<PAGE>
INSURED MUNICIPAL INCOME FUND INC. ANNUAL REPORT
May 15, 1998
Dear Shareholder,
We are pleased to present you with the annual report for the Insured
Municipal Income Fund Inc. (the "Fund") for the fiscal year ended March 31,
1998.
General Market Overview
===============================================================================
[GRAPHIC] The bond markets weakened slightly during the first quarter of 1998.
Despite little inflationary pressure, evidence of a pickup in the U.S. economy
and fears of an overbought market moderated the bulls. Speculation as to the
ultimate impact of the Asian crisis on the United States also gave investors
cause for concern.
The municipal bond market continued to lag the Treasury market during the
first quarter. Municipal issuers took advantage of low rates to refinance
outstanding debt with new, lower yielding bonds. As a result, by quarter-end
municipals had cheapened and were yielding 86% of comparable-maturity
Treasurys. Historically, on average, municipal securities yield 82% to 83% of
comparable Treasurys. This yield relationship tends to return to its average,
which suggests municipals are poised to outperform as the supply of bonds is
placed.
Portfolio Review
===============================================================================
[GRAPHIC] Performance--For the fiscal year ended March 31, 1998, the Fund
(symbol: PIF) returned 14.92% based on changes in the Fund's net asset value
and 19.70% based on changes in its share price on the New York Stock Exchange.
At March 31, 1998 the Fund's net asset value per share was $15.40, while
its share price on the New York Stock Exchange was $13.56. During the fiscal
year ended March 31, 1998, the Fund paid dividends from net investment income
totaling $0.768 per share, or 6.4 cents per share per month. Based on the
dividend paid in March and the Fund's market price on March 31, 1998, the
Fund's annualized market yield was 5.66%.
Portfolio Highlights--Our disciplined investment style--focused on duration,
sector allocation and security selection--helped the Fund outperform the
average Lipper Insured Municipal Debt Fund during the one-year period ended
March 31, 1998. There were no changes to the Fund's portfolio during the
quarter; with market interest rates steadily falling, it was better to retain
the Fund's holdings than to sell them and reinvest at lower rates.
Our hospital bond positions underperformed generally. However, since we are
underweighted in hospitals compared to our Lipper peer group, hospital issues
did not affect our performance as much as theirs.
We are still positive on the power sector (22.0% of net assets as of March
31, 1998); we expect further consolidation to lead to lower issuance and more
prerefundings as municipalities respond to customers' ability to choose power
vendors. We expect to start a position in single-family housing bonds pending
fine-tuning of individual issue prepayment rates.
We are generally positive on interest rates, believing that inflation will
stay down within the context of a moderately healthy economy. The Fund's
leverage and longer duration than its peer group should cause it to perform
relatively well if our view proves correct.
INSURED MUNICIAL INCOME FUND INC.
Top five states as percent of net assets, March 31, 1998*
Illinois 15.8%
Texas 10.9%
Pennsylvania 9.4%
Rhode Island 7.0%
Nevada 5.8%
*Allocations subject to change
INSURED MUNICIPAL INCOME FUND INC.
FUND PROFILE
Goal:
High Current income exempt from federal income tax, consistent with
preservation of capital
Portfolio Managers:
Elbridge T. Gerry, Ill and Richard S. Murphy, Mitchell Hutchins Asset
Management Inc.
Total Net Assets:
$467.8 million as of March 31, 1998
Dividend Payments:
Monthly
1
<PAGE>
ANNUAL REPORT
INSURED MUNICIPAL INCOME FUND INC.
Top five sectors as percent of net assets, March 31, 1998*
Power 22.0%
Water 20.5%
Healthcare 19.0%
Sales Tax 11.9%
General Obligations 9.6%
*Allocations subject to change
OUTLOOK
===============================================================================
[GRAPHIC] We believe the U.S. economy is slowing slightly due to the Asian
impact, though the effects will not show up in economic statistics for a
while. The Federal budget is now running a surplus, which should reduce
government borrowing and ease the upward pressure on market interest rates. We
expect U.S. economic growth to exceed 3% in 1998, with inflation just under
2%--a positive environment for bonds.
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued
support and welcome any comments or questions you may have.
For a quarterly Fund Profile on the Insured Municipal Income Fund Inc. or
other funds in the PaineWebber Family of Funds(1), please contact your
investment executive.
Sincerely,
/s/ Margo Alexander /s/ Elbridge T. Gerry, III
Margo Alexander Elbridge T. Gerry, III
President Senior Vice President
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
Portfolio Manager, Insured Municipal
Income Fund Inc.
/s/ Richard S. Murphy
Richard S. Murphy
Senior Vice President
Mitchell Hutchins Asset Management Inc.
Portfolio Manager, Insured Municipal Income Fund Inc.
This letter is intended to assist shareholders in understanding how the
Fund performed during the fiscal year ended March 31, 1998, and reflects our
views at the time we are writing this report. Of course, these views may
change in response to changing circumstances. We encourage you to consult your
investment executive regarding your personal investment program.
- ----------
1 Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses,
and should be read carefully before investing.
2
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS MARCH 31, 1998
<TABLE>
<CAPTION>
Principal Moody's S&P
Amount Rating Rating Maturity Interest
(000) (unaudited) (unaudited) Dates Rates Value
--------- ----------- ----------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Long-Term Municipal Bonds--96.46%
Alabama--1.52%
$1,590 Alabama Water Pollution Control Authority--
REVOLVING FUND LOAN SERIES A (AMBAC INSURED) Aaa AAA 08/15/17 6.750% $ 1,780,482
5,400 Birmingham Special Care Facilities Finance Authority--
Birmingham Baptist Medical Center (MBIA Insured) Aaa AAA 08/15/23 5.500 5,308,956
-----------
7,089,438
-----------
Alaska--1.10%
5,000 Anchorage General Obligation Bonds
(AMBAC Insured) Aaa AAA 06/01/23 6.250 5,127,100
-----------
California--2.27%
30 California State (FGIC Insured) Aaa AAA 11/01/12 7.000 34,697
970 California State (Pre-refunded with U.S. Government
Securities to 11/01/04 @ 102) (FGIC Insured) Aaa AAA 11/01/12 7.000 1,139,517
1,585 Contra Costa Water District (FGIC Insured) Aaa AAA 10/01/13 6.000 1,698,328
5,000 Los Angeles County Sales Tax Commission--
Sales Tax Revenue Series B (FGIC Insured) Aaa AAA 07/01/15 6.500 5,402,700
2,250 Los Angeles Wastewater System (MBIA Insured) Aaa AAA 06/01/20 5.700 2,340,967
-----------
10,616,209
-----------
Delaware--2.27%
10,000 Delaware State Economic Development Authority
Delmarva Power (MBIA Insured) Aaa AAA 06/01/21 5.900 10,628,500
-----------
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 4,226,960
-----------
Illinois--15.84%
4,000 Illinois Development Finance Authority Pollution
Refunding Commonwealth Edison Company Project
Series D (AMBAC Insured) Aaa AAA 03/01/15 6.750 4,499,280
4,500 Illinois Health Facilities Authority Franciscan Sisters
Health Care (MBIA Insured) Aaa AAA 09/01/18 5.750 4,658,130
10,000 Illinois Municipal Electric Agency (AMBAC Insured) Aaa AAA 02/01/21 5.750 10,631,400
8,000 Central Lake County Joint Action Water Agency
(FGIC Insured) Aaa AAA 05/01/20 5.375 8,048,720
11,400 Chicago--O'Hare International Airport
(MBIA Insured) Aaa AAA 01/01/15 5.500 12,371,502
to 6.375
17,220 Chicago 911 System (FGIC Insured) Aaa AAA 01/01/23 5.625 17,669,959
4,600 Chicago Public Building Commission (MBIA Insured) Aaa AAA 12/01/18 5.750 4,832,070
8,000 Regional Transportation Authority (AMBAC Insured) Aaa AAA 06/01/22 6.125 8,431,200
2,750 Regional Transportation Authority (FGIC Insured) Aaa AAA 06/01/23 5.850 2,966,777
to 06/01/25 to 7.100
-----------
74,109,038
-----------
</TABLE>
3
<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>
Long-Term Municipal Bonds (continued)
Indiana--4.83%
$2,500 Indiana Health Facilities Finance Authority--
Columbus Regional Hospital (CGIC Insured) Aaa AAA 08/15/22 5.500% $ 2,542,225
7,835 Indianapolis Gas & Utilities (FGIC Insured) Aaa AAA 06/01/21 5.375 7,882,950
12,000 Marion County Convention Center (AMBAC Insured) Aaa AAA 06/01/21 5.500 12,176,640
-----------
22,601,815
-----------
Iowa--1.03%
4,625 Ames Hospital Authority--Mary Greeley Medical Center
(AMBAC Insured) Aaa AAA 08/15/22 5.750 4,813,284
-----------
Kentucky--4.57%
1,150 Kentucky Development Finance Authority Hospital
Revenue--St. Luke Hospital Incorporated
Series A (MBIA Insured) Aaa AAA 10/01/21 7.000 1,277,673
17,530 Louisville & Jefferson County (AMBAC Insured) Aaa AAA 05/15/24 6.500 20,121,912
to 05/15/25 to 6.750
-----------
21,399,585
-----------
Louisiana--3.17%
2,000 Louisiana Public Facilities Authority--
Alton Oschner Hospital (AMBAC Insured) Aaa AAA 05/15/17 6.000 2,093,240
8,500 Louisiana Public Facilities Authority--
Alton Oschner Hospital (MBIA Insured) Aaa AAA 05/15/11 5.750 8,944,210
1,710 Louisiana Public Facilities Authority--
Tulane University (FGIC Insured) Aaa AAA 02/15/18 5.750 1,786,728
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 2,027,809
-----------
14,851,987
-----------
Maine--2.09%
9,390 Maine Health & Higher Educational
Facilities (FSA Insured) Aaa AAA 07/01/23 5.500 9,765,588
to 07/01/24 to 7.000 -----------
Massachusetts--2.35%
10,000 Massachusetts State Health & Educational Facility
Brigham & Woman's Hospital (MBIA Insured) Aaa AAA 07/01/24 6.750 10,979,600
-----------
Michigan--1.94%
8,770 Michigan State Housing Finance Authority
(AMBAC Insured) Aaa AAA 04/01/23 5.900 9,074,407
-----------
</TABLE>
4
<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>
Long-Term Municipal Bonds (continued)
Nevada--5.76%
$7,750 Clark County Airport--McCarran International Airport
(AMBAC Insured) Aaa AAA 07/01/22 6.000% $8,304,125
4,000 Clark County General Obligation Bonds
(AMBAC Insured) Aaa AAA 06/01/16 6.000 4,280,200
2,000 Clark County Sanitation District (FGIC Insured) Aaa AAA 07/01/11 5.700 2,126,800
11,500 Washoe County Gas and Water Sierra Power
(MBIA Insured) Aaa AAA 06/01/23 5.900 12,222,775
-----------
26,933,900
-----------
New Hampshire--1.30%
5,000 New Hampshire Higher Education & Health Authority--
Lakes Region Hospital (FGIC Insured) Aaa AAA 01/01/17 5.500 5,069,850
1,000 New Hampshire Higher Education & Health Authority--
University of New Hampshire (MBIA Insured) Aaa AAA 07/01/24 5.750 1,031,010
-----------
6,100,860
-----------
New Jersey--1.19%
5,000 Salem County Industrial Pollution Control Refunding
Public Service Electric and Gas Series D
(MBIA Insured) Aaa AAA 10/01/29 6.550 5,572,000
-----------
New Mexico--3.25%
9,100 Gallup Pollution Control Revenue Plains Electric
(MBIA Insured) Aaa AAA 08/15/17 6.650 9,998,807
4,700 Santa Fe Water Revenue (AMBAC Insured) Aaa AAA 06/01/24 6.300 5,212,159
-----------
15,210,966
-----------
North Carolina--0.92%
4,000 Piedmont Triad Airport Authority
Airport Revenue Series A (MBIA Insured) Aaa AAA 07/01/16 6.750 4,284,840
-----------
Ohio--0.75%
3,000 Cleveland Public Power Systems Revenue--
First Mortgage Series A (MBIA Insured) Aaa AAA 11/15/24 7.000 3,509,460
-----------
Pennsylvania--9.41%
16,435 Pennsylvania Intergovernmental Cooperative Authority
(MBIA Insured) Aaa AAA 06/15/15 5.600 16,831,516
to 06/15/23 to 5.625
2,675 Pennsylvania Intergovernmental Cooperative Authority
Philadelphia Funding Program (FGIC Insured) Aaa AAA 06/15/14 7.000 3,107,441
17,500 Philadelphia Water & Waste Authority
(FGIC Insured) Aaa AAA 06/15/15 5.500 17,810,625
6,130 North Wales Water Authority (FGIC Insured) Aaa AAA 11/01/16 5.500 6,256,523
-----------
44,006,105
-----------
</TABLE>
5
<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>
Long-Term Municipal Bonds (continued)
Rhode Island--7.04%
$14,000 Rhode Island Convention Center Authority
(AMBAC Insured) Aaa AAA 05/15/27 5.750% $14,646,940
10,000 Rhode Island Depositors Economic Protection
Corporation (FSA Insured) Aaa AAA 08/01/14 5.750 10,877,913
7,000 Rhode Island Depositors Economic Protection
Corporation (MBIA Insured) Aaa AAA 08/01/21 5.250 7,395,080
-----------
32,919,933
-----------
South Carolina--3.93%
15,000 South Carolina Public Services Authority
(MBIA Insured) Aaa AAA 07/01/21 5.500 15,684,950
to 07/01/31 to 6.000
2,625 Charleston County Hospital Facilities Authority--
Bon Secours Health System (FSA Insured) Aaa AAA 08/15/25 5.625 2,697,266
-----------
18,382,216
-----------
Tennessee--1.11%
5,000 Sullivan County Health Education and Housing
Facilities Board--Holston Valley Health
(MBIA Insured) Aaa AAA 02/15/20 5.750 5,191,950
-----------
Texas--10.85%
7,000 Austin Utilities System (AMBAC Insured) Aaa AAA 11/15/16 5.750 7,225,470
13,675 Bexar Metro Water District (MBIA Insured) Aaa AAA 05/01/22 5.875 14,559,909
10,000 Lubbock Health Facilities--Methodist Hospital
(AMBAC Insured) Aaa AAA 12/01/22 5.900 10,632,000
9,005 Matagorda County Navigation District 1 Revenue--
Houston Light & Power (AMBAC Insured) Aaa AAA 03/01/27 6.700 9,843,005
4,955 San Antonio Water Authority (MBIA Insured) Aaa AAA 05/15/16 6.000 5,223,908
720 San Antonio Water Authority
(Pre-refunded with U.S. Government Securities
to 05/15/11 @ l00) (MBIA Insured) Aaa AAA 05/15/16 6.000 794,722
2,325 San Antonio Water Authority
(Pre-refunded with U.S. Government Securities
to 05/15/02 @ 100) (MBIA Insured) Aaa AAA 05/15/16 6.000 2,487,215
-----------
50,766,229
Washington--2.05%
4,000 Washington State Health Care Facilities--
Tacoma Hospital (FGIC Insured) Aaa AAA 08/15/22 5.750 4,133,080
5,000 Metropolitan Seattle Sewer (MBIA Insured) Aaa AAA 01/01/33 6.300 5,434,650
-----------
9,567,730
-----------
</TABLE>
6
<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>
Long-Term Municipal Bonds (concluded)
West Virginia--3.94%
$5,220 West Virginia School Building Authority
(MBIA Insured) Aaa AAA 07/01/20 6.000% $5,450,150
2,245 West Virginia State Water Development Authority
(FSA Insured) Aaa AAA 11/01/29 5.750 2,348,629
10,000 Marshall County Pollution Authority Ohio Power
(MBIA Insured) Aaa AAA 04/01/22 5.900 10,617,000
-----------
18,415,779
-----------
Wisconsin--1.08%
1,500 Wisconsin Health & Educational Facilities--
Bellin Memorial Hospital (AMBAC Insured) Aaa AAA 02/15/19 5.500 1,523,025
3,500 Wisconsin State Health & Educational Facilities--
Hospital Sisters Health System (MBIA Insured) Aaa AAA 06/01/18 5.375 3,519,355
-----------
5,042,380
-----------
Total Long-Term Municipal Bonds (cost--$421,967,557) 451,187,859
-----------
Short-Term Municipal Notes--2.12%
Arizona--0.04%
200 Pinal County Pollution Control Revenue P1 A1+ 04/01/98 3.700* 200,000
-----------
Louisiana--0.26%
800 Louisiana State Offshore Terminal Revenue VMIG1 A1+ 04/01/98 3.750* 800,000
400 Parish of East Baton Rouge Pollution
Control Revenue P1 A1+ 04/01/98 3.850* 400,000
-----------
1,200,000
-----------
Massachusetts--0.19%
900 Massachusetts State VMIG1 A1+ 04/01/98 3.650* 900,000
-----------
New York--0.93%
1,300 New York City VMIG1 A1+ 04/01/98 3.700 1,300,000
to 3.800*
400 New York City Municipal Water Finance Authority
Water & Sewer Systems Revenue Series A
(FGIC Insured) VMIG1 A1+ 04/01/98 4.000* 400,000
700 New York City Series B (MBIA Insured) VMIG1 A1+ 04/01/98 3.700 700,000
to 3.850*
400 New York City (AMBAC Insured) VMIG1 A1+ 04/01/98 3.850* 400,000
200 New York City (MBIA Insured) VMIG1 A1+ 04/01/98 3.850* 200,000
100 New York State Energy Research And
Development Authority Pollution Control Revenue VMIG1 A1+ 04/01/98 3.650* 100,000
1,243 New York State Dormitory Authority Series A
(Metropolitan Museum of Art) (MBIA Insured) VMIG1 A1+ 04/01/98 3.300* 1,243,000
-----------
4,343,000
-----------
</TABLE>
7
<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>
Short-Term Municipal Notes (concluded)
Wisconsin--0.08%
$400 Wisconsin State Health Facilities Authority Revenue VMIG1 A1+ 04/01/98 3.650%* $ 400,000
------------
Wyoming--0.62%
1,800 Lincoln County Pollution Control Revenue
(Exxon Project) P1 A1+ 04/01/98 3.850* 1,800,000
400 Lincoln County Pollution Control P1 A1+ 04/01/98 3.750* 400,000
700 Platte County Wyoming Pollution Control Revenue P1 NR 04/01/98 4.000* 700,000
------------
2,900,000
------------
Total Short-Term Municipal Notes (cost--$9,943,000) 9,943,000
------------
Total Investments (cost--$431,910,557)--98.58% 461,130,859
------------
Other assets in excess of liabilities--1.42% 6,630,333
------------
Net Assets--100.00% $467,761,192
============
</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, 1998.
NR--Not Rated
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
8
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1998
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost--$431,910,557) $461,130,859
Cash 55,500
Interest receivable 7,393,586
Deferred organizational expenses 11,327
Other assets 8,211
------------
Total assets 468,599,483
------------
Liabilities
Dividends payable to preferred shareholders 298,213
Payable to investment adviser and administrator 307,955
Accrued expenses and other liabilities 232,123
------------
Total liabilities 838,291
------------
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 per share 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 640,438
Accumulated net realized losses from investment transactions (14,803,310)
Net unrealized appreciation of investments 29,220,302
------------
Net assets applicable to common shareholders 317,761,192
------------
Total net assets $467,761,192
============
Net asset value per common share ($317,761,192 applicable to 20,628,363 common
shares outstanding) $15.40
======
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year
Ended
March 31, 1998
--------------
<S> <C>
Investment income:
Interest $25,782,348
--------------
Expenses:
Investment advisory and administration 4,134,286
Auction Preferred Shares expenses 549,040
Custody and accounting 273,977
Reports and notices to shareholders 138,893
Legal and audit 133,662
Amortization of organizational expenses 49,316
Transfer agency and service fees 50,265
Directors' fees 10,500
Other expenses 32,653
--------------
5,372,592
Less: Fee waiver from adviser (761,967)
--------------
Net expenses 4,610,625
--------------
Net investment income 21,171,723
--------------
Realized and unrealized gains from investment activities:
Net realized gain from investment transactions 1,287
Net change in unrealized appreciation/depreciation of investments 27,096,902
--------------
Net realized and unrealized gains from investment activities 27,098,189
--------------
Net increase in net assets resulting from operations $ 48,269,912
==============
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended
March 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
From operations:
Net investment income $ 21,171,723 $ 21,676,988
Net realized gains from investment transactions 1,287 --
Net change in unrealized appreciation/depreciation of investments 27,096,902 (791,037)
------------ ------------
Net increase in net assets resulting from operations 48,269,912 20,885,951
------------ ------------
Dividends from:
Net investment income--common stockholders (15,842,583) (15,842,583)
Net investment income--preferred stockholders (5,424,512) (5,325,257)
------------ ------------
Total dividends to stockholders (21,267,095) (21,167,840)
------------ ------------
Net increase (decrease) in net assets 27,002,817 (281,889)
Net assets:
Beginning of year 440,758,375 441,040,264
------------ ------------
End of year (including undistributed net investment income
of $640,438 and $735,810, respectively) $467,761,192 $440,758,375
============ ============
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year
Ended
March 31, 1998
--------------
<S> <C>
Cash flows provided (used) by operating activities:
Interest received $25,685,444
Expenses paid (net of fee waivers) (4,269,361)
Purchase of short-term portfolio investments, net (193,000)
Purchase of long-term portfolio investments (25,890,190)
Sale of long-term portfolio investments 25,925,190
--------------
Net cash provided by operating activities 21,258,083
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 (5,410,712)
--------------
Net cash used for financing activities (21,253,295)
Net increase in cash 4,788
Cash at beginning of year 50,712
--------------
Cash at end of year $ 55,500
==============
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 $48,269,912
--------------
Increase in investments, at value (27,348,626)
Increase in interest receivable (4,466)
Amortization of deferred organizational expenses 49,316
Decrease in other assets 19,733
Increase in payable to investment adviser and administrator 61,442
Increase in accrued expenses and other liabilities 210,772
--------------
Total adjustments (27,011,829)
Net cash provided by operating activities $ 21,258,083
==============
</TABLE>
See accompanying notes to financial statements
12
<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"), an asset management 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.
INVESTMENT ADVISOR 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, 1998, Mitchell Hutchins voluntarily waived $761,967 in investment
advisory and administration fees from the Fund.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at March 31,
1998 was substantially the same as the cost of securities for financial
statement purposes.
At March 31, 1998, the components of the net unrealized appreciation of
investments were as follows:
Gross appreciation (from investments having an excess
of value over cost) $ 29,220,302
Gross depreciation (from investments having an excess
of cost over value) --
------------
Net unrealized appreciation of investments $ 29,220,302
============
For the year ended March 31, 1998, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $25,890,190 and
$25,925,190, respectively.
FEDERAL TAX STATUS
The Fund intends to distribute substantially all of its tax-exempt income
and any taxable income and to comply with the other requirements of the
Internal Revenue Code applicable to regulated investment companies.
Accordingly, no provision for federal income taxes is required. In addition,
by distributing during each calendar year substantially all of its net
investment income, capital gains and certain other amounts, if any, the Fund
intends not to be subject to a federal excise tax.
At March 31, 1998, the Fund had a net capital loss carryforward of
$14,803,310 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.
Dividends, which are cumulative, are generally reset every 364 days for APS
Series A, 28 days for APS Series B, three months for APS Series C and 7 days
for APS Series D. Dividend rates ranged from 2.75% to 4.125% for the year
ended March 31, 1998.
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.
14
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period
is presented below:
<TABLE>
<CAPTION>
For the Period
For the Years Ended March 31, June 8, 1993+
---------------------------------------- to
1998 1997 1996 1995 March 31, 1994
-------- --------- -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.10 $ 14.11 $13.42 $ 13.42 $ 15.00
------ ------- ------ ------- -------
Net investment income 1.03 1.05 1.06 1.02** 0.73
Net realized and unrealized gains (losses) from investments 1.30 (0.03) 0.67 0.04** (1.44)
------ ------- ------ ------- -------
Net increase (decrease) from investment operations 2.33 1.02 1.73 1.06 (0.71)
------ ------- ------ ------- -------
Dividends and distributions:
From net investment income--common stockholders (0.77) (0.77) (0.76) (0.79) (0.60)
From net investment income--preferred stockholders (0.26) (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) (1.03) (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 $15.40 $ 14.10 $14.11 $ 13.42 $ 13.42
====== ======= ====== ======= =======
Per share market value, end of period $13.56 $ 12.00 $12.13 $ 11.13 $ 13.00
====== ======= ====== ======= =======
Total investment return (1) 19.70% 5.45% 16.13% (8.17)% (9.74)%
====== ======= ====== ======= =======
Ratios to average net assets attributable to common shares:
Total expenses net of waivers from adviser 1.49% 1.38% 1.33% 1.74% 1.57%*
Total expenses before waivers from adviser 1.74% 1.76% 1.65% 1.74% 1.57%*
Net investment income before preferred stock dividends 6.84% 7.37% 7.45% 7.94% 5.92%*
Preferred stock dividends 1.75% 1.81% 1.97% 2.02% 0.98%*
Net investment income available to common stockholders 5.09% 5.56% 5.48% 5.92% 4.94%*
Supplemental data:
Net assets, end of period (000's) $467,761 $440,758 $441,040 $426,795 $333,825
Portfolio turnover rate 6% 0% 4% 4% 8%
Asset coverage per share of preferred stock, end of period $155,920 $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.
15
<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, 1998, 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, 1998 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, 1998, 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.
/s/ ERNST & YOUNG
New York, New York
May 13, 1998
16
<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,
1998) 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 1998. 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 1999. Stockholders are advised to
consult their own tax advisers with respect to the tax consequences of their
investment in the Fund.
17
<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 asset management
subsidiary of PaineWebber Incorporated, which has over $52 billion in assets
under management as of April 30, 1998.
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.
YEAR 2000 RISKS
Like other funds and financial and business organizations around the world,
the Fund could be adversely affected if the computer systems used by its
investment adviser, other service providers and entities with computer systems
that are linked to Fund records do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Issue."
Mitchell Hutchins is taking steps that it believes are reasonably designed
to address the Year 2000 Issue with respect to the computer systems that it
uses, and to obtain satisfactory assurances that each of the Fund's other
major service providers is taking comparable steps. However, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on
the Fund.
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. The ability of such stockholders to participate in the Plan may change
if their shares are transferred into the name of another broker or nominee. A
stockholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and stockholders who
have previously terminated participation in the Plan may rejoin at any time.
18
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (CONCLUDED)
Changes in elections must be made in writing to the Fund's transfer agent
and should include the stockholder's name and address as they appear on that
share certificate or in the transfer agent's records. An election to terminate
participation in the Plan, until such election is changed, will be deemed an
election by a stockholder to take all subsequent distributions in cash. An
election will be effective only for distributions declared and having a record
date at least ten days after the date on which the election is received.
Additional shares of common stock acquired under the Plan will be purchased in
the open market, on the NYSE, at prices that may be higher or lower than the
net asset value per share of the common stock at the time of the purchase. The
number of shares of common stock purchased with each dividend will be equal to
the result obtained by dividing the amount of the dividend payable to a
particular stockholder by the average price per share (including applicable
brokerage commissions) that the transfer agent was able to obtain in the open
market. The Fund will not issue any new shares of common stock in connection
with the Plan. There is no charge to participants for reinvesting dividends or
other distributions. The transfer agent's fees for handling the reinvestment
of distributions will be paid by the Fund. However, each participant pays a
pro rata share of brokerage commissions incurred with respect to the transfer
agent's open market purchases of common stock in connection with the
reinvestment of distributions. The automatic reinvestment of dividends and
other distributions in shares of common stock does not relieve participants of
any income tax that may be payable on such distributions. See "Tax
Information."
Additional information regarding the Plan may be obtained from, and all
correspondence concerning the Plan should be directed to, the transfer agent
at PNC Bank, National Association, c/o PFPC Inc., P.O. Box 8950, Wilmington,
Delaware 19899.
19
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- -------------------------------------------------------------------------------
DIRECTORS
E. Garrett Bewkes, Jr. Mary C. Farrell
Chairman
Meyer Feldberg
Margo N. Alexander
George W. Gowen
Richard Q. Armstrong
Frederic V. Malek
Richard R. Burt
Carl W. Schafer
PRINCIPAL OFFICERS
Margo N. Alexander Paul H. Schubert
President Vice President and Treasurer
Victoria E. Schonfeld Elbridge T. Gerry III
Vice President Vice President
Dianne E. O'Donnell Richard S. Murphy
Vice President and Secretary Vice President
Dennis L. McCauley
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.
<PAGE>
MARCH 31, 1998
=========================
INSURED
MUNICIPAL
INCOME FUND INC.
ANNUAL REPORT
PAINEWEBBER
(C) 1998 PaineWebber Incorporated
Member SIPC
