<PAGE>
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------------
---------- INSURED
MUNICIPAL INCOME
FUND INC.
ANNUAL REPORT
MARCH 31, 1996
<PAGE>
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May 15, 1996
Dear Shareholder,
We are pleased to present you with the annual report for Insured Municipal
Income Fund Inc. for the year ended March 31, 1996. Moderate economic growth,
low inflation and strong corporate earnings growth helped propel the stock
market to record-breaking levels during 1995. The bond market also rallied
during 1995, providing investors with their third-best year since the 1920s.
Investor sentiment changed quickly in early March 1996, however, in
response to government reports showing higher-than-expected economic growth:
there was a sharp drop in bond prices and volatility in the stock market.
Meanwhile, the Federal Reserve's Open Market Committee decided to keep monetary
policy unchanged at the March 26, 1996 meeting. The Fed's decision not to lower
rates in March (and, again in May) suggests that officials do not foresee a
recession or accelerating inflation.
MUNICIPAL MARKET OVERVIEW
During the first few months of 1995, the municipal market rebounded
strongly from the lows reached in 1994, when the Fed's monetary tightening
policy wreaked havoc on the bond market. There were positive fundamentals for
municipals during 1995, including low new issue supply and a declining interest
rate environment. However, during the spring of 1995, presidential candidates
began suggesting new Federal income tax policies. The most notable proposal was
the flat tax, which would eliminate all investment income from Federal taxation:
under this plan, Federal tax-exemption would no longer be the unique privilege
of municipal bonds, which could cause demand to decrease. The market's response
to the flat tax discussions was, we believe, overstated.
Flat tax fever was rampant during the first several months of the Fund's
fiscal year end, as a result, demand dwindled and municipal securities
underperformed Treasuries. However, by the fourth quarter of 1995, the municipal
market began outperforming the Treasury market, as flat tax fears abated and new
issue supply continued to be low. As of March 31, 1996, high quality, long-term
municipal bonds were yielding an average of 85% of comparable maturity Treasury
bonds, which is an historically attractive yield level. (The municipal market
reached its low relative to Treasuries in the spring of 1995, prior to the
mention of tax reform.) It appears as though new issue supply will continue to
be low and demand for municipals continues to increase. Therefore, we expect
that municipal outperformance could continue for the remainder of 1996.
PORTFOLIO REVIEW
Effective January 22, 1996, Elbridge T. Gerry III assumed management
responsibility for the Fund. Mr. Gerry joined Mitchell Hutchins as Senior Vice
President in charge of all municipal investments from JP Morgan & Company, where
he began his career in 1981. At JP Morgan, Mr. Gerry co-managed the municipal
department with over $5 billion in municipal assets and for the past four years,
he was Vice President in the Global Asset Management Group.
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<PAGE>
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The Fund's total return for the year ended March 31, 1996, based on the
Fund's net asset value was 10.92%, while the Fund's total return for the same
time period based on the Fund's market value was 16.13%. As of March 31, 1996,
the Fund's net asset value per share was $14.11, and its share price on the New
York Stock Exchange was $12.13.
The Fund paid dividends from net investment income to common shareholders,
which totalled $0.76 per share of common stock during the year ended March 31,
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 dividends benefitted from declining short-term interest rates
during the year ended March 31, 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 benefitted in the past from the use of leverage
through the issuance of APS. 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 common
shareholders. As always, our goal is to provide the best use of leverage for the
Fund to the common shareholders.
All of the Fund's long-term securities are insured by major bond insurers
and, as of March 31, 1996, the Fund had an average maturity of 23.8 years. The
breakdown by insurers of bonds in the portfolio as of March 31, 1996 was as
follows:
[CHART]
Pie chart graphic shows breakdown of insurers of bonds in the portfolio:
MBIA 43.4%
AMBAC 31.2%
FGIC 15.3%
FSA 5.6%
CGIC 4.5%
As of March 31, 1996, the Fund's largest sectors as a percentage of the net
assets included: power, 21.9%; water, 20.3%; and health care, 18.9%. During this
period, the Fund's greatest concentrations of issues by state were Illinois,
15.6%; Texas, 10.9%; and Pennsylvania, 9.4%.
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2
<PAGE>
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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 the portfolio further to better position the Fund 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 the dual advantage of greater return potential without increasing risk.
We value you as a shareholder and as a client, and thank you for your
continued support. We welcome any comments or questions you may have.
Sincerely,
/s/ MARGO ALEXANDER /s/ ELBRIDGE T. GERRY III
MARGO ALEXANDER ELBRIDGE T. GERRY III
President, Senior Vice President,
Mitchell Hutchins Asset Management Mitchell Hutchins Asset Management Inc.
Inc. Portfolio Manager,
Insured Municipal Income Fund Inc.
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3
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
Portfolio of Investments
March 31, 1996
- --------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--96.30%
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<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- -------- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
ALABAMA--1.55%
$ 1,625 Alabama Water Pollution Control Authority
Revolving Fund Loan Series A (AMBAC
Insured).............................. Aaa AAA 08/15/17 6.750% $ 1,759,761
5,400 Birmingham Special Care Facilities
Finance Authority Birmingham Baptist
Medical Center
(MBIA Insured)........................ Aaa AAA 08/15/23 5.500 5,066,280
------------
6,826,041
------------
ALASKA--1.14%
5,000 Anchorage General Obligation Bonds
(AMBAC Insured)....................... Aaa AAA 06/01/23 6.250 5,040,850
------------
CALIFORNIA--2.32%
1,000 California State
(FGIC Insured)........................ Aaa AAA 11/01/12 7.000 1,112,610
1,585 Contra Costa Water District
(FGIC Insured)........................ Aaa AAA 10/01/13 6.000 1,606,033
5,000 Los Angeles County Sales Tax Commission
Sales Tax Revenue Series B
(FGIC Insured)........................ Aaa AAA 07/01/15 6.500 5,321,450
2,250 Los Angeles Wastewater System
(MBIA Insured)........................ Aaa AAA 06/01/20 5.700 2,189,407
------------
10,229,500
------------
DELAWARE--2.25%
10,000 Delaware State Economic Development
Authority Delmarva Power
(MBIA Insured)........................ Aaa AAA 06/01/21 5.900 9,921,300
------------
DISTRICT OF COLUMBIA--0.89%
4,000 District of Columbia Hospital
Revenue Bonds
Medlantic Health Care Group
(MBIA Insured)........................ Aaa AAA 08/15/14 5.750 3,915,360
------------
ILLINOIS--15.64%
4,000 Illinois Development Finance Authority
Pollution Refunding Commonwealth
Edison Company Project Series D
(AMBAC Insured)....................... Aaa AAA 03/01/15 6.750 4,371,200
4,500 Illinois Health Facilities Authority
Franciscan Sisters Health Care
(MBIA Insured)........................ Aaa AAA 09/01/18 5.750 4,319,280
10,000 Illinois Municipal Electric Agency
(AMBAC Insured)....................... Aaa AAA 02/01/21 5.750 9,640,900
</TABLE>
4
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
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- --------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- -------- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
ILLINOIS (CONCLUDED)
$8,000 Central Lake County Joint Action Water
Agency
(FGIC Insured)........................ Aaa AAA 05/01/20 5.375% $ 7,395,520
11,400 Chicago--O'Hare International Airport 5.500 to
(MBIA Insured)........................ Aaa AAA 01/01/15 6.375 11,582,166
17,220 Chicago 911 System
(FGIC Insured)........................ Aaa AAA 01/01/23 5.625 16,407,216
4,600 Chicago Public Building Commission
(MBIA Insured)........................ Aaa AAA 12/01/18 5.750 4,430,490
8,000 Regional Transportation Authority
(AMBAC Insured)....................... Aaa AAA 06/01/22 6.125 8,070,640
06/01/23
2,750 Regional Transportation Authority to 5.850 to
(FGIC Insured)........................ Aaa AAA 06/01/25 7.100 2,785,487
------------
69,002,899
------------
INDIANA--4.74%
2,500 Indiana Health Facilities Finance
Authority Columbus Regional Hospital
(CGIC Insured)........................ Aaa AAA 08/15/22 5.500 2,325,925
7,835 Indianapolis Gas & Utilities
(FGIC Insured)........................ Aaa AAA 06/01/21 5.375 7,279,107
12,000 Marion County Convention Center
(AMBAC Insured)....................... Aaa AAA 06/01/21 5.500 11,283,960
------------
20,888,992
------------
IOWA--1.01%
4,625 Ames Hospital Authority
Mary Greeley Medical Center
(AMBAC Insured)....................... Aaa AAA 08/15/22 5.750 4,448,788
------------
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 1,260,124
05/15/24
17,530 Louisville & Jefferson County to 6.500 to
(AMBAC Insured)....................... Aaa AAA 05/15/25 6.750 18,856,854
------------
20,116,978
------------
LOUISIANA--3.22%
2,000 Louisiana Public Facilities Authority
Alton Oschner Hospital
(AMBAC Insured)....................... Aaa AAA 05/15/17 6.000 2,012,040
8,500 Louisiana Public Facilities Authority
Alton Oschner Hospital
(MBIA Insured)........................ Aaa AAA 05/15/11 5.750 8,499,320
</TABLE>
5
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
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- --------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- -------- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
LOUISIANA (CONCLUDED)
$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% $ 2,004,453
1,710 Louisiana Public Facilities Authority
Tulane University
(FGIC Insured)........................ Aaa AAA 02/15/18 5.750 1,668,327
------------
14,184,140
------------
MAINE--2.07%
9,390 Maine Health & Higher Educational 07/01/23
Facilities to 5.500 to
(FSA Insured)......................... Aaa AAA 07/01/24 7.000 9,113,062
------------
MASSACHUSETTS--2.42%
10,000 Massachusetts State Health & Education
Facility
Brigham & Woman's Hospital
(MBIA Insured)........................ Aaa AAA 07/01/24 6.750 10,689,400
------------
MICHIGAN--1.95%
8,770 Michigan State Housing Finance Authority
(AMBAC Insured)....................... Aaa AAA 04/01/23 5.900 8,618,893
------------
NEVADA--5.77%
7,750 Clark County Airport
McCarran International Airport
(AMBAC Insured)....................... Aaa AAA 07/01/22 6.000 7,728,843
4,000 Clark County General Obligation Bonds
(AMBAC Insured)....................... Aaa AAA 06/01/16 6.000 4,284,360
2,000 Clark County Sanitation District
(FGIC Insured)........................ Aaa AAA 07/01/11 5.700 2,005,360
11,500 Washoe County Gas and Water
Sierra Power
(MBIA Insured)........................ Aaa AAA 06/01/23 5.900 11,421,915
------------
25,440,478
------------
NEW HAMPSHIRE--1.29%
5,000 New Hampshire Higher Education & Health
Authority
Lakes Regional Hospital
(FGIC Insured)........................ Aaa AAA 01/01/17 5.500 4,744,750
1,000 New Hampshire Higher Education & Health
Authority
University of New Hampshire
(MBIA Insured)........................ Aaa AAA 07/01/24 5.750 968,710
------------
5,713,460
------------
</TABLE>
6
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- -------- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
NEW JERSEY--1.20%
$5,000 Salem County Industrial Pollution
Control
Refunding Public Service Electric and
Gas Series D
(MBIA Insured)........................ Aaa AAA 10/01/29 6.550% $ 5,283,850
------------
NEW MEXICO--3.39%
9,100 Gallup Pollution Control Revenue
Plains Electric
(MBIA Insured)........................ Aaa AAA 08/15/17 6.650 9,774,401
4,700 Santa Fe Water Revenue
(AMBAC Insured)....................... Aaa AAA 06/01/24 6.300 5,164,924
------------
14,939,325
------------
NORTH CAROLINA--0.97%
4,000 Piedmont Triad Airport Authority
Airport Revenue Series A
(MBIA Insured)........................ Aaa AAA 07/01/16 6.750 4,275,680
------------
OHIO--0.76%
3,000 Cleveland Public Power Systems Revenue
First Mortgage Series A
(MBIA Insured)........................ Aaa AAA 11/15/24 7.000 3,356,370
------------
PENNSYLVANIA--9.40%
16,435 Pennsylvania Intergovernmental 06/15/15
Cooperative Authority to 5.600 to
(MBIA Insured)........................ Aaa AAA 06/15/23 5.625 15,793,525
2,675 Pennsylvania Intergovernmental
Cooperative Authority
Philadelphia Funding Program
(FGIC Insured)........................ Aaa AAA 06/15/14 7.000 2,971,845
6,130 North Wales Water Authority
(FGIC Insured)........................ Aaa AAA 11/01/16 5.500 5,917,412
17,500 Philadelphia Water & Waste Authority
(CGIC Insured)........................ Aaa AAA 06/15/15 5.500 16,777,600
------------
41,460,382
------------
RHODE ISLAND--6.84%
14,000 Rhode Island Convention Center Authority
(AMBAC Insured)....................... Aaa AAA 05/15/27 5.750 13,356,700
10,000 Rhode Island Depositors Economic
Protection Corporation
(FSA Insured)......................... Aaa AAA 08/01/14 5.750 9,932,000
7,000 Rhode Island Depositors Economic
Protection Corporation
(MBIA Insured)........................ Aaa AAA 08/01/21 5.250 6,865,250
------------
30,153,950
------------
</TABLE>
7
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- -------- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
SOUTH CAROLINA--3.92%
07/01/21
$15,000 South Carolina Public Services Authority to 5.500 to
(MBIA Insured)........................ Aaa AAA 07/01/31 6.000% $ 14,811,700
2,625 Charleston County Hospital
Facilities Authority
Bon Secours Health System
(FSA Insured)......................... Aaa AAA 08/15/25 5.625 2,503,541
------------
17,315,241
------------
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 4,873,000
------------
TEXAS--10.90%
7,000 Austin Utilities System
(AMBAC Insured)....................... Aaa AAA 11/15/16 5.750 6,842,500
13,675 Bexar Metro Water District
(MBIA Insured)........................ Aaa AAA 05/01/22 5.875 13,521,293
10,000 Lubbock Health Facilities
Methodist Hospital
(AMBAC Insured)....................... Aaa AAA 12/01/22 5.900 9,906,200
9,005 Matagorda County Navigation District 1
Revenue Houston Light & Power A
(AMBAC Insured)....................... Aaa AAA 03/01/27 6.700 9,722,518
8,000 San Antonio Water Authority
(MBIA Insured)........................ Aaa AAA 05/15/16 6.000 8,072,640
------------
48,065,151
------------
WASHINGTON--2.04%
5,000 Metropolitan Seattle Sewer
(MBIA Insured)........................ Aaa AAA 01/01/33 6.300 5,158,800
4,000 Washington State Health Care Facilities
Tacoma Hospital
(FGIC Insured)........................ Aaa AAA 08/15/22 5.750 3,827,320
------------
8,986,120
------------
WEST VIRGINIA--3.91%
10,000 Marshall County Pollution Authority
Ohio Power
(MBIA Insured)........................ Aaa AAA 04/01/22 5.900 9,856,200
5,220 West Virginia School Building Authority
(MBIA Insured)........................ Aaa AAA 07/01/20 6.000 5,231,067
2,245 West Virginia State Water Development
Authority
(FSA Insured)......................... Aaa AAA 11/01/29 5.750 2,148,577
------------
17,235,844
------------
</TABLE>
8
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- -------- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
WISCONSIN--1.05%
$1,500 Wisconsin State Health & Educational
Facilities
Bellin Memorial Hospital
(AMBAC Insured)....................... Aaa AAA 02/15/19 5.500% $ 1,401,915
3,500 Wisconsin State Health & Educational
Facilities
Hospital Sisters Health System
(MBIA Insured)........................ Aaa AAA 06/01/18 5.375 3,237,430
------------
4,639,345
------------
TOTAL LONG-TERM MUNICIPAL BONDS (cost--$421,819,962)................... 424,734,399
------------
</TABLE>
- --------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL NOTES--2.10%
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
ALASKA--0.07%
300 Valdez Alaska Marine Terminal Revenue
Exxon Pipeline Company Project*....... P1 A-1+ 10/01/25 3.700 300,000
------------
NEW YORK--1.37%
08/15/04
to 3.300 to
5,850 New York City*.......................... VMIG1 A-1+ 08/15/23 3.850 5,850,000
200 New York Energy Research Pollution
Control*.............................. VMIG1 A-1+ 10/01/29 3.450 200,000
------------
6,050,000
------------
WYOMING--0.66%
11/01/14
to 3.700 to
2,900 Lincoln County Pollution Control*....... P1 A-1+ 08/01/15 3.800 2,900,000
------------
TOTAL SHORT-TERM MUNICIPAL NOTES (cost--$9,250,000).................... 9,250,000
------------
TOTAL INVESTMENTS (cost--$431,069,962)--98.40%......................... 433,984,399
Other assets in excess of liabilities--1.60%........................... 7,055,865
------------
NET ASSETS--100.00%.................................................... $441,040,264
------------
------------
</TABLE>
- ------------------
* Variable rate demand notes are payable on demand. The maturity dates shown are
the stated maturities; the interest rates shown are the current rates as of
March 31, 1996 and reset daily.
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
9
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
March 31, 1996
- --------------------------------------------------------------------------------
ASSETS
Investments in securities, at value (cost--$431,069,962)....... $433,984,399
Cash........................................................... 75,787
Interest receivable............................................ 7,391,627
Deferred organizational expenses............................... 141,748
Other assets................................................... 8,147
------------
Total assets................................................. 441,601,708
------------
LIABILITIES
Dividends payable to preferred shareholders.................... 287,453
Payable to investment adviser and administrator................ 231,665
Accrued expenses and other liabilities......................... 42,326
------------
Total liabilities............................................ 561,444
------------
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........ 20,628
Paid in capital in excess of par value of common shares........ 302,683,134
Undistributed net investment income............................ 226,662
Accumulated net realized losses from investment transactions... (14,804,597)
Net unrealized appreciation of investments..................... 2,914,437
------------
Net assets applicable to common shareholders................. 291,040,264
------------
Total net assets............................................. $441,040,264
------------
------------
Net asset value per common share ($291,040,264 applicable to
20,628,363 common shares outstanding)....................... $14.11
------
------
See accompanying notes to financial statements
10
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended March 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest....................................................... $25,678,331
-----------
EXPENSES:
Investment advisory and administration......................... 3,988,174
Auction Preferred Shares expenses.............................. 404,037
Custody and accounting......................................... 168,031
Legal and audit................................................ 78,549
Reports and notices to shareholders............................ 69,181
Amortization of organizational expenses........................ 61,711
Transfer agency and service expenses........................... 33,090
Directors' fees................................................ 9,000
Other expenses................................................. 12,682
-----------
4,824,455
Less: Fee waivers from adviser.................................... (927,265)
-----------
Net expenses...................................................... 3,897,190
-----------
NET INVESTMENT INCOME............................................. 21,781,141
-----------
REALIZED AND UNREALIZED GAINS FROM INVESTMENT ACTIVITIES:
Net realized gains from investment transactions................ 976,264
Net change in unrealized appreciation/depreciation of
investments.................................................. 12,848,520
-----------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT ACTIVITIES...... 13,824,784
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $35,605,925
-----------
-----------
See accompanying notes to financial statements
11
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED
MARCH 31,
--------------------------
1996 1995
------------ ------------
FROM OPERATIONS:
Net investment income........................... $ 21,781,141 $ 17,868,156
Net realized gains (losses) from investment
transactions.................................. 976,264 (905,404)
Net change in unrealized
appreciation/depreciation of investments...... 12,848,520 12,047,873
------------ ------------
Net increase in net assets resulting from
operations.................................... 35,605,925 29,010,625
------------ ------------
DIVIDENDS AND DISTRIBUTIONS:
From net investment income--common
stockholders.................................. (15,595,042) (13,609,047)
From net investment income--preferred
stockholders.................................. (5,765,362) (4,555,746)
In excess of net investment income--common
stockholders.................................. -- (321,858)
In excess of net investment income--preferred
stockholders.................................. -- (102,981)
------------ ------------
Total dividends and distributions to
stockholders................................... (21,360,404) (18,589,632)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued in connection with
the acquisition of PaineWebber Premier
Intermediate Tax-Free Income Fund Inc......... -- 82,548,499
------------ ------------
Net increase in net assets...................... 14,245,521 92,969,492
NET ASSETS:
Beginning of year............................... 426,794,743 333,825,251
------------ ------------
End of year (including undistributed net
investment income of $226,662 at March 31,
1996)......................................... $441,040,264 $426,794,743
------------ ------------
------------ ------------
See accompanying notes to financial statements
12
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
Statement of Cash Flows
For the Year Ended March 31, 1996
- --------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Interest received............................................. $ 25,702,970
Expenses paid (net of fee waivers)............................ (4,139,671)
Sale of short-term portfolio investments, net................. 350,000
Purchase of long-term portfolio investments................... (16,689,847)
Sale of long-term portfolio investments....................... 16,116,439
------------
Net cash provided by operating activities..................... 21,339,891
------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Dividends paid from net investment income to common
stockholders................................................ (15,595,042)
Dividends paid from net investment income to preferred
stockholders................................................ (5,677,807)
------------
Net cash used for financing activities........................ (21,272,849)
------------
NET INCREASE IN CASH............................................. 67,042
CASH AT BEGINNING OF YEAR........................................ 8,745
------------
CASH AT END OF YEAR.............................................. $ 75,787
------------
------------
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.......... $ 35,605,925
------------
Increase in investments, at value............................. (14,131,237)
Decrease in interest receivable............................... 107,684
Amortization of deferred organizational expenses.............. 61,711
Decrease in other assets...................................... 2,439
Decrease in payable to investment adviser and administrator... (92,979)
Decrease in accrued expenses and other liabilities............ (213,652)
------------
Total adjustments.......................................... (14,266,034)
------------
Net cash provided by operating activities..................... $ 21,339,891
------------
------------
See accompanying notes to financial statements
13
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Insured Municipal Income Fund Inc. (formerly PaineWebber Premier 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. Effective August 14,
1995, the Fund commenced conducting business under the name 'Insured Municipal
Income Fund.' The Board of Directors approved the change of the Fund's name to
'Insured Municipal Income Fund Inc.' at a meeting held on June 2, 1995 and
shareholders approved the name change on April 11, 1996. Organizational costs
have been deferred and are being amortized on a 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.
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 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 on 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 gains from investment
transactions have been 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 reclassifications.
14
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 year ended March 31,
1996 Mitchell Hutchins voluntarily waived a portion of its investment advisory
and administration fees from the Fund.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at March 31,
1996, was substantially the same as the cost of securities for financial
statement purposes.
At March 31, 1996, the components of the net unrealized appreciation of
investments were as follows:
Gross appreciation (from investments having an excess of
value over cost).......................................... $ 8,353,055
Gross depreciation (from investments having an excess of
cost over value).......................................... (5,438,618)
------------
Net unrealized appreciation of investments.................. $ 2,914,437
------------
------------
For the year ended March 31, 1996, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $16,689,847 and
$16,116,439, respectively.
FEDERAL TAX STATUS
The Fund intends to distribute 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 disturbed.
15
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 6,667 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 3.299% to 4.500% for the year ended March 31, 1996.
Effective October 23, 1995, Series A reset to a special dividend period of 364
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.
16
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Selected data for a share of common stock outstanding throughout each
period:
<TABLE>
<CAPTION>
For the Years Ended March 31, For the Period
--------------------------------- June 8, 1993+ to
1996 1995 March 31, 1994
----------------- ------------- ---------------
<S> <C> <C> <C>
Net asset value, beginning of period...................... $ 13.42 $ 13.42 $ 15.00
----------------- ------------- --------------
Net investment income..................................... 1.06 1.02** 0.73
Net realized and unrealized gains (losses) from
investments............................................. 0.67 0.04 (1.44)
----------------- ------------- --------------
Net increase (decrease) from investment operations........ 1.73 1.06 (0.71)
----------------- ------------- --------------
Dividends and distributions:
From net investment income--common stockholders......... (0.76) (0.79) (0.60)
From net investment income--preferred stockholders...... (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 shareholders......... (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............................ $ 14.11 $ 13.42 $ 13.42
----------------- ------------- --------------
----------------- ------------- --------------
Per share market value, end of period..................... $ 12.13 $ 11.13 $ 13.00
----------------- ------------- --------------
----------------- ------------- --------------
Total investment return(1)................................ 16.13% (8.17)% (9.74)%
----------------- ------------- --------------
----------------- ------------- --------------
Ratios to average net assets attributable to common
shares:
Total expenses, net of waivers from adviser............. 1.33% 1.74% 1.57%*
Total expenses, before waivers from adviser............. 1.65% 1.74% 1.57%*
Net investment income before preferred stock
dividends............................................ 7.45% 7.94% 5.92%*
Preferred stock dividends............................... 1.97% 2.02% 0.98%*
Net investment income available to common
stockholders ........................................ 5.48% 5.92% 4.94%*
Supplemental data:
Net assets, end of period (000's)....................... $ 441,040 $ 426,795 $ 333,825
Portfolio turnover rate................................. 4% 4% 8%
Asset coverage per share of preferred stock, end of
period .............................................. $ 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 one share of
common stock at the current market price on the first day of the period
reported and the sale at the current market price on the last day of the
period reported, and assuming reinvestment of dividends and other
distributions to common shareholders at prices obtained under the Fund's
Dividend Reinvestment Plan. Total investment return for periods less than a
year have not been annualized. Total investment return does not reflect
brokerage commissions.
17
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors
- --------------------------------------------------------------------------------
To Board of Directors and Stockholders
Insured Municipal Income Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Insured Municipal Income Fund Inc. (formerly PaineWebber Premier Insured
Municipal Income Fund Inc.), including the portfolio of investments, as of March
31, 1996, and the related statements of operations and cash flows for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. Our procedures included confirmation of securities owned at March
31, 1996 by correspondence with the custodian. 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 aspects, the financial position of
Insured Municipal Income Fund Inc. at March 31, 1996, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the indicated periods in conformity with generally
accepted accounting principles.
New York, New York
May 14, 1996
18
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
Tax Information
- --------------------------------------------------------------------------------
We are required by subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (March 31,
1996) as to the federal tax status of distributions received by stockholders
during such fiscal year. Accordingly, we are advising you that all dividends
paid during the period by the Fund were federal tax-exempt interest dividends.
The Fund did not invest in any securities which paid interest subject to
the federal alternative minimum tax for individual taxpayers during its fiscal
year. Therefore, none of the dividends paid by the Fund were subject to such
tax.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1996. The second
notification, which reflects the amount to be used by calendar year taxpayers on
their federal income tax returns, will be made in conjunction with Form 1099 DIV
and will be mailed in January 1997. Stockholders are advised to consult their
own tax advisers with respect to the tax consequences of their investment in the
Fund.
19
<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 April 30, 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 and The New York Times and each week in Barron's, as well as in
numerous other newspapers.
A special meeting of shareholders of the Fund was held on April 11, 1996.
At the meeting Margo N. Alexander and Meyer Feldberg were elected by
shareholders of auction preferred shares to serve as directors until the next
annual meeting of shareholders, or until their successors are elected and
qualified. Richard Q. Armstrong, E. Garrett Bewkes, Jr., Richard R. Burt, Mary
C. Farrell, George W. Gowen, Frederic V. Malek, Carl W. Schafer, and John R.
Torell III were elected to serve as directors until the next annual meeting of
shareholders, or until their successors are elected and qualified.
ALL SHARES VOTING AS A SINGLE CLASS:
1. To elect eight members of its Board of Directors:
SHARES FOR AS
SHARES FOR A % OF TOTAL SHARES WITHHOLD
VOTED SHARES VOTED AUTHORITY
---------- ------------- ---------------
Richard Q. Armstrong.............. 10,346,950 94.00% 660,018
E. Garrett Bewkes, Jr............. 10,347,184 94.01% 659,784
Richard Burt...................... 10,342,139 93.96% 664,829
Mary C. Farrell................... 10,348,432 94.02% 658,536
George W. Gowen................... 10,339,244 93.93% 667,724
Frederic V. Malek................. 10,330,912 93.86% 676,056
Carl W. Schafer................... 10,345,805 93.99% 661,163
John R. Torell III................ 10,348,203 94.02% 658,765
20
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AUCTION PREFERRED SHARES:
2. To elect two members of its Board of Directors:
SHARES FOR AS
SHARES FOR A % OF TOTAL SHARES WITHHOLD
VOTED SHARES VOTED AUTHORITY
---------- ------------- ---------------
Margo N. Alexander............ 2,072 100.00% 0
Meyer Feldberg................ 2,072 100.00% 0
In addition, the following proposals were approved for the Fund:
ALL SHARES VOTING AS A SINGLE CLASS:
3. Approval of the proposed changes to the Fund's fundamental investment
restrictions and policies:
<TABLE>
<CAPTION>
SHARES FOR AS
SHARES FOR A % OF TOTAL SHARES SHARES
VOTED SHARES VOTED AGAINST ABSTAIN
---------- --------------- ------- -------
<S> <C> <C> <C> <C>
1. Modification of Fundamental Restriction on
Portfolio Diversification for Diversified
Funds:........................................ 7,640,245 69.41% 493,352 473,370
2. Modification of Fundamental Restriction on
Concentration:................................ 7,613,145 69.17% 514,411 478,781
3. Modification of Fundamental Restriction on
Senior Securities and Borrowing
(unchanged):.................................. 7,629,614 69.32% 371,375 605,978
4. Modification of Fundamental Restriction on
Making Loans:................................. 7,720,005 70.14% 404,139 482,823
5. Modification of Fundamental Restriction on
Underwriting Securities:...................... 7,598,684 69.04% 533,665 474,618
6. Modification of Fundamental Restriction on Real
Estate Investments:........................... 7,567,545 68.75% 557,078 482,344
7. Modification of Fundamental Restriction on
Investing in Commodities:..................... 7,566,540 68.74% 589,701 450,726
8. Modification of Fundamental Restriction on
Margin Tranactions:........................... 7,693,556 69.90% 456,696 456,715
9. Elimination of Fundamental Restriction on Short
Sales:........................................ 7,536,201 68.47% 592,361 478,369
10. Elimination of Fundamental Restriction on
investments in Oil, Gas and Mineral Leases and
Programs...................................... 7,585,983 68.92% 575,663 445,321
</TABLE>
4. Approval of amendment to Articles of Incorporation to change the Fund's name
to 'Insured Municipal Income Fund Inc.':
<TABLE>
<S> <C> <C> <C> <C>
10,350,838 94.04% 250,982 405,147
</TABLE>
Broker non-votes and abstentions are included within the 'Shares Withhold
Authority' totals.
21
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DISTRIBUTION POLICY
The Fund's Board of Directors has established a Dividend Reinvestment Plan
under which all common stockholders whose shares are registered in their own
names, or in the name of PaineWebber Incorporated or its nominee, will have all
dividends and other distributions on their shares of common stock automatically
reinvested in additional shares of common stock, unless such common shareholders
elect to receive cash. Common 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 Dividend Reinvestment
Plan. Additional shares of common stock acquired under the Dividend Reinvestment
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 its Dividend Reinvestment Plan.
22
<PAGE>
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<PAGE>
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<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
Dennis L. McCauley
Vice President
Elbridge T. Gerry III
Vice President
------------------------------------
INVESTMENT ADVISER 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.
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.
(Copyright) 1996 PaineWebber
Incorporated
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