N-CSR 1 d13428.txt 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 ---------------------------------------------- Investment Grade Municipal Income Fund Inc. ------------------------------------------------------------------------------ (Exact name of registrant as specified in charter) 51 West 52nd Street, New York, New York 10019-6114 ------------------------------------------------------------------------------ (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. -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- 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, -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- 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 ========================================================================================================== Investment Grade Municipal Income Fund Inc. 3.44% 6.31% 5.40% 5.73% ---------------------------------------------------------------------------------------------------------- Lipper General Municipal Debt Funds (Leveraged) Median 3.80% 4.52% 5.74% 6.10% ---------------------------------------------------------------------------------------------------------- Market Price Return ========================================================================================================== Investment Grade Municipal Income Fund Inc. 4.21% 2.76% 5.54% 6.36% ---------------------------------------------------------------------------------------------------------- Lipper General Municipal Debt Funds (Leveraged) Median 4.21% 3.47% 5.57% 5.81% ----------------------------------------------------------------------------------------------------------
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 ======================================================================= Market Price $14.86 ----------------------------------------------------------------------- Net Asset Value (per share applicable to common shareholders) $16.31 ----------------------------------------------------------------------- 12-Month Net Investment Income Dividend (ended 9/30/03) $0.96 ----------------------------------------------------------------------- September 2003 Dividend $0.08 ----------------------------------------------------------------------- Market Yield* 6.46% ----------------------------------------------------------------------- NAV Yield* 5.89% ----------------------------------------------------------------------- IPO Yield* 6.40% ======================================================================= * 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. -------------------------------------------------------------------------------- 6 Investment Grade Municipal Income Fund Inc. Portfolio Statistics
Characteristics 9/30/03 3/31/03 9/30/02 ==================================================================================================== Net Assets Applicable to Common Shareholders (mm) $168.9 $168.2 $170.5 ---------------------------------------------------------------------------------------------------- Weighted Average Maturity* 13.0 yrs 13.4 yrs 13.7 yrs ---------------------------------------------------------------------------------------------------- Weighted Average Duration* 6.3 yrs 5.5 yrs 4.7 yrs ---------------------------------------------------------------------------------------------------- Weighted Average Coupon* 5.4% 5.6% 5.8% ---------------------------------------------------------------------------------------------------- AMT Paper** 0% 0% 0% ---------------------------------------------------------------------------------------------------- Leverage** 32.1% 32.1% 31.3% ---------------------------------------------------------------------------------------------------- Callable/Maturing Within Five Years* 5.8% 13.9% 19.1% ---------------------------------------------------------------------------------------------------- Callable/Maturing Beyond Five Years* 94.2% 86.1% 80.9% ==================================================================================================== Credit Quality*** 9/30/03 3/31/03 9/30/02 ==================================================================================================== AAA/Aaa 50.7% 63.7% 66.6% ---------------------------------------------------------------------------------------------------- AA/Aa 37.3 31.9 30.2 ---------------------------------------------------------------------------------------------------- A/A 16.0 16.8 12.5 ---------------------------------------------------------------------------------------------------- BBB/Baa 18.8 13.1 14.4 ---------------------------------------------------------------------------------------------------- BB/Ba 0.9 -- 0.4 ---------------------------------------------------------------------------------------------------- SP-1/MIG-1 6.9 7.3 7.1 ---------------------------------------------------------------------------------------------------- A1/P1 -- -- 4.3 ---------------------------------------------------------------------------------------------------- Nonrated 12.9 13.3 12.4 ---------------------------------------------------------------------------------------------------- Other Assets in Excess of Liabilities 3.8 1.5 -- ---------------------------------------------------------------------------------------------------- Liabilities in Excess of Cash and Other Assets -- -- (1.0) ---------------------------------------------------------------------------------------------------- Liquidation Value of Auction Preferred Shares (47.3) (47.6) (46.9) ---------------------------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% ==================================================================================================== Top 10 States*** 9/30/03 3/31/03 9/30/02 ==================================================================================================== Texas 23.0% Texas 27.6% Texas 30.1% ---------------------------------------------------------------------------------------------------- California 16.2 California 12.3 Illinois 19.5 ---------------------------------------------------------------------------------------------------- New York 11.8 Indiana 11.3 Indiana 11.3 ---------------------------------------------------------------------------------------------------- Illinois 10.4 Illinois 10.7 New York 7.2 ---------------------------------------------------------------------------------------------------- Indiana 10.1 North Carolina 9.7 California 6.1 ---------------------------------------------------------------------------------------------------- North Carolina 8.9 Florida 6.7 North Carolina 5.7 ---------------------------------------------------------------------------------------------------- Florida 7.9 Colorado 5.4 Colorado 5.4 ---------------------------------------------------------------------------------------------------- Pennsylvania 6.5 Massachusetts 5.2 Connecticut 5.2 ---------------------------------------------------------------------------------------------------- Kentucky 6.2 Michigan 4.9 Washington 4.8 ---------------------------------------------------------------------------------------------------- Louisiana 4.1 Pennsylvania 4.7 Pennsylvania 4.7 ---------------------------------------------------------------------------------------------------- Total 105.1% 98.5% 100.0% ==================================================================================================== Top Five Sectors*** 9/30/03 3/31/03 9/30/02 ==================================================================================================== Power 36.3% Power 32.4% Lease 19.7% ---------------------------------------------------------------------------------------------------- Water & Sewer 25.6 Lease 20.2 Hospital 19.5 ---------------------------------------------------------------------------------------------------- Lease 21.3 Pre-refunded 13.7 Power 14.2 ---------------------------------------------------------------------------------------------------- Hospital 6.6 Sewer 10.5 Water 11.7 ---------------------------------------------------------------------------------------------------- Tolls 6.3 Water 7.6 Housing 8.4 ---------------------------------------------------------------------------------------------------- Total 96.1% 84.4% 73.5% ====================================================================================================
* 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. -------------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------------------------------------------------------------- Arizona-1.55% 2,380 Arizona State Transportation Board Highway Revenue-Series B Aa1 AAA 07/01/18 5.250 2,614,335 ----------------------------------------------------------------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------------------------------------------------------------- California-15.92% 5,000 California State Department Water Resources Revenue-Series A A3 BBB+ 05/01/16 5.875 5,608,300 ----------------------------------------------------------------------------------------------------------------------------------- 3,000 California Statewide Communities Development Authority Irvine Apartment Communities- Series A-3 Baa2 BBB 05/15/25+ 5.100 3,175,710 ----------------------------------------------------------------------------------------------------------------------------------- 2,150 Fontana Redevelopment Agency Tax Allocation Jurupa Hills Redevelopment Project A NR BBB+ 10/01/17 5.500 2,254,167 ----------------------------------------------------------------------------------------------------------------------------------- 5,000 Los Angeles County Sanitation Funding Authority Revenue- Series A (FSA Insured) Aaa AAA 10/01/18 5.000 5,353,500 ----------------------------------------------------------------------------------------------------------------------------------- 3,000 Los Angeles Water & Power Revenue Power Systems-Series A (MBIA Insured) Aaa AAA 07/01/16 5.000 3,257,790 ----------------------------------------------------------------------------------------------------------------------------------- 3,200 Los Angeles Water & Power Revenue Power Systems-Series A-A-1 Aaa AAA 07/01/21 5.250 3,410,080 ----------------------------------------------------------------------------------------------------------------------------------- 3,500 Metropolitan Water District of Southern California Waterworks- Series A Aaa AAA 03/01/18 5.250 3,830,715 ----------------------------------------------------------------------------------------------------------------------------------- 26,890,262 =================================================================================================================================== Colorado-1.19% 1,874 University of Colorado Participation Interests NR A- 12/01/13 6.000 2,012,391 =================================================================================================================================== Florida-7.90% 2,540 First Governmental Financing Commission Revenue-Series B (AMBAC Insured) Aaa NR 07/01/15 5.500 2,935,630 ----------------------------------------------------------------------------------------------------------------------------------- 1,175 Gainesville Utilities Systems Revenue-Series A Aa2 AA 10/01/20 5.250 1,275,921 ----------------------------------------------------------------------------------------------------------------------------------- 2,000 Orlando Utilities Commission Water & Electric Revenue-Series A Aa2 AA- 10/01/19 5.000 2,117,880 ----------------------------------------------------------------------------------------------------------------------------------- 6,425 Orlando Utilities Commission Water & Electric Revenue-Series C Aa2 AA- 10/01/18 5.250 7,011,924 ----------------------------------------------------------------------------------------------------------------------------------- 13,341,355 ===================================================================================================================================
-------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------------------------------------------------------------ Illinois-8.86% 3,000 Chicago Parking District Harbor Facilities Revenue A2 A 01/01/21 5.700 3,477,660 ------------------------------------------------------------------------------------------------------------------------------------ 5,000 Chicago Parking District Parking Facility Revenue Baa1 A 01/01/14 6.250 5,935,600 ------------------------------------------------------------------------------------------------------------------------------------ 1,200 Illinois Educational Facilities Authority Revenue Augustana College-Series A Baa1 NR 10/01/22 5.625 1,228,500 ------------------------------------------------------------------------------------------------------------------------------------ 250 Metropolitan Pier & Exposition Authority A1 AA- 06/15/27 6.500 255,403 ------------------------------------------------------------------------------------------------------------------------------------ 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 ------------------------------------------------------------------------------------------------------------------------------------ 14,967,334 ==================================================================================================================================== 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 ------------------------------------------------------------------------------------------------------------------------------------ 3,305 Indiana Transportation Financing Authority Airport Facilities Lease Revenue-Series A A1 AA 11/01/12 5.500 3,464,003 ------------------------------------------------------------------------------------------------------------------------------------ 1,430 Indiana Transportation Financing Authority Airport Facilities Lease Revenue-Series A A1 AA 11/01/16 6.250 1,464,549 ------------------------------------------------------------------------------------------------------------------------------------ 2,000 Indiana Transportation Financing Authority Airport Facilities Lease Revenue-Series A A1 AA 11/01/17 5.500 2,081,060 ------------------------------------------------------------------------------------------------------------------------------------ 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 ------------------------------------------------------------------------------------------------------------------------------------ 1,865 Wayne Township Marion County School Building Corp.-First Mortgage NR A+ 01/15/15 5.250 1,959,649 ------------------------------------------------------------------------------------------------------------------------------------ 1,915 Wayne Township Marion County School Building Corp.-First Mortgage NR A+ 07/15/15 5.250 2,012,186 ------------------------------------------------------------------------------------------------------------------------------------ 16,994,223 ====================================================================================================================================
-------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------------------------------------------------------------ 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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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 ------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 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 ====================================================================================================================================
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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