<PAGE>
DIRECTORS
E. Garrett Bewkes, Jr., Chairman
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
John R. Torell III
PRINCIPAL OFFICERS
Margo N. Alexander
President
Julian F. Sluyters
Vice President and Treasurer
Dianne E. O'Donnell
Vice President and Secretary
Victoria E. Schonfeld
Vice President
Elbridge T. Gerry III
Vice President
Richard S. Murphy
Vice President
INVESTMENT ADVISOR AND ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
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 at market
prices shares of its common stock in the open market.
The financial information included herein is taken from the records of the Fund
without examination by independent auditors, who do not express an opinion
thereon.
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 the report.
PAINEWEBBER
1996 PaineWebber Incorporated
Member SIPC
- -------------------------------------------------------------------------------
INSURED
MUNICIPAL
INCOME
FUND INC.
SEPTEMBER 30, 1996
SEMIANNUAL REPORT
<PAGE>
SEMIANNUAL REPORT--NOVEMBER 14, 1996
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER,
We are pleased to present you with the semiannual report for Insured
Municipal Income Fund Inc. (the 'Fund') for the six months ended September 30,
1996.
GENERAL MARKET OVERVIEW
Early in 1996, government reports showing higher-than-expected economic
growth--reflected in strong employment, retail sales and investment spending
numbers, as well as a surprisingly robust housing sector--combined to convince
the market that, contrary to initial expectations, the Federal Reserve Board
(the 'Fed') would not move to ease interest rates. The change in sentiment was
clearly reflected in the 30-year U.S. Treasury bond, the benchmark of bond
market performance, as its yield increased from 5.95% on December 29, 1995, to
6.75% by August 31, 1996 (when bond yields increase, bond prices decrease).
These events established a pattern for the remainder of the period, as ongoing
reports portraying the economy as growing too rapidly continued to unsettle a
jittery bond market. August proved the exception, bringing a glimmer of hope to
the market; this was short-lived, however, as disappointing economic reports
emerged over the last few trading days of the month.
THE MUNICIPAL MARKET
While concerns over a flat tax early in the fiscal year cast a shadow over
the municipal market, over the past few months the presidential campaign
rendered these fears nearly nonexistent. Neither candidate focused heavily upon
the topic of tax restructuring, at least not to the extent that it substantially
impacted the municipal bond market.
Adding to the positive municipal environment in recent months was the fact
that municipals outperformed Treasuries, rising 60 basis points to hit their
high yields in mid-June, then rallying by 25 basis points as of August 31, 1996.
Also contributing to their attractiveness was the continued slowdown in the
supply of new municipal issues; with fewer bonds being issued, demand increased
relative to supply, thereby elevating the price of existing bonds. As of
September 30, 1996, high-quality, long-term municipal bonds were yielding an
average of 80% of comparable maturity Treasury bonds.
<PAGE>
PORTFOLIO REVIEW
Going forward, we anticipate that any remaining flat tax concerns will
continue to subside and expect that any tax reform proposals will not seriously
impact municipals. We believe that municipal bonds will continue to enjoy
tax-exemption, while other asset classes will still be subject to taxes.
Moreover, we expect that municipal bonds will continue to stay on an even keel
relative to Treasuries, and that new issue supply should continue to remain low
and demand for supply constant.
PORTFOLIO REVIEW
The Fund's total return for the six months ended September 30, 1996, based
on the Fund's common stock net asset value was 4.65%, while the Fund's total
return for the same time period based on the Fund's common stock market value
was 2.18%. As of September 30, 1996, the Fund's net asset value per share was
$14.37 and its share price on the New York Stock Exchange was $12.00.
The Fund paid dividends from net investment income to common shareholders,
which totalled $0.38 per share of common stock during the six months ended
September 30, 1996. The Fund has paid a monthly dividend of $0.0640 per share of
common stock since July 1995. Given the current interest rate environment, we
anticipate that the monthly dividend will remain unchanged for the remainder of
1996.
The Fund's dividend benefited from declining short-term interest rates
during the six months ended September 30, 1996. As short-term rates decreased,
the benefit derived from the Fund's Auction Preferred Shares ('APS') increased.
As you know, the Fund's dividends have benefited in the past from the use of
leverage through the issuance of APS. That is, by investing the proceeds of the
APS offering in longer-term, insured municipal bonds, the Fund has been able to
earn a spread--the difference between short- and long-term interest rates--over
the rate paid on the APS, which is a short-term rate. The amount of the spread,
after paying the costs attributable to the APS, increases the dividends payable
to individual shareholders. As always, our goal is to provide the best use of
leverage for the Fund to the individual shareholder.
All of the Fund's long-term securities are insured by major bond insurers
and, as of September 30, 1996, the Fund had an average maturity
2
<PAGE>
PORTFOLIO REVIEW
of 23.3 years. The breakdown by insurers of bonds in the portfolio as of
September 30, 1996 (as a percentage of portfolio investments) was as follows:
[INSERT PIE CHART]
As of September 30, 1996, the Fund's three largest sectors as a percentage
of net assets included: Power Revenue, 21.9%; Water Revenue, 20.1%; and Hospital
Revenue, 18.6%. During this period, the Fund's greatest concentrations of issues
by state were Illinois, 15.7%; Texas, 10.9%; and Pennsylvania, 9.4%.
Going forward, we see opportunities in select spots on the yield curve,
specifically issues in the fifteen to twenty year maturity range. We intend to
diversify across the yield curve and the credit spectrum as well as to increase
the structural variety of bonds included in the portfolio. These three
diversification strategies should offer greater return potential without
increasing risk.
One final note--in October, 1996, Richard S. Murphy assumed co-portfolio
management responsibilities for the Fund, joining existing portfolio manager and
Senior Vice President in charge of all municipal investments, Elbridge (Ebby) T.
Gerry III. Mr. Murphy is a senior vice president and portfolio manager at
Mitchell Hutchins Asset Management Inc. Prior to 1994, Mr. Murphy was a vice
president at American International Group.
3
<PAGE>
PORTFOLIO REVIEW
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support,
and welcome any comments or questions you may have.
Sincerely,
MARGO N. ALEXANDER ELBRIDGE T. GERRY III
President, Senior Vice President,
Mitchell Hutchins Asset Mitchell Hutchins Asset
Management Inc. Management Inc.
Portfolio Manager, Insured
Municipal Income Fund Inc.
RICHARD S. MURPHY
Portfolio Manager,
Insured Municipal
Income Fund Inc.
4
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- --------------- ------- ------ --------------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS - 96.29%
ALABAMA - 1.55%
$ 1,625 Alabama Water Pollution
Control Authority --
Revolving Fund Loan
Series A (AMBAC Insured).... Aaa AAA 08/15/17 6.750% $ 1,793,610
5,400 Birmingham Special Care
Facilities Finance
Authority -- Birmingham
Baptist Medical Center (MBIA
Insured).................... Aaa AAA 08/15/23 5.500 5,131,134
------------
6,924,744
------------
ALASKA - 1.14%
5,000 Anchorage General Obligation
Bonds (AMBAC Insured)....... Aaa AAA 06/01/23 6.250 5,081,550
------------
CALIFORNIA - 2.32%
1,000 California State (FGIC
Insured).................... Aaa AAA 11/01/12 7.000 1,162,629
1,585 Contra Costa Water District
(FGIC Insured).............. Aaa AAA 10/01/13 6.000 1,628,524
5,000 Los Angeles County Sales Tax
Commission -- Sales Tax
Revenue Series B (FGIC
Insured).................... Aaa AAA 07/01/15 6.500 5,352,850
2,250 Los Angeles Wastewater System
(MBIA Insured).............. Aaa AAA 06/01/20 5.700 2,223,878
------------
10,367,881
------------
DELAWARE - 2.25%
10,000 Delaware State Economic
Development Authority
Delmarva Power (MBIA
Insured).................... Aaa AAA 06/01/21 5.900 10,039,400
------------
DISTRICT OF COLUMBIA - 0.88%
4,000 District of Columbia Hospital
Revenue Bonds -- Medlantic
Health Care Group (MBIA
Insured).................... Aaa AAA 08/15/14 5.750 3,921,000
------------
ILLINOIS - 15.72%
4,000 Illinois Development Finance
Authority Pollution
Refunding Commonwealth
Edison Company Project
Series D (AMBAC Insured).... Aaa AAA 03/01/15 6.750 4,341,400
4,500 Illinois Health Facilities
Authority
Franciscan Sisters Health
Care (MBIA Insured)......... Aaa AAA 09/01/18 5.750 4,384,935
10,000 Illinois Municipal Electric
Agency (AMBAC Insured)...... Aaa AAA 02/01/21 5.750 9,870,200
8,000 Central Lake County Joint
Action Water Agency (FGIC
Insured).................... Aaa AAA 05/01/20 5.375 7,555,760
</TABLE>
5
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- --------------- ------- ------ --------------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS - (CONTINUED)
ILLINOIS - (CONCLUDED)
$ 11,400 Chicago -- O'Hare
International Airport (MBIA
Insured).................... Aaa AAA 01/01/15 5.500 to 6.375% $ 11,767,302
17,220 Chicago 911 System (FGIC
Insured).................... Aaa AAA 01/01/23 5.625 16,791,910
4,600 Chicago Public Building
Commission (MBIA Insured)... Aaa AAA 12/01/18 5.750 4,520,420
8,000 Regional Transportation
Authority (AMBAC Insured)... Aaa AAA 06/01/22 6.125 8,115,600
2,750 Regional Transportation
Authority (FGIC Insured).... Aaa AAA 06/01/23 to 06/01/25 5.850 to 7.100 2,849,225
------------
70,196,752
------------
INDIANA - 4.75%
2,500 Indiana Health Facilities
Finance
Authority -- Columbus
Regional Hospital (CGIC
Insured).................... Aaa AAA 08/15/22 5.500 2,355,350
7,835 Indianapolis Gas & Utilities
(FGIC Insured).............. Aaa AAA 06/01/21 5.375 7,390,520
12,000 Marion County Convention
Center (AMBAC Insured)...... Aaa AAA 06/01/21 5.500 11,499,360
------------
21,245,230
------------
IOWA - 1.01%
4,625 Ames Hospital
Authority -- Mary Greeley
Medical Center
(AMBAC Insured)............. Aaa AAA 08/15/22 5.750 4,533,194
------------
KENTUCKY - 4.56%
1,150 Kentucky Development Finance
Authority Hospital Revenue
St. Luke Hospital
Incorporated
Series A (MBIA Insured)..... Aaa AAA 10/01/21 7.000 1,262,758
17,530 Louisville & Jefferson County
(AMBAC Insured)............. Aaa AAA 05/15/24 to 05/15/25 6.500 to 6.750 19,088,593
------------
20,351,351
------------
LOUISIANA - 3.18%
2,000 Louisiana Public Facilities
Authority -- Alton Oschner
Hospital (AMBAC Insured).... Aaa AAA 05/15/17 6.000 2,016,900
8,500 Louisiana Public Facilities
Authority -- Alton Oschner
Hospital (MBIA Insured)..... Aaa AAA 05/15/11 5.750 8,482,745
1,870 Louisiana Public Facilities
Authority -- Tulane
University (Pre-refunded
with U.S. Government
Securities to 02/15/03 @
$102)
(FGIC Insured).............. Aaa AAA 02/15/18 5.750 1,994,093
</TABLE>
6
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- --------------- ------- ------ --------------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS - (CONTINUED)
LOUISIANA - (CONCLUDED)
$ 1,710 Louisiana Public Facilities
Authority -- Tulane
University
(FGIC Insured).............. Aaa AAA 02/15/18 5.750% $ 1,703,622
------------
14,197,360
------------
MAINE - 2.05%
9,390 Maine Health & Higher
Educational Facilities
(FSA Insured)............... Aaa AAA 07/01/23 to 07/01/24 5.500 to 7.000 9,171,844
------------
MASSACHUSETTS - 2.41%
10,000 Massachusetts State Health &
Education Facility
Brigham & Woman's Hospital
(MBIA Insured).............. Aaa AAA 07/01/24 6.750 10,779,000
------------
MICHIGAN - 1.95%
8,770 Michigan State Housing Finance
Authority (AMBAC Insured)... Aaa AAA 04/01/23 5.900 8,711,855
------------
NEVADA - 5.74%
7,750 Clark County Airport McCarran
International Airport (AMBAC
Insured).................... Aaa AAA 07/01/22 6.000 7,830,445
4,000 Clark County General
Obligation Bonds (AMBAC
Insured).................... Aaa AAA 06/01/16 6.000 4,249,760
2,000 Clark County Sanitation
District (FGIC Insured)..... Aaa AAA 07/01/11 5.700 2,007,180
11,500 Washoe County Gas and Water
Sierra Power (MBIA
Insured).................... Aaa AAA 06/01/23 5.900 11,545,310
------------
25,632,695
------------
NEW HAMPSHIRE - 1.30%
5,000 New Hampshire Higher Education
& Health Authority -- Lakes
Region Hospital (FGIC
Insured).................... Aaa AAA 01/01/17 5.500 4,810,600
1,000 New Hampshire Higher Education
&
Health
Authority -- University of
New Hampshire (MBIA
Insured).................... Aaa AAA 07/01/24 5.750 986,250
------------
5,796,850
------------
NEW JERSEY - 1.21%
5,000 Salem County Industrial
Pollution Control Refunding
Public Service Electric and
Gas Series D (MBIA
Insured).................... Aaa AAA 10/01/29 6.550 5,421,300
------------
</TABLE>
7
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- --------------- ------- ------ --------------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS - (CONTINUED)
NEW MEXICO - 3.36%
$ 9,100 Gallup Pollution Control
Revenue
Plains Electric (MBIA
Insured).................... Aaa AAA 08/15/17 6.650% $ 9,841,559
4,700 Santa Fe Water Revenue
(AMBAC Insured)............. Aaa AAA 06/01/24 6.300 5,141,189
-----------
14,982,748
-----------
NORTH CAROLINA - 0.97%
4,000 Piedmont Triad Airport
Authority Airport Revenue
Series A (MBIA Insured)..... Aaa AAA 07/01/16 6.750 4,327,240
-----------
OHIO - 0.77%
3,000 Cleveland Public Power Systems
Revenue -- First Mortgage
Series A
(MBIA Insured).............. Aaa AAA 11/15/24 7.000 3,419,220
-----------
PENNSYLVANIA - 9.38%
16,435 Pennsylvania Intergovernmental
Cooperative Authority
(MBIA Insured).............. Aaa AAA 06/15/15 to 06/15/23 5.600 to 5.625 16,014,174
2,675 Pennsylvania Intergovernmental
Cooperative Authority
Philadelphia Funding Program
(FGIC Insured).............. Aaa AAA 06/15/14 7.000 3,050,757
6,130 North Wales Water Authority
(FGIC Insured).............. Aaa AAA 11/01/16 5.500 5,927,220
17,500 Philadelphia Water & Waste
Authority (CGIC Insured).... Aaa AAA 06/15/15 5.500 16,884,350
------------
41,876,501
------------
RHODE ISLAND - 6.88%
14,000 Rhode Island Convention Center
Authority (AMBAC Insured)... Aaa AAA 05/15/27 5.750 13,800,500
10,000 Rhode Island Depositors
Economic Protection
Corporation (FSA Insured)... Aaa AAA 08/01/14 5.750 10,065,800
7,000 Rhode Island Depositors
Economic Protection
Corporation (MBIA
Insured).................... Aaa AAA 08/01/21 5.250 6,834,240
------------
30,700,540
------------
SOUTH CAROLINA - 3.90%
15,000 South Carolina Public Services
Authority (MBIA Insured).... Aaa AAA 07/01/21 to 07/01/31 5.500 to 6.000 14,859,650
2,625 Charleston County Hospital
Facilities Authority -- Bon
Secours Health System (FSA
Insured).................... Aaa AAA 08/15/25 5.625 2,532,311
------------
17,391,961
------------
</TABLE>
8
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- --------------- ------- ------ --------------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS - (CONCLUDED)
TENNESSEE - 1.10%
$ 5,000 Sullivan County Health
Education and Housing
Facilities Board -- Holston
Valley Health (MBIA
Insured).................... Aaa AAA 02/15/20 5.750% $ 4,905,150
------------
TEXAS - 10.90%
7,000 Austin Utilities System
(AMBAC Insured)............. Aaa AAA 11/15/16 5.750 6,974,660
13,675 Bexar Metro Water District
(MBIA Insured).............. Aaa AAA 05/01/22 5.875 13,765,255
10,000 Lubbock Health
Facilities -- Methodist
Hospital (AMBAC Insured).... Aaa AAA 12/01/22 5.900 10,020,100
9,005 Matagorda County Navigation
District 1
Revenue -- Houston Light &
Power (AMBAC Insured)....... Aaa AAA 03/01/27 6.700 9,789,516
8,000 San Antonio Water Authority
(MBIA Insured).............. Aaa AAA 05/15/16 6.000 8,102,000
------------
48,651,531
------------
WASHINGTON - 2.03%
5,000 Metropolitan Seattle Sewer
(MBIA Insured).............. Aaa AAA 01/01/33 6.300 5,198,100
4,000 Washington State Health Care
Facilities -- Tacoma
Hospital (FGIC Insured)..... Aaa AAA 08/15/22 5.750 3,858,960
------------
9,057,060
------------
WEST VIRGINIA - 3.92%
10,000 Marshall County Pollution
Authority
Ohio Power (MBIA Insured)... Aaa AAA 04/01/22 5.900 10,013,200
5,220 West Virginia School Building
Authority (MBIA Insured).... Aaa AAA 07/01/20 6.000 5,241,976
2,245 West Virginia State Water
Development
Authority (FSA Insured)..... Aaa AAA 11/01/29 5.750 2,225,177
------------
17,480,353
------------
WISCONSIN - 1.06%
1,500 Wisconsin State Health &
Educational
Facilities -- Bellin
Memorial Hospital (AMBAC
Insured).................... Aaa AAA 02/15/19 5.500 1,422,315
3,500 Wisconsin State Health &
Educational
Facilities -- Hospital
Sisters Health System (MBIA
Insured).................... Aaa AAA 06/01/18 5.375 3,301,060
------------
4,723,375
------------
TOTAL LONG-TERM MUNICIPAL BONDS
(cost - $421,865,259)......... 429,887,685
------------
</TABLE>
9
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
- --------------- ------- ------ --------------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
SHORT-TERM MUNICIPAL NOTES - 2.14%
ALASKA - 0.07%
$ 300 Valdez Alaska Marine Terminal
Revenue Exxon Pipeline
Company Project*............. VMIG1 A-1+ 10/01/96 3.900% $ 300,000
------------
ARIZONA - 0.18%
800 Pinal County Pollution Control
Revenue*..................... VMIG1 A-1+ 10/01/96 4.000 800,000
------------
LOUISIANA - 0.13%
600 Louisiana State Offshore
Terminal Revenue*............ VMIG1 A-1+ 10/01/96 3.700 600,000
------------
NEW YORK - 1.18%
4,650 New York City*................. VMIG1 A-1+ 10/01/96 3.700 to 4.000 4,650,000
600 New York Energy Research
Pollution Control*........... VMIG1 A-1+ 10/01/96 3.800 600,000
------------
5,250,000
------------
WYOMING - 0.58%
2,600 Lincoln County Pollution
Control*..................... VMIG1 A-1+ 10/01/96 3.900 to 4.000 2,600,000
------------
TOTAL SHORT-TERM MUNICIPAL NOTES
(cost - $9,550,000)............ 9,550,000
------------
TOTAL INVESTMENTS
(cost - $431,415,259) - 98.43%.. 439,437,685
Other assets in excess of liabilities - 1.57%... 7,008,712
------------
NET ASSETS - 100.00%............................ $446,446,397
============
</TABLE>
- ------------------
* Variable rate demand notes are payable on demand. The maturity dates shown are
the next interest rate reset dates; the interest rates shown are the current
rates as of September 30, 1996.
AMBAC -- American Municipal Bond Assurance Corporation
CGIC -- Capital Guaranty Insurance Company
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance Incorporated
MBIA -- Municipal Bond Investors Assurance
See accompanying notes to financial statements
10
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost - $431,415,259)...... $439,437,685
Cash........................................................... 89,388
Interest receivable............................................ 7,391,745
Deferred organizational expenses............................... 110,893
Other assets................................................... 686
------------
Total assets................................................... 447,030,397
------------
Liabilities
Dividends payable to preferred shareholders.................... 332,053
Payable to investment adviser and administrator................ 235,381
Accrued expenses and other liabilities......................... 16,566
------------
Total liabilities.............................................. 584,000
------------
Net Assets
Auction Preferred Shares Series A, B, C & D - 3,000
non-participating shares authorized, issued and outstanding;
$0.001 par value; $50,000 liquidation value................... 150,000,000
------------
Common Stock - $0.001 par value; total authorized shares
199,997,000; 20,628,363 shares issued and outstanding......... 302,703,762
Undistributed net investment income............................ 524,806
Accumulated net realized losses from investment transactions... (14,804,597)
Net unrealized appreciation of investments..................... 8,022,426
------------
Net assets applicable to common shareholders................... 296,446,397
------------
Total net assets............................................... $446,446,397
------------
------------
Net asset value per common share ($296,446,397 applicable to
20,628,363 common shares outstanding)......................... $14.37
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30,
1996 (UNAUDITED)
<TABLE>
<S> <C>
Investment income:
Interest......................................................... $ 12,869,707
------------
Expenses:
Investment advisory and administration........................... 1,977,354
Auction Preferred Shares expenses................................ 217,000
Custody and accounting........................................... 132,271
Legal and audit.................................................. 58,108
Reports and notices to shareholders.............................. 54,544
Amortization of organizational expenses.......................... 30,855
Transfer agency and service fees................................. 19,013
Directors' fees.................................................. 6,125
Other expenses................................................... 9,175
------------
2,504,445
Less: Fee waivers from adviser................................... (549,265)
------------
Net expenses..................................................... 1,955,180
------------
Net investment income............................................ 10,914,527
------------
Realized and unrealized gains from investment activities:
Net realized gains from investment transactions.................. --
Net change in unrealized appreciation/depreciation of
investments..................................................... 5,107,989
------------
Net realized and unrealized gains from investment activities..... 5,107,989
------------
Net increase in net assets resulting from operations............. $ 16,022,516
------------
------------
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEAR
SEPTEMBER 30, 1996 ENDED
(UNAUDITED) MARCH 31, 1996
------------------ --------------
<S> <C> <C>
From operations:
Net investment income......................................................... $ 10,914,527 $ 21,781,141
Net realized gains from investment transactions............................... -- 976,264
Net change in unrealized appreciation/depreciation of investments............. 5,107,989 12,848,520
------------------ --------------
Net increase in net assets resulting from operations.......................... 16,022,516 35,605,925
------------------ --------------
Dividends from:
Net investment income--common stockholders.................................... (7,921,291) (15,595,042)
Net investment income--preferred stockholders................................. (2,695,092) (5,765,362)
------------------ --------------
Total dividends to stockholders............................................. (10,616,383) (21,360,404)
------------------ --------------
Net increase in net assets.................................................... 5,406,133 14,245,521
Net assets:
Beginning of period........................................................... 441,040,264 426,794,743
------------------ --------------
End of period (including undistributed net investment income of $524,806 and
$226,662, respectively)..................................................... $446,446,397 $ 441,040,264
------------------ --------------
------------------ --------------
</TABLE>
See accompanying notes to financial statements
13
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 30,
1996 (UNAUDITED)
<TABLE>
<S> <C>
Cash flows provided (used) by operating activities:
Interest received............................................................................... $ 12,824,292
Expenses paid (net of fee waivers).............................................................. (1,938,908)
Purchase of short-term portfolio investments, net............................................... (300,000)
-------------
Net cash provided by operating activities....................................................... 10,585,384
-------------
Cash flows used for financing activities:
Dividends paid from net investment income to common stockholders................................ (7,921,291)
Dividends paid from net investment income to preferred stockholders............................. (2,650,492)
-------------
Net cash used for financing activities.......................................................... (10,571,783)
-------------
Net increase in cash............................................................................ 13,601
Cash at beginning of period..................................................................... 75,787
-------------
Cash at end of period........................................................................... $ 89,388
-------------
-------------
Reconciliation of Net Increase in Net Assets Resulting from Operations to Net Cash
Provided by Operating Activities:
Net increase in net assets resulting from operations............................................ $ 16,022,516
-------------
Increase in investments, at value............................................................... (5,453,286)
Increase in interest receivable................................................................. (118)
Amortization of deferred organizational expenses................................................ 30,855
Decrease in other assets........................................................................ 7,461
Increase in payable to investment adviser and administrator..................................... 3,716
Decrease in accrued expenses and other liabilities.............................................. (25,760)
-------------
Total adjustments............................................................................... (5,437,132)
-------------
Net cash provided by operating activities....................................................... $ 10,585,384
-------------
-------------
</TABLE>
See accompanying notes to financial statements
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (UNAUDITED)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Insured Municipal Income Fund Inc. (the 'Fund') was
incorporated in Maryland on February 18, 1993, and is
registered with the Securities and Exchange Commission as a
closed-end diversified management investment company.
Organizational costs have been deferred and are being amortized
on the straight-line method over a period not to exceed 60
months from the date the Fund commenced operations.
The preparation of financial statements in accordance with
generally accepted accounting principles requires Fund
management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates. The following
is a summary of significant accounting policies:
Valuation of Investments--Where market quotations are readily
available, portfolio securities are valued thereon, provided
such quotations adequately reflect the fair value of the
securities, in the judgment of Mitchell Hutchins Asset
Management Inc. ('Mitchell Hutchins'), a wholly owned
subsidiary of PaineWebber Incorporated, investment adviser and
administrator of the Fund. When market quotations are not
readily available, securities are valued based upon appraisals
received from a pricing service which utilizes a computerized
matrix pricing system, or based upon appraisals derived from
information concerning those securities or similar securities
received from recognized dealers in those securities. All other
securities are valued at fair value as determined in good faith
by or under the direction of the Fund's board of directors. The
amortized cost method of valuation, which approximates market
value, is used to value certain debt obligations with 60 days
or less remaining to maturity, unless the Fund's board of
directors determines that this does not represent fair value.
Investment Transactions and Investment Income--Investment
transactions are recorded on the trade date. Realized gains and
losses from investment transactions are calculated using the
identified cost method. Interest income is recorded on an
accrual basis. Discounts are accreted and premiums are
amortized as adjustments to interest income and the identified
cost of securities.
Dividends and Distributions--The Fund intends to pay monthly
cash dividends to common stockholders at a level rate that over
time will result in the distribution of all of the Fund's net
investment income remaining after the payment of dividends on
any outstanding preferred stock. Dividends and distributions to
common stockholders are recorded on the ex-dividend date.
Dividends to preferred stockholders are accrued daily.
Dividends from net investment income and distributions from
realized capital gains from investment transactions are
determined in accordance with federal income tax regulations
which may differ from 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.
15
<PAGE>
CONCENTRATION OF RISK
The Fund follows an investment policy of investing primarily in
municipal obligations of various states. Economic changes
affecting those states and certain of their public bodies and
municipalities may affect the ability of the issuers within
those states to pay interest on, or repay principal of,
municipal obligations held by the Fund.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund's board of directors has approved an investment
advisory and administration contract ('Advisory Contract') with
Mitchell Hutchins, under which Mitchell Hutchins serves as
investment adviser and administrator of the Fund. In accordance
with the Advisory Contract, Mitchell Hutchins receives
compensation from the Fund, computed weekly and paid monthly,
at the annual rate of 0.90% of the Fund's average weekly net
assets. For the six months ended September 30, 1996, Mitchell
Hutchins voluntarily waived $549,265 in investment advisory and
administration fees from the Fund.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned
at September 30, 1996, was substantially the same as the cost
of securities for financial statement purposes.
At September 30, 1996, the components of the net unrealized
appreciation of investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (from investments
having an excess of value over
cost).............................. $ 10,065,580
Gross depreciation (from investments
having an excess of cost over
value)............................. (2,043,154)
------------
Net unrealized appreciation of
investments........................ $ 8,022,426
------------
------------
</TABLE>
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, capital gains and certain other amounts, if
any, the Fund intends not to be subject to a federal excise
tax.
At March 31, 1996, the Fund had a net capital loss carryforward
of $14,804,597 which is available as a reduction, to the extent
provided in the regulations, of future net realized capital
gains and will expire by March 31, 2003. To the extent that
such losses are used to offset future capital gains, it is
probable that the gains so offset will not be distributed.
16
<PAGE>
CAPITAL STOCK
Common Stock--There are 199,997,000 shares of $0.001 par value
common stock authorized. Of the 20,628,363 common shares
outstanding, 14,449 shares are owned by Mitchell Hutchins.
Auction Preferred Shares--The Fund has issued 800 shares of
Auction Preferred Shares, Series A, 800 shares of Auction
Preferred Shares, Series B, 800 shares of Auction Preferred
Shares, Series C and 600 shares of Auction Preferred Shares,
Series D which are referred to herein collectively as the
'APS.' All shares of each series of APS have a liquidation
preference of $50,000 per share plus an amount equal to
accumulated but unpaid dividends upon liquidation.
Dividends, which are cumulative, are generally reset every 7
days for APS Series A and D, 28 days for APS Series B and three
months for APS Series C. Dividend rates ranged from 3.254% to
3.900% for the six months ended September 30, 1996. Effective
October 23, 1995, Series A reset to a special dividend period
of 364 days. Following the special dividend period Series A
continued to reset every 7 days.
The Fund is subject to certain restrictions relating to the
APS. Failure to comply with these restrictions could preclude
the Fund from declaring any distributions to common
shareholders or repurchasing common shares and/or could trigger
the mandatory redemption of APS at liquidation value.
The APS are entitled to one vote per share and, unless
otherwise required by law, will vote with holders of common
stock as a single class, except that the preferred shares will
vote separately as a class on certain matters, as required by
law. The holders of the preferred shares have the right to
elect two directors of the Fund.
17
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH PERIOD IS
PRESENTED BELOW:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEARS ENDED MARCH 31, FOR THE PERIOD
SEPTEMBER 30, 1996 --------------------------------- JUNE 8, 1993+ TO
(UNAUDITED) 1996 1995 MARCH 31, 1994
------------------ ------------------ ------------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period...................... $ 14.11 $ 13.42 $ 13.42 15.00
------------------ ------------------ ------------- ----------------
Net investment income..................................... 0.53 1.06 1.02 ** 0.73
Net realized and unrealized gains (losses) from
investments............................................. 0.24 0.67 0.04 (1.44)
------------------ ------------------ ------------- ----------------
Net increase (decrease) from investment operations........ 0.77 1.73 1.06 (0.71)
------------------ ------------------ ------------- ----------------
Dividends and distributions:
From net investment income--common stockholders......... (0.38) (0.76) (0.79) (0.60)
From net investment income--preferred stockholders...... (0.13) (0.28) (0.25) (0.13)
In excess of net investment income--common
stockholders.......................................... -- -- (0.02) --
In excess of net investment income--preferred
stockholders.......................................... -- -- -- ++ --
------------------ ------------------ ------------- ----------------
Total dividends and distributions to stockholders......... (0.51) (1.04) (1.06) (0.73)
------------------ ------------------ ------------- ----------------
Underwriting and offering costs incurred with the
preferred stock offering charged to common stock........ -- -- -- (0.14)
------------------ ------------------ ------------- ----------------
Net asset value, end of period............................ $ 14.37 $ 14.11 $ 13.42 $ 13.42
------------------ ------------------ ------------- ----------------
------------------ ------------------ ------------- ----------------
Per share market value, end of period..................... $ 12.00 $ 12.13 $ 11.13 $ 13.00
------------------ ------------------ ------------- ----------------
------------------ ------------------ ------------- ----------------
Total investment return(1)................................ 2.18% 16.13% (8.17)% (9.74)%
------------------ ------------------ ------------- ----------------
------------------ ------------------ ------------- ----------------
Ratios to average net assets attributable to common
shares:
Total expenses net of waivers from adviser.............. 1.35%* 1.33% 1.74% 1.57%*
Total expenses before waivers from adviser.............. 1.73%* 1.65% 1.74% 1.57%*
Net investment income before preferred stock
dividends............................................. 7.52%* 7.45% 7.94% 5.92%*
Preferred stock dividends............................... 1.86%* 1.97% 2.02% 0.98%*
Net investment income available to common
stockholders ......................................... 5.66%* 5.48% 5.92% 4.94%*
Supplemental data:
Net assets, end of period (000's)....................... $ 446,446 $ 441,040 $ 426,795 333,825
Portfolio turnover rate................................. 0% 4% 4% 8%
Asset coverage per share of preferred stock, end of
period ............................................... $ 148,815 $ 147,013 $ 142,265 $ 139,094
</TABLE>
- ------------------
+ Commencement of operations
++ Actual amount calculates to $0.00499 per common share
* Annualized
** Calculated using the average share method
(1) Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day and a sale at the current market
price on the last day of each period reported, and assuming reinvestment of
dividends and other distributions to common stockholders at prices obtained
under the Fund's Dividend Reinvestment Plan. Total investment return for
periods of less than one year has not been annualized. Total investment
return does not reflect brokerage commissions.
18
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION
THE FUND
Insured 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 adviser and administrator is Mitchell Hutchins Asset
Management Inc., a wholly owned subsidiary of PaineWebber
Incorporated, which has over $43 billion in assets under
management as of October 31, 1996.
SHAREHOLDER INFORMATION
The Fund's NYSE trading symbol is 'PIF.' Weekly comparative net
asset value and market price information about the Fund is
published each Monday in The Wall Street Journal, each Sunday
in The New York Times and each week in Barron's, as well as in
numerous other newspapers.
A special meeting of shareholders was held on April 11, 1996,
at which the following proposals were approved:
PROPOSAL 1
To vote for or against the election of the Board of Directors:
<TABLE>
<CAPTION>
SHARES SHARES
VOTED FOR WITHHOLD AUTHORITY
---------- ------------------
<S> <C> <C>
Richard Q. Armstrong.......................................... 10,346,950 660,018
E. Garrett Bewkes, Jr......................................... 10,347,184 659,748
Richard Burt.................................................. 10,342,139 664,829
Mary C. Farrell............................................... 10,348,432 658,536
George W. Gowen............................................... 10,339,244 667,724
Frederic V. Malek............................................. 10,330,912 676,056
Carl W. Schafer............................................... 10,345,805 661,163
John R. Torell III............................................ 10,348,203 658,765
</TABLE>
PROPOSAL 2
AUCTION PREFERRED SHARES:
To vote for or against the election of its Board of Directors:
<TABLE>
<CAPTION>
SHARES SHARES
VOTED FOR WITHHOLD AUTHORITY
--------- ------------------
<S> <C> <C>
Margo N. Alexander............................................. 2,072 0
Meyer Feldberg................................................. 2,072 0
</TABLE>
19
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
PROPOSAL 3
To vote for or against the following changes to the Fund's
fundamental investment restrictions and policies:
<TABLE>
<CAPTION>
SHARES
SHARES VOTED SHARES
VOTED FOR AGAINST ABSTAIN
---------- ------------- -------
<S> <C> <C> <C>
Modification of fundamental restriction on portfolio
diversification:...................................... 7,640,245 493,352 473,370
Modification of fundamental restriction on
concentration:........................................ 7,613,145 514,411 478,781
Modification of fundamental restriction on
senior securities and borrowing (unchanged):.......... 7,629,614 371,375 605,978
Modification of fundamental restriction on making
loans:................................................ 7,720,005 404,139 482,823
Modification of fundamental restriction on underwriting
securities:........................................... 7,598,684 533,665 474,618
Modification of fundamental restriction on
real estate investments:.............................. 7,567,545 557,078 482,344
Modification of fundamental restriction on investing in
commodities:.......................................... 7,566,540 589,701 450,726
Elimination of fundamental restriction on
margin Transactions:.................................. 7,693,556 456,696 456,715
Elimination of fundamental restriction on
short sales:.......................................... 7,536,201 592,361 478,369
Elimination of fundamental restriction on investments in
oil, gas and mineral leases and programs:............. 7,585,983 575,663 445,321
</TABLE>
PROPOSAL 4
<TABLE>
<S> <C> <C> <C>
To vote for or against amendments to Articles of
Incorporation:........................................ 10,350,838 250,982 405,147
</TABLE>
(Broker non-votes and abstentions are included within the
'Shares Withhold Authority' and 'Shares Abstain' totals.)
20
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
DISTRIBUTION POLICY
The Fund's Board of Directors has established a Dividend
Reinvestment Plan (the 'Plan') under which all common
stockholders whose shares are registered in their own names, or
in the name of PaineWebber Incorporated or its nominee, have
all dividends and other distributions on their shares of common
stock automatically reinvested in additional shares of common
stock, unless such common stockholders elect to receive cash.
Common stockholders 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. Additional shares of common stock acquired under the
Plan will be purchased in the open market, on the NYSE, 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 Fund
will not issue any new shares of common stock in connection
with the Plan.
21
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