[GRAPHIC OMITTED]
Investment Grade Municipal Income Fund Inc.
Semiannual Report
March 31, 2002
Investment Grade Municipal Income Fund Inc.
May 15, 2002
Dear Shareholder,
We present you with the semiannual report for Investment Grade Municipal Income
Fund Inc. for the six months ended March 31, 2002.
Q. HOW DID THE FUND PERFORM DURING THE PERIOD RELATIVE TO ITS PEERS?
A. For the six months ended March 31, 2002, the Fund's net asset value grew
0.5% and its market price increased 0.6%, outperforming its competitors,
measured by the Lipper General Municipal Debt Fund (Leveraged) Median. The
Lipper Median's net asset value declined 0.7% and its market price advanced
0.4%. The Fund's relatively short average duration compared to its peers
was the primary factor that helped it to outperform its benchmark.
Q. WHAT ECONOMIC FACTORS AFFECTED FUND PERFORMANCE?
A. The Federal Reserve's (The "Fed") unprecedented 11 fed funds rate cuts
totaling 4.75% in 2001 depressed bond yields during the period. Optimism
was the watchword at the start of 2002 as a series of positive economic
indicators pointed toward a sustained economic recovery. The business
activity index released in February by the Institute for Supply Management
(ISM), a group of purchasing managers, rose above 50-signifying expansion
for the first time in 18 months. Since then, the ISM index has posted
scores of 55.6 in March and 53.9 post-period in April.
The nation's economic output also grew rapidly during the first quarter at
a rate of 5.8%, after a growth rate of 1.7% in the fourth quarter of 2001
and a contraction of 1.3% in the third quarter of 2001 during the depth of
the recession. During this time, the Fed adopted a neutral bias from its
former easing stance.
However, unemployment remained stubbornly high, climbing to 6.0%
post-period after reaching 5.7% in March. Additionally, the equity markets
struggled again after a brief rally at the beginning of the year. A spate
of companies questioned about their accounting and reporting practices did
little to ease investors' fears.
--------------------------------------------------------------------------------
UBS Global Asset Management 1
Investment Grade Municipal
Income Fund Inc.
INVESTMENT GRADE MUNICIPAL
INCOME FUND INC.
INVESTMENT GOAL:
High level of current income
exempt from federal income
tax, consistent with
preservation of capital
PORTFOLIO MANAGER:
William Veronda
UBS Global Asset
Management (US) Inc.*
COMMENCEMENT:
November 6, 1992
NYSE SYMBOL:
PPM
DIVIDEND PAYMENTS:
Monthly
* Effective April 8, 2002, Brinson Advisors, Inc. was renamed UBS Global
Asset Management (US) Inc. Mr. Veronda assumed management responsibility of
the Fund effective May 20, 2002.
Q. WHAT MARKET FACTORS AFFECTED THE INVESTMENT GRADE MUNICIPAL FUND DURING THE
PERIOD?
A. Undoubtedly, The Fed's easing had the greatest effect on performance.
However, the municipal market outperformed the taxable fixed income market
despite a glut of new supply issued during the first quarter of 2002. The
Fed's change from an easing to a neutral bias in March 2002 also helped to
flatten the Treasury yield curve late in the period. At its peak in
September, the yield curve was 269 points-the steepest curve since 1993.
Since then, the yield curve has fallen to 235 points in March 2002.
Q. WHICH STRATEGIES HELPED OR HINDERED FUND PERFORMANCE DURING
THE PERIOD?
A. The best performing point on the short end of the curve was at five years,
with issues in this maturity range also quickly giving us the leverage to
reposition when opportunities presented themselves. As a result, the
weighted-average duration for the Fund was 4.80 years, although we have
been increasing duration since late in the reporting period as the yield
curve has flattened. We have combined our focus on the short end with a
focus on the 15-year range, giving the portfolio a barbell-shaped
structure. This strategy has allowed us to capture favorable returns at
both ends of the spectrum.
Security selection also helped performance during the period. The September 11
terrorist attacks knocked out bond broking giant Cantor Fitzgerald, which
virtually halted liquidity. In the succeeding weeks, travel industry sectors
such as airlines, airports and hotels were severely affected. We were
underweighted in these sectors during this time.
--------------------------------------------------------------------------------
2 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
Q. TO ILLUSTRATE YOUR INVESTMENT STRATEGIES, PLEASE PROVIDE DETAILS FOR TWO OR
THREE HOLDINGS THAT YOU BOUGHT OR SOLD DURING THIS REPORTING PERIOD?
A. Buy and sell activity was slow during the period, as we attempted to
forestall capital gains where we could. We did buy $2.825 million in bonds
from Fort Worth (Texas) Water and Sewer at 5.625% (matures in 2016). We
also bought $3.305 million in Indiana Transportation Finance Authority
bonds due November 2012, as well as a 30-year, $2.250 non-callable bond
from the Massachusetts State Health and Education Facility Financing
Authority. Both bonds had a 5.5% coupon.*
Q. LASTLY, WHAT IS YOUR SHORT-TERM AND LONG-TERM OUTLOOK FOR THE MARKET?
A. We anticipate staying relatively short to our benchmark and peers on average
duration, while we will continue to employ a barbell strategy. With good
value at the 12- to 17-year range of the yield curve, we will also look for
opportunities in this area.
We will continue to stress the more premium-structured defensive bonds, as
worries about credit quality will continue throughout the year. During the
period, we were overweighted in the essential revenue, general obligation
and education sectors. In the coming months, we will continue our
overweight in at least two of these three sectors-essential revenue and
education. We will monitor the general obligation area, where we anticipate
weaker credit quality as states, such as California, and even cities, such
as New York, see their credit ratings downgraded. We anticipate debt from
North Carolina and Georgia to remain quality opportunities.
* Weightings represent percentages of net assets as of the dates indicated.
As of March 31, 2002, Fort Worth (Texas) Water and Sewer, Indiana
Transportation Finance Authority and Massachusetts State Health and
Education Facility Financing Authority represented 1.8%, 4.2% and 1.4% of
net assets, respectively. The Fund's portfolio is actively managed and
its composition will vary over time.
--------------------------------------------------------------------------------
UBS Global Asset Management 3
Investment Grade Municipal Income Fund Inc.
Portfolio Review
AVERAGE ANNUAL RETURNS,
PERIODS ENDED 3/31/02
--------------------------------------------------------------------------------
NET ASSET VALUE RETURNS FUND LIPPER MEDIAN(1)
--------------------------------------------------------------------------------
6 Months 0.45% -0.70%
--------------------------------------------------------------------------------
1 Year 3.95 3.28
--------------------------------------------------------------------------------
5 Years 5.56 6.18
--------------------------------------------------------------------------------
Since Inception 11/6/92 6.47 6.84
--------------------------------------------------------------------------------
MARKET PRICE RETURNS FUND LIPPER MEDIAN(1)
--------------------------------------------------------------------------------
6 Months 0.62% 0.43%
--------------------------------------------------------------------------------
1 Year 6.36 5.68
--------------------------------------------------------------------------------
5 Years 8.43 6.19
--------------------------------------------------------------------------------
Since Inception 11/6/92 6.66 6.30
--------------------------------------------------------------------------------
1. Lipper General Municipal Debt Funds (Leveraged) Median
Inception returns for Lipper Median are shown as of nearest month-end of
the Fund's inception: October 31, 1992. Past performance is no guarantee of
future results. The Fund's share price and investment return will vary so
that an investor's shares may be worth more or less than their original
cost. NAV and market price returns for periods of less than one year are
not annualized. NAV return assumes, for illustration only, that dividends
were reinvested at the net asset value on the ex-dividend dates.
SHARE PRICE, DIVIDEND AND YIELD 3/31/02
-----------------------------------------
Market Price $ 15.00
--------------------------------------------------------------------------------
Net Asset Value $ 15.74
--------------------------------------------------------------------------------
12-Mo. Dividend (ended 3/31/02) $ 0.900
--------------------------------------------------------------------------------
March 2002 Dividend $ 0.075
--------------------------------------------------------------------------------
Market Yield 6.40 %
--------------------------------------------------------------------------------
NAV Yield 6.10 %
--------------------------------------------------------------------------------
IPO Yield 6.40 %
--------------------------------------------------------------------------------
Market yield is calculated by multiplying the March dividend by 12 and
dividing by the month-end market price. NAV yield is calculated by
multiplying the month-end dividend by 12 and dividing by the month-end net
asset value. IPO yield is calculated by multiplying the month-end dividend
by 12 and dividing by the initial public offering price. Prices and yields
will vary.
--------------------------------------------------------------------------------
4 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
Portfolio Statistics
CHARACTERISTICS* 3/31/02 9/30/01
-----------------------------------------------------------------------------------------
Net Assets ($mm) $ 162.9 $ 167.3
-----------------------------------------------------------------------------------------
Weighted Avg Maturity 14.1 yrs 14.1 yrs
-----------------------------------------------------------------------------------------
Weighted Avg Duration 4.8 yrs 3.8 yrs
-----------------------------------------------------------------------------------------
Weighted Avg Coupon 6.0% 6.1%
-----------------------------------------------------------------------------------------
AMT Paper 0% 0%
-----------------------------------------------------------------------------------------
Leverage** 32.9% 32.4%
-----------------------------------------------------------------------------------------
Callable/Maturing Within Five Years 16.4% 33.7%
-----------------------------------------------------------------------------------------
Callable/Maturing Beyond Five Years 83.6% 77.2%
-----------------------------------------------------------------------------------------
CREDIT QUALITY* 3/31/02 9/30/01
-----------------------------------------------------------------------------------------
AAA/Aaa 72.8% 69.0%
-----------------------------------------------------------------------------------------
AA/Aa 34.0 36.1
-----------------------------------------------------------------------------------------
A/A 13.7 12.1
-----------------------------------------------------------------------------------------
BBB/Baa 13.7 12.4
-----------------------------------------------------------------------------------------
BB/Ba 0.6 0.0
-----------------------------------------------------------------------------------------
Nonrated 13.1 13.9
-----------------------------------------------------------------------------------------
Liabilities in Excess of Cash and
Other Assets (47.9) (43.5)
-----------------------------------------------------------------------------------------
TOTAL 100.0% 100.0%
-----------------------------------------------------------------------------------------
TOP TEN STATES* 3/31/02 9/30/01
-----------------------------------------------------------------------------------------
Texas 30.2% Texas 32.8%
-----------------------------------------------------------------------------------------
Indiana 15.1 Illinois 14.0
-----------------------------------------------------------------------------------------
Illinois 14.0 Indiana 13.7
-----------------------------------------------------------------------------------------
New York 9.9 New York 13.2
-----------------------------------------------------------------------------------------
Washington 6.6 Wisconsin 7.4
-----------------------------------------------------------------------------------------
California 5.9 Virginia 6.3
-----------------------------------------------------------------------------------------
North Carolina 5.6 Pennsylvania 6.1
-----------------------------------------------------------------------------------------
Colorado 5.4 California 6.0
-----------------------------------------------------------------------------------------
Connecticut 5.4 Colorado 5.4
-----------------------------------------------------------------------------------------
Kentucky 4.9 Connecticut 5.4
-----------------------------------------------------------------------------------------
TOTAL 103.0% TOTAL 110.3%
-----------------------------------------------------------------------------------------
TOP FIVE SECTORS* 3/31/02 9/30/01
-----------------------------------------------------------------------------------------
Water 20.6% Water 24.8%
-----------------------------------------------------------------------------------------
Lease 20.4 Hospital 20.1
-----------------------------------------------------------------------------------------
Power 14.8 Power 19.1
-----------------------------------------------------------------------------------------
Hospital 14.8 Lease 16.6
-----------------------------------------------------------------------------------------
Housing 9.5 Housing 9.3
-----------------------------------------------------------------------------------------
TOTAL 80.1% TOTAL 89.9%
-----------------------------------------------------------------------------------------
* Weightings represent percentages of net assets applicable to common
shareholders as of the dates indicated. The Fund's portfolio is actively
managed and its composition will vary over time.
** As a percentage of net assets.
--------------------------------------------------------------------------------
UBS Global Asset Management 5
Investment Grade Municipal Income Fund Inc.
Our ultimate objective in managing your investments is to help you successfully
meet your financial goals. We thank you for your continued support and welcome
any comments or questions you may have. For additional information on the UBS
Funds,1 please contact your financial advisor or visit us at www.ubs.com.
Sincerely,
/s/ Brian M. Storms
-------------------
Brian M. Storms
President
Investment Grade Municipal Income Fund Inc.
President and Chief Operating Officer
UBS Global Asset Management (US) Inc.
/s/ William W. Veronda
----------------------
William Veronda
Portfolio Manager
Investment Grade Municipal Income Fund Inc.
Executive Director
UBS Global Asset Management (US) Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the six months ended March 31, 2002, and reflects our views at
the time of its writing. Of course, these views may change in response to
changing circumstances. We encourage you to consult your financial advisor
regarding your personal investment program.
1. Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, changes and expenses, and
should be read carefully before investing.
--------------------------------------------------------------------------------
6 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments - March 31, 2002 (unaudited)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS - 146.28%
ALABAMA - 2.80%
$ 4,600 Jefferson-County Sewer
Revenue-Series A
(FGIC Insured) Aaa AAA 02/01/27 5.375% $ 4,570,928
----------------------------------------------------------------------------------------------------------
ARIZONA - 0.64%
1,000 Scottsdale Municipal
Property Corp. Excise
Tax Revenue (a) Aa1 AA+ 07/01/06 5.500 1,048,400
----------------------------------------------------------------------------------------------------------
ARKANSAS - 1.13%
1,855 Little Rock Capital
Improvement Revenue
Parks & Recreation
Projects-Series A NR NR 01/01/18 5.700 1,840,346
----------------------------------------------------------------------------------------------------------
CALIFORNIA - 5.92%
1,000 California Educational
Facilities Authority-L.A.
College of Chiropractic
Medicine Ba1 NR 11/01/17 5.600 935,770
----------------------------------------------------------------------------------------------------------
3,000 California Statewide
Communities
Development Authority
Irvine Apartment
Communities Series A-3 Baa2 BBB 05/17/10+ 5.100 3,025,650
----------------------------------------------------------------------------------------------------------
2,150 Fontana Redevelopment
Agency Tax Allocation
Jurupa Hills
Redevelopment
Project A NR BBB+ 10/01/17 5.500 2,130,091
---------------------------------------------------------------------------------------------------------
3,500 Metropolitan Water
District of Southern
California Waterworks
Series A Aaa AAA 03/01/18 5.250 3,559,430
----------------------------------------------------------------------------------------------------------
9,650,941
----------------------------------------------------------------------------------------------------------
COLORADO - 5.39%
5,950 Arapahoe County Capital
Improvement Trust
Fund Highway Revenue
(Pre-refunded with U.S.
Government Securities
to 08/31/05 @ 103) Aaa AAA 08/31/26 7.000 6,774,432
----------------------------------------------------------------------------------------------------------
2,000 University of Colorado
Participation Interests NR A- 12/01/13 6.000 2,012,400
----------------------------------------------------------------------------------------------------------
8,786,832
----------------------------------------------------------------------------------------------------------
CONNECTICUT - 5.46%
8,590 Connecticut Housing
Finance Authority
Housing Mortgage 05/14/14 6.200
Finance Program to to
Series A & B Aaa AAA 11/15/23 6.750 8,904,964
----------------------------------------------------------------------------------------------------------
FLORIDA - 1.66%
2,540 First Govermental
Financing Commission
Revenue-Series B
(AMBAC Insured) Aaa NR 07/01/15 5.500 2,697,302
----------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UBS Global Asset Management 7
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments - (continued)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS - (CONTINUED)
GEORGIA - 0.32%
$ 500 Georgia Municipal Electric
Authority Power
Revenue Series B A2 A 01/01/16 6.375% $ 514,370
----------------------------------------------------------------------------------------------------------
ILLINOIS - 14.04%
7,380 Chicago Gas Supply
Revenue-People's Gas Aa3 AA- 03/01/15 6.875 7,552,840
----------------------------------------------------------------------------------------------------------
5,000 Chicago Parking District
Parking Facility Revenue Baa1 A 01/01/14 6.250 5,227,300
----------------------------------------------------------------------------------------------------------
1,890 Illinois Toll & Highway
Authority-Series A
(Pre-refunded with U.S.
Government Securities
to 01/01/03 @ 102)
(FGIC Insured) Aaa AAA 01/01/16 6.200 1,985,710
----------------------------------------------------------------------------------------------------------
250 Metropolitan Pier &
Exposition Authority Aa3 AA- 06/15/27 6.500 257,925
----------------------------------------------------------------------------------------------------------
6,350 Metropolitan Pier &
Exposition Authority
(Pre-refunded with U.S.
Government Securities
to 06/15/03 @ 102) Aaa AAA 06/15/27 6.500 6,785,356
----------------------------------------------------------------------------------------------------------
1,000 Naperville Electric
Revenue (Pre-refunded
with U.S. Government
Securities to 05/01/06
@ 100) Aa2 AA 05/01/12 5.700 1,072,780
----------------------------------------------------------------------------------------------------------
22,881,911
----------------------------------------------------------------------------------------------------------
INDIANA - 15.06%
1,000 Clark-Pleasant
Community School
Building Corp.
First Mortgage
(AMBAC Insured) Aaa AAA 07/15/17 5.500 1,028,130
----------------------------------------------------------------------------------------------------------
6,735 Indiana Transportation
Financing Authority
Airport Facilities- 11/01/12 5.500
Lease Revenue to to
Series A A1 AA 11/01/17 6.250 6,851,194
----------------------------------------------------------------------------------------------------------
2,000 Indianapolis Gas Utility
Revenue-Series A
(Pre-refunded with U.S.
Government Securities
to 06/01/02 @ 102)
(FGIC Insured) Aaa AAA 06/01/23 6.200 2,055,140
----------------------------------------------------------------------------------------------------------
2,000 Indianapolis Local Public
Improvement Bond
Bank Transportation
Revenue (Pre-refunded
with U.S. Government
Securities to 07/01/03
@ 102) Aa2 AA- 07/01/10 6.000 2,126,680
----------------------------------------------------------------------------------------------------------
3,400 Marion County
Convention &
Recreational Facitlies
Authority-Excise Tax
Revenue-Series A
(MBIA Insured) Aaa AAA 06/01/17 5.500 3,485,884
----------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
8 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments - (continued)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
--------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS - (CONTINUED)
INDIANA - (CONCLUDED)
$ 4,000 Marion County Hospital
Authority-Hospital
Facilities Revenue
Methodist Hospital of
Indiana (Escrowed to
Maturity) Aa3 AAA 09/01/13 6.500% $ 4,104,520
--------------------------------------------------------------------------------------------------------------
1,000 Purdue University-Student
Fee Revenue-Series B
(Pre-refunded with U.S.
Government Securities
to 01/01/05 @ 103) Aa2 AA 07/01/15 6.700 1,111,480
--------------------------------------------------------------------------------------------------------------
3,780 Wayne Township Marion 01/15/15
County School Building to
Corp.-First Mortgage NR A+ 07/15/15 5.250 3,786,880
--------------------------------------------------------------------------------------------------------------
24,549,908
--------------------------------------------------------------------------------------------------------------
KENTUCKY - 4.88%
7,750 Boone County Pollution
Control Revenue-
Dayton Power &
Light Co. A2 BBB+ 11/15/22 6.500 7,957,932
--------------------------------------------------------------------------------------------------------------
MASSACHUSETTS - 4.61%
2,250 Massachusetts State
Health & Educational
Facilities Authority
Revenue-
Massachusetts Institute
of Technology Series K Aaa AAA 07/01/32 5.500 2,342,655
--------------------------------------------------------------------------------------------------------------
5,000 Massachusetts Water
Resources Authority-
Series A (Pre-refunded
with U.S. Government
Securities to 07/15/02
@ 102) Aaa AAA 07/15/21 6.500 5,169,200
--------------------------------------------------------------------------------------------------------------
7,511,855
--------------------------------------------------------------------------------------------------------------
NEVADA - 4.25%
6,750 Clark County Pollution
Control Revenue-
Nevada Power Co.
Project-Series B
(FGIC Insured) Aaa AAA 06/01/19 6.600 6,932,588
--------------------------------------------------------------------------------------------------------------
NEW JERSEY - 1.32%
2,000 New Jersey Transportation
Trust Fund Authority
Transportation System
Series A Aa3 AA 06/15/11 5.500 2,154,040
--------------------------------------------------------------------------------------------------------------
New York- 9.93%
7,345 New York City Municipal
Water Financing
Authority Revenue-
Water & Sewer System
Series A Aa2 AA 06/15/17 6.000 7,501,963
--------------------------------------------------------------------------------------------------------------
5,500 New York City Transitional
Financing Authority
Revenue-Future Tax
Secured-Series B Aa2 AA+ 11/15/23 4.750 5,046,690
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UBS Global Asset Management 9
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments - (continued)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
--------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS - (CONTINUED)
NEW YORK- (CONCLUDED)
$ 2,000 New York State-Local
Government Assistance
Corp.-Series B
(Pre-refunded with U.S.
Government Securities
to 04/01/02 @ 102) Aaa AA- 04/01/21 6.250% $ 2,040,740
--------------------------------------------------------------------------------------------------------
1,500 New York State Medical
Care Facilities Finance
Agency Revenue-
Hospital and Nursing
Homes-Series D
(Pre-refunded with U.S.
Government Securities
to 02/15/03 @ 102)
(FHA Insured) NR NR 02/15/31 6.600 1,588,065
--------------------------------------------------------------------------------------------------------
16,177,458
--------------------------------------------------------------------------------------------------------
NORTH CAROLINA - 5.60%
3,155 Charlotte Water & Sewer
System Revenue-
Series A Aa1 AAA 07/01/15 5.500 3,388,786
--------------------------------------------------------------------------------------------------------
2,700 North Carolina Eastern
Municipal Power
Agency Series A
(Escrowed to Maturity) Baa3 BBB 01/01/21 6.400 3,080,376
--------------------------------------------------------------------------------------------------------
1,630 North Carolina Municipal
Power Agency-
Catawba Electric
Revenue Baa1 BBB+ 01/01/17 6.250 1,689,886
--------------------------------------------------------------------------------------------------------
920 North Carolina Municipal
Power Agency-
Catawba Electric
Revenue (Pre-refunded
with U.S. Government
Securities to 01/01/03
@ 102) NR BBB+ 01/01/17 6.250 966,147
--------------------------------------------------------------------------------------------------------
9,125,195
--------------------------------------------------------------------------------------------------------
OHIO - 1.31%
2,000 Ohio State Water
Development Authority 06/01/16
Revenue- Fresh Water to
Series B (FSA Insured) Aaa AAA 12/01/17 5.500 2,129,910
--------------------------------------------------------------------------------------------------------
PENNSYLVANIA - 4.65%
5,000 Northumberland County
Authority-Guaranteed
Lease Revenue-
Mountain View Manor
Project NR NR 10/01/20 7.000 4,848,950
--------------------------------------------------------------------------------------------------------
2,680 Philadelphia School
District-Series A
(MBIA Insured) Aaa AAA 04/01/15 5.250 2,727,114
7,576,064
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
10 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments - (continued)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS - (CONTINUED)
PUERTO RICO - 1.56%
$ 2,425 Puerto Rico Public
Buildings Authority
Revenue-Guaranteed
Government
Facilities-Series D Baa1 A 07/01/13 5.375% $ 2,538,732
------------------------------------------------------------------------------------------------------------
RHODE ISLAND - 3.90%
6,175 Rhode Island Housing &
Mortgage Finance
Corp. Homeownership
Opportunity-
Series 10-A Aa2 AA+ 04/01/27 6.500 6,352,717
------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA - 3.95%
6,290 Richland County Pollution
Control Revenue-
Union Camp Corp.
Project Series C Baa2 BBB 11/01/20 6.550 6,428,820
------------------------------------------------------------------------------------------------------------
SOUTH DAKOTA - 2.36%
3,958 Lower Brule Sioux Tribe ++ NR NR 08/15/15 6.000 3,847,430
------------------------------------------------------------------------------------------------------------
TENNESSEE - 1.54%
2,500 Memphis-Shelby County
Airport Authority-
Special Facilities
Revenue-Federal
Express Corp. Baa2 BBB 09/01/09 5.000 2,513,775
------------------------------------------------------------------------------------------------------------
TEXAS - 29.12%
2,475 Alvin Independent School
District-School House
Series A Aaa AAA 02/15/17 5.375 2,517,545
------------------------------------------------------------------------------------------------------------
4,000 Coastal Bend Health
Facilities Development-
Incarnate Word Health
System (Escrowed to
Maturity)
(AMBAC Insured) Aaa AAA 01/01/17 6.300 4,196,920
------------------------------------------------------------------------------------------------------------
10,000 Colorado River Texas
Municipal Water District
Water Revenue
(AMBAC Insured) Aaa AAA 01/01/21 5.150 9,626,700
------------------------------------------------------------------------------------------------------------
1,335 Eagle Mountain &
Saginaw Independent
School District-
Unlimited Tax-School
Building Aaa AAA 08/15/14 5.375 1,386,237
------------------------------------------------------------------------------------------------------------
2,825 Fort Worth Water & Sewer
Revenue Aa2 AA 02/15/16 5.625 2,961,165
------------------------------------------------------------------------------------------------------------
7,640 Harris County Texas Lease ++ NR NR 05/01/20 6.750 7,556,944
------------------------------------------------------------------------------------------------------------
915 Harris County Toll Road Aaa AAA 08/15/17 6.500 945,954
------------------------------------------------------------------------------------------------------------
3,007 Houston Community
College System
Certificates of
Participation ++ NR NR 06/15/25 7.875 3,002,284
------------------------------------------------------------------------------------------------------------
2,000 Houston Refunding &
Public Improvement
Series A Aa3 AA- 03/01/15 5.250 2,027,720
------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UBS Global Asset Management 11
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments - (continued)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
-------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS - (CONCLUDED)
TEXAS - (CONCLUDED)
$ 3,000 Houston Water & Sewer
System Revenue-Junior
Lien-Series C
(FGIC Insured) Aaa AAA 12/01/22 5.250% $ 2,947,800
---------------------------------------------------------------------------------------------------------
1,000 Houston Water & Sewer
System Revenue-Prior
Lien Series B
(Pre-refunded with U.S.
Government Securities
to 12/01/02 @ 102) Aaa A+ 12/01/14 6.375 1,043,570
---------------------------------------------------------------------------------------------------------
2,350 Port Corpus Christi
Industrial Development
Corp. Revenue-Valero
Energy Corp.- Series C Baa2 BBB 04/01/18 5.400 2,293,459
---------------------------------------------------------------------------------------------------------
1,875 San Antonio Electric &
Gas-Series A Aa1 AA 02/01/21 4.500 1,672,800
---------------------------------------------------------------------------------------------------------
5,000 Texas Health Facilities
Development Corp.-All
Saints Episcopal
Hospital Series B
(MBIA Insured) Aaa AAA 08/15/22 6.250 5,271,150
---------------------------------------------------------------------------------------------------------
47,450,248
---------------------------------------------------------------------------------------------------------
VIRGINIA - 4.33%
1,050 Chesapeake Public
Improvement Aa2 AA 12/01/14 5.500 1,112,118
---------------------------------------------------------------------------------------------------------
5,815 Virginia Transportation
Board-Transportation
Contract Revenue-
Route 28 Project Aa1 AA+ 04/01/18 6.500 5,949,792
---------------------------------------------------------------------------------------------------------
7,061,910
---------------------------------------------------------------------------------------------------------
WASHINGTON - 6.30%
2,170 King County Sewer
Revenue (FGIC Insured) Aaa AAA 01/01/14 5.250 2,228,177
---------------------------------------------------------------------------------------------------------
3,035 Metropolitan Park District 12/01/14
Tacoma to
(AMBAC Insured) Aaa AAA 12/01/16 6.000 3,307,948
---------------------------------------------------------------------------------------------------------
4,500 Metropolitan Seattle
Sewer Revenue Series
W (Pre-refunded with
U.S. Government
Securities to 01/01/03
@ 102) (MBIA Insured) Aaa AAA 01/01/33 6.300 4,730,580
---------------------------------------------------------------------------------------------------------
10,266,705
---------------------------------------------------------------------------------------------------------
WISCONSIN - 4.25%
6,750 Wisconsin Health &
Educational Facilities
Authority Revenue-
Sisters of Sorrowful
Mother Health Care
System
(MBIA Insured) Aaa AAA 06/01/20 6.250 6,921,585
---------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Bonds (cost - $232,083,503) 238,392,866
---------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
12 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
Portfolio of Investments - (concluded)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
--------------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL NOTES - 1.23%
MICHIGAN - 0.12% NR 04/01/02 1.500%* $ 200,000
$ 200 Delta County Economic P1
Development Corp.
Environmental
Improvement Revenue
Mead Escanaba Paper
Series D
--------------------------------------------------------------------------------------------------------------------
TEXAS - 1.11%
1,800 Harris County Health VMIG-1 A-1+ 04/01/02 1.500* 1,800,000
Facilities Development
Corp. Revenue-Special
Facilities-Texas Medical
Center Project
--------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Notes (cost - $2,000,000) 2,000,000
--------------------------------------------------------------------------------------------------------------------
Total Investments (cost - $234,083,503) - 147.51% 240,392,866
--------------------------------------------------------------------------------------------------------------------
Other assets in excess of liabilities - 1.58% 2,569,714
--------------------------------------------------------------------------------------------------------------------
Liquidation value of Auction Preferred Shares - (49.09)% (80,000,000)
--------------------------------------------------------------------------------------------------------------------
Net assets applicable to common shareholders - 100.00% $162,962,580
--------------------------------------------------------------------------------------------------------------------
(a) Security purchased on a when-issued basis.
+ The maturity date reflects the mandatory date bond will be put back to
issuer.
++ Illiquid securities representing 8.84% of net assets applicable to common
shareholders.
* Variable rate demand note is payable on demand. The maturity dates shown
are the next interest rate reset dates. The interest rates shown are the
current rates as of March 31, 2002.
AMBAC - American Municipal Bond Assurance Corporation
FGIC - Financial Guaranty Insurance Company
FHA - Federal Housing Authority
FSA - Financial Security Assurance Incorporated
MBIA - Municipal Bond Investors Assurance
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
UBS Global Asset Management 13
Investment Grade Municipal Income Fund Inc.
Statement of Assets and Liabilities - March 31, 2002 (unaudited)
ASSETS:
------------------------------------------------------------------------------
Investments in securities, at value (cost - $234,083,503) $240,392,866
------------------------------------------------------------------------------
Cash 72,419
------------------------------------------------------------------------------
Interest receivable 3,904,659
------------------------------------------------------------------------------
Other assets 27,533
------------------------------------------------------------------------------
TOTAL ASSETS 244,397,477
------------------------------------------------------------------------------
LIABILITIES:
------------------------------------------------------------------------------
Payable for investments purchased 1,038,980
------------------------------------------------------------------------------
Payable to investment advisor and administrator 161,035
------------------------------------------------------------------------------
Dividends payable to preferred shareholders 92,712
------------------------------------------------------------------------------
Accrued expenses and other liabilities 142,170
------------------------------------------------------------------------------
TOTAL LIABILITIES 1,434,897
------------------------------------------------------------------------------
Auction Preferred Shares Series A & B-1,600 non-participating
shares authorized, issued and outstanding; $0.001 par value;
$50,000 liquidation value per share 80,000,000
------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS $162,962,580
------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
------------------------------------------------------------------------------
Common Stock-$0.001 par value; 199,998,400 shares authorized;
10,356,667 shares issued and outstanding 153,674,147
------------------------------------------------------------------------------
Undistributed net investment income 1,787,927
------------------------------------------------------------------------------
Accumulated net realized gain from investment transactions 1,191,143
------------------------------------------------------------------------------
Net unrealized appreciation of investments 6,309,363
------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS $162,962,580
------------------------------------------------------------------------------
Net asset value per common share ($162,962,580 applicable to
10,356,667 common shares outstanding) $15.74
------------------------------------------------------------------------------
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
14 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
Statement of Operations
FOR THE
SIX MONTHS
ENDED
MARCH 31, 2002
(unaudited)
------------------------------------------------------------------------------------------
INVESTMENT INCOME:
------------------------------------------------------------------------------------
Interest $7,038,100
------------------------------------------------------------------------------------
EXPENSES:
------------------------------------------------------------------------------------
Investment advisory and administration 1,103,832
------------------------------------------------------------------------------------
Auction Preferred Shares expenses 118,263
------------------------------------------------------------------------------------
Custody and accounting 73,588
------------------------------------------------------------------------------------
Professional fees 29,930
------------------------------------------------------------------------------------
Reports and notices to shareholders 22,114
------------------------------------------------------------------------------------
Transfer agency fees 8,609
------------------------------------------------------------------------------------
Directors' fees 3,739
------------------------------------------------------------------------------------
Other expenses 12,067
------------------------------------------------------------------------------------
1,372,142
------------------------------------------------------------------------------------
Less: Fee waivers from advisor (153,310)
------------------------------------------------------------------------------------
Net expenses 1,218,832
------------------------------------------------------------------------------------
NET INVESTMENT INCOME 5,819,268
------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
------------------------------------------------------------------------------------
Net realized gain from investment transactions 1,191,784
------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of investments (5,612,631)
------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS FROM INVESTMENT ACTIVITIES (4,420,847)
------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
------------------------------------------------------------------------------------
Net investment income (633,708)
------------------------------------------------------------------------------------
Net realized gain on investments (85,072)
------------------------------------------------------------------------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS TO PREFERRED SHAREHOLDERS (718,780)
------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS RESULTING
FROM OPERATIONS $ 679,641
------------------------------------------------------------------------------------
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
UBS Global Asset Management 15
Investment Grade Municipal Income Fund Inc.
Statement of Changes in Net Assets Applicable to Common Shareholders
FOR THE
SIX MONTHS FOR THE
ENDED YEAR ENDED
MARCH 31, 2002 SEPTEMBER 30,
(unaudited) 2001
-----------------------------------------------------------------------------------------------
FROM OPERATIONS:
-------------------------------------------------------------------------------------------
Net investment income $ 5,819,268 $ 12,125,828
-------------------------------------------------------------------------------------------
Net realized gains from investment transactions 1,191,784 435,821
-------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of
investments (5,612,631) 4,249,989
-------------------------------------------------------------------------------------------
Dividends and distributions to preferred shareholders (718,780) (3,045,659)
-------------------------------------------------------------------------------------------
Net increase in net assets applicable to common shareholders
resulting from operations 679,641 13,765,979
-------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
-------------------------------------------------------------------------------------------
Net investment income (4,660,500) (9,321,000)
-------------------------------------------------------------------------------------------
Net realized gains on investments (351,091) (1,919,090)
-------------------------------------------------------------------------------------------
Total dividends and distributions to common shareholders (5,011,591) (11,240,090)
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets (4,331,950) 2,525,889
-------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 167,294,530 164,768,641
-------------------------------------------------------------------------------------------
End of period (including undistributed net investment income
of $1,787,927 and $1,262,867, respectively) $162,962,580 $167,294,530
-------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
16 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
Statement of Cash Flows
FOR THE
SIX MONTHS
ENDED
MARCH 31, 2002
(unaudited)
----------------------------------------------------------------------------------------
CASH FLOWS PROVIDED FROM (USED FOR) OPERATING ACTIVITIES:
------------------------------------------------------------------------------------
Interest received $ 7,250,800
------------------------------------------------------------------------------------
Expenses paid (net of fee waivers) (1,252,559)
------------------------------------------------------------------------------------
Dividends paid from net investment income to preferred shareholders (645,072)
------------------------------------------------------------------------------------
Dividends paid from capital gains to preferred shareholders (85,072)
------------------------------------------------------------------------------------
Sale of short-term portfolio investments, net 6,100,000
------------------------------------------------------------------------------------
Purchase of long-term portfolio investments (37,501,285)
------------------------------------------------------------------------------------
Sale of long-term portfolio investments 31,143,951
------------------------------------------------------------------------------------
Net cash provided from operating activities 5,010,763
------------------------------------------------------------------------------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
------------------------------------------------------------------------------------
Dividends paid from net investment income to common shareholders (4,660,500)
------------------------------------------------------------------------------------
Dividends paid from capital gains to common shareholders (351,091)
------------------------------------------------------------------------------------
Net cash used for financing activities (5,011,591)
------------------------------------------------------------------------------------
Net decrease in cash (828)
------------------------------------------------------------------------------------
Cash at beginning of period 73,247
------------------------------------------------------------------------------------
Cash at end of period $ 72,419
------------------------------------------------------------------------------------
RECONCILIATION OF NET INCREASE IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
RESULTING FROM OPERATIONS TO NET CASH PROVIDED FROM OPERATING ACTIVITIES:
------------------------------------------------------------------------------------
Net increase in net assets applicable to common shareholders
resulting from operations $ 679,641
------------------------------------------------------------------------------------
Decrease in investments, at value 7,730,611
------------------------------------------------------------------------------------
Decrease in interest receivable 213,647
------------------------------------------------------------------------------------
Increase in other assets (26,315)
------------------------------------------------------------------------------------
Decrease in payable for investments purchased (3,568,045)
------------------------------------------------------------------------------------
Increase in payable to investment advisor and administrator 3,113
------------------------------------------------------------------------------------
Decrease in dividends payable to preferred shareholders (11,364)
------------------------------------------------------------------------------------
Decrease in accrued expenses and other liabilities (10,525)
------------------------------------------------------------------------------------
Total adjustments 4,331,122
------------------------------------------------------------------------------------
Net cash provided from operating activities $ 5,010,763
------------------------------------------------------------------------------------
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
UBS Global Asset Management 17
Investment Grade Municipal Income Fund Inc.
Notes to Financial Statements (unaudited)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Investment Grade Municipal Income Fund Inc. (the "Fund") was incorporated in
Maryland on August 6, 1992, and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as a
closed-end diversified management investment company. The Fund's investment
objective is to achieve a high level of current income that is exempt from
federal income tax, consistent with the preservation of capital.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires Fund management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies:
VALUATION OF INVESTMENTS--The Fund calculates its net asset value based on the
current market value, where available, for its portfolio securities. The Fund
normally obtains market values for its securities from independent pricing
sources and broker-dealers. Independent pricing sources may use reported last
sale prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. If a market value is
not available from an independent pricing source for a particular security,
that security is valued at fair value as determined in good faith by or under
the direction of the Fund's board of directors (the "Board"). The amortized
cost method of valuation, which approximates market value, generally is used to
value short-term debt instruments with sixty days or less remaining to
maturity, unless the Board determines that this does not represent fair value.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income
is recorded on an accrual basis. Discounts are accreted and premiums are
amortized as adjustments to interest income and the identified cost of
investments.
DIVIDENDS AND DISTRIBUTIONS--The Fund intends to pay monthly dividends to common
shareholders at a level rate that over time will result in the distribution of
all of the Fund's net investment income remaining after the payment of
dividends on any outstanding preferred shares. Dividends and distributions to
common shareholders are recorded on the ex-dividend date. Dividends to
preferred shareholders are accrued daily. The amount of dividends from net
investment income and distributions from net realized capital gains is
determined in accordance with federal income tax regulations, which may differ
from accounting principles generally accepted in the United States. These
"book/tax" differences are either considered temporary or
--------------------------------------------------------------------------------
18 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
Notes to Financial Statements (unaudited) (continued)
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.
CHANGE IN ACCOUNTING PRINCIPLE
In July 2001, a Securities and Exchange Commission staff announcement, Emerging
Issues Task Force Discussion ("EITF D")-98, Classification and Measurement of
Redeemable Securities, was issued providing new guidance related to the
presentation of preferred shares in financial statements. EITF D-98 is required
to be applied beginning with fiscal quarters ending after December 15, 2001 on
a retroactive basis, by restating the prior year's financial statements. In
accordance with the announcement, the Fund has presented its auction preferred
shares outside of net assets and has presented dividends to preferred
shareholders on such auction preferred shares in the net change in net assets
attributable to common shareholders resulting from operations for all periods
presented. Therefore, beginning net assets attributable to common shareholders
have been restated and dividend activity related to preferred shares has been
reclassified from the capital activity in the statements of changes in net
assets and the financial highlights to the operating activity. The application
of EITF D-98 related entirely to presentation and had no impact on net asset
value or the allocation of net income or capital gains or losses to common
shareholders.
CONCENTRATION OF RISK
The Fund follows an investment policy of investing primarily in municipal
obligations of various states. Economic changes affecting those states and
certain of their public bodies and municipalities may affect the ability of the
issuers within those states to pay interest on, or repay principal of,
municipal obligations held by the Fund.
INVESTMENT ADVISOR AND ADMINISTRATOR
The Board has approved an investment advisory and administration contract
("Advisory Contract") with UBS Global Asset Management (US) Inc. ("UBS Global
AM", formerly known as Brinson Advisors, Inc.), under which UBS Global AM
serves as investment advisor and administrator of the Fund. In accordance with
the Advisory Contract, the Fund pays UBS Global AM an investment advisory and
administration fee, which is accrued weekly and paid monthly, at the annual
rate of 0.90% of the Fund's average weekly net assets. For the six months ended
March 31, 2002, UBS Global AM voluntarily waived $153,310 in investment
advisory and administration fees from the Fund.
COMMON STOCK
There are 199,998,400 shares of $0.001 par value common stock authorized and
10,356,667 common shares outstanding at March 31, 2002.
--------------------------------------------------------------------------------
UBS Global Asset Management 19
Investment Grade Municipal Income Fund Inc.
Notes to Financial Statements (unaudited) (concluded)
AUCTION PREFERRED SHARES
The Fund has issued 800 shares of Auction Preferred Shares Series A and 800
shares of Auction Preferred Shares Series B, which are referred to herein
collectively as the "APS." All shares of each series of APS have a liquidation
preference of $50,000 per share plus an amount equal to accumulated but unpaid
dividends upon liquidation.
Dividends, which are cumulative, are generally reset every 28 days for APS
Series A and 90 days for APS Series B. Dividend rates ranged from 1.278% to
2.300% for the six months ended March 31, 2002.
The Fund is subject to certain restrictions relating to the APS. Failure to
comply with these restrictions could preclude the Fund from declaring any
distributions to common shareholders or repurchasing common shares and/or could
trigger the mandatory redemption of APS at liquidation value.
The APS are entitled to one vote per share and, unless otherwise required by
law, will vote with holders of common stock as a single class, except that the
preferred shares will vote separately as a class on certain matters, as
required by law. The holders of the preferred shares have the right to elect
two directors of the Fund.
FEDERAL TAX STATUS
For federal income tax purposes, the cost of securities owned at March 31, 2002
was substantially the same as the cost of securities for financial statement
purposes.
At March 31, 2002, the components of net unrealized appreciation of investments
were as follows:
Gross appreciation (investments having an excess of value over cost) ..... $7,827,236
Gross depreciation (investments having an excess of cost over value) ..... (1,517,873)
----------
Net unrealized appreciation of investments. .............................. $6,309,363
==========
For the six months ended March 31, 2002, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $33,933,240 and
$31,143,951, respectively.
The Fund intends to distribute substantially all of its tax-exempt income and
any taxable income and to comply with the other requirements of the Internal
Revenue Code applicable to regulated investment companies. Accordingly, no
provision for income taxes is required. In addition, by distributing during
each calendar year substantially all of its net investment income, capital
gains and certain other amounts, if any, the Fund intends not to be subject to
a federal excise tax.
--------------------------------------------------------------------------------
20 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
Financial Highlights
Selected data for a share of common stock outstanding throughout each period is
presented below:
FOR THE
SIX MONTHS
ENDED FOR THE YEARS ENDED SEPTEMBER 30,
MARCH 31,2002 -------------------------------------------------------------------------
(unaudited) 2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.15 $ 15.91 $ 16.09 $ 17.09 $ 16.78 $ 16.11
--------------------------------------------------------------------------------------------------------------------------
Net investment income 0.56 1.17 1.18 1.17 1.19 1.19
--------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gains (losses) from investment
transactions ( 0.42) 0.46 ( 0.13) ( 1.02) 0.29 0.65
--------------------------------------------------------------------------------------------------------------------------
Common share equivalent of
dividends and distributions
paid to preferred shareholders
from:
Net investment income ( 0.06) ( 0.23) ( 0.31) ( 0.25) ( 0.27) ( 0.27)
--------------------------------------------------------------------------------------------------------------------------
Net realized gains on
investments ( 0.01) ( 0.07) ( 0.00)(1) - - -
--------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
from investment operations 0.07 1.33 0.74 ( 0.10) 1.21 1.57
--------------------------------------------------------------------------------------------------------------------------
Dividends and distributions paid
to common shareholders
from:
Net investment income ( 0.45) ( 0.90) ( 0.90) ( 0.90) ( 0.90) ( 0.90)
--------------------------------------------------------------------------------------------------------------------------
Net realized gains on
investments ( 0.03) ( 0.19) ( 0.02) -- -- --
--------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions to common
shareholders ( 0.48) ( 1.09) ( 0.92) ( 0.90) ( 0.90) ( 0.90)
--------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 15.74 $ 16.15 $ 15.91 $ 16.09 $ 17.09 $ 16.78
--------------------------------------------------------------------------------------------------------------------------
MARKET VALUE, END OF
PERIOD $ 15.00 $ 15.39 $ 13.75 $ 13.88 $ 15.94 $ 15.06
--------------------------------- --------- ---------- ---------- --------- ---------- ----------
TOTAL INVESTMENT RETURN (2) 0.62 % 20.59% 5.90% ( 7.68)% 12.21% 17.76%
--------------------------------------------------------------------------------------------------------------------------
* Annualized.
(1) Distribution equal to $0.0042 per share.
(2) Total investment return is calculated assuming a purchase of common stock
at the current market price on the first day of each period reported and a
sale at the current market price on the last day of each period reported,
and assuming reinvestment of dividends and other distributions to common
shareholders at prices obtained under the Fund's Dividend Reinvestment
Plan. Total investment return does not reflect brokerage commissions and
has not been annualized for a period of less than one year.
--------------------------------------------------------------------------------
UBS Global Asset Management 21
Investment Grade Municipal Income Fund Inc.
Financial Highlights (concluded)
FOR THE
SIX MONTHS
ENDED FOR THE YEARS ENDED SEPTEMBER 30,
MARCH 31,2002 ----------------------------------------------------------------
(unaudited) 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
ASSETS ATTRIBUTABLE TO
COMMON SHARES:
------------------------------------------------------------------------------------------------------------------
Total expenses, net of
waivers from advisor 1.47%* 1.49% 1.52% 1.52% 1.44% 1.44%
------------------------------------------------------------------------------------------------------------------
Total expenses, before
waivers from advisor 1.66%* 1.68% 1.71% 1.71% 1.62% 1.77%
------------------------------------------------------------------------------------------------------------------
Net investment income
before preferred stock
dividends 7.03%* 7.30% 7.48% 7.01% 7.03% 7.27%
------------------------------------------------------------------------------------------------------------------
Preferred stock dividends 0.77%* 1.42% 1.99% 1.50% 1.62% 1.66%
------------------------------------------------------------------------------------------------------------------
Net investment income available
to common shareholders, net
of waivers from advisor 6.27%* 5.88% 5.49% 5.51% 5.41% 5.61%
------------------------------------------------------------------------------------------------------------------
Net investment income available
to common shareholders,
before waivers from advisor 6.08%* 5.69% 5.30% 5.32% 5.23% 5.28%
------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
------------------------------------------------------------------------------------------------------------------
Net assets applicable to
common shareholders,
end of period (000's) $162,963 $167,295 $164,769 $166,618 $176,983 $173,767
------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 13% 8% 14% 8% 0% 3%
------------------------------------------------------------------------------------------------------------------
Asset coverage per share of
preferred stock, end of period $151,852 $154,559 $152,980 $154,136 $160,614 $158,604
------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
22 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
General Information (unaudited)
THE FUND
Investment Grade Municipal Income Fund Inc. (the "Fund") is a diversified,
closed-end management investment company whose shares trade on the New York
Stock Exchange ("NYSE"). The Fund's investment objective is to achieve a high
level of current income that is exempt from federal income tax, consistent with
the preservation of capital. The Fund's investment advisor and administrator is
UBS Global Asset Management (US) Inc. ("UBS Global AM"), an indirect wholly
owned asset management subsidiary of UBS AG, which had over $75.6 billion in
assets under management as of April 30, 2002.
Effective May 20, 2002, William Veronda assumed primary responsibility for the
day-to-day management of the Fund. Mr. Veronda is an Executive Director and
portfolio manager of UBS Global AM. Mr. Veronda joined UBS Global AM in
September 1995 and has led its municipal research group since that date. Mr.
Veronda previously served as the portfolio manager for PaineWebber Municipal
High Income Fund from September 1995 until March 2001.
INVESTMENT POLICY CHANGES
The Fund's board approved modifications to the Fund's investment policies as a
result of a new rule promulgated by the Securities and Exchange Commission.
This rule generally requires a fund with a name suggesting that it focuses on a
particular type of investment to invest at least 80% of its net assets (plus
the amount of any borrowing for investment purposes) in the type of investment
suggested by its name. The investment policy changes became effective on April
8, 2002. These changes are not expected to affect materially portfolio
management.
The new 80% policy has been adopted as a "fundamental" investment policy; the
Fund may not deviate from this 80% policy without shareholder approval. Many of
the Fund's other investment policies are non-fundamental policies and may be
changed by its board without shareholder approval. The Fund will interpret
these new policies as if the following phrase appeared immediately after the
words "net assets": "(plus the amount of any borrowing for investment
purposes)." If subsequent to an investment, the Fund's 80% policy is no longer
met (e.g., bonds are called resulting in a large influx of cash), then under
normal circumstances, the Fund's future investments would be made in a manner
that would bring the Fund's investments back in line with the 80% threshold.
In order to place these changes in context, reproduced below are prior policies
that were impacted by this change as well as new policies which replace the
prior policies:
--------------------------------------------------------------------------------
UBS Global Asset Management 23
Investment Grade Municipal Income Fund Inc.
General Information (unaudited) (continued)
INVESTMENT POLICY CHANGES (CONCLUDED)
Prior Policies Impacted by Change
The Fund normally invests substantially all of its assets in a diversified
portfolio of long-term, tax-exempt Municipal Obligations that have been rated
investment grade or are unrated but have been determined to be of comparable
quality by UBS Global AM. Municipal Obligations rated investment grade are
those that, at the time of investment, are rated within the four highest grades
by Moody's (Baa or higher) or S&P (BBB or higher) or have an equivalent rating
from another nationally recognized statistical rating organization. The Fund
may invest up to 20% of its total assets in Municipal Obligations that are
unrated but that, at the time of investment, have been determined by UBS Global
AM to be of comparable quality to those that are rated investment grade. Under
normal circumstances, the Fund invests at least 65% of its total assets in
income-producing securities.
Revised Policies
The Fund normally invests substantially all of its assets in a diversified
portfolio of long-term Municipal Obligations. Under normal circumstances, the
Fund invests at least 80% of its net assets in investment grade Municipal
Obligations, the income from which is exempt from regular federal income tax.
Municipal Obligations rated investment grade are those that, at the time of
investment, are rated within the four highest grades by Moody's (Baa or higher)
or S&P (BBB or higher) or have an equivalent rating from another nationally
recognized statistical rating organization. The Fund may invest up to 20% of
its net assets in Municipal Obligations that are unrated but that, at the time
of investment, have been determined by UBS Global AM to be of comparable
quality to those that are rated investment grade.
SHAREHOLDER INFORMATION
The Fund's NYSE trading symbol is "PPM." Comparative net asset value and market
price information about the Fund is published weekly in The Wall Street
Journal, The New York Times and Barron's, as well as in numerous other
publications.
An annual meeting of shareholders of the Fund was held on January 17, 2002. At
the meeting, Margo N . Alexander, Richard Q. Armstrong, David J. Beaubien, E.
Garrett Bewkes, Jr., Richard R. Burt, Meyer Feldberg, George W. Gowen, William
W. Hewitt, Jr., Morton L. Janklow, Frederick V. Malek, Carl W. Schafer and
William D. White were elected to serve as directors until the next annual
meeting of shareholders, or until their successors are elected and qualified.
--------------------------------------------------------------------------------
24 UBS Global Asset Management
Investment Grade Municipal Income Fund Inc.
General Information (unaudited) (continued)
SHAREHOLDER INFORMATION (CONCLUDED)
COMMON STOCK AND APS SHARES VOTING AS A SINGLE CLASS
SHARES
SHARES WITHHOLD
TO VOTE FOR OR AGAINST THE ELECTION OF: VOTED FOR AUTHORITY
--------------------------------------------------------------------
Richard Q. Armstrong 9,955,461 156,636
David J. Beaubien 9,951,979 160,118
E. Garrett Bewkes, Jr. 9,935,176 176,921
Richard R. Burt 9,965,699 146,398
George W. Gowen 9,943,271 168,826
William W. Hewitt, Jr. 9,939,656 172,441
Morton L. Janklow 9,937,015 175,082
Frederick V. Malek 9,962,597 149,500
Carl W. Schafer 9,957,125 154,972
William D. White 9,943,343 168,754
--------------------------------------------------------------------
AUCTION PREFERRED SHARES:
SHARES
SHARES WITHHOLD
VOTED FOR AUTHORITY
----------- -----------
TO VOTE FOR OR AGAINST THE ELECTION OF:
Margo N. Alexander ....................................................................... 1,533 0
Meyer Feldberg ........................................................................... 1,533 0
(Broker non-votes and abstentions are included within the "Shares Withold Authority" totals)
-------------------------------------------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
The Fund's Board has established a Dividend Reinvestment Plan (the "Plan")
under which all common shareholders whose shares are registered in their own
names, or in the name of UBS PaineWebber Inc. or its nominee, will have all
dividends and other distributions on their shares of common stock automatically
reinvested in additional shares of common stock, unless such common
shareholders elect to receive cash. Common shareholders who elect to hold their
shares in the name of another broker or nominee should contact such broker or
nominee to determine whether, or how, they may participate in the Plan. The
ability of such shareholders to participate in the Plan may change if their
shares are transferred into the name of another broker or nominee.
A common shareholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and common shareholders
who have previously terminated participation in the Plan may rejoin it at any
time. Changes in elections must be made in writing to the Fund's transfer agent
and should include the shareholder's name and address as they appear on that
share certificate or in the transfer agent's records. An election to terminate
participation in the Plan, until such election is changed, will be deemed an
election by a 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.
--------------------------------------------------------------------------------
UBS Global Asset Management 25
Investment Grade Municipal Income Fund Inc.
General Information (unaudited) (concluded)
DIVIDEND REINVESTMENT PLAN (CONCLUDED)
Additional shares of common stock acquired under the Plan will be purchased in
the open market, on the NYSE or otherwise, at prices that may be higher or
lower than the net asset value per share of the common stock at the time of the
purchase. The number of shares of common stock purchased with each dividend
will be equal to the result obtained by dividing the amount of the dividend
payable to a particular shareholder by the average price per share (including
applicable brokerage commissions) that the transfer agent was able to obtain in
the open market.
The Fund will not issue any new shares of common stock in connection with the
Plan. There currently is no charge to participants for reinvesting dividends or
other distributions. The transfer agent's fees for handling the reinvestment of
distributions will be paid by the Fund. However, each participant pays a pro
rata share of brokerage commissions incurred with respect to the transfer
agent's open market purchases of common stock in connection with the
reinvestment of distributions. The automatic reinvestment of dividends and
other distributions in shares of common stock does not relieve participants of
any income tax that may be payable on such distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan with respect to any
dividend or other distribution if notice of the change is sent to Plan
participants at least 30 days before the record date for such distribution. The
Plan also may be amended or terminated by the transfer agent by at least 30
days' written notice to all Plan participants. Additional information regarding
the Plan may be obtained from, and all correspondence concerning the Plan
should be directed to, the transfer agent at PFPC Inc., P.O. Box 8030, Boston,
Massachusetts 02266-8030. For further information regarding the Plan, you may
also contact the transfer agent directly at 1-800-381-1710.
--------------------------------------------------------------------------------
26 UBS Global Asset Management
Directors
E. Garrett Bewkes, Jr. George W. Gowen
Chairman
William W. Hewitt, Jr.
Margo N. Alexander
Morton L. Janklow
Richard Q. Armstrong
Frederic V. Malek
David J. Beaubien
Carl W. Schafer
Richard R. Burt
William D. White
Meyer Feldberg
Principal Officers
Brian M. Storms Paul H. Schubert
President Vice President and Treasurer
Amy R. Doberman Elbridge T. Gerry III
Vice President and Secretary Vice President
Investment Advisor and
Administrator
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, New York 10019-6114
The financial information included herein is taken from the records of the Fund
without examination by independent auditors who do not express an opinion
thereon.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that from time to time the Fund may purchase shares of its
common stock in the open market at market prices.
This report is sent to the shareholders of the Fund for their information. It
is not a prospectus, circular or representation intended for use in the
purchase or sale of shares of the Fund or of any securities mentioned in this
report.
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| | UBS GLOBAL ASSET MANAGEMENT (US) INC.
| | 51 West 52nd Street
| | New York, NY 10019
| |
| |
| |
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