<PAGE>
INSURED MUNICIPAL INCOME FUND INC. SEMIANNUAL REPORT
November 16, 1998
Dear Shareholder,
Insured Municipal
Income Fund Inc.
FUND PROFILE
[arrow pointing right] Goal:
High current income exempt from
Federal income tax, consistent with
preservation of capital
[arrow pointing right] Portfolio Managers:
Elbridge T. Gerry, III and
Richard S. Murphy, Mitchell Hutchins
Asset Management Inc.
[arrow pointing right] Total Net Assets:
$474.7 million as of September 30, 1998
[arrow pointing right] Dividend Payments:
Monthly
We are pleased to present you with the semiannual report for the Insured
Municipal Income Fund Inc. (the "Fund") for the six-month period ended September
30, 1998.
GENERAL MARKET OVERVIEW
- --------------------------------------------------------------------------------
[GRAPH]
During the last few months of global turmoil, Russian, Asian and Latin American
economies faltered and their stock markets fell. Corporate America also felt the
impact of scaled-back profit expectations. As capital retreated from stocks and
foreign markets the security of U.S. Treasury bonds attracted investors from
around the world. As a result, the 30-year Treasury Bond yield fell to 4.98% in
September, its lowest point in thirty years. Municipals registered more modest
gains as institutional investors began buying them.
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
[GRAPH]
PERFORMANCE
For the six-month period ended September 30, 1998, the Fund (symbol: PIF)
returned 4.77% based on changes in the Fund's net asset value and 8.51% based on
changes in its share price on the New York Stock Exchange.
At September 30, 1998 the Fund's net asset value per share was $15.74, while
its share price on the New York Stock Exchange was $14.31. During the six-month
period ended September 30, 1998, the Fund paid dividends from net investment
income totaling $0.3840 per share, or about 6.4 cents per share per month. Based
on the dividend paid in September and the Fund's market price on September 30,
1998, the Fund's annualized market yield was 5.44%.
HIGHLIGHTS
The Fund continues to emphasize premium coupon bonds located on attractive
parts of the yield curve. Through this approach, we have avoided more volatile
discount issues and the portfolio has been insulated from the more volatile
longer-dated maturities.
A municipal rally late in the period dramatically shortened the duration of
all market participants' portfolios. (Duration is a measure of a bond fund's
interest-rate risk.) Despite this across-the-board shortening the Fund
maintained a longer duration than that of its peers. As the market rallied, the
Fund benefited from its longer duration strategy. The Fund's state allocations
remained unchanged through the period, with Illinois the biggest state
allocation at 16.1%.(1) The Fund's top five sectors also remained unchanged.
- ----------
(1) All weightings represent percentages of portfolio assets as of September
30, 1998. The Fund is actively managed and all weightings are subject to
change.
1
<PAGE>
SEMIANNUAL REPORT
[CHART APPEARS HERE]
INSURED MUNICIPAL
INCOME FUND INC.
Top Five States,
September 30, 1998(1)
Illinois 16.1%
Texas 11.0%
Pennsylvania 9.6%
Rhode Island 7.2%
Nevada 5.8%
[CHART APPEARS HERE]
Top Five Sectors,
September 30, 1998(1)
Power 22.2%
Water 20.7%
Healthcare 19.1%
Sales Tax 11.9%
General Obligations 9.5%
OUTLOOK
- --------------------------------------------------------------------------------
[GRAPHIC]
We remain cautiously optimistic on the municipal markets: municipal bonds are
historically cheap compared to taxable bonds, suggesting that municipals have
greater relative upside potential. As we go forward we plan to extend duration
and continue to improve call protection.
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
another fund in the PaineWebber Family of Funds,(2) 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 six-month period ended September 30, 1998, and reflects our
views at the time of 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) All weightings represent percentages of portfolio assets as of September
30, 1998. The Fund is actively managed and all weightings are subject to
change.
(2) 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 SEPTEMBER 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- ---------- ------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C>
Long-Term Municipal Bonds--96.89%
Alabama--1.53%
$1,590 Alabama Water Pollution Control Authority--
Revolving Fund Loan Series A (AMBAC Insured)........... Aaa AAA 08/15/17 6.750% $ 1,813,538
5,400 Birmingham Special Care Facilities Finance Authority--
Birmingham Baptist Medical Center (MBIA Insured)....... Aaa AAA 08/15/23 5.500 5,458,860
------------
7,272,398
------------
Alaska--1.07%
5,000 Anchorage General Obligation Bonds (AMBAC Insured)....... Aaa AAA 06/01/23 6.250 5,084,950
------------
California--2.27%
30 California State (FGIC Insured).......................... Aaa AAA 11/01/12 7.000 35,432
970 California State (Pre-refunded with U.S. Government
Securities to 11/1/04 @ 102) (FGIC Insured)............ Aaa AAA 11/01/12 7.000 1,161,439
1,585 Contra Costa Water District (FGIC Insured)............... Aaa AAA 10/01/13 6.000 1,734,418
5,000 Los Angeles County Sales Tax Commission--
Sales Tax Revenue Series B (FGIC Insured).............. Aaa AAA 07/01/15 6.500 5,443,600
2,250 Los Angeles Wastewater System (MBIA Insured)............. Aaa AAA 06/01/20 5.700 2,403,113
------------
10,778,002
------------
Delaware--2.28%
10,000 Delaware State Economic Development Authority
Delmarva Power (MBIA Insured).......................... Aaa AAA 06/01/21 5.900 10,799,200
------------
District of Columbia--0.92%
4,000 District of Columbia Hospital Revenue Bonds--
Medlantic Health Care Group (MBIA Insured)............. Aaa AAA 08/15/14 5.750 4,348,360
------------
Illinois--15.93%
4,000 Illinois Development Finance Authority Pollution
Refunding Commonwealth Edison Company Project
Series D (AMBAC Insured)............................... Aaa AAA 03/01/15 6.750 4,578,640
4,500 Illinois Health Facilities Authority Franciscan Sisters
Health Care (MBIA Insured)............................. Aaa AAA 09/01/18 5.750 5,081,535
10,000 Illinois Municipal Electric Agency (AMBAC Insured)....... Aaa AAA 02/01/21 5.750 10,651,000
8,000 Central Lake County Joint Action Water Agency
(FGIC Insured)......................................... Aaa AAA 05/01/20 5.375 8,206,800
11,400 Chicago--O'Hare International Airport (MBIA Insured)..... Aaa AAA 01/01/15 5.500 to 6.375 12,585,282
17,220 Chicago 911 System (FGIC Insured)........................ Aaa AAA 01/01/23 5.625 18,072,907
4,600 Chicago Public Building Commission (MBIA Insured)........ Aaa AAA 12/01/18 5.750 4,938,008
8,000 Regional Transportation Authority (AMBAC Insured)........ Aaa AAA 06/01/22 6.125 8,501,360
2,750 Regional Transportation Authority (FGIC Insured)......... Aaa AAA 06/01/23 to 5.850 to
06/01/25 7.100 3,007,015
------------
75,622,547
------------
</TABLE>
3
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- ---------- ------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C>
Long-Term Municipal Bonds (continued)
Indiana--4.86%
$2,500 Indiana Health Facilities Finance Authority--
Columbus Regional Hospital (CGIC Insured).............. Aaa AAA 08/15/22 5.500% $ 2,598,325
7,835 Indianapolis Gas & Utilities (FGIC Insured).............. Aaa AAA 06/01/21 5.375 8,079,922
12,000 Marion County Convention Center (AMBAC Insured).......... Aaa AAA 06/01/21 5.500 12,402,480
------------
23,080,727
------------
Iowa--1.03%
4,625 Ames Hospital Authority--Mary Greeley Medical Center
(AMBAC Insured)........................................ Aaa AAA 08/15/22 5.750 4,912,028
------------
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 1,279,260
17,530 Louisville & Jefferson County (AMBAC Insured)............ Aaa AAA 05/15/24 to 6.500 to
05/15/25 6.750 20,387,712
------------
21,666,972
------------
Louisiana--3.16%
2,000 Louisiana Public Facilities Authority--Alton Oschner
Hospital (AMBAC Insured)............................... Aaa AAA 05/15/17 6.000 2,115,640
8,500 Louisiana Public Facilities Authority--Alton Oschner
Hospital (MBIA Insured)................................ Aaa AAA 05/15/11 5.750 9,002,775
1,710 Louisiana Public Facilities Authority--Tulane University
(FGIC Insured)......................................... Aaa AAA 02/15/18 5.750 1,824,331
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 2,045,742
------------
14,988,488
------------
Maine--2.10%
9,390 Maine Health & Higher Educational Facilities
(FSA Insured).......................................... Aaa AAA 07/01/23 to 5.500 to
07/01/24 7.000 9,951,525
------------
Massachusetts--2.31%
10,000 Massachusetts State Health & Educational Facility
Brigham & Woman's Hospital (MBIA Insured).............. Aaa AAA 07/01/24 6.750 10,985,200
------------
Michigan--1.94%
8,770 Michigan State Housing Finance Authority
(AMBAC Insured)........................................ Aaa AAA 04/01/23 5.900 9,203,589
------------
</TABLE>
4
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- ---------- ------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C>
Long-Term Municipal Bonds (continued)
Nevada--5.77%
$7,750 Clark County Airport--McCarran International Airport
(AMBAC Insured)......................................... Aaa AAA 07/01/22 6.000% $ 8,492,295
4,000 Clark County General Obligation Bonds (AMBAC Insured)..... Aaa AAA 06/01/16 6.000 4,307,040
2,000 Clark County Sanitation District (FGIC Insured)........... Aaa AAA 07/01/11 5.700 2,150,580
11,500 Washoe County Gas and Water Sierra Power
(MBIA Insured).......................................... Aaa AAA 06/01/23 5.900 12,429,200
------------
27,379,115
------------
New Hampshire--1.32%
5,000 New Hampshire Higher Education & Health Authority--
Lakes Region Hospital (FGIC Insured).................... Aaa AAA 01/01/17 5.500 5,203,150
1,000 New Hampshire Higher Education & Health Authority--
University of New Hampshire (MBIA Insured).............. Aaa AAA 07/01/24 5.750 1,051,170
------------
6,254,320
------------
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 5,650,050
------------
New Mexico--3.03%
8,850 Gallup Pollution Control Revenue Plains Electric
(MBIA Insured).......................................... Aaa AAA 08/15/17 6.650 9,113,730
4,700 Santa Fe Water Revenue (AMBAC Insured).................... Aaa AAA 06/01/24 6.300 5,276,126
------------
14,389,856
------------
New York--0.43%
2,000 Long Island Power Authority New York Electric
Systems Revenue General Series A (FSA Insured).......... Aaa AAA 12/01/22 5.125 2,025,300
------------
North Carolina--0.90%
4,000 Piedmont Triad Airport Authority
Airport Revenue Series A (MBIA Insured)................. Aaa AAA 07/01/16 6.750 4,272,160
------------
Ohio--0.75%
3,000 Cleveland Public Power Systems Revenue--
First Mortgage Series A (MBIA Insured).................. Aaa AAA 11/15/24 7.000 3,554,970
------------
Pennsylvania--9.49%
16,435 Pennsylvania Intergovernmental Cooperative Authority
(MBIA Insured).......................................... Aaa AAA 06/15/15 to 5.600 to
06/15/23 5.625 17,193,239
2,675 Pennsylvania Intergovernmental Cooperative Authority
Philadelphia Funding Program (FGIC Insured)............. Aaa AAA 06/15/14 7.000 3,156,661
17,500 Philadelphia Water & Waste Water Revenue
(FSA Insured)........................................... Aaa AAA 06/15/15 5.500 18,306,400
6,130 North Wales Water Authority (FGIC Insured)................ Aaa AAA 11/01/16 5.500 6,380,226
------------
45,036,526
------------
</TABLE>
5
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- ---------- ------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C>
Long-Term Municipal Bonds (continued)
Rhode Island--7.08%
$14,000 Rhode Island Convention Center Authority
(AMBAC Insured)......................................... Aaa AAA 05/15/27 5.750% $ 14,988,120
10,000 Rhode Island Depositors Economic Protection
Corporation (FSA Insured)............................... Aaa AAA 08/01/14 5.750 11,318,271
7,000 Rhode Island Depositors Economic Protection
Corporation (MBIA Insured).............................. Aaa AAA 08/01/21 5.250 7,305,550
------------
33,611,941
------------
South Carolina--3.92%
15,000 South Carolina Public Services Authority (MBIA Insured)... Aaa AAA 07/01/21 to 5.500 to 15,834,500
07/01/31 6.000
2,625 Charleston County Hospital Facilities Authority--
Bon Secours Health System (FSA Insured)................. Aaa AAA 08/15/25 5.625 2,751,945
------------
18,586,445
------------
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 5,290,800
------------
Texas--10.83%
7,000 Austin Utilities System (AMBAC Insured)................... Aaa AAA 11/15/16 5.750 7,431,130
13,675 Bexar Metro Water District (MBIA Insured)................. Aaa AAA 05/01/22 5.875 14,785,000
10,000 Lubbock Health Facilities--Methodist Hospital
(AMBAC Insured)......................................... Aaa AAA 12/01/22 5.900 10,730,300
9,005 Matagorda County Navigation District 1 Revenue--
Houston Light & Power (AMBAC Insured)................... Aaa AAA 03/01/27 6.700 9,883,078
4,955 San Antonio Water Revenue (MBIA Insured).................. Aaa AAA 05/15/16 6.000 5,280,890
720 San Antonio Water Revenue (Pre-refunded with
U.S. Government Securities to 05/15/11 @100)
(MBIA Insured).......................................... NR AAA 05/15/16 6.000 817,574
2,325 San Antonio Water Revenue (Pre-refunded with
U.S Government Securities to 05/15/02 @100)
(MBIA Insured).......................................... Aaa NR 05/15/16 6.000 2,501,468
------------
51,429,440
------------
Washington--2.09%
4,000 Washington State Health Care Facilities--
Tacoma Hospital (FGIC Insured).......................... Aaa AAA 08/15/22 5.750 4,354,800
5,000 Metropolitan Seattle Sewer (MBIA Insured)................. Aaa AAA 01/01/33 6.300 5,567,250
------------
9,922,050
------------
West Virginia--3.93%
5,220 West Virginia School Building Authority (MBIA Insured).... Aaa AAA 07/01/20 6.000 5,430,627
2,245 West Virginia State Water Development Authority
(FSA Insured)........................................... Aaa AAA 11/01/29 5.750 2,415,732
10,000 Marshall County Pollution Authority Ohio Power
(MBIA Insured).......................................... Aaa AAA 04/01/22 5.900 10,789,000
------------
18,635,359
------------
</TABLE>
6
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- ---------- ------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C>
Long-Term Municipal Bonds (continued)
Wisconsin--1.09%
$1,500 Wisconsin Health & Educational Facilities--
Bellin Memorial Hospital (AMBAC Insured)................ Aaa AAA 02/15/19 5.500% $ 1,556,985
3,500 Wisconsin State Health & Educational Facilities--
Hospital Sisters Health System (MBIA Insured)........... Aaa AAA 06/01/18 5.375 3,599,365
------------
5,156,350
------------
Total Long-Term Municipal Bonds (cost--$423,721,832)............. 459,888,668
------------
Short-Term Municipal Notes--1.98%
Alaska--0.09%
400 Valdez Marine Terminal Revenue............................ VMIG1 A1+ 10/01/98 3.900* 400,000
------------
Florida--0.09%
400 Hillsborough County Industrial Development Authority
Pollution Control Revenue............................... VMIG1 A1+ 10/01/98 4.200* 400,000
------------
Illinois--0.02%
100 Joliet Regional Port District Marine Terminal Revenue..... P1 A1+ 10/01/98 3.900* 100,000
------------
Louisiana--0.09%
400 Parish of East Baton Rouge Pollution Control Revenue...... P1 A1+ 10/01/98 4.100* 400,000
------------
Massachusetts--0.19%
900 Massachusetts State....................................... VMIG1 A1+ 10/01/98 3.850* 900,000
------------
Michigan--0.06%
300 Michigan State Strategic Fund
Limited Obligation Revenue.............................. P1 A1 10/01/98 4.000* 300,000
------------
New York--1.07%
1,100 New York City............................................. VMIG1 A1+ 10/01/98 4.100 to 1,100,000
4.250*
400 New York City (AMBAC Insured)............................. VMIG1 A1+ 10/01/98 4.100* 400,000
800 New York City (FGIC Insured).............................. VMIG1 A1+ 10/01/98 4.100* 800,000
200 New York City (MBIA Insured).............................. VMIG1 A1+ 10/01/98 4.100* 200,000
1,193 New York State Dormitory Authority Revenue
(Metropolitan Museum of Art)............................ VMIG1 A1+ 10/01/98 3.300* 1,193,000
400 New York City Municipal Water Finance Authority
Water & Sewer Systems Revenue Series C
(FGIC Insured).......................................... VMIG1 A1+ 10/01/98 4.100* 400,000
1,000 New York City Municipal Water Finance Authority
Water & Sewer Systems Revenue Series A
(FGIC Insured).......................................... VMIG1 A1+ 10/01/98 4.150* 1,000,000
------------
5,093,000
------------
</TABLE>
7
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Moody's S&P Maturity Interest
(000) Rating Rating Dates Rates Value
- ---------- ------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C>
Short-Term Municipal Notes (concluded)
Wisconsin--0.14%
$ 300 La Crosse Wisconsin Pollution Control Revenue
(AMBAC Insured)......................................... VMIG1 A1+ 10/01/98 4.150%* $ 300,000
400 Wisconsin State Health Facilities Authority Revenue....... VMIG1 A1+ 10/01/98 3.500* 400,000
------------
700,000
------------
Wyoming--0.23%
400 Lincoln County Pollution Control Revenue (Exxon Project).. Aaa A1+ 10/01/98 4.100* 400,000
700 Platte County Wyoming Pollution Control Revenue........... P1 NR 10/01/98 4.200* 700,000
------------
1,100,000
------------
Total Short-Term Municipal Notes (cost--$9,393,000)................ 9,393,000
------------
Total Investments (cost--$433,114,832)--98.87%..................... 469,281,668
Other assets in excess of liabilities--1.13%....................... 5,374,576
------------
Net Assets--100.00%................................................ $474,656,244
============
</TABLE>
- ----------
* Variable rate demand notes are payable on demand. The maturity dates shown are
the next interest rate reset dates; the interest rates shown are the current
rates as of September 30, 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 SEPTEMBER 30, 1998 (unaudited)
Assets
Investments in securities, at value (cost--$433,114,832)........ $469,281,668
Interest receivable ............................................ 7,430,851
Receivable for investments sold ................................ 266,483
------------
Total assets ................................................... 476,979,002
------------
Liabilities
Due to custodian ............................................... 1,300,859
Dividends payable to preferred shareholders .................... 369,095
Payable to investment adviser and administrator................. 300,742
Accrued expenses and other liabilities ......................... 352,062
------------
Total liabilities .............................................. 2,322,758
------------
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 ............................ 574,069
Accumulated net realized losses from investment transactions ... (14,788,423)
Net unrealized appreciation of investments ..................... 36,166,836
-------------
Net assets applicable to common shareholders ................... 324,656,244
-------------
Total net assets ............................................... $ 474,656,244
=============
Net asset value per common share ($324,656,244 applicable
to 20,628,363 common shares outstanding)...................... $15.74
======
See accompanying notes to financial statements
9
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF OPERATIONS
For the Six
Months Ended
September 30, 1998
(unaudited)
------------------
Investment income:
Interest ........................................................ $ 12,906,043
------------
Expenses:
Investment advisory and administration .......................... 2,113,649
Auction Preferred Shares expenses ............................... 236,179
Custody and accounting .......................................... 142,780
Legal and audit ................................................. 72,757
Reports and notices to shareholders ............................. 59,024
Transfer agency and service fees ................................ 27,498
Amortization of organizational expenses ......................... 11,327
Directors' fees ................................................. 5,250
Other expenses .................................................. 4,999
------------
2,673,463
Less: Fee waivers from adviser .................................. (293,562)
------------
Net expenses .................................................... 2,379,901
------------
Net investment income ........................................... 10,526,142
------------
Realized and unrealized gains from investment activities:
Net realized gain from investment transactions .................. 14,887
Net change in unrealized appreciation/depreciation
of investments................................................. 6,946,534
------------
Net realized and unrealized gains from investment activities .... 6,961,421
------------
Net increase in net assets resulting from operations ............ $ 17,487,563
============
See accompanying notes to financial statements
10
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
September 30, 1998 Ended
(unaudited) March 31, 1998
------------------ --------------
<S> <C> <C>
From operations:
Net investment income ................................................ $ 10,526,142 $ 21,171,723
Net realized gains from investment transactions ...................... 14,887 1,287
Net change in unrealized appreciation/depreciation of investments .... 6,946,534 27,096,902
------------ -------------
Net increase in net assets resulting from operations ................. 17,487,563 48,269,912
------------ -------------
Dividends from:
Net investment income--common stockholders ........................... (7,921,291) (15,842,583)
Net investment income--preferred stockholders ........................ (2,671,220) (5,424,512)
------------ -------------
Total dividends to stockholders ...................................... (10,592,511) (21,267,095)
------------ -------------
Net increase in net assets ........................................... 6,895,052 27,002,817
Net assets:
Beginning of period .................................................. 467,761,192 440,758,375
------------ -------------
End of period (including undistributed net investment income of
$574,069 and $640,438, respectively)............................... $474,656,244 $ 467,761,192
============ =============
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six
Months Ended
September 30, 1998
(unaudited)
------------------
<S> <C>
Cash flows provided (used) by operating activities:
Interest received ........................................................... $ 12,817,338
Expenses paid (net of fee waivers) .......................................... (946,778)
Sale of short-term portfolio investments, net ............................... 550,000
Purchase of long-term portfolio investments ................................. (10,898,581)
Sale of long-term portfolio investments ..................................... 8,944,150
------------
Net cash provided by operating activities ................................... 10,466,129
------------
Cash flows used for financing activities:
Dividends paid from net investment income to common stockholders ............ (7,921,291)
Dividends paid from net investment income to preferred stockholders ......... (2,600,338)
------------
Net cash used for financing activities ...................................... (10,521,629)
------------
Net decrease in cash ........................................................ (55,500)
Cash at beginning of period ................................................. 55,500
------------
Cash at end of period ....................................................... $ 0
============
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 ........................ $ 17,487,563
------------
Increase in investments, at value ........................................... (8,150,809)
Increase in receivable for investments sold ................................. (266,483)
Increase in interest receivable ............................................. (37,265)
Amortization of deferred organizational expenses ............................ 11,327
Decrease in other assets .................................................... 8,211
Decrease in payable to investment adviser and administrator ................. (7,213)
Increase in accrued expenses and other liabilities .......................... 1,420,798
------------
Total adjustments ........................................................... (7,021,434)
------------
Net cash provided by operating activities ................................... $ 10,466,129
============
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Insured Municipal Income Fund Inc. (the "Fund") was incorporated in Maryland
on February 18, 1993, and is registered with the Securities and Exchange
Commission as a closed-end diversified management investment company.
Organizational costs have been deferred and 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, and 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 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
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
monthly, at the annual rate of 0.90% of the Fund's average weekly net assets.
For the six months ended September 30, 1998, Mitchell Hutchins voluntarily
waived $293,562 in investment advisory and administration fees from the Fund.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at September
30, 1998 was substantially the same as the cost of securities for financial
statement purposes.
At September 30, 1998, the components of the net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (from investments having an excess of value over cost)..... $36,196,243
Gross depreciation (from investments having an excess of cost over value)..... (29,407)
-----------
Net unrealized appreciation of investments.................................... $36,166,836
===========
</TABLE>
For the six months ended September 30, 1998, total aggregate purchases and
sales of portfolio securities, excluding short-term securities, were $10,898,581
and $9,210,633, 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, 16,251 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 2.50% to 4.125% for the six months
ended September 30, 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 Six For the Period
Months Ended For the Years Ended March 31, June 8, 1993+
September 30, 1998 ---------------------------------------- to
(unaudited) 1998 1997 1996 1995 March 31, 1994
------------------ -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 15.40 $ 14.10 $ 14.11 $ 13.42 $ 13.42 $ 15.00
-------- -------- -------- -------- -------- --------
Net investment income............................. 0.51 1.03 1.05 1.06 1.02** 0.73
Net realized and unrealized gains (losses) from
investments..................................... 0.34 1.30 (0.03) 0.67 0.04** (1.44)
-------- -------- -------- -------- -------- --------
Net increase (decrease) from investment
operations...................................... 0.85 2.33 1.02 1.73 1.06 (0.71)
-------- -------- -------- -------- -------- --------
Dividends and distributions:
From net investment income--common
stockholders.................................. (0.38) (0.77) (0.77) (0.76) (0.79) (0.60)
From net investment income--preferred
stockholders.................................. (0.13) (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.................................... (0.51) (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.................... $ 15.74 $ 15.40 $ 14.10 $ 14.11 $13.42 $ 13.42
======== ======== ======== ======== ======== ========
Per share market value, end of period............. $ 14.31 $ 13.56 $ 12.00 $ 12.13 $11.13 $ 13.00
======== ======== ======== ======== ======== ========
Total investment return (1)....................... 8.51% 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%* 1.49% 1.38% 1.33% 1.74% 1.57%*
Total expenses before waivers from adviser...... 1.67%* 1.74% 1.76% 1.65% 1.74% 1.57%*
Net investment income before preferred
stock dividends............................... 6.59%* 6.84% 7.37% 7.45% 7.94% 5.92%*
Preferred stock dividends....................... 1.67%* 1.75% 1.81% 1.97% 2.02% 0.98%*
Net investment income available to common
stockholders.................................. 4.92%* 5.09% 5.56% 5.48% 5.92% 4.94%*
Supplemental data:
Net assets, end of period (000's)............... $474,656 $467,761 $440,758 $441,040 $426,795 $333,825
Portfolio turnover rate......................... 2% 6% 0% 4% 4% 8%
Asset coverage per share of preferred stock,
end of period................................. $158,219 $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.
GENERAL INFORMATION (unaudited)
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 $55 billion in assets
under management as of October 31, 1998.
SHAREHOLDER INFORMATION
The Fund's board of directors amended the Fund's bylaws to require that the
Fund receive notice of board nominations or proposals that any shareholder
wishes to be considered at an annual or special shareholder meeting. This
notice will give Fund management an opportunity to inform shareholders of and
respond to those nominations and proposals.
The amended bylaws require that the Fund receive notice of a nomination or
proposal for an annual meeting at least 120 days in advance of the anniversary
of the date that the Fund's proxy statement for the previous year's annual
meeting was first released to shareholders. For a special shareholder meeting,
the Fund must receive notice within seven business days of the date on which
notice of the special meeting is first given to shareholders. In order to make
a nomination or proposal to be considered at the 1999 annual meeting of
shareholders, the Fund must receive notice of that nomination or proposal no
later than February 1, 1999.
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
16
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (CONCLUDED)
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.
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.
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.
17
<PAGE>
This Page Intentionally Left Blank
<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
Dennis L. McCauley
Vice President
Paul H. Schubert
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
The financial information included herein is taken from the records of the
Fund without examination by independent auditors who do not express an opinion
thereon.
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>
SEMIANNUAL REPORT
- -------------------------------------
INSURED
MUNICIPAL
INCOME FUND INC.
SEPTEMBER 30, 1998
PaineWebber
(C)1998 PaineWebber Incorporated
Member SIPC
