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.
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(Exact name of registrant as specified in charter)
51 West 52nd Street, New York, New York 10019-6114
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(Address of principal executive offices) (Zip code)
Mark F. Kemper, Esq.
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, NY 10019-6114
(Name and address of agent for service)
Copy to:
Jack W. Murphy, Esq.
Dechert LLP
1775 I Street, N.W.
Washington, DC 20006-2401
Registrant's telephone number, including area code: 212-882 5000
Date of fiscal year end: September 30
Date of reporting period: September 30, 2004
ITEM 1. REPORTS TO STOCKHOLDERS.
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[UBS GLOBAL ASSET MANAGEMENT LOGO]
INVESTMENT GRADE MUNICIPAL
INCOME FUND INC.
Annual Report
September 30, 2004
Investment Grade Municipal Income Fund Inc.
November 15, 2004 INVESTMENT GRADE MUNICIPAL
INCOME FUND INC.
Dear Shareholder,
INVESTMENT GOAL:
We present you with the annual report for High level of current income
Investment Grade Municipal Income Fund Inc. exempt from federal
(the "Fund") for the fiscal year ended income tax, consistent with
September 30, 2004. preservation of capital.
Performance PORTFOLIO MANAGER:
William Veronda
Over the 12-month period, the Fund's net UBS Global Asset
asset value return was 6.02%. On a market Management (US) Inc.
price basis, the Fund's return was 5.57%.
Over the same period, the Lipper General COMMENCEMENT:
Municipal Debt Funds (Leveraged) median's November 6, 1992
net asset value and market price returns
were 7.50% and 8.00%, respectively. NYSE SYMBOL:
(For more performance information, please PPM
refer to "Performance At A Glance" on
page 5.) DIVIDEND PAYMENTS:
Monthly
The Fund used leverage during the fiscal year, which was 39.4% of total assets
as of September 30, 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 DURING THE FISCAL YEAR?
A. During the period, gross domestic product (GDP) figures confirmed that the
US economy was growing, fueled by the combined effects of solid consumer
and business spending, an increase in exports and ongoing military
spending. Third quarter 2003 GDP came in at 8.2%, up from 3.3% over the
prior three months. This number was far higher than anticipated, and the
sharpest recorded advance of GDP since 1984. Fourth quarter 2003 and first
quarter 2004 numbers were solid at 4.1% and 4.5%, respectively, followed by
a more muted second quarter GDP of 3.3%.
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1
Investment Grade Municipal Income Fund Inc.
Q. HOW DID THE FEDERAL RESERVE BOARD (THE "FED") REACT TO THESE ECONOMIC
CONDITIONS?
A. The Fed maintained its accommodative monetary policy through much of the
fiscal year. As late as the end of March 2004, many market participants
believed the Fed would hold rates steady until after the November
presidential election, or until early 2005. However, this abruptly changed
as improvements in the labor market became apparent. During March, April
and May, a total of nearly one million new jobs were created. This, in
turn, prompted the Fed to begin laying the groundwork for higher rates.
After many months of speculation, the Fed raised the federal funds rate (or
"fed funds" rate)-the rate that banks charge one another for funds they
borrow on an overnight basis-from 1.00% to 1.25% on June 30, 2004. The Fed
raised rates again at its subsequent meetings on August 10, 2004 and
September 21, 2004, to 1.50% and 1.75%, respectively. In doing so, it noted
that, "Even after this action, the stance of monetary policy remains
accommodative and, coupled with robust underlying growth in productivity,
is providing ongoing support to economic activity." Market perception grew
that the Fed, through its statements and in its actions, was paving the way
to continue raising rates in the future.
Q. HOW DID YOU POSITION THE FUND'S PORTFOLIO DURING THE REPORTING PERIOD?
A. As the fiscal year began, the Fund's duration was similar to that of the
Lehman Municipal Bond Index. Given expectations for a continuation of the
economic recovery and rising interest rates, in early 2004 we moved the
Fund's duration modestly lower than that of the Index. This initially
detracted from results when, surprisingly, yields fell during the first
quarter of 2004. However, as fears of a "jobless economic recovery" abated
in the second quarter, this positioning enhanced performance. The economy
then appeared to weaken in the third quarter of the year, due in large part
to record high oil prices. This caused yields to again decline, and the
Fund's short duration hurt relative performance. Fortunately, astute yield
curve positioning in the third quarter helped to offset some of the losses,
as our expectations for a flattening yield curve were met (the curve
flattens when the gap between short- and long-term yields narrows). In
particular, in recent months we emphasized securities in the 5- to 10-year
and 20- to 30-year portions of the curve, while holding underweight
positions in the 1- to 5-year and 10- to 15-year ranges of the curve.
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2
Investment Grade Municipal Income Fund Inc.
Q. WHICH SECTORS OF THE MARKET DID YOU FIND TO BE ATTRACTIVE DURING THE FISCAL
YEAR?
A. The Fund is highly diversified, and we seek compelling opportunities in a
wide variety of sectors and subsectors. For example, because of declining
government reimbursements, we remain negative on the healthcare sector as a
whole. However, using our extensive research capabilities, we identified a
number of securities that we believe offer attractive yields and, in our
opinion, more than compensate investors for the potential risks. During the
fiscal year, we purchased Kaiser Permanente (1.1%),* a California-based
health maintenance organization. We also purchased a block of bonds issued
by St. Francis Healthcare Center in Minnesota (0.9%).*
Q. WHAT HAS BEEN YOUR APPROACH IN TERMS OF THE CALIFORNIA MUNICIPAL MARKET?
A. California was one of a number of states that saw its fiscal situation
improve during the 12-month period; thus, we added a number of California
issues to our portfolio. At period end, the Fund's California holdings had
enhanced results.
Another state that shored up its balance sheet in the latter months of the
period was Massachusetts, and we are therefore looking to increase the
Fund's exposure to this state's municipal securities.
Q. THE TROUBLES IN THE AIRLINE SECTOR HAVE BEEN WELL-DOCUMENTED. DOES THE FUND
HAVE ANY EXPOSURE TO THIS AREA?
A. While the airline industry is experiencing high-profile issues, we continue
to find attractive opportunities in the airport sector. Over the last year,
both business and consumer flight trends have improved. Given the
expectations for a continuation of an economic expansion, we expect
airfreight usage will remain strong.
Q. WHAT OTHER STRATEGIES DID YOU IMPLEMENT DURING THE PERIOD?
A. As we mentioned in our last report to you, we increased the Fund's leverage
from approximately 33% to 40% at the end of December 2003, through the
Fund's issuance of an additional series of Auction Preferred Shares.
Although leverage can cause the Fund's short-term volatility to increase,
it also can better position the Fund to seek preservation of capital.
Additionally, it has the
* As a percentage of net assets applicable to common shareholders as of
September 30, 2004.
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3
Investment Grade Municipal Income Fund Inc.
potential to allow us to generate additional dividend income. We,
therefore, maintained the Fund's leverage at roughly 40% over most of the
period.
Q. HOW DO YOU ANTICIPATE POSITIONING THE FUND'S PORTFOLIO GOING FORWARD?
A. Although the US economy experienced a "soft patch" during the third quarter,
it now appears that this may have been overstated. Final second-quarter
gross domestic product was revised upward from 2.8% to 3.3%. In addition,
aside from stubbornly high oil prices, inflation remains low. We believe
the Fed will continue to raise interest rates, and, as such, we expect to
retain our short duration position. We also anticipate remaining focused on
the 5- to 10-year and 20- to 30-year portions of the yield curve.
We will continue to look for opportunities in the general obligation
market, in particular issues from the state of California. Having said
that, we expect to avoid securities in the 1- to 5-year range, as we do not
believe they are attractive given the underlying risks. On a national
level, we will seek higher yielding securities that appear attractive given
their risk/reward characteristics.
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.
Sincerely,
/s/ Joseph A. Varnas /s/ William Veronda
Joseph A. Varnas William Veronda
President Portfolio Manager
Investment Grade Municipal Income Fund Inc. Investment Grade Municipal Income Fund Inc.
Managing Director Executive Director
UBS Global Asset Management (US) Inc. UBS Global Asset Management (US) Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended September 30, 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
Average Annual Total Returns For Periods Ended 9/30/04
NET ASSET VALUE RETURNS 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
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Investment Grade Municipal Income Fund Inc. 2.43% 6.02% 6.78% 7.19%
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Lipper General Municipal Debt Funds (Leveraged)
Median 1.94 7.50 8.05 7.46
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MARKET PRICE RETURNS
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Investment Grade Municipal Income Fund Inc. -4.53 5.57 8.40 8.70
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Lipper General Municipal Debt Funds (Leveraged)
Median -1.45 8.00 9.05 8.14
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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
payable dates. NAV and market price returns for periods less than one year are
cumulative. Returns do not reflect the deduction of taxes that a shareholder
could pay on Fund distributions.
Lipper peer group data calculated by Lipper Inc.; used with permission. The
Lipper Median is the return of the fund that places in the middle of the peer
group.
SHARE PRICE, DIVIDEND AND YIELDS AS OF 9/30/04
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Market Price $14.25
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Net Asset Value (per share applicable to common shareholders) $15.81
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12-Month Net Investment Income Dividend (ended 9/30/04) $0.93
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September 2004 Dividend $0.075
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Market Yield* 6.32%
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NAV Yield* 5.69%
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IPO Yield* 6.00%
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* Market yield is calculated by multiplying the September dividend by 12
and dividing by the month-end market price. NAV yield is calculated by
multiplying the September dividend by 12 and dividing by the month-end
net asset value. IPO yield is calculated by multiplying the September
dividend by 12 and dividing by the initial public offering price. Prices
and yields will vary.
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5
Investment Grade Municipal Income Fund Inc.
Portfolio Statistics
CHARACTERISTICS 9/30/04 3/31/04 9/30/03
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Net Assets Applicable to Common
Shareholders (mm) $163.7 $164.5 $168.9
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Weighted Average Maturity* 11.7 yrs 11.2 yrs 13.0 yrs
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Weighted Average Duration* 5.1 yrs 5.1 yrs 6.3 yrs
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Weighted Average Coupon* 5.5% 5.3% 5.4%
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Leverage** 39.4% 40.0% 32.1%
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Callable/Maturing Within 5 Years* 9.1% 6.0% 5.8%
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Callable/Maturing Beyond 5 Years* 90.9% 94.0% 94.2%
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PORTFOLIO COMPOSITION*** 9/30/04 3/31/04 9/30/03
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Long-Term Municipal Bonds 160.2% 155.1% 135.8%
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Short-Term Municipal Notes 6.4 9.6 7.8
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Futures (0.0)**** (0.1) -
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Other Assets Less Liabilities 0.6 2.3 3.8
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Liquidation Value of Auction
Preferred Shares (67.2) (66.9) (47.4)
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TOTAL 100.0% 100.0% 100.0%
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CREDIT QUALITY*** 9/30/04 3/31/04 9/30/03
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AAA/Aaa 59.2% 47.0% 50.8%
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AA/Aa 40.3 46.4 37.3
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A/A 29.4 27.6 16.0
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BBB/Baa 18.0 20.7 18.8
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BB/Ba - - 0.9
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A1/P1/SP-1/VMIG-1 6.4 9.6 6.9
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Nonrated 13.3 13.4 12.9
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Other Assets Less Liabilities 0.6 2.2 3.8
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Liquidation Value of Auction
Preferred Shares (67.2) (66.9) (47.4)
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TOTAL 100.0% 100.0% 100.0%
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TOP FIVE STATES*** 9/30/04 3/31/04 9/30/03
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California 29.4% New York 26.3% Texas 23.0%
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New York 19.0 California 20.9 California 16.2
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Texas 17.9 Texas 19.1 New York 11.8
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Florida 10.6 Indiana 10.3 Illinois 10.4
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Indiana 9.7 Illinois 8.3 Indiana 10.1
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TOTAL 86.6% 84.9% 71.5%
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TOP FIVE SECTORS*** 9/30/04 3/31/04 9/30/03
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Power 36.6% Power 39.3% Power 36.3%
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Lease 20.7 Water & Sewer 26.2 Water & Sewer 25.6
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Water & Sewer 15.7 Lease 21.2 Lease 21.3
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Hospital 11.3 Escrowed to Maturity 11.2 Hospital 6.6
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Escrowed to Maturity 10.2 Pre-refunded 8.9 Tolls 6.3
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TOTAL 94.5% 106.8% 96.1%
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* 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.
**** Represents less than 0.05% of net assets applicable to common
shareholders.
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6
Investment Grade Municipal Income Fund Inc.
PORTFOLIO OF INVESTMENTS-SEPTEMBER 30, 2004
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
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Long-Term Municipal Bonds - 160.21%
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Arizona - 1.60%
$2,380 Arizona State Transportation
Board Highway Revenue-
Series B Aa1 AAA 07/01/18 5.250% $2,625,783
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Arkansas - 1.09%
1,705 Little Rock Capital Improvement
Revenue Parks & Recreation
Projects-Series A NR NR 01/01/18 5.700 1,781,316
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California - 29.41%
5,000 California State Department
Water Resources Revenue-
Series A A2 BBB+ 05/01/16 5.875 5,703,200
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5,000 California State Economic
Recovery General Obligation-
Series A (FGIC Insured) Aaa AAA 07/01/14 5.250 5,684,200
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4,000 California State Economic
Recovery General Obligation-
Series A (MBIA Insured) Aaa AAA 07/01/12 5.000 4,458,720
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2,290 California State Variable Purpose
General Obligation A3 A 04/01/11 5.000 2,517,580
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3,000 California Statewide
Communities Development
Authority Irvine Apartment
Communities-Series A-3 Baa2 BBB 05/15/25+ 5.100 3,167,340
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1,750 California Statewide
Communities Development
Authority Revenue Kaiser
Permanente-Series H NR A 04/01/34+ 2.625 1,744,628
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2,150 Fontana Redevelopment Agency
Tax Allocation Jurupa Hills
Redevelopment Project A NR A- 10/01/17 5.500 2,292,394
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5,000 Los Angeles County Sanitation
Funding Authority Revenue-
Series A (FSA Insured) Aaa AAA 10/01/18 5.000 5,402,350
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3,000 Los Angeles Water & Power
Revenue Power Systems-
Series A (MBIA Insured) Aaa AAA 07/01/16 5.000 3,272,760
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3,200 Los Angeles Water & Power
Revenue Power Systems-
Series A-A-1 (FSA Insured) Aaa AAA 07/01/21 5.250 3,464,288
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6,000 Los Angeles Water & Power
Revenue Power Systems-
Series A-A-1 (MBIA Insured) Aaa AAA 07/01/14 5.000 6,637,440
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3,500 Metropolitan Water District of
Southern California
Waterworks-Series A Aaa AAA 03/01/18 5.250 3,811,990
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48,156,890
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Colorado - 1.15%
1,742 University of Colorado
Participation Interests NR A- 12/01/13 6.000 1,884,983
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7
Investment Grade Municipal Income Fund Inc.
PORTFOLIO OF INVESTMENTS-SEPTEMBER 30, 2004
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
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Long-Term Municipal Bonds - (continued)
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Florida - 10.57%
$6,495 Broward County Parks & Land
Preservation Project Aa1 AA+ 01/01/22 5.000% $6,869,112
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1,175 Gainesville Utilities Systems
Revenue-Series A Aa2 AA 10/01/20 5.250 1,282,336
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2,000 Orlando Utilities Commission
Water & Electric Revenue-
Series A Aa1 AA 10/01/19 5.000 2,138,500
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6,425 Orlando Utilities Commission
Water & Electric Revenue-
Series C # Aa1 AA 10/01/18 5.250 7,020,983
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17,310,931
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Illinois - 4.46%
5,000 Chicago Parking District Parking
Facility Revenue (Pre-refunded
with U.S. Government
Securities to 01/01/2010) Baa1 A 01/01/14 6.250 5,794,550
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1,200 Illinois Educational Facilities
Authority Revenue Augustana
College-Series A Baa1 NR 10/01/22 5.625 1,257,024
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250 Metropolitan Pier & Exposition
Authority A1 NR 06/15/27 6.500 252,963
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7,304,537
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Indiana - 9.66%
1,000 Clark Pleasant Community School
Building Corp. First Mortgage
(AMBAC Insured) Aaa AAA 07/15/17 5.500 1,122,200
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3,305 Indiana Transportation Financing
Authority Airport Facilities
Lease Revenue-Series A A1 AA 11/01/12 5.500 3,429,004
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1,430 Indiana Transportation Financing
Authority Airport Facilities
Lease Revenue-Series A A1 AA- 11/01/16 6.250 1,434,833
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2,000 Indiana Transportation Financing
Authority Airport Facilities
Lease Revenue-Series A A1 AA 11/01/17 5.500 2,066,120
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3,400 Marion County Convention &
Recreational Facilities Authority
Excise Tax Revenue-Series A
(MBIA Insured) Aaa AAA 06/01/17 5.500 3,801,200
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1,865 Wayne Township Marion County
School Building Corp.-
First Mortgage NR A+ 01/15/15 5.250 1,951,909
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1,915 Wayne Township Marion County
School Building Corp.-
First Mortgage NR A+ 07/15/15 5.250 2,004,239
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15,809,505
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Iowa - 3.21%
4,880 Polk County-Series A # Aa1 AA+ 06/01/19 5.000 5,259,566
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Kentucky - 4.89%
7,750 Boone County Pollution Control
Revenue Dayton Power & Light
Co.-Series A Baa3 BBB- 11/15/22 6.500 8,004,200
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8
Investment Grade Municipal Income Fund Inc.
PORTFOLIO OF INVESTMENTS-SEPTEMBER 30, 2004
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
- --------------------------------------------------------------------------------------------------------------
Long-Term Municipal Bonds - (continued)
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Louisiana - 2.18%
$ 3,280 New Orleans Sewage Service
Revenue Aaa AAA 06/01/16 5.000% $3,563,195
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Massachusetts - 7.65%
5,865 Massachusetts State Consolidated
Loan-Series A Aa2 AA- 08/01/16 5.000 6,498,772
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2,000 Massachusetts State Water
Pollution Abatement-Series A Aaa AAA 08/01/20 5.250 2,155,480
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1,305 University of Massachusetts
Building Authority Revenue
Refunding-Series 05-1
(AMBAC Insured) (a) Aaa AAA 05/01/12 5.000 1,423,833
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1,235 University of Massachusetts
Building Authority Revenue
Refunding-Series 05-1
(AMBAC Insured) (a) Aaa AAA 05/01/13 5.000 1,348,991
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1,000 University of Massachusetts
Building Authority Revenue
Refunding-Series 05-1
(AMBAC Insured) (a) Aaa AAA 05/01/14 5.000 1,091,100
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12,518,176
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Michigan - 4.82%
3,425 Michigan State Building Authority
Revenue Program-Series III Aa2 AA 10/15/16 5.375 3,853,776
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2,000 Michigan State Strategic Fund
Limited Obligation
Revenue-Ford Motor Co.
Project-Series A Baa1 BBB- 02/01/06 7.100 2,115,680
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1,750 Michigan Municipal Bond
Authority Clear Water Revenue Aaa AAA 10/01/19 5.250 1,928,325
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7,897,781
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Minnesota - 0.93%
1,500 Shakopee Health Care Facilities
Saint Francis Regional Medical
Center Revenue Refunding NR BBB 09/01/17 5.000 1,530,885
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Nevada - 4.19%
6,750 Clark County Pollution Control
Revenue Nevada Power Co.
Project-Series B (FGIC Insured) Aaa AAA 06/01/19 6.600 6,856,380
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New Mexico - 0.68%
1,000 University of New Mexico
Revenues Sub Lien-Series A Aa3 AA 06/01/16 5.250 1,109,670
- --------------------------------------------------------------------------------------------------------------
New York - 19.05%
4,030 Long Island Power Authority
Electric Systems Revenue-
Series C Baa1 A- 09/01/17 5.500 4,438,319
- --------------------------------------------------------------------------------------------------------------
1,765 Metropolitan Transportation
Authority New York Dedicated
Tax Fund-Series A (FSA Insured) Aaa AAA 11/15/24 5.250 1,878,878
- --------------------------------------------------------------------------------------------------------------
5,000 New York City General
Obligation-Series G A2 A 08/01/09 5.000 5,451,550
- --------------------------------------------------------------------------------------------------------------
2,500 New York City General
Obligation-Series G A2 A 08/01/13 5.000 2,736,025
- --------------------------------------------------------------------------------------------------------------
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9
Investment Grade Municipal Income Fund Inc.
PORTFOLIO OF INVESTMENTS-SEPTEMBER 30, 2004
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
- ----------------------------------------------------------------------------------------------------------
Long-Term Municipal Bonds - (continued)
- ----------------------------------------------------------------------------------------------------------
New York - (concluded)
- ----------------------------------------------------------------------------------------------------------
$ 2,000 New York City Municipal Water
Finance Authority Revenue-
Water & Sewer Systems-
Series D Aa2 AA+ 06/15/17 5.250% $2,182,320
- ----------------------------------------------------------------------------------------------------------
1,625 Triborough Bridge & Tunnel
Authority Revenue-Series B Aa3 AA- 11/15/18 5.250 1,774,061
- ----------------------------------------------------------------------------------------------------------
8,155 Triborough Bridge & Tunnel
Authority Revenue-Series B # Aa3 AA- 11/15/19 5.250 8,873,537
- ----------------------------------------------------------------------------------------------------------
3,350 Triborough Bridge & Tunnel
Authority Revenue-Series Y Aa3 AAA 01/01/12 6.000 3,851,998
- ----------------------------------------------------------------------------------------------------------
31,186,688
- ----------------------------------------------------------------------------------------------------------
North Carolina - 7.02%
5,000 North Carolina Eastern Municipal
Power Agency-Series A
(Escrowed to Maturity) Baa2 BBB 01/01/11 5.500 5,463,000
- ----------------------------------------------------------------------------------------------------------
2,000 North Carolina Eastern Municipal
Power Agency-Series A
(Escrowed to Maturity) Baa2 BBB 01/01/12 5.500 2,191,080
- ----------------------------------------------------------------------------------------------------------
3,065 North Carolina Eastern Municipal
Power Agency-Series A
(Escrowed to Maturity) Baa2 AAA 01/01/21 6.400 3,847,617
- ----------------------------------------------------------------------------------------------------------
11,501,697
- ----------------------------------------------------------------------------------------------------------
Ohio - 6.60%
2,185 Ohio State Higher Education-
Series B Aa1 AA+ 11/01/17 5.250 2,425,722
- ----------------------------------------------------------------------------------------------------------
8,000 Ohio State Water Development
Authority Water Quality
Pollution Control Aaa AAA 06/01/24 5.000 8,387,120
- ----------------------------------------------------------------------------------------------------------
10,812,842
- ----------------------------------------------------------------------------------------------------------
Oregon - 0.67%
1,000 Portland Sewer Systems
Revenue-Series A Aaa AAA 06/01/18 5.250 1,098,440
- ----------------------------------------------------------------------------------------------------------
Pennsylvania - 5.01%
5,000 Northumberland County
Authority-Guaranteed Lease
Revenue-Mountain View
Manor Project NR NR 10/01/20 7.000 5,140,600
- ----------------------------------------------------------------------------------------------------------
3,000 Susquehanna Area Regional
Airport Authority Airport
Systems Revenue-Sub Series D Baa2 NR 01/01/18 5.375 3,054,750
- ----------------------------------------------------------------------------------------------------------
8,195,350
- ----------------------------------------------------------------------------------------------------------
Puerto Rico - 8.91%
8,010 Puerto Rico Commonwealth
Refunding-Public
Improvement-Series C Baa1 A- 07/01/18 5.000 8,621,403
- ----------------------------------------------------------------------------------------------------------
3,000 Puerto Rico Housing Finance
Authority-Capital Funding
Program (HUD Insured) Aa3 AA 12/01/18 5.000 3,204,480
- ----------------------------------------------------------------------------------------------------------
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10
Investment Grade Municipal Income Fund Inc.
PORTFOLIO OF INVESTMENTS-SEPTEMBER 30, 2004
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) 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.
Government Securities to
07/01/2012 @ 100) Baa1 A- 07/01/13 5.375% $2,766,610
- ----------------------------------------------------------------------------------------------------------
14,592,493
- ----------------------------------------------------------------------------------------------------------
Rhode Island - 0.09%
145 Rhode Island Housing &
Mortgage Finance Corp.
Homeownership
Opportunity-Series 10-A Aa2 AA+ 04/01/27 6.500 145,171
- ----------------------------------------------------------------------------------------------------------
South Carolina - 0.66%
1,000 Greenville Waterworks Revenue Aa1 AAA 02/01/20 5.250 1,087,810
- ----------------------------------------------------------------------------------------------------------
South Dakota - 2.95%
3,441 Lower Brule Sioux Tribe++ NR NR 08/15/15 6.000 3,471,762
- ----------------------------------------------------------------------------------------------------------
1,323 Standing Rock South Dakota New
Public Housing++ NR NR 08/07/13 6.000 1,356,579
- ----------------------------------------------------------------------------------------------------------
4,828,341
- ----------------------------------------------------------------------------------------------------------
Tennessee - 1.64%
2,500 Memphis-Shelby County Airport
Authority Special Facilities
Revenue-Federal Express Corp. Baa2 BBB 09/01/09 5.000 2,678,550
- ----------------------------------------------------------------------------------------------------------
Texas - 16.49%
2,475 Alvin Independent School District
School House-Series A Aaa AAA 02/15/17 5.375 2,755,838
- ----------------------------------------------------------------------------------------------------------
4,000 Coastal Bend Health Facilities
Development-Incarnate Word
Health System (Escrowed to
Maturity) (AMBAC Insured) Aaa AAA 01/01/17 6.300 4,690,000
- ----------------------------------------------------------------------------------------------------------
1,335 Eagle Mountain & Saginaw
Independent School District
Unlimited Tax-School Building Aaa AAA 08/15/14 5.375 1,499,085
- ----------------------------------------------------------------------------------------------------------
2,825 Fort Worth Water & Sewer
Revenue Aa2 AA 02/15/16 5.625 3,198,380
- ----------------------------------------------------------------------------------------------------------
7,051 Harris County Texas Lease|P^ NR NR 05/01/20 6.750 6,864,493
- ----------------------------------------------------------------------------------------------------------
3,007 Houston Community College
System Certificates of
Participation++ NR NR 06/15/25 7.875 3,136,551
- ----------------------------------------------------------------------------------------------------------
1,485 Lower Colorado River Authority
Transmission Contract Revenue Aaa AAA 05/15/20 5.250 1,608,938
- ----------------------------------------------------------------------------------------------------------
3,000 San Antonio Electric & Gas
Revenue Aa1 AA+ 02/01/20 5.375 3,247,950
- ----------------------------------------------------------------------------------------------------------
27,001,235
- ----------------------------------------------------------------------------------------------------------
Washington - 4.63%
1,920 Metropolitan Park District Tacoma
(AMBAC Insured) Aaa AAA 12/01/14 6.000 2,235,014
- ----------------------------------------------------------------------------------------------------------
1,115 Metropolitan Park District Tacoma
(AMBAC Insured) Aaa AAA 12/01/16 6.000 1,297,247
- ----------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11
Investment Grade Municipal Income Fund Inc.
PORTFOLIO OF INVESTMENTS-SEPTEMBER 30, 2004
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
- -------------------------------------------------------------------------------------------------------------------
Long-Term Municipal Bonds - (concluded)
- -------------------------------------------------------------------------------------------------------------------
Washington - (concluded)
$ 3,555 Washington State Public Power
Supply Systems Nuclear Project
No. 1-Series B Aaa AA- 07/01/09 7.250% $4,056,468
- -------------------------------------------------------------------------------------------------------------------
7,588,729
- -------------------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Bonds (cost-$253,260,708) 262,331,144
- -------------------------------------------------------------------------------------------------------------------
Short-Term Municipal Notes - 6.37%
- -------------------------------------------------------------------------------------------------------------------
Michigan - 1.95%
3,200 University of Michigan Revenues
Refunding-Medical Service
Plan-Series A-1 VMIG-1 A1+ 10/01/04 1.720* 3,200,000
- -------------------------------------------------------------------------------------------------------------------
Missouri - 0.31%
500 Missouri State Health &
Educational Facilities Authority
Educational Facilities Revenue-
Washington University-Series B VMIG-1 A1+ 10/01/04 1.700* 500,000
- -------------------------------------------------------------------------------------------------------------------
Oklahoma - 0.02%
25 Tulsa County Industrial Authority
Revenue First Mortgage-
Series A NR A1+ 10/01/04 1.740* 25,000
- -------------------------------------------------------------------------------------------------------------------
Texas - 1.40%
2,200 Harris County Health Facilities
Development Corp. Revenue-
Methodist Hospital NR A1+ 10/01/04 1.720* 2,200,000
- -------------------------------------------------------------------------------------------------------------------
100 North Central Health Facility
Development Corp. Revenue-
Methodist Hospitals Dallas-
Series B (MBIA Insured) Aaa A1+ 10/01/04 1.740* 100,000
- -------------------------------------------------------------------------------------------------------------------
2,300,000
- -------------------------------------------------------------------------------------------------------------------
Virginia - 2.69%
4,400 Loudoun County Industrial
Development Authority
Revenue-Howard Hughes
Medical Institute-Series C VMIG-1 A1+ 10/01/04 1.800* 4,400,000
- -------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Notes (cost-$10,425,000) 10,425,000
- -------------------------------------------------------------------------------------------------------------------
Total Investments (cost-$263,685,708)-166.58% 272,756,144
- -------------------------------------------------------------------------------------------------------------------
Other assets in excess of liabilities-0.60% 980,880
- -------------------------------------------------------------------------------------------------------------------
Liquidation value of auction preferred shares-(67.18)% (110,000,000)
- -------------------------------------------------------------------------------------------------------------------
Net Assets applicable to common shareholders-100.00% $163,737,024
- -------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12
Investment Grade Municipal Income Fund Inc.
PORTFOLIO OF INVESTMENTS-SEPTEMBER 30, 2004
+ The maturity date reflects the mandatory date bond will be put back to
issuer.
++ Illiquid securities representing 9.06% of net assets.
* Variable rate demand note is payable on demand. The maturity dates shown
are the next interest rate reset dates. The interest rates shown are the
current rates as of September 30, 2004.
# Entire or partial amount pledged as collateral for future transactions.
(a) Security purchased on a when-issued basis. When issued refers to a
transaction made conditionally because a security, although authorized, has
not yet been issued.
NR - Not Rated
AMBAC - American Municipal Bond Assurance Corporation
FGIC - Financial Guaranty Insurance Company
FSA - Financial Security Assurance
HUD - Housing and Urban Development
MBIA - Municipal Bond Investors Assurance
NUMBER OF IN EXPIRATION UNREALIZED
CONTRACTS CONTRACT TO RECEIVE EXCHANGE FOR DATE DEPRECIATION
- --------------------------------------------------------------------------------------
Futures Contracts
100 U.S. Treasury Note
10 Year Futures $11,262,500 December 2004 $ (61,325)
- --------------------------------------------------------------------------------------
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
13
Investment Grade Municipal Income Fund Inc.
STATEMENT OF ASSETS AND LIABILITIES - SEPTEMBER 30, 2004
Assets:
Investments in securities, at value (cost-$263,685,708) $272,756,144
- ---------------------------------------------------------------------------------------
Cash 2,092,579
- ---------------------------------------------------------------------------------------
Interest receivable 4,102,107
- ---------------------------------------------------------------------------------------
Receivable for investments sold 109,415
- ---------------------------------------------------------------------------------------
Receivable for variation margin 15,623
- ---------------------------------------------------------------------------------------
Other assets 15,255
- ---------------------------------------------------------------------------------------
Total assets 279,091,123
- ---------------------------------------------------------------------------------------
Liabilities:
- ---------------------------------------------------------------------------------------
Payable for investments purchased 5,149,899
- ---------------------------------------------------------------------------------------
Payable to investment advisor and administrator 156,973
- ---------------------------------------------------------------------------------------
Dividends payable to auction preferred shareholders 6,250
- ---------------------------------------------------------------------------------------
Accrued expenses and other liabilities 40,977
- ---------------------------------------------------------------------------------------
Total liabilities 5,354,099
- ---------------------------------------------------------------------------------------
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 $163,737,024
- ---------------------------------------------------------------------------------------
Net assets applicable to common shareholders:
Common Stock-$0.001 par value; 199,998,400 shares authorized;
10,356,667 shares issued and outstanding 153,239,012
- ---------------------------------------------------------------------------------------
Undistributed net investment income 211,405
- ---------------------------------------------------------------------------------------
Accumulated net realized gain from investment activities and futures 1,277,496
- ---------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures 9,009,111
- ---------------------------------------------------------------------------------------
Net assets applicable to common shareholders $163,737,024
- ---------------------------------------------------------------------------------------
Net asset value per common share ($163,737,024 applicable to
10,356,667 common shares outstanding) $15.81
- ---------------------------------------------------------------------------------------
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
14
Investment Grade Municipal Income Fund Inc.
STATEMENT OF OPERATIONS
For the Year
Ended
September 30, 2004
- ---------------------------------------------------------------------------------------
Investment income:
Interest $ 12,142,124
- ---------------------------------------------------------------------------------------
Expenses:
Investment advisory and administration fees 2,399,549
- ---------------------------------------------------------------------------------------
Auction Preferred Shares expenses 302,594
- ---------------------------------------------------------------------------------------
Custody and accounting 159,970
- ---------------------------------------------------------------------------------------
Professional fees 47,278
- ---------------------------------------------------------------------------------------
Reports and notices to shareholders 33,764
- ---------------------------------------------------------------------------------------
Transfer agency fees 12,491
- ---------------------------------------------------------------------------------------
Directors' fees 12,283
- ---------------------------------------------------------------------------------------
Other expenses 65,579
- ---------------------------------------------------------------------------------------
3,033,508
- ---------------------------------------------------------------------------------------
Less: Fee waivers from investment advisor and administrator (533,233)
- ---------------------------------------------------------------------------------------
Net expenses 2,500,275
- ---------------------------------------------------------------------------------------
Net investment income 9,641,849
- ---------------------------------------------------------------------------------------
Realized and unrealized gains (losses) from investment activities:
Net realized gains from:
- ---------------------------------------------------------------------------------------
Investments 1,713,606
- ---------------------------------------------------------------------------------------
Futures 176,070
- ---------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of:
- ---------------------------------------------------------------------------------------
Investments (255,367)
- ---------------------------------------------------------------------------------------
Futures (61,325)
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain from investment activities 1,572,984
- ---------------------------------------------------------------------------------------
Dividends and distributions to auction preferred shareholders
from:
Net investment income (863,818)
- ---------------------------------------------------------------------------------------
Net realized gain from investment activities (318,688)
- ---------------------------------------------------------------------------------------
Total dividends and distributions to auction preferred shareholders (1,182,506)
- ---------------------------------------------------------------------------------------
Net increase in net assets applicable to common shareholders resulting
from operations $10,032,327
- ---------------------------------------------------------------------------------------
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 Years Ended
September 30,
-------------------------------
2004 2003
- ---------------------------------------------------------------------------------------------
From operations:
Net investment income $9,641,849 $9,881,410
- ---------------------------------------------------------------------------------------------
Net realized gains from investment activities and futures 1,889,676 4,823,139
- ---------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of
investments and futures (316,692) (3,488,907)
- ---------------------------------------------------------------------------------------------
Common share equivalent of dividends and
distributions to auction preferred
shareholders from:
Net investment income (863,818) (946,455)
- ---------------------------------------------------------------------------------------------
Net realized gains from investment activities (318,688) -
- ---------------------------------------------------------------------------------------------
Total dividends and distributions paid to auction
preferred shareholders (1,182,506) (946,455)
- ---------------------------------------------------------------------------------------------
Net increase in net assets applicable to common
shareholders resulting from operations 10,032,327 10,269,187
- ---------------------------------------------------------------------------------------------
Dividends and distributions to common
shareholders from:
Net investment income (9,631,721) (9,942,400)
- ---------------------------------------------------------------------------------------------
Net realized gains from investment activities (5,116,194) (1,893,199)
- ---------------------------------------------------------------------------------------------
Total dividends and distributions to common
shareholders (14,747,915) (11,835,599)
- ---------------------------------------------------------------------------------------------
Auction Preferred Shares offering expenses (435,135) -
- ---------------------------------------------------------------------------------------------
Net decrease in net assets applicable to common
shareholders (5,150,723) (1,566,412)
- ---------------------------------------------------------------------------------------------
Net assets applicable to common shareholders:
Beginning of year 168,887,747 170,454,159
- ---------------------------------------------------------------------------------------------
End of year $163,737,024 $168,887,747
- ---------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $211,405 $1,065,095
- ---------------------------------------------------------------------------------------------
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
16
Investment Grade Municipal Income Fund Inc.
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Investment Grade Municipal Income Fund Inc. (the "Fund") was incorporated in
Maryland on August 6, 1992, and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as a
closed-end diversified management investment company. The Fund's investment
objective is to achieve a high level of current income that is exempt from
federal income tax, consistent with the preservation of capital.
In the normal course of business the Fund may enter into contracts that contain
a variety of representations or that provide indemnification for certain
liabilities. The Fund's maximum exposure under these arrangements is unknown,
as this would involve future claims that may be made against the Fund that have
not yet occurred. However, the Fund has not had prior claims or losses pursuant
to these contracts and expects the risk of loss to be remote.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires the Fund's management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies:
VALUATION OF INVESTMENTS--The Fund calculates net asset values based on the
current market value 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 last reported sale prices,
current market quotations or valuations from computerized "matrix" systems that
derive values based on comparable securities. A matrix system incorporates
parameters such as security quality, maturity and coupon, and/or research and
evaluations by its staff, including review of broker-dealer market price
quotations, if available, in determining the valuation of the portfolio
securities. If a market value is not available from an independent pricing
source for a particular security, that security is valued at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors (the "Board"). 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. Securities traded in the
over-the-counter ("OTC") market are valued at the last bid price available on
the valuation date prior to valuation.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income
is recorded on an accrual basis. Discounts are accreted and premiums are
amortized as adjustments to interest income and the identified cost of
investments.
- --------------------------------------------------------------------------------
17
Investment Grade Municipal Income Fund Inc.
NOTES TO FINANCIAL STATEMENTS
FUTURES CONTRACTS--Upon entering into a financial futures contract, the Fund is
required to deposit in a segregated account with its custodian, in the name of
the futures broker through which the transaction was effected, an amount of
cash and/or municipal obligations equal to a certain percentage of the contract
amount. This amount is known as the "initial margin." Subsequent payments,
known as "variation margin" are made or received by the Fund each day,
depending on the daily fluctuations in the value of the underlying financial
futures contracts. Such variation margin is recorded for financial statement
purposes on a daily basis as unrealized gain or loss until the financial
futures contract is closed, at which time the net gain or loss is reclassified
to realized gain or loss on futures. Variation margin calls could be
substantial in the event of adverse price movements.
Using financial futures contracts involves various market risks. If the Fund
was unable to liquidate a futures position due to the absence of a liquid
secondary market or the imposition of price limits, it could incur substantial
losses. The Fund would continue to be subject to market risk with respect to
the position. In addition, the Fund would continue to be required to make
variation margin payments and might be required to maintain the position being
hedged or to maintain cash or securities in a segregated account. Furthermore,
certain characteristics of the futures market might increase the risk that
movements in the prices of the financial futures contracts might not correlate
perfectly with movements in the prices of the investments being hedged,
including temporary price distortion.
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 U.S. generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their
federal tax-basis treatment; temporary differences do not require
reclassification.
CONCENTRATION OF RISK
The Fund follows an investment policy of investing primarily in municipal
obligations of various states. Economic changes affecting those states and
certain of their public bodies and municipalities may affect the ability of the
issuers within those
- --------------------------------------------------------------------------------
18
Investment Grade Municipal Income Fund Inc.
NOTES TO FINANCIAL STATEMENTS
states to pay interest on, or repay principal of, municipal obligations held by
the Fund.
INVESTMENT ADVISOR AND ADMINISTRATOR
The Board has approved an investment advisory and administration contract
("Advisory Contract") with UBS Global Asset Management (US) Inc. ("UBS Global
AM"), under which UBS Global AM serves as investment advisor and administrator
of the Fund. UBS Global AM is an indirect wholly owned asset management
subsidiary of UBS AG, an internationally diversified organization with
headquarters in Zurich, Switzerland and operations in many areas of the
financial services industry. In accordance with the Advisory Contract, the Fund
pays UBS Global AM an investment advisory and administration fee, which is
accrued weekly and paid monthly, at the annual rate of 0.90% of the Fund's
average weekly net assets applicable to holders of common and Auction Preferred
Shares. 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 applicable to holders of common and Auction Preferred Shares. This
waiver will continue indefinitely unless the Board agrees to any change. At
September 30, 2004, the Fund owed UBS Global AM $156,973, which is $201,825
investment advisory and administration fees less fees waived of $44,852. For
the year ended September 30, 2004, UBS Global AM waived $533,233 in investment
advisory and administration fees from the Fund.
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 each
Series of APS. Dividend rates ranged from 0.750% to 2.050% for the year ended
September 30, 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
- --------------------------------------------------------------------------------
19
Investment Grade Municipal Income Fund Inc.
NOTES TO FINANCIAL STATEMENTS
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.
Offering expenses of $435,135 were charged to paid-in-capital of the Fund in
connection with the offering of APS during the year ended September 30, 2004.
PURCHASES AND SALES OF SECURITIES
For the year ended September 30, 2004, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $148,190,358 and
$115,591,941, respectively.
FEDERAL TAX STATUS
The Fund intends to distribute substantially all of its tax-exempt income and
any taxable income and to comply with the other requirements of the Internal
Revenue Code applicable to regulated investment companies. Accordingly, no
provision for federal income taxes is required. In addition, by distributing
during each calendar year substantially all of its net investment income, net
realized capital gains and certain other amounts, if any, the Fund intends not
to be subject to a federal excise tax.
The tax character of distributions paid during the fiscal years ended September
30, 2004 and September 30, 2003 were as follows:
DISTRIBUTIONS PAID FROM: 2004 2003
- ------------------------------------------------------------
Tax-exempt income $10,491,297 $10,662,658
- ------------------------------------------------------------
Ordinary income 4,242 22,485
- ------------------------------------------------------------
Net long-term capital gains 5,434,882 2,096,911
- ------------------------------------------------------------
Total distributions paid $15,930,421 $12,782,054
- ------------------------------------------------------------
- --------------------------------------------------------------------------------
20
Investment Grade Municipal Income Fund Inc.
NOTES TO FINANCIAL STATEMENTS
At September 30, 2004, the components of accumulated earnings on a tax basis
were as follows:
Undistributed tax exempt income $217,655
- ----------------------------------------------------------
Undistributed ordinary income 19,083
- ----------------------------------------------------------
Undistributed long-term capital gains 1,197,088
- ----------------------------------------------------------
Net unrealized appreciation of investments 9,070,436
- ----------------------------------------------------------
Total accumulated earnings $10,504,262
- ----------------------------------------------------------
For federal income tax purposes, the tax cost of investments and the components
of net unrealized appreciation of investments at September 30, 2004 were as
follows:
Tax cost of investments $263,685,708
- ---------------------------------------------
Gross unrealized appreciation 9,481,886
- ---------------------------------------------
Gross unrealized depreciation (411,450)
- ---------------------------------------------
Net unrealized appreciation $9,070,436
- ---------------------------------------------
- --------------------------------------------------------------------------------
21
Investment Grade Municipal Income Fund Inc.
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each year is
presented below:
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $16.31 $16.46 $16.15 $15.91 $16.09
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.93 0.95 1.11 1.17 1.18
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) from
investment activities 0.14 0.13 0.29 0.46 (0.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Common share equivalent of dividends and
distributions paid to auction preferred
shareholders from:
Net investment income (0.08) (0.07) (0.12) (0.23) (0.31)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gains from investment activities (0.03) (0.02) (0.01) (0.07) (0.00)(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions paid to
auction preferred shareholders (0.11) (0.09) (0.13) (0.30) (0.31)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase from operations 0.96 0.99 1.27 1.33 0.74
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends and distributions paid to common
shareholders from:
Net investment income (0.93) (0.96) (0.93) (0.90) (0.90)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gains from investment activities (0.49) (0.18) (0.03) (0.19) (0.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions to
common shareholders (1.42) (1.14) (0.96) (1.09) (0.92)
- ------------------------------------------------------------------------------------------------------------------------------------
Auction Preferred Shares offering expenses (0.04) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $15.81 $16.31 $16.46 $16.15 $15.91
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE, END OF YEAR $14.25 $14.86 $15.60 $15.39 $13.75
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN (2) 5.57% 2.76% 7.96% 20.59% 5.90%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS ATTRIBUTABLE
TO COMMON SHARES:
Total expenses, net of fee waivers by advisor 1.53% 1.45% 1.48% 1.49% 1.52%
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses, before fee waivers by advisor 1.86% 1.66% 1.67% 1.68% 1.71%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income before Auction
Preferred Shares dividends 5.91% 5.89% 6.89% 7.30% 7.48%
- ------------------------------------------------------------------------------------------------------------------------------------
Auction Preferred Shares dividends from
net investment income 0.53% 0.44% 0.73% 1.42% 1.99%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income available to common
shareholders, net of fee waivers by advisor 5.38% 5.45% 6.16% 5.88% 5.49%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income available to common
shareholders, before fee waivers by advisor 5.05% 5.24% 5.97% 5.69% 5.30%
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets applicable to common shareholders,
end of year (000's) $163,737 $168,888 $170,454 $167,295 $164,769
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 45% 51% 21% 8% 14%
- ------------------------------------------------------------------------------------------------------------------------------------
Asset coverage per share of Auction Preferred
Shares, end of year $124,426 $155,555 $156,534 $154,559 $152,980
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Distribution equal to $0.0042 per share.
(2) Total investment return is calculated assuming a $10,000 purchase of
common stock at the current market price on the first day of each year
reported and a sale at the current market price on the last day of each
year reported, and assuming reinvestment of dividends and other
distributions to common shareholders at prices obtained under the Fund's
Dividend Reinvestment Plan. Total investment return does not reflect
brokerage commissions. Returns do not reflect the deduction of taxes that
a shareholder could pay on Fund distributions.
- --------------------------------------------------------------------------------
22
Investment Grade Municipal Income Fund Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Investment Grade Municipal Income Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Investment Grade Municipal Income Fund Inc. (the "Fund"), including the
portfolio of investments, as of September 30, 2004, and the related statement
of operations for the year then ended, the statements of changes in net assets
applicable to common shareholders for each of the two years in the period then
ended, and the financial highlights for each of the four years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the year ended September 30, 2000, was
audited by other auditors whose report dated November 22, 2000, expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and financial
highlights. Our procedures included confirmation of investments owned as of
September 30, 2004, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Investment Grade Municipal Income Fund Inc. at September 30, 2004, the results
of its operations for the year then ended, the changes in its net assets
applicable to common shareholders for each of the two years in the period then
ended, and the financial highlights for each of the four years in the period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
November 2, 2004
- --------------------------------------------------------------------------------
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 $49.5 billion in
assets under management as of September 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.
PROXY VOTING POLICIES AND PROCEDURES AND RECORD
You may obtain a description of the Fund's proxy voting policies and
procedures, and its proxy voting record 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
website (http://www.sec.gov).
QUARTERLY FORM N-Q PORTFOLIO SCHEDULE
The Fund will file its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third quarters of
each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's
website at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0330. Additionally, you may obtain copies of Forms N-Q from the Fund
upon request by calling 1-800-647-1568.
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
- --------------------------------------------------------------------------------
24
Investment Grade Municipal Income Fund Inc.
GENERAL INFORMATION (UNAUDITED)
DIVIDEND REINVESTMENT PLAN (CONTINUED)
in additional shares of common stock, unless such common shareholders elect to
receive cash. Common shareholders who elect to hold their shares in the name of
another broker or nominee should contact such broker or nominee to determine
whether, or how, they may participate in the Plan. The ability of such
shareholders to participate in the Plan may change if their shares are
transferred into the name of another broker or nominee.
A common shareholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and common shareholders
who have previously terminated participation in the Plan may rejoin it at any
time. Changes in elections must be made in writing to the Fund's transfer agent
and should include the shareholder's name and address as they appear on the
share certificate or in the transfer agent's records. An election to terminate
participation in the Plan, until such election is changed, will be deemed an
election by a common shareholder to take all subsequent distributions in cash.
An election will be effective only for distributions declared and having a
record date at least ten days after the date on which the election is received.
Additional shares of common stock acquired under the Plan will be purchased in
the open market, on the NYSE or otherwise, at prices that may be higher or
lower than the net asset value per share of the common stock at the time of the
purchase. The number of shares of common stock purchased with each dividend
will be equal to the result obtained by dividing the amount of the dividend
payable to a particular shareholder by the average price per share (including
applicable brokerage commissions) that the transfer agent was able to obtain in
the open market. The Fund will not issue any new shares of common stock in
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
- --------------------------------------------------------------------------------
25
Investment Grade Municipal Income Fund Inc.
GENERAL INFORMATION (UNAUDITED)
DIVIDEND REINVESTMENT PLAN (CONCLUDED)
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.
- --------------------------------------------------------------------------------
26
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- --------------------------------------------------------------------------------
27
Investment Grade Municipal Income Fund Inc.
SUPPLEMENTAL INFORMATION (UNAUDITED)
BOARD OF DIRECTORS & OFFICERS
The Fund is governed by a Board of Directors which oversees the Fund's
operations. Each Director serves until the next annual meeting of shareholders
or until his or her successor is elected and qualified or until he or she
resigns or is otherwise removed. Officers are appointed by the Directors and
serve at the pleasure of the Board. The table below shows, for each Director
and Officer, his or her name, address and age, the position held with the Fund,
the length of time served as a Director and Officer of the Fund, the Director's
or Officer's principal occupations during the last five years, the number of
funds in the UBS Fund complex overseen by the Director or for which a person
served as an Officer, and other directorships held by the Director.
INTERESTED DIRECTOR
Term of
Position(s) Office and
Name, Address, Held with Length of Principal Occupation(s)
and Age Fund Time Served During Past 5 Years
- --------------------------------------------------------------------------------------------------------
Margo N. Alexander+; 57 Director Since 1996 Mrs. Alexander is retired. She was an
c/o UBS Global Asset executive vice president of UBS Financial
Management Services Inc. (from March 1984 to
51 West 52nd Street December 2002). She was chief executive
New York, NY 10019 officer (from January 1995 to
October 2000), a director (from
January 1995 to September 2001) and
chairman (from March 1999 to
September 2001) of UBS Global AM
(formerly known as Mitchell Hutchins Asset
Management Inc.).
- --------------------------------------------------------------------------------
28
Investment Grade Municipal Income Fund Inc.
SUPPLEMENTAL INFORMATION (UNAUDITED)
Number of
Portfolios in Fund Complex Other Directorships
Overseen by Director Held by Director
- ------------------------------------------------------------------------
Mrs. Alexander is a director or trustee of 16 None
investment companies (consisting of 33 portfolios)
for which UBS Global AM or one of its affiliates
serves as investment advisor, sub-advisor or
manager.
- --------------------------------------------------------------------------------
29
Investment Grade Municipal Income Fund Inc.
SUPPLEMENTAL INFORMATION (UNAUDITED)
INDEPENDENT DIRECTORS
Term of
Position(s) Office and
Name, Address, Held with Length of Principal Occupation(s)
and Age Fund Time Served During Past 5 Years
- -----------------------------------------------------------------------------------------------------------------
Richard Q. Armstrong; 69 Director and Since 1996 Mr. Armstrong is chairman and principal of
c/o Willkie Farr & Chairman R.Q.A. Enterprises (management consulting
Gallagher LLP of the Board of firm) (since April 1991 and principal
787 Seventh Avenue Directors occupation since March 1995).
New York, NY 10019-6099
David J. Beaubien; 70 Director Since 2001 Mr. Beaubien is retired (since 2003). He was
84 Doane Road chairman of Yankee Environmental
Ware, MA 01082 Systems, Inc., a manufacturer of
meteorological measuring systems (since
1991).
Richard R. Burt; 57 Director Since 1996 Mr. Burt is chairman of Diligence LLC
1275 Pennsylvania Avenue, (international information and security firm)
N.W. and IEP Advisors (international investments
Washington, D.C. 20004 and consulting firm).
Meyer Feldberg; 62 Director Since 1992 Professor Feldberg is Dean Emeritus and
Columbia Business School Sanford Bernstein Professor of Leadership
33 West 60th Street and Ethics at Columbia Business School.
7th Floor Prior to July 2004, he was Dean and
New York, NY 10023-7905 Professor of Management of the Graduate
School of Business at Columbia University
(since 1989).
Carl W. Schafer; 68 Director Since 1996 Mr. Schafer is president of the Atlantic
66 Witherspoon Street Foundation (charitable foundation) (since
#1100 1990).
Princeton, NJ 08542
William D. White; 70 Director Since 2001 Mr. White is retired (since 1994).
P.O. Box 199
Upper Black Eddy, PA 18972
- --------------------------------------------------------------------------------
30
Investment Grade Municipal Income Fund Inc.
SUPPLEMENTAL INFORMATION (UNAUDITED)
Number of
Portfolios in Fund Complex Other Directorships
Overseen by Director Held by Director
- -------------------------------------------------------------------------------------------------------------------------
Mr. Armstrong is a director or trustee of 16 None
investment companies (consisting of 33 portfolios)
for which UBS Global AM or one of its affiliates
serves as investment advisor, sub-advisor or
manager.
Mr. Beaubien is a director or trustee of 16 Mr. Beaubien is also a director of IEC Electronics, Inc., a
investment companies (consisting of 33 portfolios) manufacturer of electronic assemblies.
for which UBS Global AM or one of its affiliates
serves as investment advisor, sub-advisor or
manager.
Mr. Burt is a director or trustee of 16 investment Mr. Burt is also a director of Hollinger International Inc.
companies (consisting of 33 portfolios) for which (publishing), HCL Technologies, Ltd., (software and
UBS Global AM or one of its affiliates serves as information technologies), The Central European Fund, Inc.,
investment advisor, sub-advisor or manager. The Germany Fund, Inc., IGT, Inc. (provides technology to
gaming and wagering industry) and chairman of Weirton
Steel Corp. (makes and finishes steel products). He is also a
director or trustee of funds in the Scudder Mutual Funds
Family (consisting of 47 portfolios).
Professor Feldberg is a director or trustee of 30 Professor Feldberg is also a director of Primedia Inc.
investment companies (consisting of 47 portfolios) (publishing), Federated Department Stores, Inc. (operator of
for which UBS Global AM or one of its affiliates department stores), Revlon, Inc. (cosmetics), Select Medical
serves as investment advisor, sub-advisor or Inc. (healthcare services) and SAPPI, Ltd. (producer of paper).
manager.
Mr. Schafer is a director or trustee of 16 investment Mr. Schafer is also a director of Labor Ready, Inc. (temporary
companies (consisting of 33 portfolios) for which employment). Guardian Life Insurance Company Mutual
UBS Global AM or one of its affiliates serves as Funds (consisting of 25 portfolios), the Harding, Loevner
investment advisor, sub-advisor or manager. Funds (consisting of three portfolios), E.I.I. Realty Securities
Trust (consisting of two portfolios) and Frontier Oil
Corporation.
Mr. White is a director or trustee of 16 investment None
companies (consisting of 33 portfolios) for which
UBS Global AM or one of its affiliates serves as
investment advisor, sub-advisor or manager.
- --------------------------------------------------------------------------------
31
Investment Grade Municipal Income Fund Inc.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS
Term of Principal Occupation(s)
Position(s) Office and During Past 5 Years;
Name, Address, Held With Length of Number of Portfolios in Fund Complex
and Age Fund Time Served For Which Person Serves as Officer
- -----------------------------------------------------------------------------------------------------------------------
W. Douglas Beck*; 37 Vice President Since 2003 Mr. Beck is an executive director and head
of mutual fund product management of
UBS Global AM (since 2002). From March
1998 to November 2002, he held various
positions at Merrill Lynch, the most recent
being first vice president and co-manager
of the managed solutions group. Mr. Beck is
vice president of 20 investment companies
(consisting of 75 portfolios) for which UBS
Global AM or one of its affiliates serves as
investment advisor, sub-advisor or manager.
James Capezzuto*; 40 Vice President Since 2004 Mr. Capezzuto is director and assistant
and Assistant general counsel at UBS Global AM (since
Secretary 2004). Prior to joining UBS Global AM he
was senior vice president, senior
compliance manager at Bank of America
(from 2003-2004) prior to that he was
general counsel at Steinberg Priest & Sloane
and prior to that he was director and senior
counsel at Deutsche Asset Management
(from 1996 - 2002.) Mr. Capezzuto is a vice
president and assistant secretary of 20
investment companies (consisting of 75
portfolios) for which UBS Global AM or one
of its affiliates serves as investment advisor,
sub-advisor or manager.
Thomas Disbrow*; 38 Vice President Since 2000 Mr. Disbrow is a director and co-head of the
and Treasurer (Vice President) mutual fund finance department of UBS
since 2004 Global AM. Prior to November 1999, he
(Treasurer) was a vice president of Zweig/Glaser
Advisers. Mr. Disbrow is a vice president
and treasurer of 16 investment companies
(consisting of 33 portfolios) and assistant
treasurer of four investment companies
(consisting of 42 portfolios) for which UBS
Global AM or one of its affiliates serves as
investment advisor, sub-advisor or manager.
Elbridge T. Gerry III*; 47 Vice President Since 1996 Mr. Gerry is a managing director-municipal
fixed income of UBS Global AM. Mr. Gerry
is a vice president of six investment
companies (consisting of 10 portfolios) for
which UBS Global AM or one of its affiliates
serves as investment advisor, sub-advisor or
manager.
- --------------------------------------------------------------------------------
32
Investment Grade Municipal Income Fund Inc.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONTINUED)
Term of Principal Occupation(s)
Position(s) Office and During Past 5 Years;
Name, Address, Held With Length of Number of Portfolios in Fund Complex
and Age Fund Time Served For Which Person Serves as Officer
- ---------------------------------------------------------------------------------------------------------------
Mark F. Kemper**; 46 Vice President Since 2004 Mr. Kemper is general counsel of UBS
and Secretary Global Asset Management-Americas
region (since July 2004). Mr. Kemper also is
an executive director of UBS Global Asset
Management (Americas) Inc. ("UBS Global
AM (Americas)") and was its deputy general
counsel from July 2001 to July 2004. He has
been secretary of UBS Global AM
(Americas) since 1999 and assistant
secretary of UBS Global Asset Management
Trust Company since 1993. Mr. Kemper is
secretary of UBS Global AM (since 2004).
Mr. Kemper is vice president and secretary
of 20 investment companies (consisting of
75 portfolios) for which UBS Global AM
(Americas) or one of its affiliates serves as
investment advisor, sub-advisor or manager.
Joanne M. Kilkeary*; 36 Vice President Since 2004 Ms. Kilkeary is an associate director and a
and Assistant senior manager of the mutual fund finance
Treasurer department of UBS Global AM. Ms. Kilkeary
is a vice president and assistant treasurer of
16 investment companies (consisting of 33
portfolios) for which UBS Global AM or one
of its affiliates serves as investment advisor,
sub-advisor or manager.
Joseph T. Malone*; 36 Vice President Since 2004 Mr. Malone is a director and co-head of the
and Assistant mutual fund finance department of UBS
Treasurer Global AM. From August 2000 through
June 2001, he was the controller at AEA
Investors Inc. From March 1998 to August
2000, Mr. Malone was a manager within
investment management services of
PricewaterhouseCoopers LLC. Mr. Malone
is vice president and assistant treasurer of
16 investment companies (consisting of 33
portfolios) and vice president, treasurer and
principal accounting officer of four
investment companies (consisting of 42
portfolios) for which UBS Global AM or one
of its affiliates serves as investment advisor,
sub-advisor or manager.
- --------------------------------------------------------------------------------
33
Investment Grade Municipal Income Fund Inc.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONCLUDED)
Term of Principal Occupation(s)
Position(s) Office and During Past 5 Years;
Name, Address, Held With Length of Number of Portfolios in Fund Complex
and Age Fund Time Served For Which Person Serves as Officer
- -------------------------------------------------------------------------------------------------------------
Joseph McGill*; 42 Vice President Since 2004 Mr. McGill is executive director and chief
and Chief compliance officer at UBS Global AM (since
Compliance 2003). Prior to joining UBS Global AM he
Officer was Assistant General Counsel, J.P. Morgan
Investment Management (from
1999-2003). Mr. McGill is a vice president
and chief compliance officer of 20
investment companies (consisting of 75
portfolios) for which UBS Global AM or one
of its affiliates serves as investment advisor,
sub-advisor or manager.
Joseph A. Varnas*; 36 President Since 2003 Mr. Varnas is a managing director (since
March 2003), global head of information
technology and operations (since March
2004) and head of product management-
Americas (since November 2002) of UBS
Global AM. He was head of technology of
UBS Global AM from November 2002 to
March 2004. From 2000 to 2001, he was
manager of product development in
Investment Consulting Services at UBS
Financial Services Inc. Mr. Varnas was a
senior analyst in the Global Securities
Research and Economics Group at Merrill
Lynch from 1995 to 1999. Mr. Varnas is
president of 20 investment companies
(consisting of 75 portfolios) for which UBS
Global AM or one of its affiliates serves as
investment advisor, sub-advisor or manager.
William Veronda*; 58 Vice President Since 2004 Mr. Veronda is an executive director-fixed
income of UBS Global AM (since 1995). Mr.
Veronda is a vice president of two
investment companies (consisting of two
portfolios) for which UBS Global AM or one
of its affiliates serves as investment advisor,
sub-advisor or manager.
Keith A. Weller*; 43 Vice President Since 1995 Mr. Weller is a director and associate
and Assistant general counsel of UBS Global AM. Mr.
Secretary Weller is a vice president and assistant
secretary of 20 investment companies
(consisting of 75 portfolios) for which UBS
Global AM or one of its affiliates serves as
investment advisor, sub-advisor or manager.
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is One North Wacker Drive, Chicago, Illinois
60606.
+ Mrs. Alexander is an "interested person" of the Fund as defined in the
Investment Company Act by virtue of her former positions with UBS Global AM
and/or any of its affiliates.
- --------------------------------------------------------------------------------
34
Investment Grade Municipal Income Fund Inc.
NEW YORK STOCK EXCHANGE CERTIFICATIONS (UNAUDITED)
Investment Grade Municipal Income Fund Inc. (the "Fund") is listed on the New
York Stock Exchange ("NYSE"). As a result, it is subject to certain corporate
governance rules and related interpretations issued by the exchange. Pursuant
to those requirements, the Fund must include information in this report
regarding certain certifications. The Fund's president and treasurer have filed
certifications with the SEC regarding the quality of the Fund's public
disclosure. Those certifications were made pursuant to Section 302 of the
Sarbanes-Oxley Act ("Section 302 Certifications"). The Section 302
Certifications were filed as exhibits to the Fund's annual report on Form
N-CSR, which included a copy of this annual report along with other information
about the Fund. After the Fund's 2005 annual meeting of shareholders, it will
be required to file a certification with the NYSE stating whether its president
is aware of any violation of the NYSE's Corporate Governance listing standards.
The Fund will be required to include certain additional information in
subsequent annual reports relating to the NYSE certification.
- --------------------------------------------------------------------------------
35
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Directors
Richard Q. Armstrong Meyer Feldberg
Chairman
Carl W. Schafer
Margo N. Alexander
William D. White
David J. Beaubien
Richard R. Burt
Principal Officers
Joseph A. Varnas Elbridge T. Gerry III
President Vice President
Mark F. Kemper W. Douglas Beck
Vice President and Secretary Vice President
Thomas Disbrow
Vice President and Treasurer
Investment Advisor and
Administrator
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, New York 10019-6114
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that from time to time the Fund may purchase shares of its
common stock in the open market at market prices.
This report is sent to the shareholders of the Fund for their information. It
is not a prospectus, circular or representation intended for use in the
purchase or sale of shares of the Fund or of any securities mentioned in this
report.
(copyright) 2004 UBS Global Asset Management (US) Inc. All rights reserved.
----------------
(UBS LOGO) Presorted
Standard
UBS GLOBAL ASSET MANAGEMENT (US) INC. US Postage
51 West 52nd Street PAID
New York, NY 10019-6114 Smithtown, NY
Permit 700
----------------
ITEM 2. CODE OF ETHICS.
- ------------------------
The registrant has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions pursuant to Section 406 of
the Sarbanes-Oxley Act of 2002. (The registrant has designated the code of
ethics adopted pursuant to Sarbanes-Oxley as a "Code of Conduct" to lessen the
risk of confusion with its separate code of ethics adopted pursuant to Rule
17j-1 under the Investment Company Act of 1940, as amended.)
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
- ------------------------------------------
The registrant's Board has determined that the following person serving on the
registrant's Audit Committee is an "audit committee financial expert" as defined
in item 3 of Form N-CSR: Richard Q. Armstrong. Mr. Armstrong is independent as
defined in item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- ------------------------------------------------
(a) Audit Fees:
-----------
For the fiscal years ended September 30, 2004 and September 30,
2003, the aggregate Ernst & Young LLP (E&Y) audit fees for
professional services rendered to the registrant were
approximately $36,750 and $13,600, respectively.
Fees included in the audit fees category are those associated with
the annual audits of financial statements and services that are
normally provided in connection with statutory and regulatory
filings.
(b) Audit-Related Fees:
-------------------
In each of the fiscal years ended September 30, 2004 and September
30, 2003, the aggregate audit-related fees billed by E&Y for
services rendered to the registrant that are reasonably related to
the performance of the audits of the financial statements, but not
reported as audit fees, were approximately $12,693 and $21,300,
respectively, which includes amounts related to non-audit services
prior to May 6, 2003 that would have been subject to pre-approval
if the SEC rules relating to the pre-approval of non-audit
services had been in effect at that time.
Fees included in the audit-related category are those associated
with (1) the reading and providing of comments on the 2004 and
2003 semiannual financial statements, (2) review of portions of
the registrant's semiannual 2003 Form N-SAR filing (3) review of
the consolidated 2003 and 2002 report on UBS Funds' profitability
of UBS Global Asset Management (US) Inc. ("UBS Global AM") to
assist the board members in their annual advisory/administration
contract reviews and (4) auction preferred shares testing for the
registrant's fiscal years ended 2004 and 2003.
There were no audit-related fees required to be approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the
fiscal years indicated above.
(c) Tax Fees:
---------
In each of the fiscal years ended September 30, 2004 and September
30, 2003, the aggregate tax fees billed by E&Y for professional
services rendered to the registrant were approximately $11,400 and
$8,100, respectively, which includes amounts related to tax
services prior to May 6, 2003 that would have been subject to
pre-approval if the SEC rules relating to the pre-approval of
non-audit services had been in effect at that time.
Fees included in the tax fees category comprise all services
performed by professional staff in the independent accountant's
tax division except those services related to the audits. This
category comprises fees for review of tax compliance, tax return
preparation and excise tax calculations.
There were no tax fees required to be approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the
fiscal years indicated above.
(d) All Other Fees:
---------------
In each of the fiscal years ended September 30, 2004 and September
30, 2003, there were no fees billed by E&Y for products and
services, other than the services reported in Item 4(a)-(c) above,
rendered to the registrant.
Fees included in the all other fees category would consist of
services related to internal control reviews, strategy and other
consulting, financial information systems design and
implementation, consulting on other information systems, and other
tax services unrelated to the registrant.
There were no "all other fees" required to be approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the
fiscal years indicated above.
(e) (1) Audit Committee Pre-Approval Policies and Procedures:
-----------------------------------------------------
The registrant's Audit Committee ("audit committee") has
adopted an "Audit Committee Charter (Amended and Restated as
of May 12, 2004)" (the "charter"). The charter contains the
audit committee's pre-approval policies and procedures.
Reproduced below is an excerpt from the charter regarding
pre-approval policies and procedures:
The [audit ]Committee shall:
...
2. Pre-approve (a) all audit and permissible
non-audit services(1) to be provided to the Fund
and (b) all permissible non-audit services to be
provided by the Fund's independent auditors to
UBS Global [AM] and any Covered
Service Providers, if the engagement relates
directly to the operations and financial
reporting of the Fund. In carrying out this
responsibility, the Committee shall seek
periodically from UBS Global [AM] and from the
independent auditors a list of such audit and
permissible non-audit services that can be
expected to be rendered to the Fund, UBS Global
[AM] or any Covered Service Providers by the
Fund's independent auditors, and an estimate of
the fees sought to be paid in connection with
such services. The Committee may delegate its
responsibility to pre-approve any such audit and
permissible non-audit services to a sub-committee
consisting of the Chairperson of the Committee
and two other members of the Committee as the
Chairperson, from time to time, may determine and
appoint, and such sub-committee shall report to
the Committee, at its next regularly scheduled
meeting after the sub-committee's meeting, its
decision(s). From year to year, the Committee
shall report to the Board whether this system of
pre-approval has been effective and efficient or
whether this Charter should be amended to allow
for pre-approval pursuant to such policies and
procedures as the Committee shall approve,
including the delegation of some or all of the
Committee's pre-approval responsibilities to
other persons (other than UBS Global [AM] or the
Fund's officers).
---------------
(1) The Committee will not approve non-audit
services that the Committee believes may
taint the independence of the auditors.
Currently, permissible non-audit services
include any professional services (including
tax services) that are not prohibited
services as described below, provided to the
Fund by the independent auditors, other than
those provided to the Fund in connection
with an audit or a review of the financial
statements of the Fund. Permissible
non-audit services may not include: (i)
bookkeeping or other services related to the
accounting records or financial statements
of the Fund; (ii) financial information
systems design and implementation; (iii)
appraisal or valuation services, fairness
opinions or contribution-in-kind reports;
(iv) actuarial services; (v) internal audit
outsourcing services; (vi) management
functions or human resources; (vii) broker
or dealer, investment adviser or investment
banking services; (viii) legal services and
expert services unrelated to the audit; and
(ix) any other service the Public Company
Accounting Oversight Board determines, by
regulation, is impermissible.
Pre-approval by the Committee of any
permissible non-audit services is not
required so long as: (i) the aggregate
amount of all such permissible non-audit
services provided to the Fund, UBS Global
[AM] and any service providers controlling,
controlled by or under common control with
UBS Global [AM] that provide ongoing
services to the Fund ("Covered Service
Providers") constitutes not more than 5% of
the total amount of revenues paid to the
independent auditors (during the fiscal year
in which the permissible non-audit services
are provided) by (a) the Fund, (b) its
investment adviser and (c) any entity
controlling, controlled by, or under common
control with the investment adviser that
provides ongoing services to the Fund during
the fiscal year in which the services are
provided that would have to be approved by
the Committee; (ii) the permissible
non-audit services were not recognized by
the Fund at the time of the engagement to be
non-audit services; and (iii) such services
are promptly brought to the attention of the
Committee and approved by the Committee (or
its delegate(s)) prior to the completion of
the audit.
(e) (2) Services approved pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X:
Audit-Related Fees:
-------------------
There were no amounts that were approved by the audit
committee pursuant to the de minimis exception for
the fiscal years ended September 30, 2004 and
September 30, 2003 on behalf of the registrant.
There were no amounts that were required to be
approved by the audit committee pursuant to the de
minimis exception for the fiscal years ended
September 30, 2004 and September 30, 2003 on behalf
of the registrant's service providers that relate
directly to the operations and financial reporting of
the registrant.
Tax Fees:
---------
There were no amounts that were approved by the audit
committee pursuant to the de minimis exception for
the fiscal years ended September 30, 2004 and
September 30, 2003 on behalf of the registrant.
There were no amounts that were required to be
approved by the audit committee pursuant to the de
minimis exception for the fiscal years ended
September 30, 2004 and September 30, 2003 on behalf
of the registrant's service providers that relate
directly to the operations and financial reporting of
the registrant.
All Other Fees:
---------------
There were no amounts that were approved by the audit
committee pursuant to the de minimis exception for
the fiscal years ended September 30, 2004 and
September 30, 2003 on behalf of the registrant.
There were no amounts that were required to be
approved by the audit committee pursuant to the de
minimis exception for the fiscal years ended
September 30, 2004 and September 30, 2003 on behalf
of the registrant's service providers that relate
directly to the operations and financial reporting of
the registrant.
(f) According to E&Y, for the fiscal year ended September 30, 2004,
the percentage of hours spent on the audit of the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons who are not full-time,
permanent employees of E&Y was 0%.
(g) For the fiscal years ended September 30, 2004 and September 30,
2003, the aggregate fees billed by E&Y of $3,661,972 and
$3,178,679, respectively, for non-audit services rendered on
behalf of the registrant ("covered"), its investment adviser (not
including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another
investment adviser) and any entity controlling, controlled by, or
under common control with the adviser ("non-covered") that
provides ongoing services to the registrant for each of the last
two fiscal years of the registrant is shown in the table below:
2004 2003
---- ----
Covered Services $24,093 $29,400
Non-Covered Services 3,637,879 3,149,279
(h) The registrant's audit committee was not required to consider
whether the provision of non-audit services that were rendered to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
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The registrant has a separately designated standing audit committee (the "Audit
Committee") established in accordance with Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended. The Audit Committee is comprised of the
following board members: Mr. Armstrong, Mr. Beaubien, Mr. Burt, Mr. Feldberg and
Mr. White.
ITEM 6. SCHEDULE OF INVESTMENTS.
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Included as part of the report to shareholders filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
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MANAGEMENT INVESTMENT COMPANIES.
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The registrant's Board of Directors believes that the voting of proxies on
securities held by the registrant is an important element of the overall
investment process. As such, the Board has delegated the responsibility to vote
such proxies to the registrant's advisor. Following is a summary of the proxy
voting policy of the advisor.
CORPORATE GOVERNANCE PHILOSOPHY, VOTING GUIDELINES AND POLICY SUMMARY
The proxy voting policy of UBS Global AM is based on its belief that voting
rights have economic value and must be treated accordingly. Generally, UBS
Global AM expects the boards of directors of companies issuing securities held
by its clients to act as stewards of the financial assets of the company, to
exercise good judgment and practice diligent oversight with the management of
the company. While there is no absolute set of rules that determines appropriate
corporate governance under all circumstances and no set of rules will guarantee
ethical behavior, there are certain benchmarks, which, if substantial progress
is made toward, give evidence of good corporate governance. UBS Global AM may
delegate to an independent proxy voting and research service the authority to
exercise the voting rights associated with certain client holdings. Any such
delegation shall be made with the direction that the votes be exercised in
accordance with UBS Global AM's proxy voting policy.
When UBS Global AM's view of a company's management is favorable, UBS Global AM
generally supports current management initiatives. When UBS Global AM's view is
that changes to the management structure would probably increase shareholder
value, UBS Global AM may not support existing management proposals. In general,
UBS Global AM (1) opposes proposals which act to entrench management; (2)
believes that boards should be independent of company management and composed of
persons with requisite skills, knowledge and experience; (3) opposes structures
which impose financial constraints on changes in control; (4) believes
remuneration should be commensurate with responsibilities
and performance; and (5) believes that appropriate steps should be taken to
ensure the independence of auditors.
UBS Global AM has implemented procedures designed to identify whether it has a
conflict of interest in voting a particular proxy proposal, which may arise as a
result of its or its affiliates' client relationships, marketing efforts or
banking and broker/dealer activities. To address such conflicts, UBS Global AM
has imposed information barriers between it and its affiliates who conduct
banking, investment banking and broker/dealer activities and has implemented
procedures to prevent business, sales and marketing issues from influencing our
proxy votes. Whenever UBS Global AM is aware of a conflict with respect to a
particular proxy, its appropriate local corporate governance committee is
required to review and agree to the manner in which such proxy is voted.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
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Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
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COMPANY AND AFFILIATED PURCHASERS.
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There were no purchases made by or on behalf of the registrant or any
"affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Securities
Exchange Act of 1934, as amended, of shares of the registrant's equity
securities made in the period covered by this report.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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The registrant's Board has established a Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee will consider
nominees recommended by shareholders if a vacancy occurs among those board
members who are not "interested persons" as defined in Section 2(a)(19) of the
Investment Company Act of 1940, as amended. In order to recommend a nominee, a
shareholder should send a letter to the chairperson of the Nominating and
Corporate Governance Committee, 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 and
Corporate Governance Committee." The shareholder's letter should state the
nominee's name and should include the nominee's resume or curriculum vitae, and
must be accompanied by a written consent of the individual to stand for election
if nominated for the Board and to serve if elected by shareholders.
ITEM 11. CONTROLS AND PROCEDURES.
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(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 12. EXHIBITS.
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(a) (1) Code of Ethics as required pursuant to Section 406 of the
Sarbanes-Oxley Act of 2002 (and designated by registrant as a
"Code of Conduct") is attached hereto as Exhibit EX-99.CODE ETH.
(a) (2) Certifications of principal executive officer and principal
financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 is attached hereto as Exhibit EX-99.CERT.
(b) Certifications of principal executive officer and principal
financial officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 is attached hereto as Exhibit EX-99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Investment Grade Municipal Income Fund Inc.
By: /s/ Joseph A. Varnas
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Joseph A. Varnas
President
Date: November 24, 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: November 24, 2004
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By: /s/ Thomas Disbrow
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Thomas Disbrow
Treasurer
Date: November 24, 2004
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