[PAINEWEBBER LOGO]
(c)1997 PaineWebber Incorporated
Member SIPC
MARCH 31, 1997
- -------------------------
Insured
Municipal
Income Fund Inc.
Annual Report
<PAGE>
INSURED MUNICIPAL INCOME FUND INC. ANNUAL REPORT
May 14, 1997
Dear Shareholder,
We are pleased to present the annual report for Insured Municipal Income Fund
Inc. for the year ended March 31, 1997.
PERFORMANCE
- -------------------------------------------------------------------------------
For the period, Insured Municipal Income Fund recorded a total return of 5.4%,
based on the Fund's common stock net asset value. The Fund's total return for
the same time period based on its common stock market value was 5.5%. For the
same time period, the Lipper Insured Municipal Debt Average advanced 5.5%. As of
March 31, 1997, the Fund's net asset value per share was $14.10, and its share
price on the New York Stock Exchange was $12.00.
During the period, the Fund paid dividends totalling $0.768 per share of
common stock. Since July 1995, the Fund has paid a monthly dividend of $0.064
per share of common stock. Given the current interest rate environment, we
anticipate that the monthly dividend will remain unchanged for the remainder of
1997.
General Market Overview
- -------------------------------------------------------------------------------
[ARTWORK]
Early in the period, the economy grew moderately, which kept long-term interest
rates relatively stable and pushed bond prices higher. Only Federal Reserve
Chairman Alan Greenspan's "irrational exuberance" speech late in 1996 put a
damper on the bond market. In February and March, the economy began showing
clear signs of strength, which pushed long-term interest rates higher and bond
prices lower. Some of the most visible signs of an overheating economy included
a marked increase in employment, wages and consumer spending. On March 25th, in
a preemptive strike against inflation, the Federal Reserve raised the federal
funds rate to 5.50%, from 5.25%. The fed funds rate is the rate banks charge
each other for overnight loans.
In late 1996, municipal bond prices rose strongly in tandem with Treasury
securities due largely to the favorable economic environment. The continuing
slowdown in the supply of new municipal issues also contributed to the
attractiveness of these securities. When fewer bonds are on the market, demand
outstrips supply, and buyers are willing to pay more for existing bonds. When
interest rates edged higher, the municipal market outperformed the Treasury
market. This is not uncommon, since municipal bonds tend to be less interest-
rate sensitive than Treasurys due to their tax-exempt status.
1
<PAGE>
ANNUAL REPORT
PORTFOLIO REVIEW
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[ARTWORK]
The Fund enjoyed strong per-formance during this period due to price gains
realized when premium callable bonds rolled down the yield curve to trade at a
spread off of pre-refunded bonds. The Fund's decision to maintain a longer
effective duration than its benchmark when interest rates began to fall, a
bullish stance, also contributed favorably to performance. As interest rates
began to rise in early 1997, we shortened our duration to bring it virtually
back in line with our benchmark, a defensive measure. This decision helped to
protect shareholder capital during a difficult period for bond prices.
Relationships between sectors were little changed throughout the period. As
of March 31, 1997, the Fund was fully invested in a well-diversified portfolio
of long-term municipal securities with an average weighted maturity of 22.59
years.
As of March 31, 1997, the largest percentages of the Fund's portfolio assets
were invested in securities of Illinois (15.9%), Texas (11.0%), Pennsylvania
(9.5%), Rhode Island (7.0%) and Nevada (5.9%). The top sector holdings were
power revenue, (22.2%); water (20.4%), health care (18.8%), sales tax (11.9%)
and general obligations (9.8%).
OUTLOOK
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[ARTWORK]
Given the Federal Reserve's track record under Chairman Alan Greenspan, we are
likely to witness one or perhaps two more rate increases during the next
reporting period. Our opinion is not only widely held, but we firmly believe the
bond market has already priced another Federal Reserve rate hike into the
market. Thus, any signs of economic weakness in the coming weeks could ignite a
bond market rally. While our near-term expectation is that interest rates will
probably edge slightly higher due to the current strength of the U.S. economy,
our longer-term outlook is favorable because real returns on bonds (current
yield minus inflation) are currently at historically attractive levels.
2
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INSURED MUNICIPAL INCOME FUND INC. ANNUAL REPORT
Thus, any significant rise in interest rates due to further
stronger-than-expected economic news should present, in our opinion, an
excellent long-term buying opportunity.
OUR STRATEGY.
Given our economic forecast, we expect continued volatility in the bond markets
near-term. We will attempt to take advantage of a flat yield curve by
implementing a barbell approach--selling intermediate maturities and buying a
combination of longer and shorter maturities. This will potentially enhance
performance when the yield curve returns to its normal shape.
Additionally, we see opportunities in select spots on the yield curve,
specifically issues in the 15- to 20-year maturity range. We expect to continue
to diversify across the yield curve and credit spectrum and will keep the fund
diversified to enhance its potential to enhance returns and limit portfolio
risk.
As always, we will continue to monitor the supply and demand environment,
state-by-state, searching for possible swap opportunities, and will monitor
relative value relationships between municipal sectors. From an individual
security and credit analysis standpoint, we will seek complex structures (e.g.,
call features and sinking funds), in our effort to find undervalued bonds and
buying opportunities among issues with potential improvements in their
underlying credits.
Thank you for your investment in Insured Municipal Income Fund Inc. We
appreciate the opportunity to serve your investment needs and hope that you will
contact us whenever you have any questions.
Sincerely,
/s/Margo N. Alexander /s/Elbridge T. Gerry III /s/Richard S. Murphy
- --------------------- ------------------------ --------------------
MARGO N. ALEXANDER ELBRIDGE T. GERRY III RICHARD S. MURPHY
President, Senior Vice President Portfolio Manager
Mitchell Hutchins Mitchell Hutchins Insured Municipal
Asset Management Inc. Asset Management Inc. Income Fund Inc.
Portfolio Manager,
Insured Municipal
Income Fund Inc.
3
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INSURED MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS MARCH 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
- --------- ----------- ----------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS -- 96.21%
ALABAMA -- 1.53%
$ 1,625 Alabama Water Pollution Control
Authority -- Revolving Fund Loan
Series A (AMBAC Insured) ................. Aaa AAA 08/15/17 6.750% $ 1,759,696
5,400 Birmingham Special Care Facilities
Finance Authority -- Birmingham
Baptist Medical Center (MBIA Insured) .... Aaa AAA O8/15/23 5.500 5,003,910
------------
6,763,606
------------
ALASKA -- 1.15%
5,000 Anchorage General Obligation Bonds
(AMBAC Insured) .......................... Aaa AAA 06/01/23 6.250 5,055,850
------------
CALIFORNIA -- 2.34%
30 California State (FGIC Insured) ............ Aaa AAA 11/01/12 7.000 33,354
970 California State (Pre-refunded with U.S.
Government Securities to 11/01/04 @ 102) . Aaa AAA 11/01/12 7.000 1,118,468
1,585 Contra Costa Water District (FGIC Insured) . Aaa AAA 10/01/13 6.000 1,623,389
5,000 Los Angeles County Sales Tax Commission
Sales Tax Revenue Series B (FGIC Insured). Aaa AAA 07/01/15 6.500 5,340,700
2,250 Los Angeles Wastewater System
(MBIA Insured) ........................... Aaa AAA 06/01/20 5.700 2,190,577
------------
10,306,488
------------
DELAWARE -- 2.25%
10,000 Delaware State Economic Development Authority
Delmarva Power (MBIA Insured) ............ Aaa AAA 06/01/21 5.900 9,935,400
------------
DISTRICT OF COLUMBIA -- 0.90%
4,000 District of Columbia Hospital Revenue Bonds
Medlantic Health Care Group (MBIA Insured) Aaa AAA 08/15/14 5.750 3,960,720
------------
ILLINOIS -- 15.60%
4,000 Illinois Development Finance Authority
Pollution Refunding Commonwealth Edison
Company Project Series D (AMBAC Insured) . Aaa AAA 03/01/15 6.750 4,337,000
4,500 Illinois Health Facilities Authority
Franciscan Sisters Health Care
(MBIA Insured) ........................... Aaa AAA 09/01/18 5.750 4,333,635
10,000 Illinois Municipal Electric Agency
(AMBAC Insured) .......................... Aaa AAA 02/01/21 5.750 9,659,700
8,000 Central Lake County Joint Action Water Agency
(FGIC Insured) ........................... Aaa AAA 05/01/20 5.375 7,313,920
</TABLE>
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INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
- --------- ----------- ----------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS -- (CONTINUED)
ILLINOIS -- (CONCLUDED)
$11,400 Chicago -- O'Hare International Airport
(MBIA lnsured) ........................... Aaa AAA 01/01/15 5.500 to 6.375% $ 11,607,876
17,220 Chicago 911 System (FGIC Insured) .......... Aaa AAA 01/01/23 5.625 16,247,759
4,600 Chicago Public Building Commission
(MBIA lnsured) ........................... Aaa AAA 12/01/18 5.750 4,455,744
8,000 Regional Transportation Authority
(AMBAC Insured) .......................... Aaa AAA 06/01/22 6.125 8,018,480
2,750 Regional Transportation Authority
(FGIC Insured) ........................... Aaa AAA 06/01/23 to 06/01/25 5.850 to 7.100 2,787,822
-------------
68,761,936
-------------
INDIANA -- 4.66%
2,500 Indiana Health Facilities Finance Authority
Columbus Regional Hospital (CGIC Insured). Aaa AAA 08/15/22 5.500 2,277,500
7,835 Indianapolis Gas & Utilities (FGIC Insured). Aaa AAA 06/01/21 5.375 7,139,487
12,000 Marion County Convention Center
(AMBAC Insured) .......................... Aaa AAA 06/01/21 5.500 11,137,680
-------------
20,554,667
-------------
IOWA -- 1.02%
4,625 Ames Hospital Authority -- Mary Greeley
Medical Center (AMBAC Insured) ........... Aaa AAA 08/15/22 5.750 4,480,793
-------------
KENTUCKY -- 4.54%
1,150 Kentucky Development Finance Authority Hospital
Revenue -- St. Luke Hospital Incorporated
Series A (MBIA Insured) .................. Aaa AAA 10/01/21 7.000 1,255,213
17,530 Louisville & Jefferson County (AMBAC Insured) Aaa AAA 05/15/24 to 05/15/25 6.500 to 6.750 18,759,052
-------------
20,014,265
-------------
LOUISIANA -- 3.23%
2,000 Louisiana Public Facilities Authority
Alton Oschner Hospital (AMBAC Insured) ... Aaa AAA 05/15/17 6.000 2,007,700
8,500 Louisiana Public Facilities Authority
Alton Oschner Hospital (MBIA Insured) .... Aaa AAA 05/15/11 5.750 8,551,680
1,710 Louisiana Public Facilities Authority
Tulane University (FGIC Insured) ......... Aaa AAA 02/15/18 5.750 1,695,516
1,870 Louisiana Public Facilities Authority
Tulane University (Pre-refunded
with U.S. Government Securities to
O2/15/03 @ 102) (FGIC Insured) ........... Aaa AAA 02/15/18 5.750 1,979,264
--------------
14,234,160
--------------
</TABLE>
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INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
- --------- ----------- ----------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS -- (CONTINUED)
MAINE -- 2.04%
$ 9,390 Maine Health & Higher Educational
Facilities (FSA Insured) ................. Aaa AAA 07/01/23 to 07/01/24 5.500 to 7.000% $ 8,974,845
-----------
MASSACHUSETTS -- 2.44%
10,000 Massachusetts State Health & Education
Facility Brigham & Women's Hospital
(MBIA Insured) ........................... Aaa AAA 07/01/24 6.750 10,771,800
-----------
MICHIGAN -- 1.97%
8,770 Michigan State Housing Finance Authority
(AMBAC Insured) .......................... Aaa AAA 04/01/23 5.900 8,666,602
-----------
NEVADA -- 5.77%
7,750 Clark County Airport -- McCarran International
Airport (AMBAC Insured) .................. Aaa AAA 07/01/22 6.000 7,771,700
4,000 Clark County General Obligation Bonds
(AMBAC Insured) .......................... Aaa AAA 06/01/16 6.000 4,213,280
2,000 Clark County Sanitation District (FGIC Insured) Aaa AAA 07/01/11 5.700 2,003,980
11,500 Washoe County Gas and Water Sierra Power
(MBIA Insured) ........................... Aaa AAA 06/01/23 5.900 11,423,065
-----------
25,412,025
-----------
NEW HAMPSHIRE -- 1.28%
5,000 New Hampshire Higher Education &
Health Authority -- Lakes Region
Hospital (FGIC Insured) .................. Aaa AAA 01/01/17 5.500 4,674,100
1,000 New Hampshire Higher Education &
Health Authority -- University of
New Hampshire (MBIA Insured) ............. Aaa AAA 07/01/24 5.750 966,550
-----------
5,640,650
-----------
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 5,300,950
-----------
NEW MEXICO -- 3.37%
9,100 Gallup Pollution Control Revenue
Plains Electric (MBIA Insured) ........... Aaa AAA 08/15/17 6.650 9,795,695
</TABLE>
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INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
- --------- ----------- ----------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS -- (CONTINUED)
NEW MEXICO -- (CONCLUDED)
$ 4,700 Santa Fe Water Revenue (AMBAC Insured) ..... Aaa AAA 06/01/24 6.300% $ 5,081,452
-----------
14,877,147
-----------
NORTH CAROLINA -- 0.97%
4,000 Piedmont Triad Airport Authority
Airport Revenue Series A (MBIA Insured) .. Aaa AAA 07/01/16 6.750 4,286,560
-----------
OHIO -- 0.78%
3,000 Cleveland Public Power Systems Revenue
First Mortgage Series A (MBIA lnsured) ... Aaa AAA 11/15/24 7.000 3,431,790
-----------
PENNSYLVANIA -- 9.40%
16,435 Pennsylvania Intergovernmental
Cooperative Authority (MBIA Insured) ..... Aaa AAA 06/15/15 to 06/15/23 5.600 to 5.625 15,754,995
2,675 Pennsylvania Intergovernmental
Cooperative Authority Philadelphia
Funding Program (FGIC Insured) ........... Aaa AAA 06/15/14 7.000 3,031,229
6,130 North Wales Water Authority (FGIC Insured) . Aaa AAA 11/01/16 5.500 5,826,688
17,500 Philadelphia Water & Waste Authority
(CGIC Insured) ........................... Aaa AAA 06/15/15 5.500 16,798,950
-----------
41,411,862
-----------
RHODE ISLAND -- 6.91%
14,000 Rhode Island Convention Center Authority
(AMBAC Insured) .......................... Aaa AAA 05/15/27 5.750 13,608,840
10,000 Rhode Island Depositors Economic
Protection Corporation (FSA lnsured) ..... Aaa AAA 08/01/14 5.750 9,977,400
7,000 Rhode Island Depositors Economic
Protection Corporation (MBIA Insured) .... Aaa AAA 08/01/21 5.250 6,884,640
-----------
30,470,880
-----------
SOUTH CAROLINA -- 3.90%
15,000 South Carolina Public Services Authority
(MBIA lnsured) ........................... Aaa AAA 07/01/21 to 07/01/31 5.500 to 6.000 14,711,700
2,625 Charleston County Hospital Facilities Authority
Bon Secours Health System (FSA lnsured) .. Aaa AAA 08/15/25 5.625 2,474,378
-----------
17,186,078
-----------
</TABLE>
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INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
- --------- ----------- ----------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS -- (CONCLUDED)
TENNESSEE -- 1.11%
$ 5,000 Sullivan County Health Education and
Housing Facilities Board -- Holston
Valley Health (MBIA lnsured) ............. Aaa AAA 02/15/20 5.750% $ 4,881,600
------------
TEXAS -- 10.85%
7,000 Austin Utilities System (AMBAC Insured) .... Aaa AAA 11/15/16 5.750 6,934,480
13,675 Bexar Metro Water District (MBIA lnsured) .. Aaa AAA 05/01/22 5.875 13,541,395
10,000 Lubbock Health Facilities-- Methodist
Hospital (AMBAC Insured) ................. Aaa AAA 12/01/22 5.900 9,653,400
9,005 Matagorda County Navigation
District 1 Revenue -- Houston
Light & Power (AMBAC lnsured) ............ Aaa AAA 03/01/27 6.700 9,642,644
8,000 San Antonio Water Authority (MBIA Insured) . Aaa AAA 05/15/16 6.000 8,044,800
------------
47,816,719
------------
WASHINGTON -- 2.03%
4,000 Washington State Health Care Facilities
Tacoma Hospital (FGIC Insured) .......... Aaa AAA 08/15/22 5.750 3,840,040
5,000 Metropolitan Seattle Sewer (MBIA Insured) . Aaa AAA 01/01/33 6.300 5,103,400
------------
8,943,440
------------
WEST VIRGINIA -- 3.93%
5,220 West Virginia School Building Authority
(MBIA Insured) .......................... Aaa AAA 07/01/20 6.000 5,180,641
2,245 West Virginia State Water Development
Authority (FSA lnsured) ................. Aaa AAA 11/01/29 5.750 2,196,374
10,000 Marshall County Pollution Authority
Ohio Power (MBIA lnsured) ............... Aaa AAA 04/01/22 5.900 9,935,400
------------
17,312,415
------------
WISCONSIN -- 1.04%
1,500 Wisconsin Health & Educational Facilities
Bellin Memorial Hospital (AMBAC Insured) . Aaa AAA 02/15/19 5.500 1,390,275
3,500 Wisconsin State Health & Educational
Facilities -- Hospital Sisters Health
System (MBIA lnsured) .................... Aaa AAA 06/01/18 5.375 3,188,710
------------
4,578,985
------------
TOTAL LONG-TERM MUNICIPAL BONDS
(cost-- $421,908,833) 424,032,233
------------
</TABLE>
8
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING MATURITY INTEREST
(000) (UNAUDITED) (UNAUDITED) DATES RATES VALUE
- --------- ----------- ----------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM MUNICIPAL NOTES -- 2.21%
ALASKA -- 0.07%
$ 300 Valdez Alaska Marine Terminal Revenue
Exxon Pipeline Company Project .......... P1 A1+ 04/01/97 3.800%* $ 300,000
------------
ARIZONA -- 0.18%
800 Pinal County Pollution Control Revenue ...... P1 A1+ 04/01/97 3.850* 800,000
------------
LOUISIANA -- 0.14%
600 Louisiana State Offshore Terminal Revenue ... VMIG1 A1+ 04/01/97 3.800* 600,000
------------
NEW YORK -- 1.10%
2,450 New York City ............................... VMIG1 A1+ 04/01/97 3.500 to 4.000* 2.450,000
700 New York City Series B (AMBAC Insured) ...... VMIG1 A1+ 04/01/97 4.000* 700,000
1,200 New York City Series B (MBIA Insured) ....... VMIG1 A1+ 04/01/97 3.800 to 4.000* 1,200,000
400 New York State Energy Research And
Development Authority Pollution Control
Revenue ................................... VMIG1 A1+ 04/01/97 4.000* 400,000
100 New York City Municipal Water Finance Authority
Water & Sewer Systems Revenue Series A
(FGIC Insured) ............................ VMIG1 A1+ 04/01/97 3.700* 100,000
------------
4,850,000
------------
WYOMING -- 0.72%
3,200 Lincoln County Pollution Control Revenue
(Exxon Project) ........................... P1 A1+ 04/01/97 3.800 to 3.900* 3,200,000
------------
TOTAL SHORT-TERM MUNICIPAL NOTES
(cost-- $9,750,000) ................................ 9,750,000
------------
TOTAL INVESTMENTS
(cost-- $431,658,833)-- 98.42% ..................... 433,782,233
Other assets in excess of liabilities - 1.58% ........ 6,976,142
------------
NET ASSETS-- 100.00% ................................. $440,758,375
============
</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 March 31, 1997.
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, 1997
ASSETS:
Investments in securities, at value (cost-- $431,658,833) .... $433,782,233
Cash ......................................................... 50,712
Interest receivable .......................................... 7,389,120
Deferred organizational expenses ............................. 80,038
Other assets ................................................. 8,549
------------
Total assets ................................................. 441,310,652
------------
LIABILITIES:
Dividends payable to preferred shareholders .................. 284,413
Payable to investment adviser and administrator .............. 246,513
Accrued expenses and other liabilities ....................... 21,351
------------
Total liabilities ............................................ 552,277
------------
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 liquidationvalue ................. 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 .......................... 735,810
Accumulated net realized losses from investment transactions . (14,804,597)
Net unrealized appreciation of investments ................... 2,123,400
------------
Net assets applicable to common shareholders ................. 290,758,375
------------
Total net assets ............................................. $440,758,375
============
Net asset value per common share ($290,758,375 applicable to
20,628,363 common shares outstanding) ...................... $14.10
======
See accompanying notes to financial statements
10
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF OPERATIONS
FOR THE YEAR
ENDED
MARCH 31, 1997
--------------
INVESTMENT INCOME:
Interest ....................................................... $ 25,737,353
------------
EXPENSES:
Investment advisory and administration ......................... 3,988,417
Auction Preferred Shares expenses .............................. 525,318
Custody and accounting ......................................... 268,174
Legal and audit ................................................ 118,043
Reports and notices to shareholders ............................ 114,109
Amortization of organizational expenses ........................ 61,710
Transfer agency and service fees ............................... 43,095
Directors' fees ................................................ 12,250
Other expenses ................................................. 37,142
------------
5,168,258
Less: Fee waivers from adviser ................................. (1,107,893)
------------
Net expenses ................................................... 4,060,365
------------
NET INVESTMENT INCOME .......................................... 21,676,988
------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gains from investment transactions .................. --
Net change in unrealized appreciation/depreciation of investments (791,037)
------------
NET UNREALIZED LOSS FROM INVESTMENT ACTIVITIES ................. (791,037)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $ 20,885,951
============
See accompanying notes to financial statements
11
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
----------------------------
1997 1996
------------- -----------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ........................................... $ 21,676,988 $ 21,781,141
Net realized gains from investment transactions ................. -- 976,264
Net change in unrealized appreciation/depreciation of investments (791,037) 12,848,520
------------- -------------
Net increase in net assets resulting from operations ............ 20,885,951 35,605,925
------------- -------------
DIVIDENDS FROM:
Net investment income -- common stockholders .................... (15,842,583) (15,595,042)
Net investment income-- preferred stockholders .................. (5,325,257) (5,765,362)
------------- -------------
Total dividends to stockholders ............................... (21,167,840) (21,360,404)
------------- -------------
Net increase (decrease) in net assets ........................... (281,889) 14,245,521
NET ASSETS:
Beginning of year ............................................... 441,040,264 426,794,743
------------- -------------
End of year (including undistributed net investment income
of $735,810 and $226,662, respectively) ....................... $ 440,758,375 $ 441,040,264
============= =============
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR
ENDED
MARCH 31, 1997
--------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Interest received .............................................. $ 25,650,989
Expenses paid (net of fee waivers) ............................. (4,005,184)
Purchase of short-term portfolio investments, net .............. (500,000)
------------
Net cash provided by operating activities ...................... 21,145,805
------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Dividends paid from net investment
income to common stockholders ................................ (15,842,583)
Dividends paid from net investment
income to preferred stockholders ............................. (5,328,297)
------------
Net cash used for financing activities ......................... (21,170,880)
------------
Net decrease in cash ........................................... (25,075)
Cash at beginning of year ...................................... 75,787
------------
Cash at end of year ............................................ $ 50,712
============
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 .............................................. $ 20,885,951
------------
Decrease in investments, at value .............................. 202,166
Decrease in interest receivable ................................ 2,507
Amortization of deferred organizational expenses ............... 61,710
Increase in other assets ....................................... (402)
Increase in payable to investment adviser
and administrator ............................................ 14,848
Decrease in accrued expenses and other liabilities ............. (20,975)
------------
Total adjustments .............................................. 259,854
------------
Net cash provided by operating activities ...................... $ 21,145,805
============
See accompanying notes to financial statements
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
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.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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,
1997, Mitchell Hutchins voluntarily waived $1,107,893 in investment advisory and
administration fees from the Fund.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at March 31,
1997 was substantially the same as the cost of securities for financial
statement purposes.
At March 31, 1997, the components of the net unrealized appreciation of
investments were as follows:
Gross appreciation (from investments
having an excess of value over cost) .................. $ 8,413,128
Gross depreciation (from investments
having an excess of cost over value) .................. (6,289,728)
-----------
Net unrealized appreciation of investments .............. $ 2,123,400
===========
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, 1997, 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.
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, 14,910 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.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 3.000% to 4.250% for the year ended March 31, 1997.
Effective January 6, 1997, 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
<TABLE>
<CAPTION>
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
FOR THE YEARS ENDED MARCH 31, FOR THE PERIOD
JUNE 8, 1993+ TO
1997 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 ....................................... 1.05 1.06 1.02** 0.73
Net realized and unrealized
gains (losses) from investments . (0.03) 0.67 0.04 (1.44)
----- ----- ----- -----
Net increase (decrease)
from investment operations .......... 1.02 1.73 1.06 (0.71)
----- ----- ----- -----
Dividends and distributions:
From net investment income-- common stockholders .......... (0.77) (0.76) (0.79) (0.60)
From net investment income-- preferred stockholders ....... (0.26) (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 ........... (1.03) (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 .............................. $14.10 $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) .................................. 5.45% 16.13% (8.17)% (9.74)%
====== ====== ====== ======
Ratios to average net assets attributable to common shares:
Total expenses net of waivers from adviser ................ 1.38% 1.33% 1.74% 1.57%*
Total expenses before waivers from adviser ................ 1.76% 1.65% 1.74% 1.57%*
Net investment income before preferred stock dividends .... 7.37% 7.45% 7.94% 5.92%*
Preferred stock dividends ................................. 1.81% 1.97% 2.02% 0.98%*
Net investment income available to common stockholders .... 5.56% 5.48% 5.92% 4.94%*
Supplemental data:
Net assets, end of period (000's) ......................... $440,758 $441,040 $426,795 $333,825
Portfolio turnover rate ................................... 0% 4% 4% 8%
Asset coverage per share of preferred stock, end of period $146,919 $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.
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. including the portfolio of investments, as of
March 31, 1997, 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 and financial highlights. Our procedures included confirmation of
securities owned as of March 31, 1997 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. as of March 31, 1997, 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.
ERNST & YOUNG LLP
New York, New York
May 13, 1997
18
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
TAX INFORMATION -- (UNAUDITED)
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,
1997) 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 1997. 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 1998. 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, 1997.
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.
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.
20
<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
PRINCIPAL OFFICERS
Margo N. Alexander
PRESIDENT
Victoria E. Schonfeld
VICE PRESIDENT
Dianne E. O'Donnell
VICE PRESIDENT AND SECRETARY
Julian F. Sluyters
VICE PRESIDENT AND TREASURER
Elbridge T. Gerry III
VICE PRESIDENT
Richard S. Murphy
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 SHARES OF ITS
COMMON STOCK IN THE OPEN MARKET AT MARKET PRICES.
THIS REPORT IS SENT TO THE SHAREHOLDERS OF THE FUND FOR THEIR INFORMATION. IT IS
NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR THE USE IN THE
PURCHASE OR SALE OF SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THIS
REPORT.
