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, Esq.
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 Eye Street, N.W.
Washington, DC 20006-2401
Registrant's telephone number, including area code: 212-882 5000
Date of fiscal year end: September 30, 2003
Date of reporting period: March 31, 2003
Item 1. Reports to Stockholders.
[LOGO] UBS
Global Asset Management
Investment Grade Municipal Income Fund Inc.
Semiannual Report
March 31, 2003
Investment Grade Municipal Income Fund Inc.
May 15, 2003
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
Dear Shareholder,
We present you with the semiannual report for Investment Grade Municipal Income
Fund Inc. for the six months ended March 31, 2003.
An Interview with Portfolio Manager William Veronda
Q. How did the Fund perform during the period relative to its peers?
A. For the six months ended March 31, 2003, the Fund's net asset value return
grew 2.77% and its market price return declined 1.39%. The Lipper General
Municipal Debt Funds (Leveraged) Median's net asset value rose 0.36% and
its market price declined 0.64%, respectively. (For more performance
information, please refer to "Performance At A Glance" on page 5).
Q. Can you describe the economic environment during the period?
A. As the reporting period began in October 2002, the economy appeared to be
on the road to recovery. Third quarter's gross domestic product (GDP)
figure had just been announced at 4.0%, a move in the right direction
after second quarter's anemic 1.3% growth rate. However, hopes for
economic recovery dimmed when fourth quarter's GDP came in at 1.4%.
By the time the review period wound down in March, little about this
economic picture had changed. Fears concerning a potential war with Iraq
were replaced by fears over the longevity and cost of the war after it
began. It was also clear that other factors, including the heightened
threat of terrorism and saber-rattling in North Korea were continuing to
weigh heavily on the forces that drive economic growth. This was
ultimately reflected in the advance GDP figure for first quarter 2003,
which came in at 1.6%.
Q. How did the Federal Reserve Board (the "Fed") react to the weakening
economy?
A. In November 2002, the Fed acknowledged that the economy appeared to have
hit a "soft spot". Thus, after holding interest rates steady during the
first ten months of 2002, the Fed, at its November meeting, moved to lower
the
--------------------------------------------------------------------------------
1
Investment Grade Municipal Income Fund Inc.
federal funds rate one half of a percentage point to 1.25%--a 41-year low.
Since that time, the Fed has held rates steady--most recently at its May
6, 2003 meeting.
Q. How did the bond market perform during the six-month period?
A. The bond market performed well, although there were periods of volatility
due to the uncertainty engendered by the economy and the situation in
Iraq. Looking at the period as a whole, bond prices rose as investors were
drawn to the relative safety offered by fixed income securities, including
municipal bonds.
Q. During the last several years, interest rates have substantially declined.
Has this affected the Fund?
A. Yes, it has. A number of issuers have chosen to call, or buy back, their
bonds before their stated maturity dates. By doing so, the issuers can
then issue new securities at today's lower rates, and thus cut their
borrowing costs. We are using the proceeds we receive from these
involuntary sales to purchase bonds offering lower coupons. Because of
this trend, however, we are taking special care to thoroughly investigate
any call provisions in the bonds we are considering for the Fund.
Q. The Fund's NAV returns were better than the average return of its peers.
What were some of the factors that led to these results?
A. The Fund benefited from our strategy to reposition the portfolio from one
with a shorter-than-average duration to one that was more neutral to its
peer group. As we explained in the last report to shareholders, we've been
emphasizing bonds with longer durations, typically those with maturities
that more accurately reflect the municipal market as a whole. This
strategy has increased our flexibility to purchase what we believe are
attractively structured and priced municipal securities.
Q. When purchasing new bonds for the portfolio, are you targeting a specific
duration range and yield?
A. Yes, we are emphasizing bonds with approximately a 10-year call and a
maturity in the 15- to 20-year range. We believe these issues allow us to
maximize yield relative to market volatility. Additionally, we're looking
for bonds that offer a yield premium of 50 to 100 basis points versus what
is currently available in the marketplace (a basis point is 1/100 of a
percentage point).
--------------------------------------------------------------------------------
2
Investment Grade Municipal Income Fund Inc.
Q. Are there any areas of the investment grade municipal market that you're
emphasizing?
A. We like the fundamentals offered by essential service revenue bonds,
including revenue-producing utilities--in particular, select electric
power revenue bonds. We're seeing a rebound in this area due to a reversal
in the deregulation that led to severe problems in states such as
California.
We're also drawn to select airport revenue bonds. While the airline
industry is extremely weak, we believe many airport bonds offer compelling
opportunities, since the need for airfreight and transportation will
continue to be a vital component of our economy.
Q. Can you share some examples of specific securities that were added to, or
eliminated from, the portfolio during the period?
A. One example of the type of security we're emphasizing is Gainesville
Utilities Systems bonds. This is a revenue-generating security that offers
a yield of 4.54%, with a 17-year maturity and a call date of 10 years.
Based on our extensive credit analysis, we also added Augustana College
bonds to the portfolio. Augustana, founded in 1860, is a private liberal
arts and sciences college in Illinois, with a student population of 2,200.
We were drawn to its strong fundamentals, which include a substantial
endowment that equals one half of its outstanding debt. Its bonds offer a
healthy 5.58% yield and mature in 9 years.
Conversely, we eliminated our position in New York City Transitional
Financing Authority Revenue bonds. We were concerned about the
fundamentals of this security, based on the weakness in the city's
economy, and, in particular, because of the smaller tax revenues coming
from the city's financial services organizations. While these bonds are
still investment grade, we chose to proactively exit the position based on
our credit concerns.
Q. What is your outlook for the economy, and how do you anticipate
positioning the Fund's portfolio going forward?
A. The economy clearly failed to gain any momentum during the period, and we
believe it is likely to expand only modestly in the coming months. In
terms of interest rates, the outlook remains cloudy at best, due to the
uncertainties surrounding the war in Iraq and its effect on economic
growth.
On a strategy level, the mounting state budget deficits have drawn our
attention. Numerous states have seen their budget surpluses dry up and
become
--------------------------------------------------------------------------------
3
Investment Grade Municipal Income Fund Inc.
substantial deficits. In fact, over 90% of the states are now experiencing
shortfalls, with a record $80 billion nationwide deficit projected for
fiscal year 2004 (which begins on July 1, 2003). In many cases, states
have been reluctant to make the necessary spending cuts or to implement
tax increases necessary to bring their budgets in line. Because of this,
we will continue to avoid state credits that do not meet our stringent
quality requirements. Finally, given the uncertain interest rate
environment, we intend to keep the Fund's duration neutral to the
benchmark. In summary, we'll seek to add value through careful attention
to coupon, call, maturity structure and credit analysis.
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,
Joseph A. Varnas
President
Investment Grade Municipal Income Fund Inc.
Head of Product, Technology and Operations
UBS Global Asset Management (US) Inc.
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 six months ended March 31, 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 prospectus for a fund
contains more complete information regarding risks, charges and expenses,
and should be read carefully before investing.
--------------------------------------------------------------------------------
4
Investment Grade Municipal Income Fund Inc.
Performance At A Glance
Average Annual Return, Periods Ended 3/31/03
Net Asset Value Returns 6 months 1 year 5 years 10 years
===========================================================================================================
Investment Grade Municipal Income Fund Inc. 2.77% 10.71% 5.48% 6.49%
-----------------------------------------------------------------------------------------------------------
Lipper General Municipal Debt Funds (Leveraged) Median 0.36 12.01 5.80 6.56
===========================================================================================================
Market Price Returns
===========================================================================================================
Investment Grade Municipal Income Fund Inc. -1.39% 5.75% 6.48% 6.51%
-----------------------------------------------------------------------------------------------------------
Lipper General Municipal Debt Funds (Leveraged) Median -0.64 12.39 5.74 5.92
===========================================================================================================
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 of one
year or less 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 3/31/03
====================================================
Market Price $ 14.72
----------------------------------------------------
Net Asset Value (per share applicable
to common shareholders) $ 16.24
----------------------------------------------------
6-Month Net Investment Income
Dividend (ended 3/31/03) $ 0.48
----------------------------------------------------
March 2003 Dividend $ 0.08
----------------------------------------------------
Market Yield* 6.52%
----------------------------------------------------
NAV Yield* 5.91%
----------------------------------------------------
IPO Yield* 6.40%
====================================================
* Market yield is calculated by multiplying the March dividend by 12 and
dividing by the month-end market price. NAV yield is calculated by
multiplying the March dividend by 12 and dividing by the month-end net
asset value. IPO yield is calculated by multiplying the March dividend by
12 and dividing by the initial public offering price. Prices and yields
will vary.
--------------------------------------------------------------------------------
5
Investment Grade Municipal Income Fund Inc.
Portfolio Statistics
Characteristics 3/31/03 9/30/02 3/31/02
===============================================================
Net Assets Applicable to
Common Shareholders (mm) $ 168.2 $ 170.5 $ 162.9
---------------------------------------------------------------
Weighted Average Maturity* 13.4 yrs 13.7 yrs 14.1 yrs
---------------------------------------------------------------
Weighted Average Duration* 5.5 yrs 4.7 yrs 4.8 yrs
---------------------------------------------------------------
Weighted Average Coupon* 5.6% 5.8% 6.0%
---------------------------------------------------------------
AMT Paper** 0% 0% 0%
---------------------------------------------------------------
Leverage** 32.1% 31.3% 32.7%
---------------------------------------------------------------
Callable/Maturing Within
Five Years* 13.9% 19.1% 15.6%
---------------------------------------------------------------
Callable/Maturing Beyond
Five Years* 86.1% 80.9% 84.4%
===============================================================
Credit Quality*** 3/31/03 9/30/02 3/31/02
===============================================================
AAA/Aaa 63.7% 66.6% 72.0%
---------------------------------------------------------------
AA/Aa 31.9 30.2 33.6
---------------------------------------------------------------
A/A 16.8 12.5 13.6
---------------------------------------------------------------
BBB/Baa 13.1 14.4 13.6
---------------------------------------------------------------
BB/Ba 0.0 0.4 0.6
---------------------------------------------------------------
SP-1/MIG-1 7.3 7.1 1.0
---------------------------------------------------------------
A1/P1 0.0 4.3 0.1
---------------------------------------------------------------
Nonrated 13.3 12.4 13.0
---------------------------------------------------------------
Liabilities in Excess of Cash
and Other Assets 1.5 (1.0) 1.6
---------------------------------------------------------------
Liquidation Value of
Auction Preferred Shares (47.6) (46.9) (49.1)
---------------------------------------------------------------
Total 100.0% 100.0% 100.0%
===============================================================
Top Ten States*** 3/31/03 9/30/02 3/31/02
===================================================================================
Texas 27.6% Texas 30.1% Texas 30.2%
-----------------------------------------------------------------------------------
California 12.3 Illinois 19.5 Indiana 15.1
-----------------------------------------------------------------------------------
Indiana 11.3 Indiana 11.3 Illinois 14.0
-----------------------------------------------------------------------------------
Illinois 10.7 New York 7.2 New York 9.9
-----------------------------------------------------------------------------------
North Carolina 9.7 California 6.1 Washington 6.6
-----------------------------------------------------------------------------------
Florida 6.7 North Carolina 5.7 California 5.9
-----------------------------------------------------------------------------------
Colorado 5.4 Colorado 5.4 North Carolina 5.6
-----------------------------------------------------------------------------------
Massachusetts 5.2 Connecticut 5.2 Colorado 5.4
-----------------------------------------------------------------------------------
Michigan 4.9 Washington 4.8 Connecticut 5.4
-----------------------------------------------------------------------------------
Pennsylvania 4.7 Pennsylvania 4.7 Kentucky 4.9
-----------------------------------------------------------------------------------
Total 98.5% 100.0% 103.0%
===================================================================================
Top Five Sectors*** 3/31/03 9/30/02 3/31/02
=============================================================================
Power 32.4% Lease 19.7% Water 20.4%
-----------------------------------------------------------------------------
Lease 20.2 Hospital 19.5 Lease 20.2
-----------------------------------------------------------------------------
Pre-refunded 13.7 Power 14.2 Power 14.6
-----------------------------------------------------------------------------
Sewer 10.5 Water 11.7 Hospital 14.6
-----------------------------------------------------------------------------
Water 7.6 Housing 8.4 Housing 9.4
-----------------------------------------------------------------------------
Total 84.4% 73.5% 79.2%
=============================================================================
* 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
Ratings Group and Moody's Investor Services, Inc. Both are independent
rating agencies.
--------------------------------------------------------------------------------
6
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--March 31, 2003 (unaudited)
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
=====================================================================================================
Long-Term Municipal Bonds--138.76%
=====================================================================================================
Alabama--3.66%
$4,600 Jefferson-County Sewer Revenue-
Series A (FGIC Insured) Aaa AAA 02/01/27 5.375% $ 4,712,148
-----------------------------------------------------------------------------------------------------
1,500 Phenix City Industrial Development
Board Environmental
Improvement Revenue-Series B
(Meadwest Vaco Insured) Baa2 BBB 05/15/30 6.100 1,450,710
-----------------------------------------------------------------------------------------------------
6,162,858
=====================================================================================================
Arizona--1.54%
2,380 Arizona State Transportation Board
Highway Revenue-Series B Aa1 AAA 07/01/18 5.250 2,583,062
=====================================================================================================
Arkansas--1.09%
1,790 Little Rock Capital Improvement
Revenue Parks & Recreation
Projects-Series A NR NR 01/01/18 5.700 1,842,912
=====================================================================================================
California--8.82%
5,000 California State Department Water
Resources Revenue-Series A A3 BBB+ 05/01/16 5.875 5,624,800
-----------------------------------------------------------------------------------------------------
3,000 California Statewide Communities
Development Authority
Irvine Apartment Communities-
Series A-3 Baa2 BBB 05/15/25+ 5.100 3,171,600
-----------------------------------------------------------------------------------------------------
2,150 Fontana Redevelopment Agency Tax
Allocation Jurupa Hills
Redevelopment Project A NR BBB+ 10/01/17 5.500 2,250,211
-----------------------------------------------------------------------------------------------------
3,500 Metropolitan Water District of
Southern California Waterworks-
Series A Aaa AAA 03/01/18 5.250 3,795,015
-----------------------------------------------------------------------------------------------------
14,841,626
=====================================================================================================
Colorado--5.39%
5,950 Arapahoe County Capital
-----------------------------------------------------------------------------------------------------
Improvement Trust Fund Highway
Revenue (Pre-refunded with
U.S. Government Securities to
08/31/05 @ 103) Aaa AAA 08/31/26 7.000 6,908,426
-----------------------------------------------------------------------------------------------------
2,000 University of Colorado Participation
Interests NR A- 12/01/13 6.000 2,152,160
-----------------------------------------------------------------------------------------------------
9,060,586
=====================================================================================================
Connecticut--1.77%
2,900 Connecticut Housing Finance
-----------------------------------------------------------------------------------------------------
Authority Housing Mortgage
Finance Program-Series A & B Aaa AAA 05/15/14 6.200 2,974,472
=====================================================================================================
Florida--6.63%
2,540 First Governmental Financing
Commission Revenue-Series B
(AMBAC Insured) Aaa NR 07/01/15 5.500 2,927,299
-----------------------------------------------------------------------------------------------------
1,175 Gainesville Utilities Systems
Revenue-Series A Aa2 AA 10/01/20 5.250 1,265,440
-----------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
7
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--March 31, 2003 (unaudited)
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
====================================================================================================
Long-Term Municipal Bonds--(continued)
====================================================================================================
Florida--(concluded)
$6,425 Orlando Utilities Commission Water
Revenue-Series C Aa2 AA- 10/01/18 5.250% $ 6,959,496
-----------------------------------------------------------------------------------------------------
11,152,235
=====================================================================================================
Georgia--0.02%
30 Georgia Municipal Electric Authority
Power Revenue-Series B A2 A+ 01/01/16 6.375 30,651
=====================================================================================================
Illinois--10.71%
5,000 Chicago Parking District Parking
Facility Revenue Baa1 A 01/01/14 6.250 5,912,250
-----------------------------------------------------------------------------------------------------
1,200 Illinois Educational Facilities
Authority Revenue Augustana
College-Series A Baa1 NR 10/01/22 5.625 1,217,184
-----------------------------------------------------------------------------------------------------
250 Metropolitan Pier & Exposition
Authority Aa3 AA- 06/15/27 6.500 255,985
-----------------------------------------------------------------------------------------------------
6,350 Metropolitan Pier & Exposition
Authority (Pre-refunded with
U.S. Government Securities to
06/15/03 @ 102) Aaa AAA 06/15/27 6.500 6,547,422
-----------------------------------------------------------------------------------------------------
2,875 Metropolitan Pier & Exposition
Authority-Series A (MBIA Insured) Aaa AAA 06/15/42 5.250 2,966,741
-----------------------------------------------------------------------------------------------------
1,000 Naperville Electric Revenue (Pre-
refunded with U.S. Government
Securities to 05/01/06 @ 100) Aa2 AA 05/01/12 5.700 1,119,650
-----------------------------------------------------------------------------------------------------
18,019,232
=====================================================================================================
Indiana--11.30%
1,000 Clark Pleasant Community School
Building Corp. First Mortgage
(AMBAC Insured) Aaa AAA 07/15/17 5.500 1,104,710
-----------------------------------------------------------------------------------------------------
6,735 Indiana Transportation Financing
Authority Airport Facilities Lease 11/01/12 to 5.500 to
Revenue-Series A A1 AA 11/01/17 6.250 7,026,433
-----------------------------------------------------------------------------------------------------
2,000 Indianapolis Local Public
Improvement Bond Bank-
Transportation Revenue (Pre-
refunded with U.S. Government
Securities to 07/01/03 @ 102) Aa2 AA- 07/01/10 6.000 2,064,440
-----------------------------------------------------------------------------------------------------
3,400 Marion County Convention &
Recreational Facilities Authority
Excise Tax Revenue-Series A
(MBIA Insured) Aaa AAA 06/01/17 5.500 3,727,318
-----------------------------------------------------------------------------------------------------
1,000 Purdue University Student Fee
Revenue-Series B (Pre-refunded
with U.S. Government Securities
to 01/01/05 @ 103) Aa2 AA 07/01/15 6.700 1,121,680
-----------------------------------------------------------------------------------------------------
3,780 Wayne Township Marion County
School Building Corp.-First 01/15/15 to
Mortgage NR A+ 07/15/15 5.250 3,967,866
-----------------------------------------------------------------------------------------------------
19,012,447
=====================================================================================================
--------------------------------------------------------------------------------
8
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--March 31, 2003 (unaudited)
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
=====================================================================================================
Long-Term Municipal Bonds--(continued)
=====================================================================================================
Iowa--3.06%
$4,880 Polk County-Series A Aa1 AA+ 06/01/19 5.000% $5,155,183
=====================================================================================================
Kentucky--4.68%
7,750 Boone County Pollution Control
Revenue Dayton Power & Light Co. A2 BBB 11/15/22 6.500 7,869,660
=====================================================================================================
Louisiana--4.13%
6,390 New Orleans Sewage Service 06/01/15 to
Revenue Aaa AAA 06/01/16 5.000 6,940,747
=====================================================================================================
Massachusetts--4.23%
2,250 Massachusetts State Health &
Educational Facilities Authority
Revenue Massachusetts Institute
of Technology-Series K Aaa AAA 07/01/32 5.500 2,555,077
-----------------------------------------------------------------------------------------------------
2,260 Massachusetts State Water Pollution
Abatement-Series 8 Aaa AAA 08/01/17 5.000 2,414,494
-----------------------------------------------------------------------------------------------------
2,000 Massachusetts State Water Pollution
Abatement-Series A Aaa AAA 08/01/20 5.250 2,139,920
-----------------------------------------------------------------------------------------------------
7,109,491
=====================================================================================================
Michigan--4.60%
3,425 Michigan State Building Authority
Revenue Program-Series III Aa1 AA+ 10/15/16 5.375 3,824,149
-----------------------------------------------------------------------------------------------------
2,000 Delta County Economic
Development Corp.
Environmental Improvement
Revenue-Series A Baa2 BBB 04/15/27 6.250 2,013,920
-----------------------------------------------------------------------------------------------------
1,750 Michigan Municipal Bond Authority
Clear Water Revenue Aaa AAA 10/01/19 5.250 1,892,730
-----------------------------------------------------------------------------------------------------
7,730,799
=====================================================================================================
Nevada--4.17%
6,750 Clark County Pollution Control
Revenue Nevada Power Co.
Project-Series B (FGIC Insured) Aaa AAA 06/01/19 6.600 7,010,550
=====================================================================================================
New Mexico--0.65%
1,000 University of New Mexico Revenues Aa3 AA 06/01/16 5.250 1,094,280
=====================================================================================================
New York--3.94%
2,150 New York State Dormitory Authority
Revenue Columbia University- 07/01/14 to
Series A Aaa AAA 07/01/16 5.125 2,379,226
-----------------------------------------------------------------------------------------------------
2,000 New York City Municipal Water
Finance Authority Revenue-Water
& Sewer Systems-Series D Aa2 AA 06/15/17 5.250 2,168,380
-----------------------------------------------------------------------------------------------------
2,000 Triborough Bridge & Tunnel
Authority New York Revenue-
Series B Aa3 AA- 11/15/20 5.000 2,088,420
-----------------------------------------------------------------------------------------------------
6,636,026
=====================================================================================================
--------------------------------------------------------------------------------
9
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--March 31, 2003 (unaudited)
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
=====================================================================================================
Long-Term Municipal Bonds--(continued)
=====================================================================================================
North Carolina--9.67%
$3,155 Charlotte Water & Sewer System
Revenue-Series A Aa1 AAA 07/01/15 5.500% $ 3,662,766
-----------------------------------------------------------------------------------------------------
9,700 North Carolina Eastern Municipal
Power Agency-Series A (Escrowed 01/01/11 to 5.500 to
to Maturity) Baa3 BBB 01/01/21 6.400 10,942,148
-----------------------------------------------------------------------------------------------------
1,630 North Carolina Eastern Municipal
Power Agency-Catawba Electric
Revenue Baa1 BBB+ 01/01/17 6.250 1,663,056
-----------------------------------------------------------------------------------------------------
16,267,970
=====================================================================================================
Ohio--2.80%
2,185 Ohio State Higher Education-
Series B Aa1 AA+ 11/01/17 5.250 2,398,759
-----------------------------------------------------------------------------------------------------
2,000 Ohio State Water Development
Authority Revenue-Fresh Water- 06/01/16 to
Series B (FSA Insured) Aaa AAA 12/01/17 5.500 2,314,780
-----------------------------------------------------------------------------------------------------
4,713,539
=====================================================================================================
Oregon--0.65%
1,000 Portland Sewer Systems Revenue-
Series A Aaa AAA 06/01/18 5.250 1,088,690
=====================================================================================================
Pennsylvania--4.68%
5,000 Northumberland County Authority-
Guaranteed Lease Revenue-
Mountain View Manor Project NR NR 10/01/20 7.000 4,950,350
-----------------------------------------------------------------------------------------------------
2,680 Philadelphia School District-Series A
(MBIA Insured) Aaa AAA 04/01/15 5.250 2,927,257
-----------------------------------------------------------------------------------------------------
7,877,607
=====================================================================================================
Puerto Rico--1.65%
2,425 Puerto Rico Public Buildings
Authority Revenue-Guaranteed
Government Facilities-Series D Baa1 A- 07/01/13 5.375 2,781,524
=====================================================================================================
Rhode Island--3.74%
6,175 Rhode Island Housing & Mortgage
Finance Corp. Homeownership
Opportunity-Series 10-A Aa2 AA+ 04/01/27 6.500 6,292,078
=====================================================================================================
South Carolina--0.64%
1,000 Greenville Waterworks Revenue Aa1 AAA 02/01/20 5.250 1,077,130
=====================================================================================================
South Dakota--3.06%
3,760 Lower Brule Sioux Tribe++ NR NR 08/15/15 6.000 3,662,346
-----------------------------------------------------------------------------------------------------
1,509 Standing Rock South Dakota New
Public Housing++ NR NR 08/07/13 6.000 1,487,293
-----------------------------------------------------------------------------------------------------
5,149,639
=====================================================================================================
Tennessee--1.59%
2,500 Memphis-Shelby County Airport
Authority-Special Facilities
Revenue Federal Express Corp. Baa2 BBB 09/01/09 5.000 2,669,775
=====================================================================================================
--------------------------------------------------------------------------------
10
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--March 31, 2003 (unaudited)
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
=====================================================================================================
Long-Term Municipal Bonds--(concluded)
=====================================================================================================
Texas--25.78%
$2,475 Alvin Independent School District
School House-Series A Aaa AAA 02/15/17 5.375% $ 2,707,601
-----------------------------------------------------------------------------------------------------
4,000 Coastal Bend Health Facilities
Development-Incarnate Word
Health System (Escrowed to
Maturity) (AMBAC Insured) Aaa AAA 01/01/17 6.300 4,884,480
-----------------------------------------------------------------------------------------------------
1,335 Eagle Mountain & Saginaw
Independent School District
Unlimited Tax-School Building Aaa AAA 08/15/14 5.375 1,490,768
-----------------------------------------------------------------------------------------------------
2,825 Fort Worth Water & Sewer Revenue Aa2 AA 02/15/16 5.625 3,173,859
-----------------------------------------------------------------------------------------------------
7,416 Harris County Texas Lease++ NR NR 05/01/20 6.750 7,408,776
-----------------------------------------------------------------------------------------------------
3,007 Houston Community College
System Certificates of
Participation++ NR NR 06/15/25 7.875 3,055,870
-----------------------------------------------------------------------------------------------------
2,000 Houston Refunding & Public
Improvement-Series A Aa3 AA- 03/01/15 5.250 2,165,940
-----------------------------------------------------------------------------------------------------
3,000 Houston Water & Sewer System
Revenue-Junior Lien-Series C
(FGIC Insured) Aaa AAA 12/01/22 5.250 3,103,860
-----------------------------------------------------------------------------------------------------
1,485 Lower Colorado River Authority
Transmission Contract Revenue Aaa AAA 05/15/20 5.250 1,578,926
-----------------------------------------------------------------------------------------------------
2,350 Port Corpus Christi Industrial
Development Corp. Revenue-
Valero Energy Corp.-Series C Baa2 BBB 04/01/18 5.400 2,268,079
-----------------------------------------------------------------------------------------------------
3,000 San Antonio Electric & Gas Revenue Aa1 AA+ 02/01/20 5.375 3,218,790
-----------------------------------------------------------------------------------------------------
3,200 San Antonio Electric & Gas
Revenue-Series A Aa1 AA+ 02/01/21 4.500 3,119,328
-----------------------------------------------------------------------------------------------------
5,000 Texas Health Facilities Development
Corp.-All Saints Episcopal
Hospital-Series B (Pre-refunded
with U.S. Government securities
to 8/15/03 @ 102) (MBIA Insured) Aaa AAA 08/15/22 6.250 5,195,850
-----------------------------------------------------------------------------------------------------
43,372,127
=====================================================================================================
Utah--1.31%
2,000 Utah Assisted Municipal Power
Systems Revenue Payson Power
Project-Series A Aaa AAA 04/01/16 5.250 2,197,480
=====================================================================================================
Virginia--0.71%
1,050 Chesapeake Public Improvement Aa2 AA 12/01/14 5.500 1,189,986
=====================================================================================================
Washington--2.09%
3,035 Metropolitan Park District Tacoma 12/01/14 to
(AMBAC Insured) Aaa AAA 12/01/16 6.000 3,512,694
=====================================================================================================
Total Long-Term Municipal Bonds (cost $223,368,734) 233,417,056
=====================================================================================================
--------------------------------------------------------------------------------
11
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--March 31, 2003 (unaudited)
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
=====================================================================================================
Short-Term Municipal Notes--7.33%
=====================================================================================================
Alaska--0.30%
$ 500 Valdez Alaska Marine Terminal
Revenue-Exxon Pipeline
Company-Project C P1 A1+ 04/01/03 1.100%* $ 500,000
=====================================================================================================
California--3.45%
300 California Health Facilities Financing
Authority Revenue-Hospital
Adventist-Series A VMIG-1 A1+ 04/01/03 1.200* 300,000
-----------------------------------------------------------------------------------------------------
5,500 California State Department Water
Resources Power Supply Revenue-
Series B2 VMIG-1 A1+ 04/01/03 1.200* 5,500,000
-----------------------------------------------------------------------------------------------------
5,800,000
=====================================================================================================
Connecticut--0.32%
550 Connecticut State Health &
Educational Facilities Authority
Revenue-Yale University VMIG-1 A1+ 04/01/03 1.150* 550,000
=====================================================================================================
Florida--0.06%
100 Jacksonville Electric
Authority Revenue VMIG-1 A1+ 04/01/03 1.200* 100,000
=====================================================================================================
Georgia--0.06%
100 Hapeville Development Authority
Industrial Development Revenue-
Hapeville Hotel Ltd. P1 NR 04/01/03 1.150* 100,000
=====================================================================================================
Louisiana--0.06%
100 East Baton Rouge Parish Pollution
Control Revenue-Exxon Project P1 A1+ 04/01/03 1.100* 100,000
=====================================================================================================
Massachusetts--0.95%
1,600 Massachusetts State Water
Resources Authority-Series C VMIG-1 A1+ 04/01/03 1.150* 1,600,000
=====================================================================================================
Michigan--0.30%
100 Michigan University Revenue-
Series A-2 VMIG-1 A1+ 04/01/03 1.150* 100,000
-----------------------------------------------------------------------------------------------------
400 University of Michigan Revenues
Refunding Medical Service
Plan A-1 VMIG-1 A1+ 04/01/03 1.150* 400,000
-----------------------------------------------------------------------------------------------------
500,000
=====================================================================================================
Ohio--0.06%
100 Ohio State Air Quality Development
Authority Revenue-Refunding
Pollution Control Ohio Edison-
Series C VMIG-1 A1+ 04/01/03 1.150* 100,000
=====================================================================================================
Texas--1.77%
200 Angelina & Neches River Authority
Solid Waste Revenue-Series C P1 NR 04/01/03 1.150* 200,000
-----------------------------------------------------------------------------------------------------
330 Bell County Health Facilities
Development Corp. Revenue
Scott & White Memorial Hospital
(MBIA Insured) VMIG1 A1+ 04/01/03 1.200* 330,000
-----------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
12
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments--March 31, 2003 (unaudited)
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
=====================================================================================================
Short-Term Municipal Notes--(concluded)
=====================================================================================================
Texas--(concluded)
$ 450 Guadalupe-Blanco River Authority
Pollution Central Revenue VMIG-1 A1+ 04/01/03 1.150%* $ 450,000
-----------------------------------------------------------------------------------------------------
100 Harris County Health Facilities
Development Corp. NR A1+ 04/01/03 1.200* 100,000
-----------------------------------------------------------------------------------------------------
500 Harris County Health Facilities
Development Corp. Texas Medical
Center-Series B (FSA Insured) VMIG-1 A1+ 04/01/03 1.200* 500,000
-----------------------------------------------------------------------------------------------------
1,400 Lower Neches Valley Authority
Development Corp.-ExxonMobil
Project-Series A VMIG-1 A1+ 04/01/03 1.100* 1,400,000
-----------------------------------------------------------------------------------------------------
2,980,000
-----------------------------------------------------------------------------------------------------
Total Short-Term Municipal Notes (cost $12,330,000) 12,330,000
-----------------------------------------------------------------------------------------------------
Total Investments (cost--$235,698,734)--146.09% 245,747,056
-----------------------------------------------------------------------------------------------------
Other assets in excess of liabilities--1.47% 2,464,083
-----------------------------------------------------------------------------------------------------
Liquidation value of auction preferred shares--(47.56)% (80,000,000)
-----------------------------------------------------------------------------------------------------
Net Assets applicable to common shareholders--100.00% $168,211,139
=====================================================================================================
+ The maturity date reflects the mandatory date bond will be put back to
issuer.
++ Illiquid securities representing 9.28% of net assets.
* Variable rate demand notes are payable on demand. The maturity dates shown
are the next interest rate reset dates. The interest rates shown are the
current rates as of March 31, 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
--------------------------------------------------------------------------------
13
Investment Grade Municipal Income Fund Inc.
Statement of Assets and Liabilities--March 31, 2003 (unaudited)
Assets:
Investments in securities, at value (cost--$235,698,734) $ 245,747,056
---------------------------------------------------------------------------------------------
Cash 84,073
---------------------------------------------------------------------------------------------
Receivable for investments sold 100,130
---------------------------------------------------------------------------------------------
Interest receivable 3,639,596
---------------------------------------------------------------------------------------------
Other assets 12,696
---------------------------------------------------------------------------------------------
Total assets 249,583,551
---------------------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 1,065,600
---------------------------------------------------------------------------------------------
Payable to investment advisor and administrator 163,192
---------------------------------------------------------------------------------------------
Dividends payable to auction preferred shareholders 84,037
---------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 59,583
---------------------------------------------------------------------------------------------
Total liabilities 1,372,412
---------------------------------------------------------------------------------------------
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 $ 168,211,139
---------------------------------------------------------------------------------------------
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 1,819,479
---------------------------------------------------------------------------------------------
Accumulated net realized gain from investment transactions 2,669,191
---------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 10,048,322
---------------------------------------------------------------------------------------------
Net assets applicable to common shareholders $ 168,211,139
---------------------------------------------------------------------------------------------
Net asset value per common share ($168,211,139 applicable to 10,356,667
common shares outstanding) $ 16.24
=============================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
14
Investment Grade Municipal Income Fund Inc.
Statement of Operations
For the Six
Months Ended
March 31,
2003
(unaudited)
=============================================================================================
Investment income:
Interest $ 6,461,724
--------------------------------------------------------------------------------------------
Expenses:
Investment advisory and administration fees 1,108,451
--------------------------------------------------------------------------------------------
Custody and accounting 73,897
--------------------------------------------------------------------------------------------
Auction Preferred Shares expenses 58,034
--------------------------------------------------------------------------------------------
Professional fees 29,102
--------------------------------------------------------------------------------------------
Reports and notices to shareholders 22,843
--------------------------------------------------------------------------------------------
Transfer agency fees 10,975
--------------------------------------------------------------------------------------------
Directors' fees 3,137
--------------------------------------------------------------------------------------------
Other expenses 21,111
--------------------------------------------------------------------------------------------
1,327,550
--------------------------------------------------------------------------------------------
Less: Fee waivers from investment advisor and administrator (153,951)
--------------------------------------------------------------------------------------------
Net expenses 1,173,599
--------------------------------------------------------------------------------------------
Net investment income 5,288,125
--------------------------------------------------------------------------------------------
Realized and unrealized gains (losses) from investment activities:
Net realized gain from investment transactions 2,669,628
--------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of investments (2,766,388)
--------------------------------------------------------------------------------------------
Net realized and unrealized loss from investment activities (96,760)
--------------------------------------------------------------------------------------------
Dividends and distributions to auction preferred shareholders
from:
Net investment income (366,274)
--------------------------------------------------------------------------------------------
Net realized gain from investment transactions (203,712)
--------------------------------------------------------------------------------------------
Total dividends and distributions to auction preferred shareholders (569,986)
--------------------------------------------------------------------------------------------
Net increase in net assets applicable to common shareholders resulting from
operations $ 4,621,379
=============================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
15
Investment Grade Municipal Income Fund Inc.
Statement of Changes in Net Assets Applicable to
Common Shareholders
For the Six
Months Ended For the
March 31, 2003 Year Ended
(unaudited) September 30, 2002
====================================================================================================
From operations:
Net investment income $ 5,288,125 $ 11,453,707
----------------------------------------------------------------------------------------------------
Net realized gains from investment transactions 2,669,628 2,096,508
----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of
investments (2,766,388) 892,716
----------------------------------------------------------------------------------------------------
Dividends and distributions to auction preferred shareholders (569,986) (1,300,511)
----------------------------------------------------------------------------------------------------
Net increase in net assets applicable to common shareholders
resulting from operations 4,621,379 13,142,420
----------------------------------------------------------------------------------------------------
Dividends and distributions to common shareholders from:
Net investment income (4,971,200) (9,631,700)
----------------------------------------------------------------------------------------------------
Net realized gains from investment transactions (1,893,199) (351,091)
----------------------------------------------------------------------------------------------------
Total dividends and distributions to common shareholders (6,864,399) (9,982,791)
----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to common
shareholders (2,243,020) 3,159,629
----------------------------------------------------------------------------------------------------
Net assets applicable to common shareholders:
Beginning of period 170,454,159 167,294,530
----------------------------------------------------------------------------------------------------
End of period (including undistributed net investment income
of $1,819,479 and $1,868,828, respectively) $168,211,139 $170,454,159
====================================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
16
Investment Grade Municipal Income Fund Inc.
Notes to Financial Statements (unaudited)
Organization and Significant Accounting Policies
Investment Grade Municipal Income Fund Inc. (the "Fund") was incorporated in
Maryland on August 6, 1992, and is registered with the Securities and Exchange
Commission 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 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 performance 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
--------------------------------------------------------------------------------
17
Investment Grade Municipal Income Fund Inc.
Notes to Financial Statements (unaudited)
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 internationally 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. At March 31, 2003, the Fund owed UBS Global AM
$163,192, representing $189,513 for investment advisory and administration fees
less amounts due for fee waivers of $26,321. For the six months ended March 31,
2003, UBS Global AM voluntarily waived $153,951 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 March 31, 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. Dividend rates ranged from 0.953% to
1.850% for the six months ended March 31, 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
--------------------------------------------------------------------------------
18
Investment Grade Municipal Income Fund Inc.
Notes to Financial Statements (unaudited)
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.
Federal Tax Status
For federal income tax purposes, at March 31, 2003, the components of net
unrealized appreciation of investments were as follows:
Gross appreciation (investments having an excess of value over cost) $10,409,134
-------------------------------------------------------------------------------------
Gross depreciation (investments having an excess of cost over value) (360,812)
-------------------------------------------------------------------------------------
Net unrealized appreciation of investments $10,048,322
=====================================================================================
For the six months ended March 31, 2003, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $71,605,209 and
$69,518,361, 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.
The tax character of distributions paid during the fiscal year ended September
30, 2002 was as follows:
Distributions paid from: 2002
====================================================
Tax-exempt income $10,887,019
----------------------------------------------------
Net long-term realized capital gains 436,163
----------------------------------------------------
Total distributions paid $11,323,182
====================================================
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.
The tax character of distributions paid and the components of accumulated
earnings (deficit) on a tax basis for the current fiscal year will be
calculated for the Fund after the Fund's fiscal year end, at September 30,
2003.
--------------------------------------------------------------------------------
19
Investment Grade Municipal Income Fund Inc.
Financial Highlights
Selected data for a share of common stock outstanding throughout each period is
presented below:
For the Six
Months Ended For the Years Ended September 30,
March 31, 2003 ==============================================================================
(unaudited) 2002 2001 2000 1999 1998
====================================================================================================================================
Net asset value,
beginning of period $ 16.46 $ 16.15 $ 15.91 $ 16.09 $ 17.09 $ 16.78
------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.51 1.11 1.17 1.18 1.17 1.19
------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) from investment activities (0.01) 0.29 0.46 (0.13) (1.02) 0.29
------------------------------------------------------------------------------------------------------------------------------------
Common share equivalent of
dividends and distributions paid
to auction preferred
shareholders from:
Net investment income (0.04) (0.12) (0.23) (0.31) (0.25) (0.27)
------------------------------------------------------------------------------------------------------------------------------------
Net realized gains from
investment transactions (0.02) (0.01) (0.07) (0.00)1 -- --
------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions
paid to auction preferred
shareholders (0.06) (0.13) (0.30) (0.31) (0.25) (0.27)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from
investment operations 0.44 1.27 1.33 0.74 (0.10) 1.21
------------------------------------------------------------------------------------------------------------------------------------
Dividends and distributions paid
to common shareholders from:
Net investment income (0.48) (0.93) (0.90) (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 (0.66) (0.96) (1.09) (0.92) (0.90) (0.90)
------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 16.24 $ 16.46 $ 16.15 $ 15.91 $ 16.09 $ 17.09
------------------------------------------------------------------------------------------------------------------------------------
Market value, end of period $ 14.72 $ 15.60 $ 15.39 $ 13.75 $ 13.88 $ 15.94
------------------------------------------------------------------------------------------------------------------------------------
Total investment return2 (1.39)% 7.96% 20.59% 5.90% (7.68)% 12.21%
------------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets
attributable to common shares:
Total expenses, net of waivers
from advisor 1.41%* 1.48% 1.49% 1.52% 1.52% 1.44%
------------------------------------------------------------------------------------------------------------------------------------
Total expenses, before waivers
from advisor 1.59%* 1.67% 1.68% 1.71% 1.71% 1.62%
------------------------------------------------------------------------------------------------------------------------------------
Net investment income before
auction preferred shares
dividends 6.35%* 6.89% 7.30% 7.48% 7.01% 7.03%
-----------------------------------------------------------------------------------------------------------------------------------
Auction preferred shares
dividends from net investment
income 0.44%* 0.73% 1.42% 1.99% 1.50% 1.62%
------------------------------------------------------------------------------------------------------------------------------------
Net investment income available
to common shareholders, net
of waivers from advisor 5.91%* 6.16% 5.88% 5.49% 5.51% 5.41%
------------------------------------------------------------------------------------------------------------------------------------
Net investment income available
to common shareholders,
before waivers from advisor 5.73%* 5.97% 5.69% 5.30% 5.32% 5.23%
------------------------------------------------------------------------------------------------------------------------------------
Supplemental data:
Net assets applicable to common
shareholders, end of period (000's) $168,211 $170,454 $167,295 $164,769 $166,618 $176,983
------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 30% 21% 8% 14% 8% 0%
------------------------------------------------------------------------------------------------------------------------------------
Asset coverage per share of auction
preferred shares, end of period $155,132 $156,534 $154,559 $152,980 $154,136 $160,614
====================================================================================================================================
* Annualized
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 period
reported and a sale at the current market price on the last day of each
period reported, and assuming reinvestment of dividends and other
distributions to common shareholders at prices obtained under the Fund's
Dividend Reinvestment Plan. Total investment return does not reflect
brokerage commissions or taxes paid on realized capital gain distributions
and has not been annualized for periods less than one year.
--------------------------------------------------------------------------------
20
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 has over $73.0 billion in
assets under management as of April 30, 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.
An annual meeting of shareholders of the Fund was held on January 16, 2003. At
the meeting, Margo N. Alexander, Richard Q. Armstrong, David J. Beaubien, E.
Garrett Bewkes, Jr., Richard R. Burt, Meyer Feldberg, George W. Gowan, William
W. Hewitt, Jr., Morton L. Janklow, Frederick V. Malek, Carl W. Schafer and
William D. White were elected to serve as directors until the next annual
meeting of shareholders, or until their successors are elected and qualified or
until they resign or are otherwise removed. The shares were voted as indicated
below:
Common Stock and APS Shares Voting as a Single Class
Shares
Shares Withhold
To vote for or withhold authority in the election of: Voted For Authority
================================================================================================
Richard Q. Armstrong 9,733,194.7553 304,966.4797
------------------------------------------------------------------------------------------------
David J. Beaubien 9,726,419.7553 311,741.4797
------------------------------------------------------------------------------------------------
E. Garrett Bewkes, Jr. 9,716,531.7553 321,629.4797
------------------------------------------------------------------------------------------------
Richard R. Burt 9,729,981.7553 308,179.4797
------------------------------------------------------------------------------------------------
George W. Gowen 9,719,169.7553 318,991.4797
------------------------------------------------------------------------------------------------
William W. Hewitt, Jr. 9,716,735.7553 321,425.4797
------------------------------------------------------------------------------------------------
Morton L. Janklow 9,719,038.8797 319,122.3553
------------------------------------------------------------------------------------------------
Frederick V. Malek 9,730,461.7553 307,699.4797
------------------------------------------------------------------------------------------------
Carl W. Schafer 9,728,538.7553 309,622.4797
------------------------------------------------------------------------------------------------
William D. White 9,729,159.7553 309,001.4797
================================================================================================
--------------------------------------------------------------------------------
21
Investment Grade Municipal Income Fund Inc.
General Information (unaudited) (continued)
Shareholder Information (concluded)
Auction Preferred Shares
Shares
Shares Withhold
To vote for or withhold authority in the election of: Voted For Authority
==============================================================================
Margo N. Alexander 1,500 0
------------------------------------------------------------------------------
Meyer Feldberg 1,500 0
------------------------------------------------------------------------------
Broker non-votes were as follows: common stock - 320,005.765 shares; and
Auction Preferred Shares - 100 shares.
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 PaineWebber 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.
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
--------------------------------------------------------------------------------
22
Investment Grade Municipal Income Fund Inc.
General Information (unaudited) (concluded)
Dividend Reinvestment Plan (concluded)
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.
--------------------------------------------------------------------------------
23
(This page has been left blank intentionally.)
Directors
E. Garrett Bewkes, Jr. George W. Gowen
Chairman William W. Hewitt, Jr.
Margo N. Alexander Morton L. Janklow
Richard Q. Armstrong Frederic V. Malek
David J. Beaubien Carl W. Schafer
Richard R. Burt William D. White
Meyer Feldberg
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
The financial information included herein is taken from the records of the Fund
without examination by independent auditors who do not express an opinion
thereon.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that from time to time the Fund may purchase shares of its
common stock in the open market at market prices.
This report is sent to the shareholders of the fund for their information. It
is not a prospectus, circular or representation intended for 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 Global Asset Management
51 West 52nd Street
New York, NY 10019-6114
Item 2. Code of Ethics.
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
Item 3. Audit Committee Financial Expert.
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
Item 4. Principal Accountant Fees and Services.
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
Items 5 and 6. [Reserved by SEC for future use. ]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
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-2(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) There were no significant changes in the registrant's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Item 10. Exhibits.
(a) Form N-CSR disclosure requirement not yet effective with respect to
the registrant.
(b) The certifications required by Rule 30a-2 of the Investment Company
Act of 1940, as amended, and Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002 are attached hereto.
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: June 6, 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: June 6, 2003
By: /s/ Paul H. Schubert
-------------------------------
Paul H. Schubert
Treasurer
Date: June 6, 2003