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)
Mark F. Kemper, Esq.
UBS Global Asset Management
51 West 52nd Street
New York, NY 10019-6114
(Name and address of agent for service)
Copy to:
Jack W. Murphy, Esq.
Dechert LLP
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, 2006
ITEM 1. REPORTS TO STOCKHOLDERS.
--------------------------------
[LOGO OF UBS] UBS Global Asset
Management
INVESTMENT GRADE MUNICIPAL
INCOME FUND INC.
ANNUAL REPORT
SEPTEMBER 30, 2006
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
November 15, 2006
DEAR SHAREHOLDER,
We are pleased to present you with the annual report for Investment Grade
Municipal Income Fund Inc. ("the Fund") for the fiscal year ended
September 30, 2006.
PERFORMANCE
Over the one-year period, the Fund returned 5.87% on a net asset value basis and
13.05% on a market price basis. Over the same period, the Fund's peer group, the
Lipper General Municipal Debt Funds (Leveraged) category, posted median net
asset value and market price returns of 6.00% and 8.56%, respectively. Finally,
the Fund's benchmark, the Lehman Brothers Municipal Bond Index (the "Index"),
returned 4.45%. (For more performance information, please refer to "Performance
at a glance" on page 6.)
--------------------------------------------------------------------------------
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:
Kevin McIntyre
UBS Global Asset Management(Americas) Inc.
COMMENCEMENT:
November 6, 1992
NYSE SYMBOL:
PPM
DIVIDEND PAYMENTS:
Monthly
--------------------------------------------------------------------------------
The Fund continued to use leverage during the period, which helped performance
on an absolute basis. As of September 30, 2006, leverage accounted for
approximately 41% of the Fund's total assets. While short-term rates rose over
the period and increased the Fund's borrowing costs, the leverage still had a
positive effect on the Fund's income during the fiscal year, as the yields on
the Fund's longer-term bonds more than offset the borrowing costs. Leverage
magnifies returns on both the upside and on the downside.
AN INTERVIEW WITH PORTFOLIO MANAGER KEVIN MCINTYRE
Q. HOW WOULD YOU DESCRIBE THE ECONOMIC ENVIRONMENT DURING THE REPORTING PERIOD?
A. Economic data were generally positive during the fiscal year, despite the
fact that economic growth appears to be slowing from an above-average rate
back to historical norms. Although the housing market continued to cool, a
sharp decline in energy prices during the final two months of the reporting
period helped to offset that trend. Other economic
--------------------------------------------------------------------------------
1
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
indicators were mixed; advance GDP data for the third quarter came in below
expectations, while unemployment remained low and consumer confidence high.
Q. HOW DID THE FEDERAL RESERVE BOARD (THE "FED") REACT TO THESE ECONOMIC
CONDITIONS?
A. After raising short-term interest rates at 17 consecutive meetings dating
back to 2004, the Fed paused in June and has left rates unchanged at 5.25%
in its past three sessions, including its October meeting after the Fund's
reporting period ended. Future rate hikes remain a possibility, according to
Fed releases, as "some inflation risks remain." The extent and timing of any
future firming, or monetary easing for that matter, will likely be dependent
on emerging economic data.
Q. HOW DID THE MUNICIPAL BOND MARKET PERFORM IN THIS ENVIRONMENT?
A. The municipal bond market on the whole outperformed Treasuries throughout the
reporting period. Treasury yields rose throughout most of the period,
resulting in corresponding price declines, while municipal securities with
maturities of 10 years and longer actually rallied during this same period.
The difference in performance versus Treasuries was greatest when comparing
securities with maturities of around 30 years.
Q. IN GENERAL TERMS, HOW DID YOU POSITION THE PORTFOLIO?
A. Over the course of the reporting period, we extended duration to a more
neutral position relative to our Fund's Lipper peer group. (Duration is a
measure of a fund's sensitivity to interest rate changes and is related to
the maturity of the bonds comprising the portfolio.) We are also slightly
longer in duration than the Index, and we significantly increased the Fund's
position in the 30-year area of the curve. This clearly benefited the
portfolio on an absolute basis, as the longer end of the curve outperformed
every other area on the yield curve.
Additionally, some changes to the Fund's investment strategies benefited
performance. The Fund has increased its exposure to lower-quality securities
and securities subject to the alternative minimum tax (AMT). These changes
were implemented to bring the Fund's investment style more in line with that
of its peers, with the goal of making it more competitive. During the course
of the period, we used these to our advantage. We diversified away from
higher grade securities to increase the Fund's position in relatively
lower-rated securities. We likewise increased the Fund's position in AMT
securities, to benefit from the higher yields associated with these types of
bonds.
--------------------------------------------------------------------------------
2
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
Q. FROM A SECTOR STANDPOINT, WHAT WERE IMPORTANT POSITIONS FOR THE FUND?
A. We strive to maintain a well-diversified portfolio regardless of market
conditions. As a result, the Fund holds bonds in a number of different
sectors. Over the past year, we have focused our research on uncovering new
opportunities in the water, airport and hospital sectors. This research
indicates that the water sector tends to have stronger revenue and earnings
stability than some other sectors of the municipal market, even in changing
economic climates. While we slightly reduced the Fund's position in water
related bonds during the period in order to diversify into other areas, we
continued to view the sector positively, and it represented the Fund's
largest sector position at period end.
Meanwhile, the airport sector continued to rebound. A significant portion of
airport sector bonds are subject to AMT, and tend to offer higher yields.
During the period, we purchased NYC IDA revenue bonds for the Terminal One
Group Association. They are subject to AMT and have performed well over this
period, helping us diversify the credit quality of the portfolio.
While our long-term outlook for the healthcare sector as a whole remains
negative, we see positive trends developing for certain healthcare providers
with stable or improving finances and strong market share. With that in
mind, we have selectively added to our holdings in this sector, which has
benefited performance.
Although the tobacco sector posted very strong gains, we continued to avoid
it, which detracted from performance during the period. We do not believe
the potential rewards in the tobacco sector are commensurate with the risks
our analysis indicates these bonds entail.
Q. WERE THERE ANY STATES OR REGIONS THAT WERE AN AREA OF FOCUS FOR THE FUND?
A. From a regional standpoint, we continued to focus on states that exhibited
improved fiscal health and offered what we viewed as attractively valued
municipal bonds. Issues that we believe met that definition included
long-term California bonds and New York securities. While we
opportunistically reduced these positions where we were able to benefit
performance, they remained our largest single state exposures at period end.
Additionally, we have increased our exposure to New Jersey bonds, primarily
with the purchase of New Jersey Transportation Trust Fund Bonds, one of our
best-performing bonds over the period.
--------------------------------------------------------------------------------
3
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
Q. WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND THE MUNICIPAL FIXED INCOME MARKET?
A. We are generally more upbeat on the prospects for the economy than some
market prognosticators. Throughout 2006, corporate earnings have appeared
quite healthy, while employment and wage data have appeared strong.
Inflation, high energy prices and the prospect of a bursting housing bubble
represent the major hurdles facing the economy and the markets, and we find
it unlikely that any of the three represents enough of a threat to derail
what has been a period of solid, if not exceptional, economic growth. With
respect to the municipal bond market, we believe there continue to be
pockets of attractive valuations along the yield curve and within certain
sectors. Our in-house research should help position the Fund well in hopes
of taking advantage of those investment opportunities we identify in the
months and quarters that follow.
--------------------------------------------------------------------------------
4
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
We thank you for your continued support and welcome any comments or questions
you may have. For additional information regarding your fund, please contact
your financial advisor, or visit us at www.ubs.com/globalam-us.
Sincerely,
/s/ Kai R. Sotorp
Kai R. Sotorp
President
Investment Grade Municipal Income Fund Inc.
Head of the Americas
UBS Global Asset Management (Americas) Inc.
/s/ Kevin McIntyre
Kevin McIntyre
Portfolio Management Team
Investment Grade Municipal Income Fund Inc.
Director
UBS Global Asset Management (Americas) Inc.
/s/ Elbridge T. Gerry III
Elbridge T. Gerry III
Portfolio Management Team
Investment Grade Municipal Income Fund Inc.
Managing Director
UBS Global Asset Management (Americas) Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended September 30, 2006. The views and
opinions in the letter were current as of November 15, 2006. They are not
guarantees of performance or investment results and should not be taken as
investment advice. Investment decisions reflect a variety of factors, and we
reserve the right to change our views about individual securities, sectors and
markets at any time. As a result, the views expressed should not be relied upon
as a forecast of the Fund's future investment intent. We encourage you to
consult your financial advisor regarding your personal investment program.
--------------------------------------------------------------------------------
5
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PERFORMANCE AT A GLANCE (UNAUDITED)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 09/30/06
INVESTMENT GRADE MUNICIPAL INCOME FUND INC. 1 YEAR 5 YEARS 10 YEARS
----------------------------------------------------------------------------------------------------
Net asset value returns 5.87% 6.19% 6.08%
----------------------------------------------------------------------------------------------------
Market price returns 13.05% 5.86% 7.56%
====================================================================================================
LIPPER GENERAL MUNICIPAL DEBT FUNDS (LEVERAGED) MEDIAN
----------------------------------------------------------------------------------------------------
Net asset value returns 6.00% 6.83% 6.64%
----------------------------------------------------------------------------------------------------
Market price returns 8.56% 7.79% 7.11%
====================================================================================================
LEHMAN BROTHERS MUNICIPAL BOND INDEX 4.45% 5.17% 5.90%
====================================================================================================
PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE. THE RETURN AND 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 PAYABLE
DATES. RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER COULD
PAY ON FUND DISTRIBUTIONS.
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 09/30/06
----------------------------------------------------------------------------------------------------
Market price $13.95
----------------------------------------------------------------------------------------------------
Net asset value (per share applicable to common shareholders) $15.39
----------------------------------------------------------------------------------------------------
Net investment income dividends paid to common shareholders during
the twelve months ended 09/30/06 $0.732
----------------------------------------------------------------------------------------------------
September 2006 dividend $0.063
----------------------------------------------------------------------------------------------------
Market yield* 5.42%
----------------------------------------------------------------------------------------------------
NAV yield* 4.91%
====================================================================================================
* 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.
Prices and yields will vary.
--------------------------------------------------------------------------------
6
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO STATISTICS (UNAUDITED)
CHARACTERISTICS 09/30/06 03/31/06 09/30/05
-----------------------------------------------------------------------------------------------
Net assets applicable to common
shareholders (mm) $159.4 $155.8 $162.2
-----------------------------------------------------------------------------------------------
Weighted average maturity 15.0 yrs 15.9 yrs 14.5 yrs
-----------------------------------------------------------------------------------------------
Weighted average duration 5.1 yrs 5.5 yrs 4.1 yrs
-----------------------------------------------------------------------------------------------
Weighted average coupon 5.2% 5.2% 5.2%
-----------------------------------------------------------------------------------------------
Leverage** 40.8% 41.3% 40.4%
-----------------------------------------------------------------------------------------------
Securities subject to alternative
minimum tax (AMT)* 9.5% 8.4% -
-----------------------------------------------------------------------------------------------
Callable/maturing within five years* 8.2% 9.9% 9.1%
-----------------------------------------------------------------------------------------------
Callable/maturing beyond five years* 91.8% 90.1% 90.9%
===============================================================================================
PORTFOLIO COMPOSITION*** 09/30/06 03/31/06 09/30/05
-----------------------------------------------------------------------------------------------
Long-term municipal bonds 97.6% 93.6% 94.8%
-----------------------------------------------------------------------------------------------
Short-term municipal notes 1.1 5.1 2.4
-----------------------------------------------------------------------------------------------
Futures (0.1) 0.0+ 0.5
-----------------------------------------------------------------------------------------------
Other assets less liabilities 1.4 1.3 2.3
-----------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
===============================================================================================
CREDIT QUALITY* 09/30/06 03/31/06 09/30/05
-----------------------------------------------------------------------------------------------
AAA 41.3% 55.3% 54.1%
-----------------------------------------------------------------------------------------------
AA 24.4 8.5 14.3
-----------------------------------------------------------------------------------------------
A 15.0 9.9 9.2
-----------------------------------------------------------------------------------------------
BBB 9.8 10.6 8.5
-----------------------------------------------------------------------------------------------
BB - - 0.8
-----------------------------------------------------------------------------------------------
A-1 1.1 5.2 2.5
-----------------------------------------------------------------------------------------------
Nonrated 8.4 10.5 10.6
-----------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
===============================================================================================
* Weightings represent percentages of total investments 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 and preferred
shareholders as of the dates indicated. Credit quality ratings shown are
designated by Standard & Poor's Rating Group, an independent rating agency.
+ Represents less than 0.05% of net assets applicable to common and preferred
shareholders as of the date indicated.
--------------------------------------------------------------------------------
7
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO STATISTICS (UNAUDITED) (CONCLUDED)
TOP FIVE STATES* 09/30/06 03/31/06 09/30/05
--------------------------------------------------------------------------------------------
California 23.2% California 19.4% California 26.9%
--------------------------------------------------------------------------------------------
New York 13.7 New York 16.8 Texas 18.5
--------------------------------------------------------------------------------------------
New Jersey 9.8 Texas 12.0 New York 9.7
--------------------------------------------------------------------------------------------
North Carolina 7.4 North Carolina 7.4 North Carolina 7.4
--------------------------------------------------------------------------------------------
Texas 7.1 Pennsylvania 6.0 Pennsylvania 6.0
--------------------------------------------------------------------------------------------
Total 61.2% 61.6% 68.5%
============================================================================================
TOP FIVE SECTORS* 09/30/06 03/31/06 09/30/05
--------------------------------------------------------------------------------------------
Water 14.7% Water 21.8% Power 22.5%
--------------------------------------------------------------------------------------------
University 13.6 University 14.2 Water 21.3
--------------------------------------------------------------------------------------------
Hospital 11.9 Power 12.2 University 7.3
--------------------------------------------------------------------------------------------
Transportation 9.4 Hospital 9.6 Hospital 6.1
--------------------------------------------------------------------------------------------
Lease 9.3 Airport 8.5 Lease 5.5
--------------------------------------------------------------------------------------------
Total 58.9% 66.3% 62.7%
============================================================================================
* Weightings represent percentages of total investments as of the dates
indicated. The Fund's portfolio is actively managed and its composition will
vary over time.
--------------------------------------------------------------------------------
8
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--SEPTEMBER 30, 2006
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-----------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--164.92%
-----------------------------------------------------------------------------------------------------
ALASKA--1.99%
$1,000 Alaska International
Airports Revenues
Refunding-Series A
(MBIA Insured)++ Aaa AAA 10/01/19 5.000% $1,061,450
-----------------------------------------------------------------------------------------------------
1,000 Alaska International
Airports Revenues
Refunding-Series A
(MBIA Insured)++ Aaa AAA 10/01/20 5.000 1,058,100
-----------------------------------------------------------------------------------------------------
1,000 Alaska International
Airports Revenues
Refunding-Series A
(MBIA Insured)++ Aaa AAA 10/01/21 5.000 1,054,770
-----------------------------------------------------------------------------------------------------
3,174,320
=====================================================================================================
ARIZONA--1.61%
2,380 Arizona State Transportation
Board Highway
Revenue-Series B Aa1 AAA 07/01/18 5.250 2,561,856
=====================================================================================================
ARKANSAS--0.99%
1,525 Little Rock Capital
Improvement Revenue
Parks & Recreation
Projects-Series A NR NR 01/01/18 5.700 1,571,802
=====================================================================================================
CALIFORNIA--38.73%
5,000 California Educational
Facilities Authority Revenue
Refunding-Pepperdine
University-Series A
(FGIC Insured) Aaa AAA 09/01/33 5.000 5,199,650
-----------------------------------------------------------------------------------------------------
5,000 California Health Facilities
Financing Authority
Revenue-Kaiser
Permanente-Series A NR A[PLUS] 04/01/39 5.250 5,286,250
-----------------------------------------------------------------------------------------------------
5,000 California State
Refunding A1 A[PLUS] 05/01/27 5.000 5,256,300
-----------------------------------------------------------------------------------------------------
3,000 California State
Refunding-Series 2 A1 A[PLUS] 09/01/27 5.000 3,165,930
-----------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
9
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--SEPTEMBER 30, 2006
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-----------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
-----------------------------------------------------------------------------------------------------
CALIFORNIA--(CONTINUED)
$3,000 California Statewide
Communities Development
Authority Apartment
Development Revenue
Refunding-Irvine Apartment
Communities-Series A-3
(Mandatory Put
05/17/10 @ 100) Baa2 BBB[PLUS] 05/15/25 5.100%+ $3,082,230
-----------------------------------------------------------------------------------------------------
1,750 California Statewide
Communities Development
Authority Revenue-Kaiser
Permanente-Series H
(Mandatory Put
05/01/08 @ 100) NR A[PLUS] 04/01/34 2.625+ 1,713,408
-----------------------------------------------------------------------------------------------------
2,150 Fontana Redevelopment
Agency Tax Allocation
Refunding-Jurupa
Hills Redevelopment
Project A NR A- 10/01/17 5.500 2,248,986
-----------------------------------------------------------------------------------------------------
2,905 Inglewood Unified
School District 1998
Election-Series C
(FSA Insured) Aaa AAA 10/01/28 5.000 3,050,163
-----------------------------------------------------------------------------------------------------
2,390 Los Angeles County
Sanitation Districts
Financing Authority
Revenue Capital
Projects-District
No. 14-Subseries B
(FGIC Insured) NR AAA 10/01/28 5.000 2,537,654
-----------------------------------------------------------------------------------------------------
6,250 Los Angeles Wastewater
System Revenue
Refunding-Series A
(FSA Insured) Aaa AAA 06/01/32 5.000 6,528,000
-----------------------------------------------------------------------------------------------------
5,000 Los Angeles Water &
Power Revenue Power
System-Series A, Subseries
A-2 (MBIA Insured) Aaa AAA 07/01/27 5.000 5,244,850
-----------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
10
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--SEPTEMBER 30, 2006
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-----------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
-----------------------------------------------------------------------------------------------------
CALIFORNIA--(CONCLUDED)
$10,000 Sacramento County
Sanitation District
Financing Authority
Revenue Refunding
(AMBAC Insured) Aaa AAA 12/01/27 5.000% $10,352,800
-----------------------------------------------------------------------------------------------------
2,600 San Diego County
Regional Airport
Authority Airport
Revenue Refunding
(AMBAC Insured)++ Aaa AAA 07/01/16 5.250 2,845,934
-----------------------------------------------------------------------------------------------------
5,000 University of California
Revenues-Series A
(AMBAC Insured)# Aaa AAA 05/15/28 5.000 5,240,850
-----------------------------------------------------------------------------------------------------
61,753,005
=====================================================================================================
COLORADO--0.97%
1,452 University of Colorado
Participation Interests NR A[PLUS] 12/01/13 6.000 1,545,039
=====================================================================================================
FLORIDA--6.15%
3,350 Florida State Board of
Education Capital
Outlay-Series E
(FGIC Insured) Aaa AAA 06/01/24 5.000 3,527,014
-----------------------------------------------------------------------------------------------------
1,175 Gainesville Utilities
System Revenue-Series A Aa2 AA 10/01/20 5.250 1,282,700
-----------------------------------------------------------------------------------------------------
2,000 Miami-Dade County
Aviation Revenue
Refunding-Miami
International
Airport-Series B
(XLCA Insured)++ Aaa AAA 10/01/13 5.000 2,125,540
-----------------------------------------------------------------------------------------------------
2,700 Miami-Dade County
Aviation Revenue
Refunding-Miami
International
Airport-Series B
(XLCA Insured)++ Aaa AAA 10/01/18 5.000 2,864,727
-----------------------------------------------------------------------------------------------------
9,799,981
=====================================================================================================
11
--------------------------------------------------------------------------------
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--SEPTEMBER 30, 2006
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-----------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
-----------------------------------------------------------------------------------------------------
ILLINOIS--4.87%
$1,200 Illinois Educational
Facilities Authority
Revenues
Refunding-Augustana
College-Series A Baa1 NR 10/01/22 5.625% $1,270,356
-----------------------------------------------------------------------------------------------------
6,000 Illinois Finance Authority
Revenue-University of
Chicago-Series A Aa1 AA 07/01/34 5.000 6,250,020
-----------------------------------------------------------------------------------------------------
250 Metropolitan Pier &
Exposition Authority
Dedicated State Tax
Revenue A1 AAA 06/15/27 6.500 250,565
-----------------------------------------------------------------------------------------------------
7,770,941
=====================================================================================================
INDIANA--7.21%
4,000 Indiana Health &
Educational Facilities
Financing Authority
Hospital Revenue
Refunding-Clarian
Health Obligation
Group-Series B A2 A[PLUS] 02/15/21 5.000 4,182,600
-----------------------------------------------------------------------------------------------------
4,480 Indiana Health Facility
Financing Authority
Revenue Ascension
Health Subordinated
Credit-A Aa3 AA- 04/01/10 5.000 4,673,581
-----------------------------------------------------------------------------------------------------
2,500 Indianapolis Airport
Authority Revenue
Refunding-Special
Facilities-FedEx Corp.
Project (Federal Express
Co. Insured)++ Baa2 BBB 01/15/17 5.100 2,636,675
-----------------------------------------------------------------------------------------------------
11,492,856
=====================================================================================================
--------------------------------------------------------------------------------
12
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--SEPTEMBER 30, 2006
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-----------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS-(CONTINUED)
-----------------------------------------------------------------------------------------------------
MASSACHUSETTS--3.92%
$6,000 Massachusetts Health &
Educational Facilities
Authority
Revenue-Harvard
University-Series DD Aaa AAA 07/15/35 5.000% $6,243,120
=====================================================================================================
MICHIGAN--4.65%
2,055 Michigan State Hospital
Finance Authority
Revenue Ascension
Health Subordinated
Credit-A Aa3 AA- 05/01/12 5.000 2,174,128
-----------------------------------------------------------------------------------------------------
5,000 Michigan State Hospital
Finance Authority
Revenue
Refunding-Trinity Health
Credit-Series D Aa3 AA- 08/15/25 5.000 5,244,500
-----------------------------------------------------------------------------------------------------
7,418,628
=====================================================================================================
MINNESOTA--0.99%
1,500 Shakopee Health Care
Facilities Revenue-Saint
Francis Regional
Medical Center NR BBB 09/01/17 5.000 1,572,585
=====================================================================================================
NEW JERSEY--16.26%
10,000 New Jersey State
Educational Facilities
Authority
Revenue-Princeton
University-Series D Aaa AAA 07/01/29 5.000 10,612,600
-----------------------------------------------------------------------------------------------------
10,000 New Jersey Transportation
Trust Fund Authority
Transportation
System-Series A A1 AA- 12/15/20 5.250 11,263,200
-----------------------------------------------------------------------------------------------------
3,500 New Jersey Transportation
Trust Fund Authority
Transportation
System-Series A A1 AA- 12/15/21 5.500 4,045,965
-----------------------------------------------------------------------------------------------------
25,921,765
=====================================================================================================
13
--------------------------------------------------------------------------------
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--SEPTEMBER 30, 2006
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-----------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
-----------------------------------------------------------------------------------------------------
NEW YORK--22.83%
$1,765 Metropolitan Transportation
Authority New York
Dedicated Tax
Fund-Series A
(FSA Insured) Aaa AAA 11/15/24 5.250% $1,905,653
-----------------------------------------------------------------------------------------------------
7,390 Metropolitan Transportation
Authority Revenue
Transportation-Series A A2 A 11/15/25 5.000 7,854,461
-----------------------------------------------------------------------------------------------------
2,500 New York City General
Obligation-Series G A1 AA- 08/01/13 5.000 2,683,425
-----------------------------------------------------------------------------------------------------
4,815 New York City General
Obligation-Series O A1 AA- 06/01/24 5.000 5,067,258
-----------------------------------------------------------------------------------------------------
2,000 New York City Industrial
Development Agency
Special Facilities Revenue-
Terminal One Group
Association Project ++ A3 BBB[PLUS] 01/01/15 5.500 2,173,860
-----------------------------------------------------------------------------------------------------
2,750 New York City Industrial
Development Agency
Special Facilities
Revenue-Terminal One
Group Association
Project ++ A3 BBB[PLUS] 01/01/17 5.500+ 2,995,218
-----------------------------------------------------------------------------------------------------
3,250 New York City Industrial
Development Agency
Special Facilities
Revenue-Terminal One
Group Association
Project ++ A3 BBB[PLUS] 01/01/18 5.500+ 3,529,467
-----------------------------------------------------------------------------------------------------
3,140 Triborough Bridge &
Tunnel Authority Revenues
Refunding-Series B Aa2 AA- 11/15/19 5.250 3,397,386
-----------------------------------------------------------------------------------------------------
6,400 Triborough Bridge &
Tunnel Authority
Revenues-Subordinate
Bonds Aa3 A[PLUS] 11/15/30 5.250 6,797,760
-----------------------------------------------------------------------------------------------------
36,404,488
=====================================================================================================
--------------------------------------------------------------------------------
14
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--SEPTEMBER 30, 2006
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-----------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
-----------------------------------------------------------------------------------------------------
NORTH CAROLINA--12.41%
$5,000 North Carolina Eastern
Municipal Power Agency
Power System Revenue
Refunding-Series A Baa2 BBB 01/01/11 5.500% $5,318,650
-----------------------------------------------------------------------------------------------------
2,000 North Carolina Eastern
Municipal Power Agency
Power System Revenue
Refunding-Series A Baa2 BBB 01/01/12 5.500 2,149,620
-----------------------------------------------------------------------------------------------------
3,065 North Carolina Eastern
Municipal Power Agency
Power System
Revenue-Series A
(Escrowed to Maturity) Baa2 AAA 01/01/21 6.400 3,745,859
-----------------------------------------------------------------------------------------------------
8,745 North Carolina
State Public
Improvement-Series A Aa1 AAA 03/01/24 4.000 8,572,549
-----------------------------------------------------------------------------------------------------
19,786,678
=====================================================================================================
OHIO--6.82%
2,185 Ohio State Higher
Education-Series B Aa1 AA[PLUS] 11/01/17 5.250 2,355,692
-----------------------------------------------------------------------------------------------------
8,000 Ohio State Water
Development Authority
Water Pollution Control
Revenue-Water Quality Aaa AAA 06/01/24 5.000 8,512,720
-----------------------------------------------------------------------------------------------------
10,868,412
=====================================================================================================
PENNSYLVANIA--9.91%
7,125 Allegheny County
Sanitation Authority
Sewer Revenue
Refunding-Series A
(MBIA Insured) Aaa AAA 12/01/24 5.000 7,588,267
-----------------------------------------------------------------------------------------------------
5,000 Northumberland County
Authority-Guaranteed
Lease Revenue-Mountain
View Manor Project NR NR 10/01/20 7.000 5,226,200
-----------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
15
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--SEPTEMBER 30, 2006
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-----------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
-----------------------------------------------------------------------------------------------------
PENNSYLVANIA--(CONCLUDED)
$3,000 Susquehanna Area
Regional Airport
Authority Airport System
Revenue-Subseries D Baa2 NR 01/01/18 5.375% $2,983,710
-----------------------------------------------------------------------------------------------------
15,798,177
=====================================================================================================
PUERTO RICO--2.00%
3,000 Puerto Rico Housing
Finance Authority-Capital
Funding Program
(HUD Insured) Aa3 AA 12/01/18 5.000 3,187,410
=====================================================================================================
RHODE ISLAND--1.05%
1,600 Rhode Island Health &
Educational Building
Corp. Revenue
Refunding-Hospital
Financing-Lifespan
Obligation-Series A A3 A- 05/15/11 5.000 1,672,832
=====================================================================================================
SOUTH CAROLINA--9.02%
7,570 Charleston Educational
Excellence Financing
Corp. Revenue-Charleston
County School District
Project A1 AA- 12/01/24 5.000 7,989,681
-----------------------------------------------------------------------------------------------------
5,000 Greenville County School
District Installment
Purchase
Refunding-Building Equity
Sooner-Series AGC Aa3 AA- 12/01/24 5.000 5,306,800
-----------------------------------------------------------------------------------------------------
1,000 Greenville Waterworks
Revenue Aa1 AAA 02/01/20 5.250 1,089,180
-----------------------------------------------------------------------------------------------------
14,385,661
=====================================================================================================
SOUTH DAKOTA--0.67%
1,049 Standing Rock New
Public Housing** NR NR 08/07/13 6.000 1,070,661
=====================================================================================================
--------------------------------------------------------------------------------
16
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--SEPTEMBER 30, 2006
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
-----------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONCLUDED)
-----------------------------------------------------------------------------------------------------
TENNESSEE--1.61%
$2,500 Memphis-Shelby County
Airport Authority Special
Facilities Revenue
Refunding-Federal
Express Corp. Baa2 BBB 09/01/09 5.000% $2,568,225
=====================================================================================================
TEXAS--10.26%
4,000 Coastal Bend Health
Facilities Development
Corp.-Incarnate Word
Health System-Series A
(Escrowed to Maturity)
(AMBAC Insured) Aaa AAA 01/01/17 6.300 4,488,200
-----------------------------------------------------------------------------------------------------
6,503 Harris County
Texas Lease(++) NR NR 05/01/20 6.750 6,887,855
-----------------------------------------------------------------------------------------------------
3,007 Houston Community
College System
Participation Interests(++) NR NR 06/15/25 7.875 3,389,688
-----------------------------------------------------------------------------------------------------
1,485 Lower Colorado River
Authority Transmission
Contract Revenue-LCRA
Transmission Services
Corp. Project B
(FSA Insured) Aaa AAA 05/15/20 5.250 1,588,445
-----------------------------------------------------------------------------------------------------
16,354,188
=====================================================================================================
Total long-term municipal bonds (cost--$256,182,868) 262,922,630
=====================================================================================================
SHORT-TERM MUNICIPAL NOTES--1.84%
-----------------------------------------------------------------------------------------------------
INDIANA--0.27%
435 Whiting Industrial
Environmental Facilities
Revenue-Amoco Oil Co.
Project ++ VMIG-1 A-1[PLUS] 10/02/06 3.830* 435,000
=====================================================================================================
--------------------------------------------------------------------------------
17
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--SEPTEMBER 30, 2006
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATE RATE VALUE
-----------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL NOTES--(CONCLUDED)
-----------------------------------------------------------------------------------------------------
TEXAS--1.57%
$2,500 West Side Calhoun
County Naval District
Environmental Facilities
Revenue-BP Chemicals,
Inc. Project ++ NR A-1[PLUS] 10/02/06 3.830%* $2,500,000
-----------------------------------------------------------------------------------------------------
Total short-term municipal notes (cost--$2,935,000) 2,935,000
=====================================================================================================
Total investments (cost--$259,117,868)--166.76% 265,857,630
-----------------------------------------------------------------------------------------------------
Other assets in excess of liabilities--2.24% 3,572,014
-----------------------------------------------------------------------------------------------------
Liquidation value of auction preferred shares--(69.00)% (110,000,000)
-----------------------------------------------------------------------------------------------------
Net assets applicable to common shareholders--100.00% $159,429,644
=====================================================================================================
+ Floating rate security. The interest rate shown is the current rate as of
September 30, 2006.
++ Security subject to Alternative Minimum Tax.
# Partial amount pledged as collateral for futures transactions.
* Variable rate demand notes are payable on demand. The maturity dates shown
are the next interest rate reset dates. The interest rates shown are the
current rates as of September 30, 2006.
** Security exempt from registration under Rule 144A of the Securities Act
of 1933. This security, which represents 0.67% of net assets applicable to
common shareholders as of September 30, 2006, is considered illiquid and
restricted. (See table below for more information).
ACQUISITION MARKET
COST AS A VALUE AS A
PERCENTAGE PERCENTAGE
ILLIQUID AND ACQUISITION ACQUISITION OF COMMON MARKET OF COMMON
RESTRICTED SECURITY DATE COST NET ASSETS VALUE NET ASSETS
----------------------------------------------------------------------------------------------
Standing Rock New
Public Housing,
6.000%, 08/07/13 08/08/02 $1,048,742 0.66% $1,070,661 0.67%
==============================================================================================
--------------------------------------------------------------------------------
18
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--SEPTEMBER 30, 2006
(++) The securities detailed in the table below are considered illiquid and
restricted and represent 6.45% of net assets applicable to common
shareholders as of September 30, 2006.
ACQUISITION MARKET
COST AS A VALUE AS A
ILLIQUID AND PERCENTAGE PERCENTAGE
RESTRICTED ACQUISITION ACQUISITION OF COMMON MARKET OF COMMON
SECURITIES DATE COST NET ASSETS VALUE NET ASSETS
---------------------------------------------------------------------------------------------
Harris County
Texas Lease,
6.750%, 05/01/20 09/07/00 $6,503,253 4.08% $6,887,855 4.32%
---------------------------------------------------------------------------------------------
Houston Community
College System
Participation Interests,
7.875%, 06/15/25 04/22/02 3,007,095 1.89 3,389,688 2.13
---------------------------------------------------------------------------------------------
$9,510,348 5.97% $10,277,543 6.45%
=============================================================================================
AMBAC American Municipal Bond Assurance Corporation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
HUD Housing and Urban Development
MBIA Municipal Bond Investors Assurance
NR Not Rated
XLCA XL Capital Assurance
FUTURES CONTRACTS
NUMBER OF IN EXPIRATION UNREALIZED
CONTRACTS CONTRACTS TO DELIVER EXCHANGE FOR DATES DEPRECIATION
------------------------------------------------------------------------------------
80 US Treasury Bond
20 Year Futures $8,845,222 December 2006 $147,278
------------------------------------------------------------------------------------
135 US Treasury Note
10 Year Futures 14,463,126 December 2006 125,311
------------------------------------------------------------------------------------
$272,589
====================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
19
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES--SEPTEMBER 30, 2006
ASSETS:
Investments in securities, at value (cost-$259,117,868) $265,857,630
-----------------------------------------------------------------------------------
Cash 73,607
-----------------------------------------------------------------------------------
Receivable for interest 3,791,044
-----------------------------------------------------------------------------------
Receivable for variation margin 12,656
-----------------------------------------------------------------------------------
Other assets 9,608
-----------------------------------------------------------------------------------
Total assets 269,744,545
-----------------------------------------------------------------------------------
LIABILITIES:
Payable to investment advisor and administrator 117,502
-----------------------------------------------------------------------------------
Dividends payable to auction preferred shareholders 46,611
-----------------------------------------------------------------------------------
Accrued expenses and other liabilities 150,788
-----------------------------------------------------------------------------------
Total liabilities 314,901
-----------------------------------------------------------------------------------
Auction preferred shares Series A, B and C-2,200 non-participating
shares authorized, issued and outstanding; $0.001 par value per
auction preferred share; $50,000 liquidation value per auction
preferred share 110,000,000
-----------------------------------------------------------------------------------
Net assets applicable to common shareholders $159,429,644
-----------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Common stock-$0.001 par value per common share; 199,997,800
shares authorized; 10,356,667 shares issued and outstanding $153,239,012
-----------------------------------------------------------------------------------
Accumulated undistributed net investment income 39,452
-----------------------------------------------------------------------------------
Accumulated net realized loss from investment activities and futures (315,993)
-----------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures 6,467,173
-----------------------------------------------------------------------------------
Net assets applicable to common shareholders $159,429,644
-----------------------------------------------------------------------------------
Net asset value per common share ($159,429,644 applicable to
10,356,667 common shares outstanding) $15.39
===================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
20
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF OPERATIONS
FOR THE
YEAR ENDED
SEPTEMBER 30, 2006
-----------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $12,621,869
-----------------------------------------------------------------------------------
EXPENSES:
Investment advisory and administration fees 2,407,638
-----------------------------------------------------------------------------------
Auction preferred shares expenses 323,895
-----------------------------------------------------------------------------------
Custody and accounting fees 129,092
-----------------------------------------------------------------------------------
Professional fees 87,713
-----------------------------------------------------------------------------------
Reports and notices to shareholders 74,930
-----------------------------------------------------------------------------------
Stock exchange listing fees 24,567
-----------------------------------------------------------------------------------
Transfer agency fees 18,441
-----------------------------------------------------------------------------------
Directors' fees 15,498
-----------------------------------------------------------------------------------
Insurance fees 12,821
-----------------------------------------------------------------------------------
Other expenses 11,197
-----------------------------------------------------------------------------------
3,105,792
-----------------------------------------------------------------------------------
Less: Fee waivers by investment advisor and administrator (610,956)
-----------------------------------------------------------------------------------
Net expenses 2,494,836
-----------------------------------------------------------------------------------
Net investment income 10,127,033
-----------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gain (loss) from:
Investments (53,891)
-----------------------------------------------------------------------------------
Futures 1,934,364
-----------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of:
-----------------------------------------------------------------------------------
Investments 2,578,992
-----------------------------------------------------------------------------------
Futures (1,585,338)
-----------------------------------------------------------------------------------
Net realized and unrealized gain from investment activities 2,874,127
-----------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS PAID TO AUCTION PREFERRED
SHAREHOLDERS FROM:
Net investment income (2,745,725)
-----------------------------------------------------------------------------------
Net realized gain from investment activities (1,187,664)
-----------------------------------------------------------------------------------
Total dividends and distributions paid to auction
preferred shareholders (3,933,389)
-----------------------------------------------------------------------------------
Net increase in net assets applicable to common shareholders
resulting from operations $9,067,771
===================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
21
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------
2006 2005
-------------------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $10,127,033 $9,882,683
-------------------------------------------------------------------------------------------------
Net realized gains from investment activities and futures 1,880,473 3,290,230
-------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of
investments and futures 993,654 (3,535,592)
-------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS PAID TO AUCTION
PREFERRED SHAREHOLDERS FROM:
Net investment income (2,745,725) (2,191,349)
-------------------------------------------------------------------------------------------------
Net realized gains from investment activities (1,187,664) (152,322)
-------------------------------------------------------------------------------------------------
Total dividends and distributions paid to auction
preferred shareholders (3,933,389) (2,343,671)
-------------------------------------------------------------------------------------------------
Net increase in net assets applicable to common
shareholders resulting from operations 9,067,771 7,293,650
-------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS PAID TO COMMON
SHAREHOLDERS FROM:
Net investment income (7,581,081) (7,663,934)
-------------------------------------------------------------------------------------------------
Net realized gains from investment activities (4,216,199) (1,207,587)
-------------------------------------------------------------------------------------------------
Total dividends and distributions paid to
common shareholders (11,797,280) (8,871,521)
-------------------------------------------------------------------------------------------------
Net decrease in net assets applicable to
common shareholders (2,729,509) (1,577,871)
-------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of year 162,159,153 163,737,024
-------------------------------------------------------------------------------------------------
End of year 159,429,644 162,159,153
-------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $39,452 $238,805
=================================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
22
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. There can be no assurance that
the Fund's investment objective will be achieved.
In the normal course of business the Fund may enter into contracts that contain
a variety of representations or that provide indemnifications for certain
liabilities. The Fund's maximum exposure under these arrangements is unknown, as
this would involve future claims that may be made against the Fund that have not
yet occurred. However, the Fund has not had prior claims or losses pursuant to
these contracts and expects the risk of loss to be remote.
The preparation of financial statements in accordance with US generally accepted
accounting principles requires the Fund's 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 last reported
sale prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. A matrix system
incorporates parameters such as security quality, maturity and coupon, and/or
research and evaluations by its staff, including review of broker-dealer market
price quotations, if available, in determining the valuation of the portfolio
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"). Various factors may be reviewed in order to make a good
faith determination of a security's fair value. These factors include, but are
not limited to, the type and cost of the security; contractual or legal
restrictions on resale of the security; relevant financial or business
developments of the issuer; actively traded
--------------------------------------------------------------------------------
23
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS
similar or related securities; conversion or exchange rights on the security;
related corporate actions; and changes in overall market conditions. If events
occur that materially affect the value of securities (particularly non-US
securities) between the close of trading in those securities and the close of
regular trading on the New York Stock Exchange, the securities are fair valued.
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 or its delegate determines that this
does not represent fair value. Securities traded in the over-the-counter ("OTC")
market are valued at the last bid price available on the valuation date prior to
valuation.
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.
FUTURES CONTRACTS--Upon entering into a financial futures contract, the Fund is
required to deliver to a broker an amount of cash and/or securities equal to a
certain percentage of the contract amount. This amount is known as the "initial
margin." Subsequent payments, known as "variation margin", are made or received
by the Fund each day, depending on the daily fluctuations in the value of the
underlying financial futures contracts. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss until
the financial futures contract is closed, at which time the net gain or loss is
reclassified to realized gain or loss on futures. Variation margin calls could
be substantial in the event of adverse price movements.
Using financial futures contracts involves various market risks. If the Fund was
unable to liquidate a futures position due to the absence of a liquid secondary
market or the imposition of price limits, it could incur substantial losses and
would continue to be subject to market risk with respect to the position. In
addition, the Fund would continue to be required to make variation margin
payments and might be required to maintain the position being hedged or to
maintain cash or securities in a separate account. Furthermore, certain
characteristics of the futures market might increase the risk that movements in
the prices of the financial futures contracts might not correlate perfectly with
movements in the prices of the investments
--------------------------------------------------------------------------------
24
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS
being hedged, including temporary price distortion. The separate account for
margin will be maintained at the futures counterparty and may be subject to
risks or delays if the counterparty becomes insolvent.
DIVIDENDS AND DISTRIBUTIONS--The Fund intends to pay monthly dividends to common
shareholders at a rate level 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 US generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification.
CONCENTRATION OF RISK
The Fund follows an investment policy of investing primarily in municipal
obligations of various states. Economic changes affecting those states and
certain of their public bodies and municipalities may affect the ability of the
issuers within those states to pay interest on, or repay principal of, municipal
obligations held by the Fund.
INVESTMENT ADVISOR AND ADMINISTRATOR
UBS Global Asset Management (US) Inc. ("UBS Global AM--US") served as the Fund's
investment advisor and administrator from October 1, 2005 until April 1, 2006.
On April 1, 2006, the Fund's Investment Advisory and Administration Contract
("Advisory Contract") was transferred from UBS Global AM--US to UBS Global Asset
Management (Americas) Inc. ("UBS Global AM--Americas").
The transfer of the Advisory Contract between sister companies occurred in
connection with an internal reorganization involving UBS Global AM--US and UBS
Global AM--Americas. The Fund's Board of Directors approved the transfer of the
Advisory Contract effective April 1, 2006. All of the personnel of UBS Global
AM--US who previously provided investment advisory services to the Fund continue
to provide investment advisory
--------------------------------------------------------------------------------
25
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS
services to the Fund as employees of UBS Global AM--Americas. UBS Global
AM--Americas has the same contractual rights and responsibilities under the
Advisory Contract as those previously held by UBS Global AM--US. UBS Global
AM--US and UBS Global AM--Americas are both indirect wholly owned subsidiaries
of UBS AG. In accordance with the Advisory Contract, the Fund pays UBS Global
AM--Americas an investment advisory and administration fee, which is accrued
weekly and paid monthly, at an annual rate of 0.90% of the Fund's average weekly
net assets applicable to holders of common and auction preferred shares. For the
period October 1, 2005 through July 31, 2006, UBS Global AM--Americas (and
previously UBS Global AM--US) had agreed to waive 0.20% of the advisory and
administration fee, so that the Fund's effective fee was 0.70% of average weekly
net assets applicable to holders of common and auction preferred shares.
Effective August 1, 2006, UBS Global AM--Americas agreed to further reduce the
Fund's management fee so that the Fund's effective fee for the period August 1,
2006 through September 30, 2006 was 0.90% of the Fund's average weekly net
assets applicable only to holders of common shares. This waiver will continue
indefinitely unless the Board agrees to any change. At September 30, 2006, the
Fund owed UBS Global AM--Americas $117,502 in investment advisory and
administration fees, which is composed of $198,872 of investment advisory and
administration fees less fees waived of $81,370. For the year ended September
30, 2006, UBS Global AM waived $610,956 of investment advisory and
administration fees from the Fund.
ADDITIONAL INFORMATION REGARDING COMPENSATION TO AFFILIATE OF A BOARD MEMBER
Effective March 1, 2005, Professor Meyer Feldberg accepted the position of
senior advisor to Morgan Stanley, resulting in him becoming an interested
director of the Fund. The Fund has been informed that Professor Feldberg's role
at Morgan Stanley does not involve matters directly affecting any UBS funds.
Fund transactions are executed through Morgan Stanley based on that firm's
ability to provide best execution of the transactions. During the year ended
September 30, 2006, the Fund purchased and sold certain securities (e.g., fixed
income securities) in principal trades with Morgan Stanley having an aggregate
value of $81,117,485. Morgan Stanley received compensation in connection with
these trades, which may have been in the form of a "mark-up" or "mark-down" of
the price of the securities, a fee from the issuer for maintaining a commercial
paper program, or some other form of compensation. Although the precise amount
of this compensation is not generally known by UBS Global AM--Americas,
--------------------------------------------------------------------------------
26
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS
UBS Global AM--Americas believes that under normal circumstances it represents a
small portion of the total value of the transactions. In addition, Morgan
Stanley may participate as a broker-dealer in auctions for the Fund's Auction
Preferred Shares and receive compensation therefore. Amounts received by Morgan
Stanley, if any, will vary depending upon that firm's participation in an
auction, and such amounts are calculated and paid by the auction agent from
money provided by the Fund.
RESTRICTED SECURITIES
The Fund may invest in securities that are subject to legal or contractual
restrictions on resale. These securities generally may be resold in transactions
exempt from registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations and
expense, and prompt sale at an acceptable price may be difficult. Information
regarding restricted securities is included at the end of the Fund's "Portfolio
of Investments."
AUCTION PREFERRED SHARES
The Fund has issued 800 shares of auction preferred shares Series A, 800 shares
of auction preferred shares Series B, and 600 shares of auction preferred shares
Series C, 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 and/or capital gain distributions, which are cumulative, are generally
reset every 7 days for each Series of APS. Dividend rates ranged from 2.405% to
4.000% and capital gain distribution rates ranged from 3.750% to 5.375% for the
year ended September 30, 2006.
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
APS will vote separately as a class on certain matters, as required by law. The
holders of the APS have the right to elect two directors of the Fund.
--------------------------------------------------------------------------------
27
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS
The redemption of the Fund's APS 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.
PURCHASES AND SALES OF SECURITIES
For the year ended September 30, 2006, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $140,787,537 and
$137,822,999, respectively.
FEDERAL TAX STATUS
The Fund intends to distribute substantially all of its tax-exempt income and
any taxable income and to comply with the 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 years ended September
30, 2006 and September 30, 2005 were as follows:
DISTRIBUTIONS PAID FROM: 2006 2005
--------------------------------------------------------------------------------
Tax-exempt income $10,321,275 $9,850,254
--------------------------------------------------------------------------------
Ordinary income 765,631 24,785
--------------------------------------------------------------------------------
Net long-term capital gains 4,643,763 1,340,153
--------------------------------------------------------------------------------
Total distributions paid $15,730,669 $11,215,192
================================================================================
At September 30, 2006, the components of accumulated earnings on a tax basis
were as follows:
Undistributed tax-exempt income $86,063
--------------------------------------------------------------------------------
Accumulated capital and other losses (588,582)
--------------------------------------------------------------------------------
Unrealized appreciation of investments 6,739,762
--------------------------------------------------------------------------------
Total accumulated earnings $6,237,243
================================================================================
--------------------------------------------------------------------------------
28
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS
For federal income tax purposes, the tax cost of investments and the components
of net unrealized appreciation of investments at September 30, 2006 were as
follows:
Tax cost of investments $259,117,868
--------------------------------------------------------------------------------
Gross unrealized appreciation 6,938,309
--------------------------------------------------------------------------------
Gross unrealized depreciation (198,547)
--------------------------------------------------------------------------------
Net unrealized appreciation $6,739,762
================================================================================
In accordance with US Treasury regulations, the Fund has elected to defer
realized capital losses of $588,582 arising after October 31, 2005. Such losses
are treated for tax purposes as arising on October 1, 2006.
To reflect reclassifications arising from permanent "book/tax" differences for
the year ended September 30, 2006, the Fund's accumulated undistributed net
investment income was increased by $420 and accumulated net realized loss from
investment activities and futures was increased by $420. These differences are
due to reclassification of dividends.
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. At this time, management is
evaluating the implications of FIN 48, and its impact on the financial
statements has not yet been determined.
--------------------------------------------------------------------------------
29
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
YEAR ENDED
SEPTEMBER 30, 2006
---------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $15.66
---------------------------------------------------------------------------------------------------
Net investment income 0.98
---------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) from investment activities 0.27
---------------------------------------------------------------------------------------------------
Common share equivalent of dividends and distributions paid to auction
preferred shareholders from:
Net investment income (0.27)
---------------------------------------------------------------------------------------------------
Net realized gains from investment activities (0.11)
---------------------------------------------------------------------------------------------------
Total dividends and distributions paid to auction preferred shareholders (0.38)
---------------------------------------------------------------------------------------------------
Net increase from operations 0.87
---------------------------------------------------------------------------------------------------
Dividends and distributions paid to common shareholders from:
Net investment income (0.73)
---------------------------------------------------------------------------------------------------
Net realized gains from investment activities (0.41)
---------------------------------------------------------------------------------------------------
Total dividends and distributions paid to common shareholders (1.14)
---------------------------------------------------------------------------------------------------
Auction preferred shares offering expenses --
---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $15.39
---------------------------------------------------------------------------------------------------
MARKET VALUE, END OF YEAR $13.95
---------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN(1) 13.05%
---------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS ATTRIBUTABLE TO COMMON SHARES:
Total expenses, net of fee waivers by advisor 1.58%
---------------------------------------------------------------------------------------------------
Total expenses, before fee waivers by advisor 1.97%
---------------------------------------------------------------------------------------------------
Net investment income before auction preferred shares dividends 6.43%
---------------------------------------------------------------------------------------------------
Auction preferred shares dividends from net investment income 1.74%
---------------------------------------------------------------------------------------------------
Net investment income available to common shareholders 4.69%
---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets applicable to common shareholders, end of year (000's) $159,430
---------------------------------------------------------------------------------------------------
Portfolio turnover 54%
---------------------------------------------------------------------------------------------------
Asset coverage per share of auction preferred shares, end of year $122,468
===================================================================================================
(1) 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. Returns do not reflect the deduction of taxes that a
shareholder could pay on Fund distributions.
--------------------------------------------------------------------------------
30
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------
2005 2004 2003 2002
--------------------------------------------------------------
$15.81 $16.31 $16.46 $16.15
--------------------------------------------------------------
0.95 0.93 0.95 1.11
--------------------------------------------------------------
(0.02) 0.14 0.13 0.29
--------------------------------------------------------------
(0.21) (0.08) (0.07) (0.12)
--------------------------------------------------------------
(0.01) (0.03) (0.02) (0.01)
--------------------------------------------------------------
(0.22) (0.11) (0.09) (0.13)
--------------------------------------------------------------
0.71 0.96 0.99 1.27
--------------------------------------------------------------
(0.74) (0.93) (0.96) (0.93)
--------------------------------------------------------------
(0.12) (0.49) (0.18) (0.03)
--------------------------------------------------------------
(0.86) (1.42) (1.14) (0.96)
--------------------------------------------------------------
-- (0.04) -- --
--------------------------------------------------------------
$15.66 $15.81 $16.31 $16.46
--------------------------------------------------------------
$13.44 $14.25 $14.86 $15.60
--------------------------------------------------------------
0.42% 5.57% 2.76% 7.96%
--------------------------------------------------------------
1.66% 1.53% 1.45% 1.48%
--------------------------------------------------------------
1.99% 1.86% 1.66% 1.67%
--------------------------------------------------------------
6.04% 5.91% 5.89% 6.89%
--------------------------------------------------------------
1.34% 0.53% 0.44% 0.73%
--------------------------------------------------------------
4.70% 5.38% 5.45% 6.16%
--------------------------------------------------------------
$162,159 $163,737 $168,888 $170,454
--------------------------------------------------------------
49% 45% 51% 21%
--------------------------------------------------------------
$123,709 $124,426 $155,555 $156,534
==============================================================
--------------------------------------------------------------------------------
31
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2006, and the related statement of
operations for the year then ended, the statement 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 five 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.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of September 30, 2006, by correspondence with the custodian
and brokers. 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, 2006, 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 five years in the period
then ended, in conformity with US generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
November 7, 2006
--------------------------------------------------------------------------------
32
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 NYSE trading symbol is "PPM."
Comparative net asset value and market price information about the Fund is
available weekly in various publications. Effective as of April 1, 2006, the
Fund's investment advisor and administrator is UBS Global Asset Management
(Americas) Inc., an indirect wholly owned asset management subsidiary of UBS AG.
QUARTERLY FORM N-Q PORTFOLIO SCHEDULE
The Fund will file its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third quarters of
each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's
Web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC 0330. Additionally, you may obtain copies of Forms N-Q from the Fund
upon request by calling 1-800-647 1568.
PROXY VOTING POLICIES, PROCEDURES AND RECORD
You may obtain a description of the Fund's (1) proxy voting policies, (2) proxy
voting procedures and (3) information regarding how the Fund voted any proxies
related to portfolio securities during the most recent 12-month period ended
June 30 for which an SEC filing has been made, 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
--------------------------------------------------------------------------------
33
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (UNAUDITED)
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 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
--------------------------------------------------------------------------------
34
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (UNAUDITED)
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.
--------------------------------------------------------------------------------
35
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
BOARD APPROVAL OF INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT (UNAUDITED)
BACKGROUND--At a meeting of the board of Investment Grade Municipal Income Fund,
Inc. (the "Fund") on July 19, 2006, the members of the board, including the
directors who are not "interested persons" of the Fund ("Independent Directors")
as defined in the Investment Company Act of 1940, as amended (the "1940 Act"),
considered and approved the continuance of the Investment Advisory and
Administration Agreement of the Fund with UBS Global Asset Management (Americas)
Inc. ("UBS Global AM"). In preparing for the meeting, the board members had
requested and received extensive information from UBS Global AM to assist them,
including performance and expense information for other investment companies
with similar investment objectives. The board received and considered a variety
of information about UBS Global AM, as well as the advisory and administrative
arrangements for the Fund. The Independent Directors discussed the materials
initially provided by management prior to the scheduled board meeting in a
session with their independent legal counsel and requested, and received from
management, supplemental materials to assist them in their consideration of the
Investment Advisory and Administration Agreement. The board received materials
detailing the administrative services provided to the Fund by UBS Global AM,
which include providing accounting and financial analysis, ensuring that all
financial and tax regulatory reporting requirements were met, certifying
required Securities and Exchange Commission documentation and monitoring the
performance of the Fund's service providers.
The Independent Directors also met for several hours the evening before the
board meeting and met again after management's presentation was completed to
review the disclosure that had been made to them at the meeting. At all of these
sessions the Independent Directors met in session with their independent legal
counsel. The Independent Directors also received a memorandum from their
independent legal counsel discussing the duties of board members in considering
approval of advisory and administration agreements.
In its consideration of the approval of the Investment Advisory and
Administration Agreement, the board considered the following factors:
NATURE, EXTENT AND QUALITY OF THE SERVICES UNDER THE INVESTMENT ADVISORY AND
ADMINISTRATION AGREEMENT--The board received and considered information
regarding the nature, extent and quality of management services provided to the
Fund by UBS Global AM and its
--------------------------------------------------------------------------------
36
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
BOARD APPROVAL OF INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT (UNAUDITED)
predecessor, UBS Global Asset Management (US) Inc., under the Investment
Advisory and Administration Agreement during the past year. The board also
received a description of the administrative and other services rendered to the
Fund and its shareholders by UBS Global AM. The board considered the nature,
extent and quality of administrative and shareholder services performed by UBS
Global AM and its affiliates. The board also considered the resources devoted
to, and the record of compliance with, the Fund's compliance policies and
procedures. The board noted that it received information at regular meetings
throughout the year regarding the services rendered by UBS Global AM concerning
the management of the Fund's affairs and UBS Global AM's role in coordinating
providers of other services to the Fund, including custody, accounting and
transfer agency services. The board's evaluation of the services provided by UBS
Global AM took into account the board's knowledge and familiarity gained as
board members of funds in the UBS New York Fund complex, including the scope and
quality of UBS Global AM's investment management and other capabilities and the
quality of its administrative and other services. The board observed that the
scope of services provided by UBS Global AM had expanded over time as a result
of regulatory and other developments, including maintaining and monitoring its
own and the Fund's expanded compliance programs.
The board had available to it the qualifications, backgrounds and
responsibilities of the Fund's senior personnel at UBS Global AM and had
received information regarding the persons primarily responsible for the
day-to-day portfolio management of the Fund and recognized that the Fund's
senior personnel at UBS Global AM report to the board regularly, some at every
board meeting, and that at each regular meeting the board receives a report on
the Fund's performance. The board also considered, based on its knowledge of UBS
Global AM and its affiliates, the financial resources available to UBS Global AM
and its parent organization, UBS AG. In that regard, the board received
extensive financial information regarding UBS Global AM and noted that it was a
wholly owned, indirect subsidiary of one of the largest financial services firms
in the world. It was also noted that UBS Global AM had well over $100 billion in
assets under management and was part of the UBS Global Asset Management
Division, which had over $600 billion of assets under management worldwide.
The board reviewed how transactions in Fund assets are effected. The board also
reviewed the Fund's brokerage policies and practices, the standards
--------------------------------------------------------------------------------
37
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
BOARD APPROVAL OF INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT (UNAUDITED)
applied in seeking best execution, policies and practices regarding soft
dollars, the use of a broker affiliated with UBS Global AM and the existence of
quality controls applicable to brokerage allocation procedures. In addition, UBS
Global AM also reported to the board on, among other things, its disaster
recovery plans and portfolio manager compensation plan.
The board concluded that, overall, it was satisfied with the nature, extent and
quality of services provided (and expected to be provided) to the Fund under the
Investment Advisory and Administration Agreement.
ADVISORY FEES AND EXPENSE RATIOS--The board reviewed and considered the
contractual management fee ("Contractual Management Fee") payable by the Fund to
UBS Global AM in light of the nature, extent and quality of the advisory and
administrative services provided by UBS Global AM. The board also reviewed and
considered the fee waiver arrangement in place for the Fund and considered the
actual fee rate (after taking any waivers into account) (the "Actual Management
Fee"). Additionally, the board received and considered information comparing
the Fund's Contractual Management Fee, Actual Management Fee and overall
expenses with those of funds in a group of funds selected and provided by
Lipper, Inc. ("Lipper"), an independent provider of investment company data (the
"Expense Group").
In connection with its consideration of the Fund's advisory fees, the board also
received information on UBS Global AM's standard institutional account fees for
accounts of a similar investment type to the Fund. The board noted that, in
general, these fees were lower than the Contractual Management Fee and Actual
Management Fee for the Fund, but also noted management's explanation that
comparisons with such accounts may be of limited relevance given the different
structures and regulatory requirements of mutual funds versus such accounts and
the differences in the levels of services required by mutual funds and such
accounts. The board also received information on fees charged to other mutual
funds managed by UBS Global AM.
In addition to the Contractual and Actual Management Fees, the board also
reviewed and considered the total expenses for the Fund. The comparative Lipper
information showed that the Fund's Contractual Management Fee, Actual Management
Fee and total expenses were in the fifth quintile in the Fund's Expense Group
for the comparison periods utilized in the Lipper
--------------------------------------------------------------------------------
38
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
BOARD APPROVAL OF INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT (UNAUDITED)
report (with the first quintile representing that fifth of the funds in the
Expense Group with the lowest level of fees or expenses, as applicable, and the
fifth quintile representing that fifth of the funds in the Expense Group with
the highest level of fees or expenses, as applicable). In light of the level of
the Fund's fees and expenses, management proposed a revision in the management
fee such that the management fee will be calculated only on the value of net
assets attributable to the Fund's common shares, rather than of net assets
attributable to both the Fund's common and preferred shares. Management noted
that this change should result in an anticipated reduction in the Fund's Actual
Management Fee to 0.90% of net assets applicable to common shares from its
current level of 1.183%, which would be below the median of its Expense Group.
Management also explained that it had negotiated a reduction in the Fund's
custodian fees such that the custodian fee rate will be based only on assets
attributable to common shares and not on assets attributable to both common and
preferred shares. Combined, these modifications should result in an anticipated
reduction in the Fund's total expenses to approximately 1.11% from its current
level of 1.419%, which is below the median of its Expense Group.
Taking all of the above into consideration, including the proposed reductions in
the advisory fee and custodian fees, the board determined that the management
fee was reasonable in light of the nature, extent and quality of the services
provided to the Fund under the Investment Advisory and Administration Agreement.
FUND PERFORMANCE--The board received and considered performance information of
the Fund compared to other funds (the "Performance Universe") selected by Lipper
over the one-, three-, five-, ten-year and since inception periods ended April
30, 2006. The board was provided with a description of the methodology Lipper
used to determine the similarity of the Fund with the funds included in its
Performance Universe. The board also noted that it had received information
throughout the year at periodic intervals with respect to the Fund's
performance, including in most cases with respect to its benchmark index.
The comparative Lipper information showed that the Fund's performance was in the
fifth quintile for the one-, three-, five- and ten-year periods and since
inception (with the first quintile representing that fifth of the funds in the
Performance Universe with the highest performance and the fifth
--------------------------------------------------------------------------------
39
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
BOARD APPROVAL OF INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT (UNAUDITED)
quintile representing that fifth of the funds in the Performance Universe with
the lowest performance). In its review, the board noted the Fund's performance
as compared to the average return for the Fund's Performance Universe and
benchmark index, taking the volatility in returns for the Performance Universe
and the index into account. In addition, the board noted that in the past the
Fund has been managed with a more conservative view when compared to its
Performance Universe. Management noted that, as had been approved by the Board,
it had taken certain steps to increase the Fund's exposure to interest rates by
increasing the average life of the investments that it holds by over two years.
Management also noted that the Fund has increased its investment in lower
quality issues and added approximately 8% exposure to AMT securities. Management
explained that it believed that these initiatives were positive contributors to
the Fund's performance and should make the Fund more competitive in the future
as compared to its Performance Group. Based on its review, and management's
explanation and changes to the investment strategies of the Fund, the board
concluded that the Fund's investment performance was acceptable.
ADVISER PROFITABILITY--The board received and considered a profitability
analysis of UBS Global AM and its affiliates in providing services to the Fund.
The board also received profitability information with respect to the UBS New
York fund complex as a whole. In addition, the board received information with
respect to UBS Global AM's allocation methodologies used in preparing this
profitability data. UBS Global AM's profitability was considered not excessive
in light of the nature, extent and quality of the services provided to the Fund.
ECONOMIES OF SCALE--The board received and considered information from
management regarding whether it has achieved economies of scale with respect to
the management of the Fund, whether the Fund has appropriately benefited from
any economies of scale, and whether there is potential realization of further
economies of scale. The board considered whether economies of scale in the
provision of services to the Fund were being passed along to shareholders. The
board also considered whether alternative fee structures (such as breakpoints)
would be more appropriate or reasonable taking into consideration economies of
scale or other efficiencies.
--------------------------------------------------------------------------------
40
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
BOARD APPROVAL OF INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT (UNAUDITED)
In conducting its review, the board noted that the Fund's Contractual Management
Fee did not contain any breakpoints. Further, the board noted that advisory
agreements of closed-end funds usually do not contain breakpoints. Management
informed the board that the Fund, as a closed-end investment company, was not
expected to materially increase in size; thus, UBS Global AM would not benefit
from economies of scale. The Board members considered whether economies of
scale could be realized because UBS Global AM advises other similar funds, and,
based on their experience, the board accepted UBS Global AM's explanation that
significant economies of scale would not be realized because the nature of the
market in which the Fund invests did not provide significant savings.
OTHER BENEFITS TO UBS GLOBAL AM--The board considered other benefits received by
UBS Global AM and its affiliates as a result of its relationship with the Fund,
including the opportunity to offer additional products and services to Fund
shareholders.
In light of the costs of providing investment management, administrative and
other services to the Fund and UBS Global AM's ongoing commitment to the Fund,
the profits and other ancillary benefits that UBS Global AM and its affiliates
received were considered reasonable.
In light of all of the foregoing, the board approved the Advisory and
Administration Agreement to continue for another year.
In making its decision, the board identified no single factor as being
determinative in approving the Investment Advisory and Administration Agreement.
The Independent Directors were advised by separate independent legal counsel
throughout the entire process. The board discussed the proposed continuance of
the Investment Advisory and Administration Agreement in a private session with
their independent legal counsel at which no representatives of UBS Global AM
were present.
--------------------------------------------------------------------------------
41
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 DIRECTOR
Term of
Position(s) office+ and
held with length of Principal occupation(s)
Name, address, and age Fund time served during past 5 years
----------------------------------------------------------------------------------------------------
Meyer Feldberg++; 64 Director Since 1992 Professor Feldberg is Dean
Morgan Stanley Emeritus and Sanford Bernstein
1585 Broadway Professor of Leadership and
33rd Floor Ethics at Columbia Business
New York, NY 10036 School, although on a two year
leave of absence. He is also a
senior advisor to Morgan Stanley
(financial services) (since
March 2005). Prior to July 2004,
he was Dean and Professor of
Management of the Graduate
School of Business at Columbia
University (since 1989).
--------------------------------------------------------------------------------
42
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
Number of portfolios in fund complex
overseen by director Other directorships held by director
----------------------------------------------------------------------------------------------------
Professor Feldberg is a director or trustee of Professor Feldberg is also a director of
29 investment companies (consisting of 49 Primedia Inc. (publishing), Federated
portfolios) for which UBS Global AM or one Department Stores, Inc. (operator of
of its affiliates serves as investment advisor, department stores), Revlon, Inc. (cosmetics),
sub-advisor or manager. and SAPPI, Ltd. (producer of paper).
--------------------------------------------------------------------------------
43
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
INDEPENDENT DIRECTORS
Term of
Position(s) office+ and
held with length of Principal occupation(s)
Name, address, and age Fund time served during past 5 years
----------------------------------------------------------------------------------------------------
Richard Q. Armstrong; 71 Director and Since 1995 Mr. Armstrong is chairman and
c/o Willkie Farr & Gallagher Chairman of (Director) principal of R.Q.A. Enterprises
LLP the Board of Since 2004 (management consulting firm)
787 Seventh Avenue Directors (Chairman (since April 1991 and principal
New York, NY 10019-6099 of the Board occupation since March 1995).
of Directors)
Alan S. Bernikow; 65 Director Since 2006 Mr. Bernikow is a consultant on
207 Benedict Ave. non-management matters for the
Staten Island, NY 10314 firm of Deloitte & Touche
(international accounting and
consulting firm) (since June 2003).
Previously, he was Deputy Chief
Executive Officer at Deloitte &
Touche.
Richard R. Burt; 59 Director Since 1995 Mr. Burt is chairman of Diligence
1275 Pennsylvania Ave., N.W. Inc. (information and risk
Washington, D.C. 20004 management firm) and IEP
Advisors (international
investments and consulting firm).
Bernard H. Garil; 66 Director Since 2006 Mr. Garil is retired (since 2001).
6754 Casa Grande Way He was a Managing Director at
Delray Beach, FL 33446 PIMCO Advisory Services (from
1999 to 2001) where he served
as President of closed-end funds
and Vice-President of the variable
insurance product funds advised
by OpCap Advisors (until 2001).
--------------------------------------------------------------------------------
44
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
Number of portfolios in fund complex
overseen by director Other directorships held by director
----------------------------------------------------------------------------------------------------
Mr. Armstrong is a director or trustee of 16 None
investment companies (consisting of 36
portfolios) for which UBS Global AM or one of
its affiliates serves as investment advisor,
sub-advisor or manager.
Mr. Bernikow is a director or trustee of 16 Mr. Bernikow is also a director of Revlon, Inc.
investment companies (consisting of 36 (cosmetics) (and serves as the chair of its
portfolios) for which UBS Global AM or one of audit committee), a director of Mack-Cali
its affiliates serves as investment advisor, Realty Corporation (real estate investment
sub-advisor or manager. trust) (and serves as the chair of its audit
committee) and a director of the Casual Male
Retail Group, Inc. (menswear).
Mr. Burt is a director or trustee of 16 Mr. Burt is also a director of The Central
investment companies (consisting of 36 European Fund, Inc., The Germany Fund,
portfolios) for which UBS Global AM or one of Inc., The New Germany Fund, Inc., IGT, Inc.
its affiliates serves as investment advisor, (provides technology to gaming and
sub-advisor or manager. wagering industry) and The Protective
Group, Inc. (produces armor products).
Mr. Garil is a director or trustee of 16 Mr. Garil is also a director of OFI Trust
investment companies (consisting of 36 Company (commercial trust company) and
portfolios) for which UBS Global AM or one of a trustee for the Brooklyn College
its affiliates serves as investment advisor, Foundation, Inc. (charitable foundation).
sub-advisor or manager.
--------------------------------------------------------------------------------
45
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
INDEPENDENT DIRECTORS (CONCLUDED)
Term of
Position(s) office+ and
held with length of Principal occupation(s)
Name, address, and age Fund time served during past 5 years
----------------------------------------------------------------------------------------------------
Heather R. Higgins; 47 Director Since 2006 Ms. Higgins is the President and
255 E. 49th St., Suite 23D Director of The Randolph Foundation
New York, NY 10017 (charitable foundation) (since 1991).
Ms. Higgins also serves on the
boards of several non-profit
charitable groups, including the
Independent Women's Forum
(chairman), the Philanthropy
Roundtable (vice chairman) and
the Hoover Institution (executive
committee).
--------------------------------------------------------------------------------
46
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
Number of portfolios in fund complex
overseen by director Other directorships held by director
----------------------------------------------------------------------------------------------------
Ms. Higgins is a director or trustee of 16 None
investment companies (consisting of 36
portfolios) for which UBS Global AM or one of
its affiliates serves as investment advisor,
sub-advisor or manager.
--------------------------------------------------------------------------------
47
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS
Term of Principal occupation(s) during
Position(s) office+ and past 5 years; number of portfolios
Name, address, held with length of in fund complex for which person
and age Fund time served serves as officer
--------------------------------------------------------------------------------------------------------------
Joseph Allessie*; 41 Vice President Since 2005 Mr. Allessie is a director and deputy
and Assistant general counsel at UBS Global Asset
Secretary Management (US) Inc. and UBS Global
Asset Management (Americas) Inc.
(collectively, "UBS Global AM--Americas
region") (since 2005). Prior to joining
UBS Global AM--Americas region, he
was senior vice president and general
counsel of Kenmar Advisory Corp. (from
2004 to 2005). Prior to that Mr. Allessie
was general counsel and secretary of GAM
USA Inc., GAM Investments, GAM
Services, GAM Funds, Inc. and the GAM
Avalon Funds (from 1999 to 2004).
Mr. Allessie is a vice president and
assistant secretary of 20 investment
companies (consisting of 92 portfolios)
for which UBS Global AM--Americas region
or one of its affiliates serves as
investment advisor, sub-advisor or manager.
Rose Ann Bubloski*; 38 Vice President Since 2006 Ms. Bubloski is an associate director
and Assistant and a senior manager (since 2004) of the
Treasurer US mutual fund treasury administration
department of UBS Global AM--Americas
region. Ms. Bubloski is vice president and
assistant treasurer of 20 investment
companies (consisting of 92 portfolios)
for which UBS Global AM--Americas
region or one of its affiliates serves as
investment advisor, sub-advisor or
manager.
--------------------------------------------------------------------------------
48
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONTINUED)
Term of Principal occupation(s) during
Position(s) office+ and past 5 years; number of portfolios
Name, address, held with length of in fund complex for which person
and age Fund time served serves as officer
------------------------------------------------------------------------------------------------------------------
Thomas Disbrow*; 40 Vice President Since 2000 Mr. Disbrow is a director (since 2001),
and Treasurer (Vice President) and head of the US mutual fund treasury
Since 2004 administration department (since
(Treasurer) September 2006) of UBS Global AM--
Americas region. Mr. Disbrow is a vice
president and treasurer and/or principal
accounting officer of 20 investment
companies (consisting of 92 portfolios)
for which UBS Global AM--Americas
region or one of its affiliates serves
as investment advisor, sub-advisor
or manager.
Michael J. Flook*; 41 Vice President Since 2006 Mr. Flook is an associate director and a
and Assistant senior manager of the US mutual fund
Treasurer treasury administration department of
UBS Global AM--Americas region (since
2006). Prior to joining UBS Global AM--
Americas region, he was a senior manager
with The Reserve (asset management firm)
from May 2005 to May 2006. Prior to
that he was a senior manager with PFPC
Worldwide since October 2000. Mr. Flook
is a vice president and assistant treasurer
of 20 investment companies (consisting of
92 portfolios) for which UBS Global AM--
Americas region or one of its affiliates
serves as investment advisor, sub-advisor
or manager.
Elbridge T. Gerry III*; 49 Vice President Since 1996 Mr. Gerry is a managing director--
municipal fixed income of UBS Global
AM--Americas region (since 2001).
Mr. Gerry is a vice president of six
investment companies (consisting of
10 portfolios) for which UBS Global
AM--Americas region or one of its
affiliates serves as investment advisor,
sub-advisor or manager.
--------------------------------------------------------------------------------
49
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONTINUED)
Term of Principal occupation(s) during
Position(s) office+ and past 5 years; number of portfolios
Name, address, held with length of in fund complex for which person
and age Fund time served serves as officer
--------------------------------------------------------------------------------------------------------------
Mark F. Kemper**; 48 Vice President Since 2004 Mr. Kemper is general counsel of UBS
and Secretary Global AM--Americas region (since 2004).
Mr. Kemper also is a managing director of
UBS Global AM--Americas region (since
2006). He was deputy general counsel of
UBS Global Asset Management (Americas)
Inc. ("UBS Global AM--Americas") from
July 2001 to July 2004. He has been
secretary of UBS Global AM--Americas
since 1999 and assistant secretary of UBS
Global Asset Management Trust Company
since 1993. Mr. Kemper is secretary of
UBS Global AM--Americas region (since
2004). Mr. Kemper is vice president and
secretary of 20 investment companies
(consisting of 92 portfolios) for which
UBS Global AM--Americas region or
one of its affiliates serves as investment
advisor, sub-advisor or manager.
Joanne M. Kilkeary*; 38 Vice President Since 2004 Ms. Kilkeary is an associate director
and Assistant (since 2000) and a senior manager
Treasurer (since 2004) of the US mutual fund
treasury administration department of
UBS Global AM--Americas region.
Ms. Kilkeary is a vice president and
assistant treasurer of 20 investment
companies (consisting of 92 portfolios) for
which UBS Global AM--Americas region
or one of its affiliates serves as investment
advisor, sub-advisor or manager.
--------------------------------------------------------------------------------
50
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONTINUED)
Term of Principal occupation(s) during
Position(s) office+ and past 5 years; number of portfolios
Name, address, held with length of in fund complex for which person
and age Fund time served serves as officer
---------------------------------------------------------------------------------------------------------------
Tammie Lee*; 35 Vice President Since 2005 Ms. Lee is a director and associate
and Assistant general counsel of UBS Global AM--
Secretary Americas region (since 2005). Prior to
joining UBS Global AM--Americas
region, she was vice president and
counsel at Deutsche Asset
Management/Scudder Investments from
2003 to 2005. Prior to that she was
assistant vice president and counsel at
Deutsche Asset Management/Scudder
Investments from 2000 to 2003. Ms. Lee
is a vice president and assistant secretary
of 20 investment companies (consisting of
92 portfolios) for which UBS Global
AM--Americas region or one of its
affiliates serves as investment advisor,
sub-advisor or manager.
Joseph McGill*; 44 Vice President Since 2004 Mr. McGill is a managing director (since
and Chief 2006) and chief compliance officer
Compliance (since 2003) at UBS Global AM--
Officer Americas region. Prior to joining UBS
Global AM--Americas region, he was
assistant general counsel at J.P. Morgan
Investment Management (from 1999 to
2003). Mr. McGill is a vice president and
chief compliance officer of 20 investment
companies (consisting of 92 portfolios)
for which UBS Global AM--Americas
region or one of its affiliates serves as
investment advisor, sub-advisor or
manager.
--------------------------------------------------------------------------------
51
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONTINUED)
Term of Principal occupation(s) during
Position(s) office+ and past 5 years; number of portfolios
Name, address, held with length of in fund complex for which person
and age Fund time served serves as officer
---------------------------------------------------------------------------------------------------------------
Kevin McIntyre*; 40 Vice President Since 2005 Mr. McIntyre is a director (since 2003) and
portfolio manager (since 2005) of UBS
Global AM--Americas region. He is also
Head of Municipal Trading since 2002.
Prior to that he was a trader and assistant
portfolio manager with UBS Global AM--
Americas region. Mr. McIntyre is a vice
president of two investment companies
(consisting of two portfolios) for which UBS
Global AM--Americas region or one of its
affiliates serves as investment advisor,
sub-advisor or manager.
Eric Sanders*; 41 Vice President Since 2005 Mr. Sanders is a director and associate
and Assistant general counsel of UBS Global AM--
Secretary Americas region (since 2005). From 1996
until June 2005, he held various positions
at Fred Alger & Company, Incorporated,
the most recent being assistant vice
president and associate general counsel.
Mr. Sanders is a vice president and
assistant secretary of 20 investment
companies (consisting of 92 portfolios)
for which UBS Global AM--Americas
region or one of its affiliates serves as
investment advisor, sub-advisor or
manager.
--------------------------------------------------------------------------------
52
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONTINUED)
Term of Principal occupation(s) during
Position(s) office+ and past 5 years; number of portfolios
Name, address, held with length of in fund complex for which person
and age Fund time served serves as officer
---------------------------------------------------------------------------------------------------------------
Andrew Shoup*; 50 Vice Since 2006 Mr. Shoup is a managing director and
President senior member of the Global Treasury
and Chief Administration department of UBS Global
Operating AM--Americas region (since July 2006).
Officer Prior to joining UBS Global AM--Americas
region, he was Chief Administrative
Officer for the Legg Mason Partner Funds
(formerly Smith Barney, Salomon
Brothers, and CitiFunds mutual funds)
from November 2003 to July 2006. Prior
to that, he held various positions with
Citigroup Asset Management and related
companies with their domestic and
offshore mutual funds since 1993.
Additionally, he has worked for another
mutual fund complex as well as spending
eleven years in public accounting.
Mr. Shoup is a vice president of 20
investment companies (consisting of
92 portfolios) for which UBS Global AM--
Americas region or one of its affiliates
serves as investment advisor, sub-advisor
or manager.
--------------------------------------------------------------------------------
53
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONTINUED)
Term of Principal occupation(s) during
Position(s) office+ and past 5 years; number of portfolios
Name, address, held with length of in fund complex for which person
and age Fund time served serves as officer
---------------------------------------------------------------------------------------------------------------
Kai R. Sotorp**; 47 President Since 2006 Mr. Sotorp is the Head of the Americas
for UBS Global Asset Management (since
2004); a member of the UBS Group
Managing Board (since 2003) and a
member of the UBS Global Asset
Management Executive Committee (since
2001). Prior to his current role, Mr. Sotorp
was Head of UBS Global Asset
Management--Asia Pacific (2002-2004),
covering Australia, Japan, Hong Kong,
Singapore and Taiwan; Head of UBS
Global Asset Management (Japan) Ltd.
(2001-2004) and Representative Director
and President of UBS Global Asset
Management (Japan) Ltd. (2000-2004).
Mr. Sotorp is president of 20 investment
companies (consisting of 92 portfolios)
for which UBS Global Asset
Management--Americas region or one
of its affiliates serves as investment
advisor, sub-advisor or manager.
--------------------------------------------------------------------------------
54
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONCLUDED)
Term of Principal occupation(s) during
Position(s) office+ and past 5 years; number of portfolios
Name, address, held with length of in fund complex for which person
and age Fund time served serves as officer
---------------------------------------------------------------------------------------------------------------
Keith A. Weller*; 45 Vice President Since 1995 Mr. Weller is an executive director and
and Assistant senior associate general counsel of UBS
Secretary Global AM--Americas region (since 2005)
and has been an attorney with affiliated
entities since 1995. Mr. Weller is a vice
president and assistant secretary of 20
investment companies (consisting of 92
portfolios) for which UBS Global AM--
Americas region or one of its affiliates
serves as investment advisor, sub-advisor
or manager.
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is One North Wacker Drive, Chicago,
Illinois 60606.
+ 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-four (74) years will be subject to retirement on the last
day of the month in which he or she attains such age. Officers are
appointed by the directors and serve at the pleasure of the board.
++ Professor Feldberg is deemed an "interested person" of the Fund as
defined in the Investment Company Act because he is a senior advisor to
Morgan Stanley, a financial services firm with which the Fund may conduct
transactions.
--------------------------------------------------------------------------------
55
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NEW YORK STOCK EXCHANGE CERTIFICATIONS (UNAUDITED)
Investment Grade Municipal Income Fund Inc. (the "Fund") is listed on the New
York Stock Exchange ("NYSE"). As a result, it is subject to certain corporate
governance rules and related interpretations issued by the exchange. Pursuant to
those requirements, the Fund must include information in this report regarding
certain certifications. The Fund's president and treasurer have filed
certifications with the SEC regarding the quality of the Fund's public
disclosure. Those certifications were made pursuant to Section 302 of the
Sarbanes-Oxley Act ("Section 302 Certifications"). The Section 302
Certifications were filed as exhibits to the Fund's annual report on Form N-CSR,
which included a copy of this annual report along with other information about
the Fund. After the Fund's 2006 annual meeting of shareholders, it filed a
certification with the NYSE on February 28, 2006 stating that its president was
unaware of any violation of the NYSE's Corporate Governance listing standards.
--------------------------------------------------------------------------------
56
DIRECTORS
Richard Q. Armstrong Meyer Feldberg
Chairman
Bernard H. Garil
Alan S. Bernikow
Heather R. Higgins
Richard R. Burt
PRINCIPAL OFFICERS
Kai R. Sotorp Elbridge T. Gerry III
President Vice President
Mark F. Kemper Kevin McIntyre
Vice President and Secretary Vice President
Thomas Disbrow
Vice President and Treasurer
INVESTMENT ADVISOR AND ADMINISTRATOR
UBS Global Asset Management (Americas) 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) 2006 UBS Global Asset Management (Americas) Inc. All rights reserved.
[LOGO OF UBS] UBS
-------------
PRESORTED
STANDARD
U.S. POSTAGE
PAID
COMPUTERSHARE
-------------
UBS GLOBAL ASSET MANAGEMENT (AMERICAS) INC.
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 has determined that the following person serving on the
registrant's Audit Committee is an "audit committee financial expert" as defined
in item 3 of Form N-CSR: Alan S. Bernikow. Mr. Bernikow is independent as
defined in item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
-----------------------------------------------
(a) Audit Fees:
-----------
For the fiscal years ended September 30, 2006 and September 30, 2005,
the aggregate Ernst & Young LLP (E&Y) audit fees for professional
services rendered to the registrant were approximately $38,500 and
$28,600, respectively.
Fees included in the audit fees category are those associated with the
annual audits of financial statements and services that are normally
provided in connection with statutory and regulatory filings.
(b) Audit-Related Fees:
-------------------
In each of the fiscal years ended September 30, 2006 and September 30,
2005, the aggregate audit-related fees billed by E&Y for services
rendered to the registrant that are reasonably related to the
performance of the audits of the financial statements, but not reported
as audit fees, were approximately $8,773 and $7,712, respectively.
Fees included in the audit-related category are those associated with
(1) the reading and providing of comments on the 2006 and 2005
semiannual financial statements, (2) review of the consolidated 2005
and 2004 report on the profitability of the UBS Funds to UBS Global
Asset Management (US) Inc. ("UBS Global AM") and its affiliates to
assist the board members in their annual advisory/administration
contract reviews and (3) auction preferred shares testing for the
registrant's fiscal years ended 2006 and 2005.
There were no audit-related fees required to be approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the fiscal
years indicated above.
(c) Tax Fees:
---------
In each of the fiscal years ended September 30, 2006 and September 30,
2005, the aggregate tax fees billed by E&Y for professional services
rendered to the registrant were approximately $8,000 and $11,150,
respectively.
Fees included in the tax fees category comprise all services performed
by professional staff in the independent accountant's tax division
except those services related to the audits. This category comprises
fees for review of tax compliance, tax return preparation and excise
tax calculations.
There were no tax fees required to be approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X during the fiscal years
indicated above.
(d) All Other Fees:
---------------
In each of the fiscal years ended September 30, 2006 and September 30,
2005, there were no fees billed by E&Y for products and services, other
than the services reported in Item 4(a)-(c) above, rendered to the
registrant.
Fees included in the all other fees category would consist of services
related to internal control reviews, strategy and other consulting,
financial information systems design and implementation, consulting on
other information systems, and other tax services unrelated to the
registrant.
There were no "all other fees" required to be approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the fiscal
years indicated above.
(e) (1) Audit Committee Pre-Approval Policies and Procedures:
-----------------------------------------------------
The registrant's Audit Committee ("audit committee") has adopted an
"Audit Committee Charter (Amended and Restated as of May 12, 2004-
Revised as of February 3, 2006)" (the "charter"). The charter
contains the audit committee's pre-approval policies and procedures.
Reproduced below is an excerpt from the charter regarding pre-
approval policies and procedures:
The [audit]Committee shall:
...
2. Pre-approve (a) all audit and permissible non-audit
services(1) to be provided to the Fund and (b) all
permissible non-audit services to be provided by the Fund's
independent auditors to UBS Global [AM] and any Covered
Service Providers, if the engagement relates directly to the
operations and financial reporting of the Fund. In carrying
out this responsibility, the Committee shall seek
periodically from UBS Global [AM] and from the independent
auditors a list of such audit and permissible non-audit
services that can be expected to be rendered to the Fund,
UBS Global [AM] or any Covered Service Providers by the
Fund's independent auditors, and an estimate of the fees
sought to be paid in connection with such services. The
Committee may delegate its responsibility to pre-approve any
such audit and permissible non-audit services to a
sub-committee consisting of the Chairperson of the Committee
and two other members of the Committee as the Chairperson,
from time to time, may determine and appoint, and such
sub-committee shall report to the Committee, at its next
regularly scheduled meeting after the sub-committee's
meeting, its decision(s). From year to year, the Committee
shall report to the Board whether this system of pre-approval
has been effective and efficient or whether this Charter
should be amended to allow for pre-approval pursuant to such
policies and procedures as the Committee shall approve,
including the delegation of some or all of the Committee's
pre-approval responsibilities to other persons (other than
UBS Global [AM] or the Fund's officers).
----------------
(1) The Committee will not approve non-audit services
that the Committee believes may taint the independence
of the auditors. Currently, permissible non-audit
services include any professional services (including
tax services) that are not prohibited services as
described below, provided to the Fund by the
independent auditors, other than those provided to the
Fund in connection with an audit or a review of the
financial statements of the Fund. Permissible non-audit
services may not include: (i) bookkeeping or other
services related to the accounting records or financial
statements of the Fund; (ii) financial information
systems design and implementation; (iii) appraisal or
valuation services, fairness opinions or
contribution-in-kind reports; (iv) actuarial services;
(v) internal audit outsourcing services;
(vi) management functions or human resources;
(vii) broker or dealer, investment adviser or investment
banking services; (viii) legal services and expert
services unrelated to the audit; and (ix) any other
service the Public Company Accounting Oversight Board
determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissible
non-audit services is not required so long as: (i) the
aggregate amount of all such permissible non-audit
services provided to the Fund, UBS Global [AM] and any
service providers controlling, controlled by or under
common control with UBS Global [AM] that provide
ongoing services to the Fund ("Covered Service
Providers") constitutes not more than 5% of the total
amount of revenues paid to the independent auditors
(during the fiscal year in which the permissible
non-audit services are provided) by (a) the Fund,
(b) its investment adviser and (c) any entity
controlling, controlled by, or under common control with
the investment adviser that provides ongoing services to
the Fund during the fiscal year in which the services
are provided that would have to be approved by the
Committee; (ii) the permissible non-audit services were
not recognized by the Fund at the time of the
engagement to be non-audit services; and (iii) such
services are promptly brought to the attention of the
Committee and approved by the Committee (or its
delegate(s)) prior to the completion of the audit.
(e) (2) Services approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X:
Audit-Related Fees:
-------------------
There were no amounts that were approved by the audit committee
pursuant to the de minimis exception for the fiscal years ended
September 30, 2006 and September 30, 2005 on behalf of the
registrant.
There were no amounts that were required to be approved by the
audit committee pursuant to the de minimis exception for the fiscal
years ended September 30, 2006 and September 30, 2005 on behalf of
the registrant's service providers that relate directly to the
operations and financial reporting of the registrant.
Tax Fees:
---------
There were no amounts that were approved by the audit committee
pursuant to the de minimis exception for the fiscal years ended
September 30, 2006 and September 30, 2005 on behalf of the
registrant.
There were no amounts that were required to be approved by the
audit committee pursuant to the de minimis exception for the fiscal
years ended September 30, 2006 and September 30, 2005 on behalf of
the registrant's service providers that relate directly to the
operations and financial reporting of the registrant.
All Other Fees:
---------------
There were no amounts that were approved by the audit committee
pursuant to the de minimis exception for the fiscal years ended
September 30, 2006 and September 30, 2005 on behalf of the
registrant.
There were no amounts that were required to be approved by the
audit committee pursuant to the de minimis exception for the fiscal
years ended September 30, 2006 and September 30, 2005 on behalf of
the registrant's service providers that relate directly to the
operations and financial reporting of the registrant.
(f) According to E&Y, for the fiscal year ended September 30, 2006, the
percentage of hours spent on the audit of the registrant's financial
statements for the most recent fiscal year that were attributed to work
performed by persons who are not full-time, permanent employees of
E&Y was 0%.
(g) For the fiscal years ended September 30, 2006 and September 30, 2005,
the aggregate fees billed by E&Y of $24,773 and $72,362, respectively,
for non-audit services rendered on behalf of the registrant ("covered"),
its investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser) and any entity controlling, controlled by,
or under common control with the adviser ("non-covered") that provides
ongoing services to the registrant for each of the last two fiscal years
of the registrant is shown in the table below:
2006 2005
---- ----
Covered Services $16,773 $18,862
Non-Covered Services 8,000 53,500
(h) The registrant's audit committee was not required to consider whether
the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling,
controlled by, or under
common control with the investment adviser that provides ongoing
services to the registrant that were not pre-approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
----------------------------------------------
The registrant has a separately designated standing audit committee (the "Audit
Committee") established in accordance with Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended. The Audit Committee is comprised of the
following board members: Mr. Armstrong, Mr. Bernikow, Mr. Burt, Mr. Garil and
Ms. Higgins.
ITEM 6. SCHEDULE OF INVESTMENTS.
--------------------------------
Included as part of the report to shareholders filed under Item 1 of this form.
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 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 determines 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 interest in voting a particular proxy proposal, which may arise as a
result of its or its affiliates' client relationships,
marketing efforts or 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. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
-------------------------------------------------------------------------
(a) (1) Name - Kevin McIntyre
Title - Vice President
Length of Service - Since 2005
Business Experience Last 5 Years - Mr. McIntyre is a director (since
2003) and portfolio manager (since 2005) of UBS Global Asset Management
(Americas) Inc. and UBS Global Asset Management (US) Inc. (collectively,
the "UBS Global AM - Americas Region"). He is also Head of Municipal
Trading for UBS Global AM-Americas Region since 2002. Prior to that he
was a trader and assistant portfolio manager with UBS Global AM -
Americas Region. Mr. McIntyre is a vice president of two investment
companies (consisting of two portfolios) for which UBS Global AM -
Americas Region or one of its affiliates serves as investment
advisor, sub-advisor or manager.
Information is as of - November 29, 2006
(a) (2) (i) Portfolio Manager
Kevin McIntyre
(a) (2) (ii) (A) Registered Management Investment Companies
The portfolio manager is responsible for one additional
Registered Management Investment Company having $519,622,141 in
net assets as of September 30, 2006.
(a) (2) (ii) (B) Other Pooled Investment Vehicles
None
(a) (2) (ii) (C) Other Accounts
None
(a) (2) (iii) Accounts with respect to which an advisory fee is based on the
performance of the account.
None
(a) (2) (iv) Conflicts.
The management of the registrant and other accounts by a portfolio
manager could result in potential conflicts of interest if the registrant
and other accounts have different objectives, benchmarks and fees because
the portfolio manager and his team must allocate time and investment
expertise across multiple accounts, including the registrant. The
portfolio manager and his team manage the registrant and other accounts
utilizing an approach that groups similar accounts by characteristics and
objectives. The Advisor manages accounts according to their respective
objectives, including where possible, those accounts that have specific
investment restrictions. Accordingly, portfolio holdings, position sizes,
and industry and sector exposures tend to be similar across accounts,
which may minimize the potential for conflicts of interest.
If a portfolio manager identifies a limited investment opportunity
that may be suitable for more than one account, the registrant may not be
able to take full advantage of that opportunity due to an allocation of
filled purchase or sale orders across all eligible portfolios and accounts.
To deal with these situations, the Advisor has adopted procedures for
allocating portfolio trades across multiple accounts to provide fair
treatment to all accounts.
The management of personal accounts by a portfolio manager may also
give rise to potential conflicts of interest. The Advisor and the
registrant have adopted a Code of Ethics that governs such personal
trading, but there is no assurance that the Code will adequately address
all such conflicts.
(a) (3) Compensation.
The compensation received by portfolio managers at UBS Global
AM - Americas Region, including Mr. McIntyre, includes a base salary and
incentive compensation as detailed below. Overall compensation can be
grouped into three categories: base salary, annual bonuses and UBS AG
equity. Base salary is fixed compensation used to recognize the experience,
skills and knowledge that the investment professionals bring to their
roles. Annual bonuses are correlated with performance and are based on
three components: 1) the firm's overall business success; 2) the
performance of the respective asset class and/or investment mandate; and 3)
an individual's specific contribution to the firm's results. Senior
investment professionals may receive a portion of their annual
performance-based incentive in the form of deferred or restricted UBS AG
shares or employee stock options. Broader equity share ownership is
encouraged for all employees through "Equity Plus." This long-term
incentive program gives employees the opportunity to purchase UBS stock
with after-tax funds from their bonus or salary. Two UBS stock options
are given for each share acquired and held for two years.
(a) (4) Dollar Range of Securities of Registrant Beneficially Owned by
Portfolio Manager.
None
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
--------------------------------------------------------------------------
COMPANY AND AFFILIATED PURCHASERS.
----------------------------------
There were no purchases made by or on behalf of the registrant or any
"affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Securities
Exchange Act of 1934, as amended, of shares of the registrant's equity
securities made in the period covered by this report.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------------------------------------------------------------
The registrant's Board has established a Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee will consider
nominees recommended by shareholders if a vacancy occurs among those board
members who are not "interested persons" as defined in Section 2(a)(19) of the
Investment Company Act of 1940, as amended. In order to recommend a nominee, a
shareholder should send a letter to the chairperson of the Nominating and
Corporate Governance Committee, Richard R. Burt, care of the Secretary of the
registrant at UBS Global Asset Management, 51 West 52nd Street, New York, New
York 10019-6114, and indicate on the envelope "Nominating and Corporate
Governance Committee." The shareholder's letter should state the nominee's name
and should include the nominee's resume or curriculum vitae, and must be
accompanied by a written consent of the individual to stand for election if
nominated for the Board and to serve if elected by shareholders.
ITEM 11. 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 (as defined in Rule 30a-3(d) under the
Investment Company Act of 1940, as amended) that occurred during the
registrant's last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
ITEM 12. 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 incorporated by reference herein from Exhibit EX-99.CODE
ETH to the registrant's Report on Form N-CSR filed November 24, 2004
(Accession Number: 0000950136-04-004154)(SEC File No. 811-07096).
(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.
(a) (3) Written solicitation to purchase securities under Rule 23c-1 under
the Investment Company Act of 1940 sent or given during the period
covered by the report by or on behalf of the registrant to 10 or more
persons - The registrant has not engaged in such a solicitation during
the period covered by this report.
(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/ Kai R. Sotorp
-----------------
Kai R. Sotorp
President
Date: November 29, 2006
-----------------
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/ Kai R. Sotorp
-----------------
Kai R. Sotorp
President
Date: November 29, 2006
-----------------
By: /s/ Thomas Disbrow
------------------
Thomas Disbrow
Vice President and Treasurer
Date: November 29, 2006
-----------------