887,747 $170,454,159
================================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
17
Investment Grade Municipal Income Fund Inc.
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 under the Investment Company Act of 1940, as amended, 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 accounting principles
generally accepted in the United States 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, where available, for its portfolio's securities. The Fund
normally obtains market values for its securities from independent pricing
sources and broker-dealers. 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. 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 investments.
Dividends and Distributions--The Fund intends to pay monthly dividends to common
shareholders 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 auction preferred shares. The dividend rate on the common
stock is adjusted as necessary to reflect the earnings rate of the Fund.
Dividends and distributions to common shareholders are recorded on the
ex-dividend date. Dividends to auction preferred shareholders are accrued daily.
The amount of dividends from net investment income and distributions from net
realized capital gains is determined in accordance with federal income tax
regulations, which may differ from accounting principles generally accepted in
the
--------------------------------------------------------------------------------
18
Investment Grade Municipal Income Fund Inc.
Notes to Financial Statements
United States. 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.
Investment Advisor and Administrator
The Board has approved an investment advisory and administration contract
("Advisory Contract") with UBS Global Asset Management (US) Inc. ("UBS Global
AM"), under which UBS Global AM serves as investment advisor and administrator
of the Fund. UBS Global AM is an indirect wholly owned asset management
subsidiary of UBS AG, an international diversified organization with
headquarters in Zurich, Switzerland and operations in many areas of the
financial services industry. In accordance with the Advisory Contract, the Fund
pays UBS Global AM an investment advisory and administration fee, which is
accrued weekly and paid monthly, at the annual rate of 0.90% of the Fund's
average weekly net assets. UBS Global AM has agreed to waive 0.20% of the
advisory and administration fee, so that the Fund's effective fee is 0.70% of
average weekly net assets. This waiver will continue indefinitely unless the
Board agrees to any change. At September 30, 2003, the Fund owed UBS Global AM
$141,111 representing $181,424 for investment advisory and administration fees
less amounts due for fee waivers of $40,313. For the year ended September 30,
2003, UBS Global AM waived $344,355 in investment advisory and administration
fees from the Fund.
Common Stock
There are 199,998,400 shares of $0.001 par value common stock authorized and
10,356,667 common shares outstanding at September 30, 2003.
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. As of the end of November 2003, dividend
--------------------------------------------------------------------------------
19
Investment Grade Municipal Income Fund Inc.
Notes to Financial Statements
periods for both series are expected to be reset every 7 days to take advantage
of more favorable interest rates. Dividend rates ranged from 0.700% to 1.850%
for the year ended September 30, 2003.
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
auction preferred shares will vote separately as a class on certain matters, as
required by law. The holders of the auction preferred shares have the right to
elect two directors of the Fund.
The redemption of the Fund's auction preferred shares is outside of the control
of the Fund because it is redeemable upon the occurrence of an event that is not
solely within the control of the Fund.
It is anticipated that the Fund will issue additional shares of Auction
Preferred Shares in December 2003. All shares are expected to have terms similar
to those of the existing APS.
Federal Tax Status
For federal income tax purposes at September 30, 2003, the components of net
unrealized appreciation of investments were as follows:
Gross appreciation (investments having an excess of value over cost) $9,752,055
-------------------------------------------------------------------------------
Gross depreciation (investments having an excess of cost over value) (426,252)
-------------------------------------------------------------------------------
Net unrealized appreciation of investments $9,325,803
===============================================================================
For the year ended September 30, 2003, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $118,289,467 and
$121,549,163, respectively.
The Fund intends to distribute substantially all of its tax-exempt income and
any taxable income and to comply with the other requirements of the Internal
Revenue Code applicable to regulated investment companies. Accordingly, no
provision for federal income taxes is required. In addition, by distributing
during each calendar year substantially all of its net investment income, net
realized capital gains and certain other amounts, if any, the Fund intends not
to be subject to a federal excise tax.
--------------------------------------------------------------------------------
20
Investment Grade Municipal Income Fund Inc.
Notes to Financial Statements
The tax character of distributions paid during the fiscal years ended September
30, 2003 and September 30, 2002 was as follows:
Distributions paid from: 2003 2002
============================================================
Tax-exempt income $10,662,658 $10,887,019
------------------------------------------------------------
Ordinary income 22,485 --
------------------------------------------------------------
Net long-term capital gains 2,096,911 436,163
------------------------------------------------------------
Total distributions paid $12,782,054 $11,323,182
============================================================
For the fiscal year ended September 30, 2003, tax distributions are the same for
both book and tax purposes.
For the fiscal year ended September 30, 2002, total distributions paid differ
from the statement of changes in net assets applicable to common shareholders
because for tax purposes dividends are recognized when actually paid.
At September 30, 2003, the components of accumulated earnings on a tax basis
were as follows:
Undistributed tax-exempt income $ 1,112,521
-------------------------------------------------------
Undistributed long-term capital gains 4,822,702
-------------------------------------------------------
Accumulated earnings 5,935,223
-------------------------------------------------------
Net unrealized appreciation of investments 9,325,803
-------------------------------------------------------
Total accumulated earnings $15,261,026
=======================================================
--------------------------------------------------------------------------------
21
Investment Grade Municipal Income Fund Inc.
Financial Highlights
Selected data for a share of common stock outstanding throughout each year is
presented below:
For the Years Ended September 30,
=====================================================================
2003 2002 2001 2000 1999
==========================================================================================================================
Net asset value,
beginning of year $16.46 $16.15 $15.91 $16.09 $17.09
--------------------------------------------------------------------------------------------------------------------------
Net investment income 0.95 1.11 1.17 1.18 1.17
--------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) from
investment activities 0.13 0.29 0.46 (0.13) (1.02)
--------------------------------------------------------------------------------------------------------------------------
Common share equivalent of dividends and
distributions paid to auction preferred
shareholders from:
Net investment income (0.07) (0.12) (0.23) (0.31) (0.25)
--------------------------------------------------------------------------------------------------------------------------
Net realized gains from investment transactions (0.02) (0.01) (0.07) (0.00)(1) --
--------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions paid to auction
preferred shareholders (0.09) (0.13) (0.30) (0.31) (0.25)
--------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from investment operations 0.99 1.27 1.33 0.74 (0.10)
--------------------------------------------------------------------------------------------------------------------------
Dividends and distributions paid to common
shareholders from:
Net investment income (0.96) (0.93) (0.90) (0.90) (0.90)
--------------------------------------------------------------------------------------------------------------------------
Net realized gains from investment transactions (0.18) (0.03) (0.19) (0.02) --
--------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions to
common shareholders (1.14) (0.96) (1.09) (0.92) (0.90)
--------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $16.31 $16.46 $16.15 $15.91 $16.09
--------------------------------------------------------------------------------------------------------------------------
Market value, end of year $14.86 $15.60 $15.39 $13.75 $13.88
--------------------------------------------------------------------------------------------------------------------------
Total investment return(2) 2.76% 7.96% 20.59% 5.90% (7.68)%
--------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets attributable
to common shares:
Total expenses, net of waivers from advisor 1.45% 1.48% 1.49% 1.52% 1.52%
--------------------------------------------------------------------------------------------------------------------------
Total expenses, before waivers from advisor 1.66% 1.67% 1.68% 1.71% 1.71%
--------------------------------------------------------------------------------------------------------------------------
Net investment income before auction preferred
shares dividends 5.89% 6.89% 7.30% 7.48% 7.01%
--------------------------------------------------------------------------------------------------------------------------
Auction preferred shares dividends from net
investment income 0.44% 0.73% 1.42% 1.99% 1.50%
--------------------------------------------------------------------------------------------------------------------------
Net investment income available to common
shareholders, net of waivers from advisor 5.45% 6.16% 5.88% 5.49% 5.51%
--------------------------------------------------------------------------------------------------------------------------
Net investment income available to common
shareholders, before waivers from advisor 5.24% 5.97% 5.69% 5.30% 5.32%
--------------------------------------------------------------------------------------------------------------------------
Supplemental data:
Net assets applicable to common shareholders,
end of year (000's) $168,888 $170,454 $167,295 $164,769 $166,618
--------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 51% 21% 8% 14% 8%
--------------------------------------------------------------------------------------------------------------------------
Asset coverage per share of auction preferred shares,
end of year $155,555 $156,534 $154,559 $152,980 $154,136
--------------------------------------------------------------------------------------------------------------------------
(1) Distribution equal to $0.0042 per share.
(2) Total investment return is calculated assuming a $10,000 purchase of common
stock at the current market price on the first day of each year reported
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 shareholders at prices obtained under the Fund's Dividend
Reinvestment Plan. Total investment return does not reflect brokerage
commissions.
--------------------------------------------------------------------------------
22
Investment Grade Municipal Income Fund Inc.
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Investment Grade Municipal Income Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Investment Grade Municipal Income Fund Inc. (the "Fund"), including the
portfolio of investments, as of September 30, 2003, and the related statement of
operations for the year then ended, the statements of changes in net assets
applicable to common shareholders for each of the two years in the period then
ended, and the financial highlights for each of the three years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the two years in the period ended
September 30, 2000, were audited by other auditors whose report dated November
22, 2000, expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of investments owned as of September 30, 2003, by correspondence
with the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Investment Grade Municipal Income Fund Inc. at September 30, 2003, the results
of its operations for the year then ended, the changes in its net assets
applicable to common shareholders for each of the two years in the period then
ended, and the financial highlights for each of the three years in the period
then ended, in conformity with accounting principles generally accepted in the
United States.
/s/ ERNST & YOUNG LLP
New York, New York
November 7, 2003
--------------------------------------------------------------------------------
23
Investment Grade Municipal Income Fund Inc.
General Information (unaudited)
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 ("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 advisor and administrator is
UBS Global Asset Management (US) Inc. ("UBS Global AM"), an indirect wholly
owned asset management subsidiary of UBS AG, which had over $65.0 billion in
assets under management as of October 31, 2003.
Shareholder Information
The Fund's NYSE trading symbol is "PPM." Comparative net asset value and market
price information about the Fund is published weekly in The Wall Street Journal,
The New York Times and Barron's, as well as in numerous other publications.
Investment Policy Change
In July 2003, the Fund's Board approved a change in investment policy. The Fund
may now invest in securities whose maturities are less than 10 years at the time
of purchase. Prior to this change, the Fund had a policy of investing
substantially all of its assets in municipal obligations having maturities in
excess of 10 years at the time of purchase.
Proxy Voting Policies and Procedures
You may obtain a description of the Fund's proxy voting policies and procedures,
without charge, upon request by contacting the Fund directly at 1-800-647-1568,
online on the Fund's Web site: www.ubs.com/ubsglobalam-proxy, or on the EDGAR
Database on the SEC's Web site (http://www.sec.gov).
Dividend Reinvestment Plan
The Fund's Board has established a Dividend Reinvestment Plan (the "Plan") under
which all common shareholders whose shares are registered in their own names, or
in the name of UBS Financial Services Inc. 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 shareholders
elect to receive cash. Common shareholders 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
shareholders to participate in the Plan may change if their shares are
transferred into the name of another broker or nominee.
--------------------------------------------------------------------------------
24
Investment Grade Municipal Income Fund Inc.
General Information (unaudited) (concluded)
Dividend Reinvestment Plan (concluded)
A common shareholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and common shareholders
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 shareholder's name and address as they appear on the
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 common shareholder 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 or otherwise, 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 shareholder 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 currently 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.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan with respect to any
dividend or other distribution if notice of the change is sent to Plan
participants at least 30 days before the record date for such distribution. The
Plan also may be amended or terminated by the transfer agent by at least 30
days' written notice to all Plan participants. Additional information regarding
the Plan may be obtained from, and all correspondence concerning the Plan should
be directed to, the transfer agent at PFPC Inc., P.O. Box 43027, Providence,
Rhode Island 02940-3027. For further information regarding the Plan, you may
also contact the transfer agent directly at 1-800-331-1710.
--------------------------------------------------------------------------------
25
Investment Grade Municipal Income Fund Inc.
Supplemental Information (unaudited)
Board of Directors & Officers
The Fund is governed by a Board of Directors which oversees the Fund's
operations. Each Director serves until the next annual meeting of shareholders
or until his or her successor is elected and qualified or until he or she
resigns or is otherwise removed. Officers are appointed by the Directors and
serve at the pleasure of the Board. The table below shows, for each Director and
Officer, his or her name, address and age, the position held with the Fund, the
length of time served as a Director and Officer of the Fund, the Director's or
Officer's principal occupations during the last five years, the number of funds
in the UBS Fund complex overseen by the Director or for which a person served as
an Officer, and other directorships held by the Director.
Interested Directors
Term of
Office+ and
Position(s) Length of
Name, Address, Held with Time Principal Occupation(s)
and Age Fund Served During Past 5 Years
----------------------------------------------------------------------------------------------------
Margo N. Alexander*++; 56 Director Since 1996 Mrs. Alexander is retired. She was an
executive vice president of UBS Financial
Services Inc. (March 1984 to December
2002). She was chief executive officer (from
January 1995 to October 2000), a director
(from January 1995 to September 2001)
and chairman (from March 1999 to
September 2001) of UBS Global AM.
Brian M. Storms*++; 49 Director Since 2003 Mr. Storms is chief executive officer of
and UBS Global Asset Management-Americas
Chairman region (since July 2002). Mr. Storms was
of the chief executive officer, president and/or
Board of chief operating officer of UBS Global AM
Directors and certain affiliated asset management
companies from 1999 to July 2002. He
was president of Prudential Investments
( 1996-1999).
--------------------------------------------------------------------------------
26
Investment Grade Municipal Income Fund Inc.
Supplemental Information (unaudited)
Number of
Portfolios in Fund Complex Other Directorships
Overseen by Director Held by Director
---------------------------------------------------------------------------
Mrs. Alexander is a director or trustee of None
19 investment companies (consisting of
40 portfolios) for which UBS Global AM or
one of its affiliates serves as investment advisor,
sub-advisor or manager.
Mr. Storms is a director or trustee of None
23 investment companies (consisting of
83 portfolios) for which UBS Global AM or
one of its affiliates serves as investment advisor,
sub-advisor or manager.
--------------------------------------------------------------------------------
27
Investment Grade Municipal Income Fund Inc.
Supplemental Information (unaudited)
Independent Directors
Term of
Office+ and
Position(s) Length of
Name, Address, Held with Time Principal Occupation(s)
and Age Fund Served During Past 5 Years
----------------------------------------------------------------------------------------------------
Richard Q. Armstrong; 68 Director Since 1996 Mr. Armstrong is chairman and principal
R.Q.A. Enterprises of R.Q.A. Enterprises (management
One Old Church Road - consulting firm) (since April 1991 and
Unit # 6 principal occupation since March 1995).
Greenwich, CT 06830
David J. Beaubien; 69 Director Since 2001 Mr. Beaubien is chairman of Yankee
84 Doane Road Environmental Systems, Inc., a
Ware, MA 01082 manufacturer of meteorological
measuring systems (since 1991).
Richard R. Burt; 56 Director Since 1996 Mr. Burt is chairman of Diligence LLC
1275 Pennsylvania Ave., N.W. (international information and security
Washington, D.C. 20004 firm) and IEP Advisors (international
investments and consulting firm).
Meyer Feldberg; 61 Director Since 1992 Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School
101 Uris Hall of Business, Columbia University
New York, New York 10027 (since 1989).
--------------------------------------------------------------------------------
28
Investment Grade Municipal Income Fund Inc.
Supplemental Information (unaudited)
Number of
Portfolios in Fund Complex Other Directorships
Overseen by Director Held by Director
-------------------------------------------------------------------------------------------------
Mr. Armstrong is a director or trustee of None
19 investment companies (consisting of
40 portfolios) for which UBS Global AM
or one of its affiliates serves as investment
advisor, sub-advisor or manager.
Mr. Beaubien is a director or trustee of Mr. Beaubien is also a director of
19 investment companies (consisting of IEC Electronics, Inc., a manufacturer
40 portfolios) for which UBS Global AM or of electronic assemblies.
one of its affiliates serves as investment advisor,
sub-advisor or manager.
Mr. Burt is a director or trustee of Mr. Burt is also a director of Hollinger
19 investment companies (consisting of International Inc. (publishing), HCL
40 portfolios) for which UBS Global AM or Technologies Ltd., The Central
one of its affiliates serves as investment advisor, European Fund, Inc., The Germany
sub-advisor or manager. Fund, Inc., IGT, Inc. (provides technol-
ogy to gaming and wagering industry)
and chairman of Weirton Steel Corp.
(makes and finishes steel products).
He is also a director or trustee of
funds in the Scudder Mutual Funds
Family (consisting of 47 portfolios).
Dean Feldberg is a director or trustee of Dean Feldberg is also a director of
33 investment companies (consisting of Primedia Inc. (publishing), Federated
54 portfolios) for which UBS Global AM or Department Stores, Inc. (operator of
one of its affiliates serves as investment advisor, department stores), Revlon, Inc.
sub-advisor or manager. (cosmetics), Select Medical Inc. (health
care services) and SAPPI, Ltd.
(producer of paper).
--------------------------------------------------------------------------------
29
Investment Grade Municipal Income Fund Inc.
Supplemental Information (unaudited)
Independent Directors (concluded)
Term of
Office+ and
Position(s) Length of
Name, Address, Held with Time Principal Occupation(s)
and Age Fund Served During Past 5 Years
--------------------------------------------------------------------------------------------------
Carl W. Schafer; 67 Director Since 1996 Mr. Schafer is president of the Atlantic
66 Witherspoon Street Foundation (charitable foundation)
#1100 (since 1993).
Princeton, NJ 08542
William D. White; 69 Director Since 2001 Mr. White is retired (since 1994).
P.O. Box 199
Upper Black Eddy, PA 18972
--------------------------------------------------------------------------------
30
Investment Grade Municipal Income Fund Inc.
Supplemental Information (unaudited)
Number of
Portfolios in Fund Complex Other Directorships
Overseen by Director Held by Director
----------------------------------------------- --------------------------------------------
Mr. Schafer is a director or trustee of Mr. Schafer is also a director of Labor
19 investment companies (consisting of Ready, Inc. (temporary employment),
40 portfolios) for which UBS Global AM Roadway Corp. (trucking), Guardian
or one of its affiliates serves as investment Life Insurance Company Mutual Funds
advisor, sub-advisor or manager. (consisting of 19 portfolios), the
Harding, Loevner Funds (consisting of
three portfolios), E.I.I. Realty Securities
Trust (investment company) and Frontier
Oil Corporation.
Mr. White is a director or trustee of None
19 investment companies (consisting of
40 portfolios) for which UBS Global AM
or one of its affiliates serves as investment
advisor, sub-advisor or manager.
--------------------------------------------------------------------------------
31
Investment Grade Municipal Income Fund Inc.
Supplemental Information (unaudited)
Officers
Term of Principal Occupation(s)
Office+ and During Past 5 Years;
Position(s) Length of Number of Portfolios in
Name, Address, Held with Time Fund Complex for which person
and Age Fund Served serves as Officer
--------------------------------------------------------------------------------------------
W. Douglas Beck*; 36 Vice Since 2003 Mr. Beck is an executive director
President and head of mutual fund product
management of UBS Global AM
(since 2002). From March 1998 to
November 2002, he held various
positions at Merrill Lynch, the most
recent being first vice president and
co-manager of the managed solutions
group. Mr. Beck is vice president of
22 investment companies (consisting
of 81 portfolios) for which UBS Global
AM or one of its affiliates serves as
investment advisor, sub-advisor
or manager.
Thomas Disbrow*; 37 Vice Since 2000 Mr. Disbrow is a director and a senior
President manager of the mutual fund finance
and department of UBS Global AM. Prior
Assistant to November 1999, he was a vice
Treasurer president of Zweig/Glaser Advisers.
Mr. Disbrow is a vice president and
assistant treasurer of 19 investment
companies (consisting of 40 portfolios)
for which UBS Global AM or one of its
affiliates serves as investment advisor,
sub-advisor or manager.
Amy R. Doberman*; 41 Vice Since 2000 Ms. Doberman is a managing director
President and general counsel of UBS Global
and AM. From December 1997 through
Secretary July 2000, she was general counsel of
Aeltus Investment Management, Inc.
Ms. Doberman is vice president and
assistant secretary of five investment
companies (consisting of 44 portfolios)
and vice president and secretary of
19 investment companies (consisting
of 40 portfolios) for which UBS Global
AM or one of its affiliates serves as
investment advisor, sub-advisor
or manager.
--------------------------------------------------------------------------------
32
Investment Grade Municipal Income Fund Inc.
Supplemental Information (unaudited)
Term of Principal Occupation(s)
Office+ and During Past 5 Years;
Position(s) Length of Number of Portfolios in
Name, Address, Held with Time Fund Complex for which person
and Age Fund Served serves as Officer
---------------------------------------------------------------------------------------------------
Elbridge T. Gerry III*; 46 Vice Since 1996 Mr. Gerry is a managing director -
President fixed income of UBS Global AM.
Mr. Gerry is a vice president of six
investment companies (consisting of
11 portfolios) for which UBS Global
AM or one of its affiliates serves as
investment advisor, sub-advisor or
manager.
David M. Goldenberg*; 37 Vice Since 2002 Mr. Goldenberg is an executive director
President and deputy general counsel of
and UBS Global AM. From 2000 to 2002
Assistant he was director, legal affairs at Lazard
Secretary Asset Management. Mr. Goldenberg
served in various capacities, including
most recently as global director of
compliance for SSB Citi Asset
Management Group from 1996 to
2000. Mr. Goldenberg is a vice
president and secretary of five
investment companies (consisting of
44 portfolios) and a vice president and
assistant secretary of 19 investment
companies (consisting of 40 portfolios)
for which UBS Global AM or one of its
affiliates serves as investment advisor,
sub-advisor or manager.
Kevin J. Mahoney*; 38 Vice Since 1999 Mr. Mahoney is a director and a senior
President manager of the mutual fund finance
and department of UBS Global AM. Prior to
Assistant April 1999, he was the manager of the
Treasurer mutual fund internal control group of
Salomon Smith Barney. Mr. Mahoney is
a vice president and assistant treasurer
of 19 investment companies (consisting
of 40 portfolios) for which UBS Global
AM or one of its affiliates serves as
investment advisor, sub-advisor
or manager.
--------------------------------------------------------------------------------
33
Investment Grade Municipal Income Fund Inc.
Supplemental Information (unaudited)
Officers (continued)
Term of Principal Occupation(s)
Office+ and During Past 5 Years;
Position(s) Length of Number of Portfolios in
Name, Address, Held with Time Fund Complex for which person
and Age Fund Served serves as Officer
----------------------------------------------------------------------------------------------
Paul H. Schubert*; 40 Vice Since 1994 Mr. Schubert is an executive director
President and head of the mutual fund finance
and department of UBS Global AM.
Treasurer Mr. Schubert is treasurer and principal
accounting officer of three investment
companies (consisting of 41 portfolios),
a vice president and treasurer of
20 investment companies (consisting of
41 portfolios), and treasurer and chief
financial officer of one investment
company (consisting of two portfolios)
for which UBS Global AM or one of its
affiliates serves as investment advisor,
sub-advisor or manager.
Joseph A. Varnas*; 35 President Since 2003 Mr. Varnas is a managing director
(since March 2003), chief technology
officer (since March 2001) and head
of product, technology and operations
of UBS Global AM (since Novem-
ber 2002). From 2000 to 2001, he
was manager of product development
in Investment Consulting Services at
UBS Financial Services Inc. Mr. Varnas
was a senior analyst in the Global
Securities Research and Economics
Group at Merrill Lynch from 1995 to
1999. Mr. Varnas is president of
23 investment companies (consisting
of 82 portfolios) for which UBS Global
AM or one of its affiliates serves as
investment advisor, sub-advisor
or manager.
--------------------------------------------------------------------------------
34
Investment Grade Municipal Income Fund Inc.
Supplemental Information (unaudited)
Term of Principal Occupation(s)
Office+ and During Past 5 Years;
Position(s) Length of Number of Portfolios in
Name, Address, Held with Time Fund Complex for which person
and Age Fund Served serves as Officer
----------------------------------------------------------------------------------------------
Keith A. Weller*; 42 Vice President Since 1995 Mr. Weller is a director and senior
and Assistant associate general counsel of UBS Global
Secretary AM. Mr. Weller is a vice president and
assistant secretary of 19 investment
companies (consisting of 40 portfolios)
for which UBS Global AM or one of its
affiliates serves as investment advisor,
sub-advisor or manager.
------------------
+ Each Director holds office until the next annual meeting of shareholders or
until his or her successor is elected and qualified or until he or she
resigns or is otherwise removed. Each director who has attained the age of
seventy-two (72) years will be subject to retirement on the last day of the
month in which he or she attains such age. Officers of the Fund are
appointed by the Directors and serve at the pleasure of the Board.
++ Mrs. Alexander and Mr. Storms are "interested persons" of the Fund as
defined in the Investment Company Act by virtue of their present or former
positions with UBS Global AM and/or its affiliates.
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
--------------------------------------------------------------------------------
35
(This page has been left blank intentionally.)
Directors
Brian M. Storms Richard R. Burt
Chairman
Meyer Feldberg
Margo N. Alexander Carl W. Schafer
Richard Q. Armstrong William D. White
David J. Beaubien
Principal Officers
Joseph A. Varnas Elbridge T. Gerry III
President Vice President
Amy R. Doberman W. Douglas Beck
Vice President and Secretary Vice President
Paul H. Schubert
Vice President and Treasurer
Investment Advisor and
Administrator
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, New York 10019-6114
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 use in the purchase or
sale of shares of the Fund or of any securities mentioned in this report.
(C) 2003 UBS Global Asset Management (US) Inc. All rights reserved.
[LOGO] UBS
UBS Global Asset Management
51 West 52nd Street
New York, New York 10019-6114
Item 2. Code of Ethics.
The registrant has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions pursuant to Section 406 of
the Sarbanes-Oxley Act of 2002. (The registrant has designated the code of
ethics adopted pursuant to Sarbanes-Oxley as a "Code of Conduct" to lessen the
risk of confusion with its separate code of ethics adopted pursuant to Rule
17j-1 under the Investment Company Act of 1940, as amended.)
Item 3. Audit Committee Financial Expert.
The registrant's Board of Directors has determined that the following persons
serving on the registrant's Audit and Contract Review Committee are "audit
committee financial experts" as defined in item 3 of Form N-CSR : Richard Q.
Armstrong and Carl W. Schafer. Each of Mr. Armstrong and Mr. Schafer is
independent as defined in item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
Item 5. Audit Committee of Listed Registrants.
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
Item 6. [Reserved by SEC for future use. ]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed - End
Management Investment Companies.
The registrant's Board of Directors believes that the voting of proxies on
securities held by the registrant is an important element of the overall
investment process. As such, the Board has delegated the responsibility to vote
such proxies to the registrant's advisor. Following is a summary of the proxy
voting policy of the advisor.
Corporate Governance Philosophy, Voting Guidelines and Policy Summary
The proxy voting policy of UBS Global Asset Management (US) Inc. ("UBS Global
AM") is based on its belief that voting rights have economic value and must be
treated accordingly. Generally, UBS Global AM expects the boards of directors of
companies issuing securities held by its clients to act as stewards of
the financial assets of the company, to exercise good judgment and practice
diligent oversight with the management of the company. While there is no
absolute set of rules that determine appropriate corporate governance under all
circumstances and no set of rules will guarantee ethical behavior, there are
certain benchmarks, which, if substantial progress is made toward, give evidence
of good corporate governance. UBS Global AM may delegate to an independent proxy
voting and research service the authority to exercise the voting rights
associated with certain client holdings. Any such delegation shall be made with
the direction that the votes be exercised in accordance with UBS Global AM's
proxy voting policy.
When UBS Global AM's view of a company's management is favorable, UBS Global AM
generally supports current management initiatives. When UBS Global AM's view is
that changes to the management structure would probably increase shareholder
value, UBS Global AM may not support existing management proposals. In general,
UBS Global AM (1) opposes proposals which act to entrench management; (2)
believes that boards should be independent of company management and composed of
persons with requisite skills, knowledge and experience; (3) opposes structures
which impose financial constraints on changes in control; (4) believes
remuneration should be commensurate with responsibilities and performance; and
(5) believes that appropriate steps should be taken to ensure the independence
of auditors.
UBS Global AM has implemented procedures designed to identify whether it has a
conflict of interests in voting a particular proxy proposal, which may arise as
a result of its or its affiliates' client relationships, marketing efforts or
banking, investment banking and broker/dealer activities. To address such
conflicts, UBS Global AM has imposed information barriers between it and its
affiliates who conduct banking, investment banking and broker/dealer activities
and has implemented procedures to prevent business, sales and marketing issues
from influencing our proxy votes. Whenever UBS Global AM is aware of a conflict
with respect to a particular proxy, its appropriate local corporate governance
committee is required to review and agree to the manner in which such proxy is
voted.
Item 8. [Reserved by SEC for future use. ]
Item 9. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act
of 1940, as amended) are effective based on their evaluation of these
controls and procedures as of a date within 90 days of the filing date
of this document.
(b) The registrant's principal executive officer and principal financial
officer are aware of no changes in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal half-year that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
Item 10. Exhibits.
(a) (1) Code of Ethics as required pursuant to Section 406 of the
Sarbanes-Oxley Act of 2002 (and designated by registrant as a "Code of
Conduct") is attached hereto as Exhibit EX-99.CODE ETH.
(a) (2) Certifications of principal executive officer and principal
financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 is attached hereto as Exhibit EX-99.CERT.
(b) Certifications of principal executive officer and principal financial
officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is
attached hereto as Exhibit EX-99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Investment Grade Municipal income fund inc.
By: /s/ Joseph A. Varnas
---------------------
Joseph A. Varnas
President
Date: December 8, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Joseph A. Varnas
---------------------
Joseph A. Varnas
President
Date: December 8, 2003
By: /s/ Paul H. Schubert
---------------------
Paul H. Schubert
Treasurer
Date: December 8, 2003