UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07096
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Investment Grade Municipal Income Fund Inc.
------------------------------------------------------------------------------
(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)
David M. Goldenberg
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, NY 10019-6114
(Name and address of agent for service)
Copy to:
Jack W. Murphy, Esq.
Dechert 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: March 31, 2004
ITEM 1. REPORTS TO STOCKHOLDERS.
[UBS LOGO] GLOBAL ASSET MANAGEMENT
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
SEMIANNUAL REPORT
MARCH 31, 2004
Investment Grade Municipal Income Fund Inc.
May 14, 2004
DEAR SHAREHOLDER,
[sidebar]
----------------------------
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
----------------------------
[end sidebar]
We present you with the semiannual report for Investment Grade Municipal Income
Fund Inc. for the six months ended March 31, 2004.
PERFORMANCE
For the six months ended March 31, 2004, Investment Grade Municipal Income Fund
Inc.'s net asset value return was 3.50%. On a market price basis, the Fund's
return was 11.12%. Over the same period, the Lipper General Municipal Debt
Funds (Leveraged) median's net asset value and market price returns were 5.36%
and 9.76%, respectively. (For more performance information, please refer to
"Performance At A Glance" on page 5).
The Fund used leverage during the period, which was 40.0% of total assets as of
March 31, 2004. Leverage can magnify returns on the upside and on the downside,
and can create wider dispersions of returns within the Fund's peer group.
AN INTERVIEW WITH PORTFOLIO MANAGER WILLIAM VERONDA
Q. CAN YOU DESCRIBE THE ECONOMIC ENVIRONMENT?
A. During the reporting period, the US economy continued to gain momentum,
fueled by the combined effects of ongoing military spending, an increase in
exports, and robust consumer and business spending. Gross domestic product
(GDP) figures confirmed the economy's growth: following a solid second
quarter 2003 GDP figure, third quarter 2003 posted a GDP figure of 8.2%. This
number, far higher than anticipated, was the sharpest recorded advance of GDP
since 1984. At 4.1%, fourth quarter GDP came in significantly lower, but was
still viewed as a solid gain.
While first quarter 2004 GDP figures are yet to be released, the economy
appears to be moving forward at a strong pace. With the exception of the
job
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1
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
market, which has been slow to recover, most areas of the economy are
expanding, while overall inflation remains benign.
Q. HOW DID THE FEDERAL RESERVE BOARD (THE "FED") REACT IN THE ECONOMIC
ENVIRONMENT?
A. The Fed held rates steady throughout the period, as it has since it lowered
short-term interest rates to 1.00% on June 25, 2003. However, at its May 4,
2004 meeting (held after period end), there was a clear shift in the Fed's
stance, when, in its official statement, it noted, "accommodation can be
removed at a pace that is likely to be measured." Many viewed this as an
indication that the Fed could raise rates as early as its next meeting in
June.
Q. HOW DID THE BOND MARKET PERFORM DURING THE SIX-MONTH REPORTING PERIOD?
A. As the period began, the bond markets had just come off of a period of
extreme volatility. Beginning in June 2003, bond prices began to fall when
a less-than-hoped-for cut in the federal funds rate, diminishing concerns
regarding the potential for deflation, and fears that an improving economy
would lead to a less accommodative fiscal policy triggered a selloff. The
market declined through July, before stabilizing and recouping most of its
losses.
As 2004 began, a widely accepted expectation that the economy would
continue to expand created a less than promising outlook for fixed income.
However, the bond market proved surprisingly resilient. Despite the strong
evidence that the economy was expanding, continued weakness in the labor
market created a somewhat muddled picture. In February 2004, news that only
21,000 new jobs were created--significantly less than forecasted--gave rise
to concerns that consumer confidence could weaken, and, thus, temper
economic growth. Bonds rallied on the news. Additionally, periodic "flights
to quality" as a result of geopolitical events, including a terrorist
attack in Spain and turmoil in the Middle East, bolstered the bond market.
The municipal market participated in the broad fixed income rally, and was
aided further by a strong demand for municipals.
Q. HOW DID YOU POSITION THE FUND'S PORTFOLIO DURING THE REPORTING PERIOD?
A. The Fund's duration was held generally in line with that of its benchmark,
the Lehman Municipal Bond Index (the "Index"), during the first half of the
period. However, in early 2004, we adjusted the Fund's duration, moving it
slightly lower than the Index. We felt this cautious approach was
warranted, given our belief that rates would increase. This detracted from
relative results when yields fell and prices rose during the first quarter
of 2004.
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2
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
With regard to sector positioning, we continued to emphasize essential
service revenue bonds, including revenue-producing utilities, such as
water, sewers and select electric power facilities. We held select airport
revenue bonds, because, although the airline industry itself is weak, the
strengthening economy has increased the need for airfreight and
transportation. We added toll road revenue bonds to the portfolio,
including New Jersey Turnpike Authority revenue bonds, and we selectively
added several carefully researched BAA-rated securities to the portfolio in
order to generate incremental yield. Alternately, we continued to
underweight the hospital sector, as we believe declining government
reimbursements are likely to continue and, in our opinion, will lead to
credit deterioration.
Q. CAN YOU PROVIDE SOME EXAMPLES OF NEW HOLDINGS ADDED TO THE PORTFOLIO DURING
THE PERIOD?
A. Given the equity market revival and the improvements we've seen in certain
New York state credits, we added a number of New York City general
obligation credits.
Late in the fiscal year, we also began to add some California revenue
credits that are not directly associated with the economic troubles in the
state. An example of one of these holdings is Kaiser Permanente, the
country's first health maintenance organization. The firm insures roughly
one out of every four Californians, as well as individuals located in other
states. We are also closely monitoring California's fiscal condition, and
are encouraged by progress that has been made on several fronts. Should
this continue, we will look to selectively increase the Fund's exposure to
California's municipal securities.
Q. WHAT DETRACTED FROM RESULTS DURING THE PERIOD?
A. A number of bonds in the Fund's portfolio were "called" or prematurely
retired by issuers looking to take advantage of the low interest rate
environment-one example was Rhode Island Housing & Mortgage Finance Corp.,
which was scheduled to mature in April 2027 and offered a yield of 6.50%.
Given today's lower rates, it was not possible to replace these holdings
with securities that offered comparable yields.
Q: WERE THERE ANY OTHER FACTORS THAT AFFECTED THE FUND'S PERFORMANCE DURING THE
PERIOD?
A: In December 2003, the Fund generated a significant amount of new investor
assets that were then redeployed using the same positioning strategies
previously mentioned. Toward the end of 2003, we increased the Fund's
leverage from approximately 33% to 40%. While this could lead to an
increase in the Fund's
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3
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
short-term volatility, over time we feel this strategy is consistent with
our goal of preservation of capital. It will also help us to moderately
extend the Fund's duration. In addition, we believe this increased
leveraging will allow the Fund to generate incremental dividend income.
Q. HOW DO YOU ANTICIPATE POSITIONING THE FUND'S PORTFOLIO GOING FORWARD?
A. Looking ahead, it's our belief that the US economy will continue to expand.
Given that interest rates are so low, we believe it is inevitable that they
will rise. Based on this outlook, we expect to keep the Fund's duration
neutral or slightly lower than that of the Index. In terms of the Fund's
portfolio, we are comfortable with its current positioning. Should the
economy continue to expand, it will likely serve to improve the fiscal
situations in a number of states. If this occurs, we will look to identify
select general obligation bonds that we believe offer compelling
opportunities.
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*, please contact your financial advisor or visit us at
www.ubs.com/globalam-us.
Sincerely,
/s/ Joseph A. Varnas /s/ William Veronda
-------------------- -------------------
Joseph A. Varnas William Veronda
President Portfolio Manager
Investment Grade Municipal Income Investment Grade Municipal Income
Fund Inc. Fund Inc.
Managing Director Executive Director
UBS Global Asset Management (US) UBS Global Asset Management (US)
Inc. Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the six months ended March 31, 2004, and reflects our views at
the time of its writing. Of course, these views may change in response to
changing circumstances, and they do not guarantee the future performance of the
markets or the Fund. We encourage you to consult your financial advisor
regarding your personal investment program.
* Mutual funds are sold by prospectus only. A prospectus contains more complete
information regarding investment objectives, risks, charges and expenses,
and, should be read carefully before investing.
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4
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PERFORMANCE AT A GLANCE (UNAUDITED)
AVERAGE ANNUAL RETURN, PERIODS ENDED 3/31/04
NET ASSET VALUE RETURNS 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
----------------------------------------------------------------------------------------------------------
Investment Grade Municipal Income Fund Inc. 3.50% 7.06% 5.84% 6.94%
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Lipper General Municipal Debt Funds (Leveraged) Median 5.36% 9.60% 6.54% 7.37%
----------------------------------------------------------------------------------------------------------
MARKET PRICE RETURNS
----------------------------------------------------------------------------------------------------------
Investment Grade Municipal Income Fund Inc. 11.12% 15.21% 7.15% 8.37%
----------------------------------------------------------------------------------------------------------
Lipper General Municipal Debt Funds (Leveraged) Median 9.76% 13.94% 6.99% 8.01%
----------------------------------------------------------------------------------------------------------
Past performance does not predict future performance. The return and principal
value of an investment will fluctuate, so that an investor's shares, when sold,
may be worth more or less than their original cost. NAV return assumes, for
illustration only, that dividends were reinvested at the net asset value on the
ex-dividend dates. Market price return assumes dividends were reinvested under
the Dividend Reinvestment Plan. NAV and market price returns for periods less
than one year are cumulative.
Lipper peer group data calculated by Lipper Inc.; used with permission. The
Lipper Median is the return of the fund that places in the middle of the peer
group.
SHARE PRICE, DIVIDEND AND YIELDS AS OF 3/31/04
-------------------------------------------------------------------------------
Market Price $15.42
-------------------------------------------------------------------------------
Net Asset Value (per share applicable to common shareholders) $15.89
-------------------------------------------------------------------------------
12-Month Net Investment Income Dividend (ended 3/31/04) $0.96
-------------------------------------------------------------------------------
March 2004 Dividend $0.08
-------------------------------------------------------------------------------
Market Yield* 6.23%
-------------------------------------------------------------------------------
NAV Yield* 6.04%
-------------------------------------------------------------------------------
IPO Yield* 6.40%
-------------------------------------------------------------------------------
* Market yield is calculated by multiplying the March dividend by 12 and
dividing by the month-end market price. NAV yield is calculated by
multiplying the March dividend by 12 and dividing by the month-end net asset
value. IPO yield is calculated by multiplying the March dividend by 12 and
dividing by the initial public offering price. Prices and yields will vary.
--------------------------------------------------------------------------------
5
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO STATISTICS (UNAUDITED)
CHARACTERISTICS 3/31/04 9/30/03 3/31/03
=======================================================================================================================
Net Assets Applicable to
Common Shareholders (mm) $164.5 $168.9 $168.2
-----------------------------------------------------------------------------------------------------------------------
Weighted Average Maturity* 11.2 yrs 13.0 yrs 13.4 yrs
-----------------------------------------------------------------------------------------------------------------------
Weighted Average Duration* 5.1 yrs 6.3 yrs 5.5 yrs
-----------------------------------------------------------------------------------------------------------------------
Weighted Average Coupon* 5.3% 5.4% 5.6%
-----------------------------------------------------------------------------------------------------------------------
Leverage** 40.0% 32.1% 32.1%
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Callable/Maturing Within Five
Years* 6.0% 5.8% 13.9%
-----------------------------------------------------------------------------------------------------------------------
Callable/Maturing Beyond Five
Years* 94.0% 94.2% 86.1%
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CREDIT QUALITY*** 3/31/04 9/30/03 3/31/03
=======================================================================================================================
AAA/Aaa 47.0% 50.7% 63.7%
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AA/Aa 46.4 37.3 31.9
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A/A 27.6 16.0 16.8
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BBB/Baa 20.7 18.8 13.1
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BB/Ba -- 0.9 --
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A1/P1 6.8 -- --
-----------------------------------------------------------------------------------------------------------------------
SP-1/MIG-1 2.8 6.9 7.3
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Nonrated 13.4 12.9 13.3
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Other Assets in Excess of
Liabilities 2.2 3.8 1.5
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Liquidation Value of Auction
Preferred Shares (66.9) (47.3) (47.6)
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TOTAL 100.0% 100.0% 100.0%
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TOP TEN STATES*** 3/31/04 9/30/03 3/31/03
=======================================================================================================================
New York 26.3% Texas 23.0% Texas 27.6%
-----------------------------------------------------------------------------------------------------------------------
California 20.9 California 16.2 California 12.3
-----------------------------------------------------------------------------------------------------------------------
Texas 19.1 New York 11.8 Indiana 11.3
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Indiana 10.3 Illinois 10.4 Illinois 10.7
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Illinois 8.3 Indiana 10.1 North Carolina 9.7
-----------------------------------------------------------------------------------------------------------------------
North Carolina 7.0 North Carolina 8.9 Florida 6.7
-----------------------------------------------------------------------------------------------------------------------
Massachusetts 6.9 Florida 7.9 Colorado 5.4
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Florida 6.4 Pennsylvania 6.5 Massachusetts 5.2
-----------------------------------------------------------------------------------------------------------------------
Kentucky 4.9 Kentucky 6.2 Michigan 4.9
-----------------------------------------------------------------------------------------------------------------------
Pennsylvania 4.9 Louisiana 4.1 Pennsylvania 4.7
-----------------------------------------------------------------------------------------------------------------------
TOTAL 115.0% 105.1% 98.5%
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TOP FIVE SECTORS*** 3/31/04 9/30/03 3/31/03
=======================================================================================================================
Power 39.3% Power 36.3% Power 32.4%
-----------------------------------------------------------------------------------------------------------------------
Water & Sewer 26.2 Water & Sewer 25.6 Lease 20.2
-----------------------------------------------------------------------------------------------------------------------
Lease 21.2 Lease 21.3 Pre-refunded 13.7
-----------------------------------------------------------------------------------------------------------------------
Escrowed to Maturity 11.2 Hospital 6.6 Sewer 10.5
-----------------------------------------------------------------------------------------------------------------------
Pre-refunded 8.9 Tolls 6.3 Water 7.6
-----------------------------------------------------------------------------------------------------------------------
TOTAL 106.8% 96.1% 84.4%
-----------------------------------------------------------------------------------------------------------------------
* Weightings represent percentages of portfolio assets as of the dates
indicated. The Fund's portfolio is actively managed and its composition will
vary over time.
** As a percentage of total assets as of the dates indicated.
*** As a percentage of net assets applicable to common shareholders as of the
dates indicated. Credit quality ratings designated by Standard & Poor's
Rating Group and Moody's Investor Services, Inc. Both are independent rating
agencies.
--------------------------------------------------------------------------------
6
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
===========================================================================================================
LONG-TERM MUNICIPAL BONDS - 155.10%
===========================================================================================================
ARIZONA - 2.71%
$ 2,380 Arizona State Transportation
Board Highway Revenue-
Series B Aa1 AAA 07/01/18 5.250% $ 2,616,215
-----------------------------------------------------------------------------------------------------------
1,635 Salt River Project Arizona
Agricultural Improvement &
Power Distribution Electrical
Systems Revenue-Salt River
Project-Series A Aa2 AA 01/01/12 5.000 1,837,904
-----------------------------------------------------------------------------------------------------------
4,454,119
===========================================================================================================
ARKANSAS - 1.08%
1,705 Little Rock Capital Improvement
Revenue Parks & Recreation
Projects-Series A NR NR 01/01/18 5.700 1,771,103
===========================================================================================================
CALIFORNIA - 16.50%
5,000 California State Department
Water Resources Revenue-
Series A A3 BBB+ 05/01/16 5.875 5,668,900
-----------------------------------------------------------------------------------------------------------
3,000 California Statewide
Communities Development
Authority Irvine Apartment
Communities-Series A-3 Baa2 BBB 05/15/25(+) 5.100 3,211,050
-----------------------------------------------------------------------------------------------------------
2,150 Fontana Redevelopment Agency
Tax Allocation Jurupa Hills
Redevelopment Project A NR BBB+ 10/01/17 5.500 2,264,122
-----------------------------------------------------------------------------------------------------------
5,000 Los Angeles County Sanitation
Funding Authority Revenue-
Series A (FSA Insured) Aaa AAA 10/01/18 5.000 5,433,150
-----------------------------------------------------------------------------------------------------------
3,000 Los Angeles Water & Power
Revenue Power Systems-
Series A (MBIA Insured) Aaa AAA 07/01/16 5.000 3,288,210
-----------------------------------------------------------------------------------------------------------
3,200 Los Angeles Water & Power
Revenue Power Systems-
Series A-A-1 Aaa AAA 07/01/21 5.250 3,429,760
-----------------------------------------------------------------------------------------------------------
3,500 Metropolitan Water District of
Southern California
Waterworks-Series A Aaa AAA 03/01/18 5.250 3,853,115
-----------------------------------------------------------------------------------------------------------
27,148,307
===========================================================================================================
COLORADO - 1.20%
1,809 University of Colorado
Participation Interests NR A- 12/01/13 6.000 1,975,028
===========================================================================================================
FLORIDA - 6.39%
1,175 Gainesville Utilities Systems
Revenue-Series A Aa2 AA 10/01/20 5.250 1,288,188
-----------------------------------------------------------------------------------------------------------
2,000 Orlando Utilities Commission
Water & Electric Revenue-
Series A Aa2 AA- 10/01/19 5.000 2,145,240
-----------------------------------------------------------------------------------------------------------
6,425 Orlando Utilities Commission
Water & Electric Revenue-
Series C# Aa2 AA- 10/01/18 5.250 7,071,804
-----------------------------------------------------------------------------------------------------------
10,505,232
===========================================================================================================
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7
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
======================================================================================================
LONG-TERM MUNICIPAL BONDS - (CONTINUED)
======================================================================================================
ILLINOIS - 7.29%
$ 3,000 Chicago Parking District Harbor
Facilities Revenue (Pre-
refunded with U.S. Govern-
ment Securities to 01/01/2011
@ 100) A2 A 01/01/21 5.700% $ 3,485,490
------------------------------------------------------------------------------------------------------
5,000 Chicago Parking District Parking
Facility Revenue (Pre-refunded
with U.S. Government Securi-
ties to 01/01/2010) Baa1 A 01/01/14 6.250 5,921,700
------------------------------------------------------------------------------------------------------
1,200 Illinois Educational Facilities
Authority Revenue Augustana
College-Series A Baa1 NR 10/01/22 5.625 1,246,368
------------------------------------------------------------------------------------------------------
250 Metropolitan Pier & Exposition
Authority A1 AA- 06/15/27 6.500 255,475
------------------------------------------------------------------------------------------------------
1,000 Naperville Electric Revenue
(Pre-refunded with U.S.
Government Securities to
05/01/2006 @ 100) Aa2 AA 05/01/12 5.700 1,084,830
------------------------------------------------------------------------------------------------------
11,993,863
======================================================================================================
INDIANA - 10.31%
1,000 Clark Pleasant Community School
Building Corp. First Mortgage
(AMBAC Insured) Aaa AAA 07/15/17 5.500 1,130,200
------------------------------------------------------------------------------------------------------
3,305 Indiana Transportation Financing
Authority Airport Facilities
Lease Revenue-Series A A1 AA 11/01/12 5.500 3,457,724
------------------------------------------------------------------------------------------------------
1,430 Indiana Transportation Financing
Authority Airport Facilities
Lease Revenue-Series A A1 AA 11/01/16 6.250 1,449,334
------------------------------------------------------------------------------------------------------
2,000 Indiana Transportation Financing
Authority Airport Facilities
Lease Revenue-Series A A1 AA 11/01/17 5.500 2,075,860
------------------------------------------------------------------------------------------------------
3,400 Marion County Convention &
Recreational Facilities Authority
Excise Tax Revenue-Series A
(MBIA Insured) Aaa AAA 06/01/17 5.500 3,804,702
------------------------------------------------------------------------------------------------------
1,000 Purdue University Student Fee
Revenue-Series B
(Pre-refunded with U.S.
Government Securities to
01/01/2005 @ 103) Aa2 AA 07/01/15 6.700 1,071,840
------------------------------------------------------------------------------------------------------
1,865 Wayne Township Marion County
School Building Corp.-First
Mortgage NR A+ 01/15/15 5.250 1,962,819
------------------------------------------------------------------------------------------------------
1,915 Wayne Township Marion County
School Building Corp.-First
Mortgage NR A+ 07/15/15 5.250 2,015,442
------------------------------------------------------------------------------------------------------
16,967,921
======================================================================================================
IOWA - 3.17%
4,880 Polk County-Series A# Aa1 AA+ 06/01/19 5.000 5,218,038
======================================================================================================
KANSAS - 1.26%
1,840 Kansas State Development
Finance Authority Revenue
Water Pollution Control Aa1 AA+ 05/01/11 5.000 2,074,103
======================================================================================================
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8
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS-MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
=======================================================================================================
LONG-TERM MUNICIPAL BONDS - (CONTINUED)
=======================================================================================================
KENTUCKY - 4.80%
$ 7,750 Boone County Pollution Control
Revenue Dayton Power & Light
Co.-Series A Baa1 BBB 11/15/22 6.500% $ 7,902,675
=======================================================================================================
LOUISIANA - 2.18%
3,280 New Orleans Sewage Service
Revenue Aaa AAA 06/01/16 5.000 3,582,088
=======================================================================================================
MASSACHUSETTS - 6.80%
5,865 Massachusetts State
Consolidated Loan-Series A Aa2 AA- 08/01/16 5.000 6,562,642
-------------------------------------------------------------------------------------------------------
2,260 Massachusetts State Water
Pollution Abatement-Series 8 Aaa AAA 08/01/17 5.000 2,445,342
-------------------------------------------------------------------------------------------------------
2,000 Massachusetts State Water
Pollution Abatement-Series A Aaa AAA 08/01/20 5.250 2,175,580
-------------------------------------------------------------------------------------------------------
11,183,564
=======================================================================================================
MICHIGAN - 4.82%
3,425 Michigan State Building Authority
Revenue Program-Series III Aa1 AA+ 10/15/16 5.375 3,842,576
-------------------------------------------------------------------------------------------------------
2,000 Michigan State Strategic Fund
Limited Obligation Revenue-
Ford Motor Co. Project-
Series A Baa1 BBB- 02/01/06 7.100 2,170,240
-------------------------------------------------------------------------------------------------------
1,750 Michigan Municipal Bond
Authority Clear Water Revenue Aaa AAA 10/01/19 5.250 1,920,012
-------------------------------------------------------------------------------------------------------
7,932,828
=======================================================================================================
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 6,987,600
=======================================================================================================
NEW JERSEY - 3.33%
4,425 New Jersey State Turnpike
Authority Turnpike Revenue-
Pre-refunded-Series C
(MBIA-IBC Insured) Aaa AAA 01/01/16 6.500 5,475,318
=======================================================================================================
NEW MEXICO - 0.68%
1,000 University of New Mexico
Revenues Sub Lien-Series A Aa3 AA 06/01/16 5.250 1,111,270
=======================================================================================================
NEW YORK - 26.29%
1,000 New York State Dormitory
Authority Revenue Columbia
University-Series A Aaa AAA 07/01/16 5.125 1,113,190
-------------------------------------------------------------------------------------------------------
6,500 New York State Environmental
Facscorp State Clean Water &
Drinking Revolving Funds-New
York City Municipal Water
Project-K Aaa AAA 06/15/12 5.000 7,335,705
-------------------------------------------------------------------------------------------------------
4,030 Long Island Power Authority
Electric Systems Revenue-
Series C Baa1 A- 09/01/17 5.500 4,440,456
-------------------------------------------------------------------------------------------------------
5,000 New York City General
Obligation-Series G A2 A 08/01/09 5.000 5,530,800
-------------------------------------------------------------------------------------------------------
2,500 New York City General
Obligation-Series G A2 A 08/01/13 5.000 2,736,425
-------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
9
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS-MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
=======================================================================================================
LONG-TERM MUNICIPAL BONDS - (CONTINUED)
=======================================================================================================
NEW YORK - (CONCLUDED)
$ 4,700 New York City Municipal Water
Finance Authority Revenue-
Water & Sewer Systems-
Series D Aa2 AA 06/15/12 5.000% $ 5,257,514
-------------------------------------------------------------------------------------------------------
2,000 New York City Municipal Water
Finance Authority Revenue-
Water & Sewer Systems-
Series D Aa2 AA 06/15/17 5.250 2,193,820
-------------------------------------------------------------------------------------------------------
1,625 Triborough Bridge & Tunnel
Authority Revenue-Series B Aa3 AA- 11/15/18 5.250 1,785,501
-------------------------------------------------------------------------------------------------------
8,155 Triborough Bridge & Tunnel
Authority Revenue-Series B# Aa3 AA- 11/15/19 5.250 8,910,479
-------------------------------------------------------------------------------------------------------
3,350 Triborough Bridge & Tunnel
Authority Revenue-Series Y Aa3 AAA 01/01/12 6.000 3,956,015
-------------------------------------------------------------------------------------------------------
43,259,905
=======================================================================================================
NORTH CAROLINA - 7.01%
5,000 North Carolina Eastern Municipal
Power Agency-Series A
(Escrowed to Maturity) Baa3 BBB 01/01/11 5.500 5,504,700
-------------------------------------------------------------------------------------------------------
2,000 North Carolina Eastern Municipal
Power Agency-Series A
(Escrowed to Maturity) Baa3 BBB 01/01/12 5.500 2,199,500
-------------------------------------------------------------------------------------------------------
3,065 North Carolina Eastern Municipal
Power Agency-Series A
(Escrowed to Maturity) Baa3 BBB 01/01/21 6.400 3,829,656
-------------------------------------------------------------------------------------------------------
11,533,856
=======================================================================================================
OHIO - 1.47%
2,185 Ohio State Higher Education-
Series B Aa1 AA+ 11/01/17 5.250 2,415,802
=======================================================================================================
OKLAHOMA - 1.94%
2,840 Tulsa County Industrial Authority
Capital Improvements
Revenue-Series B NR AA 05/15/10 5.000 3,185,117
=======================================================================================================
OREGON - 0.67%
1,000 Portland Sewer Systems
Revenue-Series A Aaa AAA 06/01/18 5.250 1,104,780
=======================================================================================================
PENNSYLVANIA - 4.91%
5,000 Northumberland County
Authority-Guaranteed Lease
Revenue-Mountain View
Manor Project NR NR 10/01/20 7.000 5,051,850
-------------------------------------------------------------------------------------------------------
3,000 Susquehanna Area Regional
Airport Authority Airport
Systems Revenue-Sub
Series D Baa2 NR 01/01/18 5.375 3,025,770
-------------------------------------------------------------------------------------------------------
8,077,620
=======================================================================================================
PUERTO RICO - 9.01%
8,010 Puerto Rico Commonwealth
Refunding-Public
Improvement-Series C Baa1 A- 07/01/18 5.000 8,773,353
-------------------------------------------------------------------------------------------------------
3,000 Puerto Rico Housing Finance
Authority-Capital Funding
Program (HUD Insured) Aa3 AA 12/01/18 5.000 3,235,890
-------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
10
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
=======================================================================================================
LONG-TERM MUNICIPAL BONDS - (CONTINUED)
=======================================================================================================
PUERTO RICO - (CONCLUDED)
$ 2,425 Puerto Rico Public Buildings
Authority Revenue-
Guaranteed Government
Facilities-Series D (Pre-
refunded with U.S. Govern-
ment Securities to 07/01/2012
@ 100) Baa1 A- 07/01/13 5.375% $ 2,820,881
-------------------------------------------------------------------------------------------------------
14,830,124
=======================================================================================================
RHODE ISLAND - 0.09%
145 Rhode Island Housing &
Mortgage Finance Corp.
Homeownership Opportunity-
Series 10-A Aa2 AA+ 04/01/27 6.500 147,320
=======================================================================================================
SOUTH CAROLINA - 0.66%
1,000 Greenville Waterworks Revenue Aa1 AAA 02/01/20 5.250 1,092,970
=======================================================================================================
SOUTH DAKOTA - 3.08%
3,551 Lower Brule Sioux Tribe++ NR NR 08/15/15 6.000 3,637,002
-------------------------------------------------------------------------------------------------------
1,387 Standing Rock South Dakota
New Public Housing++ NR NR 08/07/13 6.000 1,436,375
-------------------------------------------------------------------------------------------------------
5,073,377
=======================================================================================================
TENNESSEE - 1.65%
2,500 Memphis-Shelby County Airport
Authority Special Facilities
Revenue-Federal Express Corp. Baa2 BBB 09/01/09 5.000 2,715,100
=======================================================================================================
TEXAS - 18.03%
2,475 Alvin Independent School District
School House-Series A Aaa AAA 02/15/17 5.375 2,753,932
-------------------------------------------------------------------------------------------------------
4,000 Coastal Bend Health Facilities
Development-Incarnate Word
Health System (Escrowed to
Maturity) (AMBAC Insured) Aaa AAA 01/01/17 6.300 4,925,120
-------------------------------------------------------------------------------------------------------
1,335 Eagle Mountain & Saginaw
Independent School District
Unlimited Tax-School Building Aaa AAA 08/15/14 5.375 1,511,567
-------------------------------------------------------------------------------------------------------
2,825 Fort Worth Water & Sewer
Revenue Aa2 AA 02/15/16 5.625 3,220,895
-------------------------------------------------------------------------------------------------------
7,177 Harris County Texas Lease++ NR NR 05/01/20 6.750 7,086,320
-------------------------------------------------------------------------------------------------------
3,007 Houston Community College
System Certificates of
Participation++ NR NR 06/15/25 7.875 3,098,872
-------------------------------------------------------------------------------------------------------
2,000 Houston Refunding & Public
Improvement-Series A Aa3 AA- 03/01/15 5.250 2,195,980
-------------------------------------------------------------------------------------------------------
1,485 Lower Colorado River Authority
Transmission Contract Revenue Aaa AAA 05/15/20 5.250 1,602,954
-------------------------------------------------------------------------------------------------------
3,000 San Antonio Electric & Gas
Revenue Aa1 AA+ 02/01/20 5.375 3,266,460
-------------------------------------------------------------------------------------------------------
29,662,100
=======================================================================================================
UTAH - 1.34%
2,000 Utah Assisted Municipal Power
Systems Revenue Payson
Power Project-Series A Aaa AAA 04/01/16 5.250 2,211,280
=======================================================================================================
--------------------------------------------------------------------------------
11
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
===========================================================================================================
LONG-TERM MUNICIPAL BONDS - (CONCLUDED)
===========================================================================================================
WASHINGTON - 2.18%
$ 1,920 Metropolitan Park District Tacoma
(AMBAC Insured) Aaa AAA 12/01/14 6.000% $ 2,269,958
---------------------------------------------------------------------------------------------------------
1,115 Metropolitan Park District Tacoma
(AMBAC Insured) Aaa AAA 12/01/16 6.000 1,307,505
---------------------------------------------------------------------------------------------------------
3,577,463
=============== =============
Total Long-Term Municipal Bonds (cost-$245,500,256) 255,169,871
===========================================================================================================
SHORT-TERM MUNICIPAL NOTES - 9.57%
===========================================================================================================
CALIFORNIA - 4.38%
7,200 California State Department
Water Resources Power Supply
Revenue-Series B-4 VMIG-1 A-1+ 04/01/04 1.080* 7,200,000
===========================================================================================================
COLORADO - 2.65%
4,350 Colorado Educational & Cultural
Facilities Authority Revenue-
National Jewish Federal
Building Program-A1 VMIG-1 NR 04/01/04 1.120* 4,350,000
===========================================================================================================
ILLINOIS - 0.97%
1,600 Illinois Health Facilities Authority
Revenue-Resurrection Health-
Series A (FSA Insured) VMIG-1 A-1 04/01/04 1.130* 1,600,000
===========================================================================================================
KENTUCKY - 0.12%
200 Breckinridge County Kentucky
Lease Program Revenue VMIG-1 NR 04/01/04 1.120* 200,000
===========================================================================================================
MASSACHUSETTS - 0.06%
100 Massachusetts State Health &
Educational Facilities Authority
Revenue-Capital Asset
Program-Series C (MBIA
Insured) VMIG-1 A-1+ 04/01/04 1.100* 100,000
===========================================================================================================
MISSOURI - 0.12%
200 Missouri State Health &
Educational Facilities Authority
Educational Facilities Revenue-
Washington University-Series B VMIG-1 A-1+ 04/01/04 1.050* 200,000
===========================================================================================================
NEW JERSEY - 0.06%
100 Port Authority of New York and
New Jersey Split Obligation
Revenue-Versatile Structure
Obligation-Series 2 VMIG-1 A-1+ 04/01/04 1.100* 100,000
===========================================================================================================
TEXAS - 1.03%
1,700 Harris County Texas Health
Facilities Development Corp.
Revenue-St. Lukes Episcopal
Hospital-Series B NR A-1+ 04/01/04 1.120* 1,700,000
===========================================================================================================
--------------------------------------------------------------------------------
12
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS--MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATE RATE VALUE
===========================================================================================================
SHORT-TERM MUNICIPAL NOTES - (CONCLUDED)
-----------------------------------------------------------------------------------------------------------
VIRGINIA - 0.18%
$300 Loudoun County Industrial
Development Authority Revenue-
Howard Hughes Medical-Series A VMIG-1 A-1+ 04/01/04 1.090%* $300,000
-----------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Notes (cost-$15,750,000) 15,750,000
===========================================================================================================
Total Investments (cost-$261,250,256)-164.67% 270,919,871
===========================================================================================================
Other assets in excess of liabilities-2.19% 3,603,432
===========================================================================================================
Liquidation value of auction preferred shares-(66.86)% (110,000,000)
===========================================================================================================
Net Assets applicable to common shareholders-100.00% $164,523,303
===========================================================================================================
+ The maturity date reflects the mandatory date bond will be put back to
issuer.
++ Illiquid securities representing 9.27% of net assets.
* Variable rate demand note is payable on demand. The maturity dates shown
are the next interest rate reset dates. The interest rates shown are the
current rates as of March 31, 2004.
# Entire or partial amount pledged as collateral for futures transactions.
AMBAC - American Municipal Bond Assurance Corporation
FGIC - Financial Guaranty Insurance Company
FSA - Financial Security Assurance
HUD - Housing and Urban Development
IBC - Insured Bond Certificate
MBIA - Municipal Bond Investors Assurance
NUMBER OF IN EXPIRATION UNREALIZED
CONTRACTS CONTRACT TO RECEIVE EXCHANGE FOR DATE DEPRECIATION
====================================================================================
FUTURES CONTRACTS
U.S. Treasury Note
85 10 Year Futures $ 9,668,750 June 2004 $ (140,781)
...................................................................................
See accompanying notes to financial statements
--------------------------------------------------------------------------------
13
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES -- MARCH 31, 2004 (UNAUDITED)
ASSETS:
Investments in securities, at value (cost-$261,250,256) $270,919,871
-----------------------------------------------------------------------------------------
Cash 33,194
-----------------------------------------------------------------------------------------
Interest receivable 3,805,938
-----------------------------------------------------------------------------------------
Receivable for investments sold 20,563
-----------------------------------------------------------------------------------------
Other assets 14,440
-----------------------------------------------------------------------------------------
Total assets 274,794,006
-----------------------------------------------------------------------------------------
LIABILITIES:
Payable to investment advisor and administrator 164,808
-----------------------------------------------------------------------------------------
Variation margin payable 47,812
-----------------------------------------------------------------------------------------
Dividends payable to auction preferred shareholders 8,801
-----------------------------------------------------------------------------------------
Accrued expenses and other liabilities 49,282
-----------------------------------------------------------------------------------------
Total liabilities 270,703
-----------------------------------------------------------------------------------------
Auction Preferred Shares Series A, B and C-2,200 non-participating
shares authorized, issued and outstanding; $0.001 par value;
$50,000 liquidation value per share 110,000,000
-----------------------------------------------------------------------------------------
Net assets applicable to common shareholders $164,523,303
-----------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Common Stock-$0.001 par value; 199,998,400 shares authorized;
10,356,667 shares issued and outstanding 153,263,815
-----------------------------------------------------------------------------------------
Undistributed net investment income 545,828
-----------------------------------------------------------------------------------------
Accumulated net realized gain from investment activities and futures 1,184,826
-----------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures 9,528,834
-----------------------------------------------------------------------------------------
Net assets applicable to common shareholders $164,523,303
-----------------------------------------------------------------------------------------
Net asset value per common share ($164,523,303 applicable to
10,356,667 common shares outstanding) $15.89
=========================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
14
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF OPERATIONS
FOR THE SIX
MONTHS ENDED
MARCH 31, 2004
(UNAUDITED)
=======================================================================================
INVESTMENT INCOME:
Interest $5,912,222
---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory and administration fees 1,185,033
---------------------------------------------------------------------------------------
Auction Preferred Shares expenses 149,760
---------------------------------------------------------------------------------------
Custody and accounting 79,002
---------------------------------------------------------------------------------------
Professional fees 25,456
---------------------------------------------------------------------------------------
Reports and notices to shareholders 23,553
---------------------------------------------------------------------------------------
Transfer agency fees 7,737
---------------------------------------------------------------------------------------
Directors' fees 3,517
---------------------------------------------------------------------------------------
Other expenses 13,797
---------------------------------------------------------------------------------------
1,487,855
---------------------------------------------------------------------------------------
Less: Fee waivers from investment advisor and administrator (263,341)
---------------------------------------------------------------------------------------
Net expenses 1,224,514
---------------------------------------------------------------------------------------
Net investment income 4,687,708
---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
NET REALIZED GAINS (LOSSES) FROM:
Investments 2,052,198
---------------------------------------------------------------------------------------
Futures (255,192)
---------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION OF:
Investments 343,812
---------------------------------------------------------------------------------------
Futures (140,781)
---------------------------------------------------------------------------------------
Net realized and unrealized gain from investment activities 2,000,037
---------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO AUCTION PREFERRED SHAREHOLDERS
FROM:
Net investment income (235,755)
---------------------------------------------------------------------------------------
Net realized gain from investment activities (318,688)
---------------------------------------------------------------------------------------
Total dividends and distributions to auction preferred shareholders (554,443)
---------------------------------------------------------------------------------------
Net increase in net assets applicable to common shareholders resulting
from operations $6,133,302
=======================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
15
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS
FOR THE SIX
MONTHS ENDED FOR THE
MARCH 31, 2004 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2003
================================================================================================
FROM OPERATIONS:
Net investment income $4,687,708 $9,881,410
------------------------------------------------------------------------------------------------
Net realized gains from investment activities and futures 1,797,006 4,823,139
------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of
investments and futures 203,031 (3,488,907)
------------------------------------------------------------------------------------------------
COMMON SHARE EQUIVALENT OF DIVIDENDS AND
DISTRIBUTIONS TO AUCTION PREFERRED
SHAREHOLDERS FROM:
Net investment income (235,755) (946,455)
------------------------------------------------------------------------------------------------
Net realized gains from investment activities (318,688) --
------------------------------------------------------------------------------------------------
Total dividends and distributions paid to auction
preferred shareholders (554,443) (946,455)
------------------------------------------------------------------------------------------------
Net increase in net assets applicable to common
shareholders resulting from operations 6,133,302 10,269,187
------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO COMMON
SHAREHOLDERS FROM:
Net investment income (4,971,220) (9,942,400)
------------------------------------------------------------------------------------------------
Net realized gains on investment activities (5,116,194) (1,893,199)
------------------------------------------------------------------------------------------------
Total dividends and distributions to common
shareholders (10,087,414) (11,835,599)
------------------------------------------------------------------------------------------------
Auction Preferred Shares offering costs and sales load (410,332) --
------------------------------------------------------------------------------------------------
Net decrease in net assets applicable to
common shareholders (4,364,444) (1,566,412)
------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 168,887,747 170,454,159
------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $545,828 and $1,065,095, respectively) $164,523,303 $168,887,747
================================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
16
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Investment Grade Municipal Income Fund Inc. (the "Fund") was incorporated in
Maryland on August 6, 1992, and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as a
closed-end diversified management investment company. The Fund's investment
objective is to achieve a high level of current income that is exempt from
federal income tax, consistent with the preservation of capital.
In the normal course of business the Fund enters into contracts that contain a
variety of representations that provide general indemnification. 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 accounting
principles generally accepted in the United States requires Fund management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies:
VALUATION OF INVESTMENTS--The Fund calculates its net asset value based on the
current market value, where available, for its portfolio's securities. The Fund
normally obtains market values for its securities from independent pricing
sources and broker-dealers. Independent pricing sources may use reported last
sale prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. 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"). 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 Fund's
Board 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
--------------------------------------------------------------------------------
17
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
an accrual basis. Discounts are accreted and premiums are amortized as
adjustments to interest income and the identified cost of investments.
DERIVATIVES--The Fund may use options (both exchange traded and OTC to attempt
to enhance income (which would be taxable income) and also may attempt to
"hedge" or manage the overall risk of its investments by using options, futures
contracts and interest rate protection transactions. The Fund may use
derivatives as a substitute for taking a position in an underlying security or
other asset and/or as part of a strategy designed to reduce exposure to other
risks, such as interest rate risk. The Fund also may use derivatives to add
leverage to the portfolio and/or to hedge against increases in the Fund's costs
associated with the dividend payments on preferred stock and auction preferred
stock of the Fund.
Derivatives are subject to a number of risks, including liquidity risk,
interest rate risk, credit risk and leverage risk. They also involve the risk
of improper valuation and imperfect correlation with the underlying asset rate
index.
DIVIDENDS AND DISTRIBUTIONS--The Fund intends to pay monthly dividends to common
shareholders at a level rate that over time will result in the distribution of
all of the Fund's net investment income remaining after the payment of
dividends on any outstanding auction preferred shares. The dividend rate on the
common stock is adjusted as necessary to reflect the earnings rate of the Fund.
Dividends and distributions to common shareholders are recorded on the
ex-dividend date. Dividends to auction preferred shareholders are accrued
daily. The amount of dividends from net investment income and distributions
from net realized capital gains is determined in accordance with federal income
tax regulations, which may differ from accounting principles generally accepted
in the United States. These "book/tax" differences are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification.
CONCENTRATION OF RISK
The Fund follows an investment policy of investing primarily in municipal
obligations of various states. Economic changes affecting those states and
certain of their public bodies and municipalities may affect the ability of the
issuers within those states to pay interest on, or repay principal of,
municipal obligations held by the Fund.
INVESTMENT ADVISOR AND ADMINISTRATOR
The Board has approved an investment advisory and administration contract
("Advisory Contract") with UBS Global Asset Management (US) Inc. ("UBS Global
AM"), under which UBS Global AM serves as investment advisor and administrator
of
--------------------------------------------------------------------------------
18
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
the Fund. UBS Global AM is an indirect wholly owned asset management subsidiary
of UBS AG, an international diversified organization with headquarters in
Zurich, Switzerland and operations in many areas of the financial service
industry. In accordance with the Advisory Contract, the Fund pays UBS Global AM
an investment advisory and administration fee, which is accrued weekly and paid
monthly, at the annual rate of 0.90% of the Fund's average weekly net assets.
UBS Global AM has agreed to waive 0.20% of the advisory and administration fee,
so that the Fund's effective fee is 0.70% of average weekly net assets. This
waiver will continue indefinitely unless the Board agrees to any change. At
March 31, 2004, the Fund owed UBS Global AM $164,808 representing $211,899 for
investment advisory and administration fees less amounts due for fee waivers of
$47,091. For the six months ended March 31, 2004, UBS Global AM voluntarily
waived $263,341 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, 2004.
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."
(Auction Preferred Shares Series C were issued on December 22, 2003). 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 7 days for APS
Series A, APS Series B, and APS Series C. Dividend rates ranged from 0.750% to
2.010% for the six months ended March 31, 2004.
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.
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.
--------------------------------------------------------------------------------
19
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Offering costs of $110,332 and sales load of $300,000 were charged to
paid-in-capital of the Fund in connection with the offering of APS during the
six months ended March 31, 2004.
--------------------------------------------------------------------------------
20
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
FEDERAL TAX STATUS
The components of net unrealized appreciation of investments at March 31, 2004,
were as follows:
Gross appreciation (investments having an excess of value over cost) $9,926,816
------------------------------------------------------------------------------------
Gross depreciation (investments having an excess of cost over value) (257,201)
------------------------------------------------------------------------------------
Net unrealized appreciation of investments $9,669,615
------------------------------------------------------------------------------------
For the six months ended March 31, 2004, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $95,450,805 and
$71,489,800, respectively.
The Fund intends to distribute substantially all of its tax-exempt income and
any taxable income and to comply with the other requirements of the Internal
Revenue Code applicable to regulated investment companies. Accordingly, no
provision for federal income taxes is required. In addition, by distributing
during each calendar year substantially all of its net investment income, net
realized capital gains and certain other amounts, if any, the Fund intends not
to be subject to a federal excise tax.
The tax character of distributions paid during the fiscal year ended September
30, 2003 was as follows:
DISTRIBUTIONS PAID FROM: 2003
====================================================================================
Tax-exempt income $10,662,658
------------------------------------------------------------------------------------
Ordinary income 22,485
------------------------------------------------------------------------------------
Net long-term capital gains 2,096,911
------------------------------------------------------------------------------------
Total distributions paid $12,782,054
====================================================================================
The tax character of distributions paid and the components of accumulated
earnings (deficit) on a tax basis for the current fiscal year will be
calculated after the Fund's fiscal year ending September 30, 2004.
--------------------------------------------------------------------------------
21
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
March 31, 2004
(unaudited)
====================================================================================================
NET ASSET VALUE,
BEGINNING OF PERIOD $16.31
----------------------------------------------------------------------------------------------------
Net investment income 0.45
----------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) from investment activities 0.19
----------------------------------------------------------------------------------------------------
Common share equivalent of dividends and distributions paid to auction preferred
shareholders from:
Net investment income (0.02)
----------------------------------------------------------------------------------------------------
Net realized gains from investment activities (0.03)
----------------------------------------------------------------------------------------------------
Total dividends and distributions paid to auction preferred shareholders (0.05)
----------------------------------------------------------------------------------------------------
Net increase (decrease) from investment operations 0.59
----------------------------------------------------------------------------------------------------
Dividends and distributions paid to common shareholders from:
Net investment income (0.48)
----------------------------------------------------------------------------------------------------
Net realized gains from investment activities (0.49)
----------------------------------------------------------------------------------------------------
Total dividends and distributions to common shareholders (0.97)
----------------------------------------------------------------------------------------------------
Auction Preferred Shares offering costs and sales load (0.04)
----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.89
----------------------------------------------------------------------------------------------------
MARKET VALUE, END OF PERIOD $15.42
----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN(2) 11.12%
----------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS ATTRIBUTABLE TO COMMON SHARES:
Total expenses, net of waivers from advisor 1.47%
----------------------------------------------------------------------------------------------------
Total expenses, before waivers from advisor 1.80%
----------------------------------------------------------------------------------------------------
Net investment income before auction preferred shares dividends 5.64%
----------------------------------------------------------------------------------------------------
Auction preferred shares dividends from net investment income 0.28%
----------------------------------------------------------------------------------------------------
Net investment income available to common shareholders, net of waivers from advisor 5.36%
----------------------------------------------------------------------------------------------------
Net investment income available to common shareholders, before waivers from advisor 5.03%
----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets applicable to common shareholders, end of period (000's) $164,523
----------------------------------------------------------------------------------------------------
Portfolio turnover 29%
----------------------------------------------------------------------------------------------------
Asset coverage per share of auction preferred shares, end of period $124,783
----------------------------------------------------------------------------------------------------
(1) Distribution equal to $0.0042 per share.
(2) Total investment return is calculated assuming a $10,000 purchase of
common stock at the current market price on the first day of each period
reported and a sale at the current market price on the last day of each
period reported, and assuming reinvestment of dividends and other
distributions to common shareholders at prices obtained under the Fund's
Dividend Reinvestment Plan. Total investment return does not reflect
brokerage commissions and has not been annualized for periods less than
one year.
--------------------------------------------------------------------------------
22
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
FINANCIAL HIGHLIGHTS
For the Years Ended September 30,
-----------------------------------------------------------------------------
2003 2002 2001 2000 1999
=============================================================================
$ 16.46 $ 16.15 $ 15.91 $ 16.09 $ 17.09
-----------------------------------------------------------------------------
0.95 1.11 1.17 1.18 1.17
-----------------------------------------------------------------------------
0.13 0.29 0.46 (0.13) (1.02)
-----------------------------------------------------------------------------
(0.07) (0.12) (0.23) (0.31) (0.25)
-----------------------------------------------------------------------------
(0.02) (0.01) (0.07) (0.00)(1) --
-----------------------------------------------------------------------------
(0.09) (0.13) (0.30) (0.31) (0.25)
-----------------------------------------------------------------------------
0.99 1.27 1.33 0.74 (0.10)
-----------------------------------------------------------------------------
(0.96) (0.93) (0.90) (0.90) (0.90)
-----------------------------------------------------------------------------
(0.18) (0.03) (0.19) (0.02) --
-----------------------------------------------------------------------------
(1.14) (0.96) (1.09) (0.92) (0.90)
-----------------------------------------------------------------------------
-- -- -- -- --
-----------------------------------------------------------------------------
$ 16.31 $ 16.46 $ 16.15 $ 15.91 $ 16.09
-----------------------------------------------------------------------------
$ 14.86 $ 15.60 $ 15.39 $ 13.75 $ 13.88
-----------------------------------------------------------------------------
2.76% 7.96% 20.59% 5.90% (7.68)%
-----------------------------------------------------------------------------
1.45% 1.48% 1.49% 1.52% 1.52%
-----------------------------------------------------------------------------
1.66% 1.67% 1.68% 1.71% 1.71%
-----------------------------------------------------------------------------
5.89% 6.89% 7.30% 7.48% 7.01%
-----------------------------------------------------------------------------
0.44% 0.73% 1.42% 1.99% 1.50%
-----------------------------------------------------------------------------
5.45% 6.16% 5.88% 5.49% 5.51%
-----------------------------------------------------------------------------
5.24% 5.97% 5.69% 5.30% 5.32%
-----------------------------------------------------------------------------
$168,888 $170,454 $167,295 $164,769 $166,618
-----------------------------------------------------------------------------
51% 21% 8% 14% 8%
-----------------------------------------------------------------------------
$155,555 $156,534 $154,559 $152,980 $154,136
=============================================================================
--------------------------------------------------------------------------------
23
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (UNAUDITED)
THE FUND
Investment Grade Municipal Income Fund Inc. (the "Fund") is a diversified,
closed-end management investment company whose shares trade on the New York
Stock Exchange ("NYSE"). The Fund's investment objective is to achieve a high
level of current income that is exempt from federal income tax, consistent with
the preservation of capital. The Fund's investment advisor and administrator is
UBS Global Asset Management (US) Inc. ("UBS Global AM"), an indirect wholly
owned asset management subsidiary of UBS AG, which had over $53.1 billion in
assets under management as of April 30, 2004.
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 15, 2004. At
the meeting, Margo N. Alexander, Richard Q. Armstrong, David J. Beaubien,
Richard R. Burt, Meyer Feldberg, Carl W. Schafer, Brian M. Storms and William
D. White were elected to serve as directors until the next annual meeting of
shareholders, or until their successors are elected and qualified or until they
resign or are otherwise removed. The shares were voted as indicated below:
COMMON STOCK AND APS SHARES VOTING AS A SINGLE CLASS
Shares
To vote for or withhold Shares Withhold
authority in the election of: Voted For Authority
=========================================================================
Richard Q. Armstrong 9,719,391.6030 116,317.9265
-------------------------------------------------------------------------
David J. Beaubien 9,718,705.6030 117,003.9265
-------------------------------------------------------------------------
Richard R. Burt 9,710,008.6030 125,700.9265
-------------------------------------------------------------------------
Carl W. Schafer 9,717,037.6030 118,671.9265
-------------------------------------------------------------------------
Brian M. Storms 9,713,837.6030 121,871.9265
-------------------------------------------------------------------------
William D. White 9,719,032.6030 119,696.9265
-------------------------------------------------------------------------
AUCTION PREFERRED SHARES
Shares
To vote for or withhold Shares Withhold
authority in the election of: Voted For Authority
==========================================================
Margo N. Alexander 1,368 0
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Meyer Feldberg 1,368 0
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The Fund was informed that there were no broker non-votes. In April 2004, Mr.
Storms resigned from the Fund's board.
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24
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (UNAUDITED)
INVESTMENT POLICY CHANGE
In July 2003, the Fund's Board approved a change in investment policy. The Fund
may now invest in securities whose maturities are less than 10 years at the
time of purchase. Prior to this change, the Fund had a policy of investing
substantially all of its assets in municipal obligations having maturities in
excess of 10 years at the time of purchase.
PROXY VOTING POLICIES AND PROCEDURES
You may obtain a description of the Fund's proxy voting policies and
procedures, without charge, upon request by contacting the Fund directly at
1-800-647-1568, online on the Fund's Web site: www.ubs.com/ubsglobalam-proxy,
or on the EDGAR Database on the SEC's Web site (http://www.sec.gov).
DIVIDEND REINVESTMENT PLAN
The Fund's Board has established a Dividend Reinvestment Plan (the "Plan")
under which all common shareholders whose shares are registered in their own
names, or in the name of UBS Financial Services Inc. or its nominee, will have
all dividends and other distributions on their shares of common stock
automatically reinvested in additional shares of common stock, unless such
common shareholders elect to receive cash. Common shareholders who elect to
hold their shares in the name of another broker or nominee should contact such
broker or nominee to determine whether, or how, they may participate in the
Plan. The ability of such shareholders to participate in the Plan may change if
their shares are transferred into the name of another broker or nominee.
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
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25
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (UNAUDITED)
DIVIDEND REINVESTMENT PLAN (CONCLUDED)
particular shareholder by the average price per share (including applicable
brokerage commissions) that the transfer agent was able to obtain in the open
market. The Fund will not issue any new shares of common stock in connection
with the Plan. There currently is no charge to participants for reinvesting
dividends or other distributions. The transfer agent's fees for handling the
reinvestment of distributions will be paid by the Fund. However, each
participant pays a pro rata share of brokerage commissions incurred with
respect to the transfer agent's open market purchases of common stock in
connection with the reinvestment of distributions. The automatic reinvestment
of dividends and other distributions in shares of common stock does not relieve
participants of any income tax that may be payable on such distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan with respect to any
dividend or other distribution if notice of the change is sent to Plan
participants at least 30 days before the record date for such distribution. The
Plan also may be amended or terminated by the transfer agent by at least 30
days' written notice to all Plan participants. Additional information regarding
the Plan may be obtained from, and all correspondence concerning the Plan
should be directed to, the transfer agent at PFPC Inc., P.O. Box 43027,
Providence, Rhode Island 02940-3027. For further information regarding the
Plan, you may also contact the transfer agent directly at 1-800-331-1710.
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26
DIRECTORS
Margo N. Alexander Meyer Feldberg
Richard Q. Armstrong Carl W. Schafer
David J. Beaubien William D. White
Richard R. Burt
PRINCIPAL OFFICERS
Joseph A. Varnas Elbridge T. Gerry III
President Vice President
Amy R. Doberman W. Douglas Beck
Vice President and Secretary Vice President
Paul H. Schubert
Vice President and Treasurer
INVESTMENT ADVISOR AND
ADMINISTRATOR
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, New York 10019-6114
The financial information included herein is taken from the records of the Fund
without examination by independent auditors who do not express an opinion
thereon.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that from time to time the Fund may purchase shares of its
common stock in the open market at market prices.
This report is sent to the shareholders of the fund for their information. It
is not a prospectus, circular or representation intended for use in the
purchase or sale of shares of the Fund or of any securities mentioned in this
report.
(c) 2004 UBS Global Asset Management (US) Inc. All rights reserved.
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| Presorted |
| Standard |
| US Postage |
| PAID |
| Smithtown, NY |
| Permit 700 |
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[UBS LOGO]
UBS GLOBAL ASSET MANAGEMENT (US) INC.
51 West 52nd Street
New York, NY 10019-6114
ITEM 2. CODE OF ETHICS.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 6. [RESERVED BY SEC FOR FUTURE USE. ]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The registrant's Board has established a Nominating Committee. The Nominating
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 Committee, Mr. Meyer Feldberg, care of the Secretary of the
registrant at UBS Global Asset Management (US) Inc., 51 West 52nd Street, New
York, New York 10019-6114, and indicate on the envelope "Nominating 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 10. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940, as amended) are effective based on their evaluation of
these controls and procedures as of a date within 90 days of the
filing date of this document.
(b) The registrant's principal executive officer and principal financial
officer are aware of no changes in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal half-year that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
ITEM 11. EXHIBITS.
(a) (1) Code of Ethics - Form N-CSR disclosure requirement not applicable
to this filing of a semi-annual report.
(a) (2) Certifications of principal executive officer and principal
financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 is attached hereto as Exhibit EX-99.CERT.
(b) Certifications of principal executive officer and principal financial
officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is
attached hereto as Exhibit EX-99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Investment Grade Municipal Income Fund Inc.
By: /s/ Joseph A. Varnas
--------------------
Joseph A. Varnas
President
Date: June 9, 2004
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Joseph A. Varnas
--------------------
Joseph A. Varnas
President
Date: June 9, 2004
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By: /s/ Paul H. Schubert
--------------------
Paul H. Schubert
Treasurer
Date: June 9, 2004
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