<PAGE>
INSURED MUNICIPAL INCOME FUND INC. ANNUAL REPORT
May 20, 1999
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,
1999.
MARKET REVIEW
[Graph Omitted]
The crisis in Russia last August and fears of it spreading to Latin America
heightened investors' aversion to credit risk and prompted them to sell other
securities in favor of U.S. Treasurys. The "flight to quality" ultimately drove
U.S. Treasury bond yields to a low of 4.70% in October. To fend off a
threatening global financial crisis, the Federal Reserve cut the short-term
interest rate by 0.25% three times in as many months, lowering it from 5.50% to
4.75%. As the bond markets began to stabilize, investors returned to them in
search of bargains.
Long-term interest rates remained in the low 5% range until early February
1999, when Federal Reserve Chairman Alan Greenspan expressed an inclination to
restrain economic policy and confessed that he might have overdone interest-rate
cuts during the fall crisis. This surprised market participants, and the yield
on the 30-year Treasury bond rose by about one-half of a percentage point in
response. Economic growth and inflation held steady, however, so investors had
no real cause for concern.
As Treasury yields rose in February, municipal bonds strongly outperformed
taxable bonds, reversing their underperformance throughout 1998. Long-term
AAA-rated municipal bonds finished the fiscal year yielding about 84% of
comparable U.S. Treasurys--close to their historical average. At year-end 1998,
municipal bonds yielded about 97% of U.S. Treasurys. As rates rose,
municipalities delayed their financing, further decreasing supply and resulting
in significant municipal bond outperformance.
PORTFOLIO REVIEW
[Graph Omitted]
Performance--For the fiscal year ended March 31, 1999, the Fund (symbol: PIF)
returned 6.27% based on changes in the Fund's net asset value (assuming, for
illustration only, that dividends were reinvested at the net asset value on the
payable dates) and 10.96% based on changes in its share price on the New York
Stock Exchange (assuming dividends were reinvested under the Dividend
Reinvestment Plan).
At March 31, 1999, the Fund's net asset value per share was $15.58, while its
share price on the New York Stock Exchange was $14.25. During the fiscal year
ended March 31, 1999, the Fund paid dividends from net investment income
totaling $0.7680 per share, or $0.064 per share per month. Based on the dividend
paid in March and the Fund's market price on March 31, 1999, the Fund's
annualized market yield was 5.39%.
Highlights--A municipal rally late in the first half of the fiscal year
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
* Weightings represent percentages of portfolio assets as of March 31, 1999. The
Fund's portfolio is actively managed and its composition will vary over time.
- --------------------------------------------------------------------------------
INSURED MUNICIPAL
INCOME FUND INC.
Top Five States*
Illinois 16.1%
---------
Texas 11.1%
-------
Pennsylvania 11.0%
-----
Rhode Island 7.1%
----
Nevada 5.8%
----
- --------------------------------------------------------------------------------
INSURED MUNICIPAL
INCOME FUND INC.
FUND PROFILE
[Graph Omitted]Goal:
High current income
exempt from federal
income tax, consistent
with preservation of
capital
[Graph Omitted]Portfolio Managers:
Elbridge T. Gerry, III and
Richard S. Murphy,
Mitchell Hutchins Asset
Management Inc.
[Graph Omitted]Total Net Assets:
$471.4 million as of
March 31, 1999
[Graph Omitted]Dividend Payments:
Monthly
- --------------------------------------------------------------------------------
1
<PAGE>
ANNUAL REPORT
INSURED MUNICIPAL
INCOME FUND INC.
Top Five Sectors*
Power 21.9%
-----------
Water 20.4%
----------
Healthcare 19.2%
--------
Sales Tax 12.0%
-------
General
Obligations 10.7%
----
- --------------------------------------------------------------------------------
longer duration strategy.
We managed to swap out of some of our shorter positions into securities
located at the peak of the yield curve (15-20 year range) during the February
market unrest. Typical of these purchases, New York City MBIA insured bonds
(0.48%*)--which yield 5.375% and mature in 2013--positioned us ideally on the
yield curve and helped extend the Fund's duration. These small-premium bonds
provided higher yields than one would expect for their level of interest rate
risk, which translated to better performance for the Fund.
OUTLOOK
[GRAPHIC OMITTED]
Against the backdrop of a slowing economy, unchanged monetary policy and less
turbulent global financial market conditions, we believe Treasury yields will
likely remain within a fairly narrow near-term trading range of 5.25-5.75%. We
expect spreads of municipal bonds relative to taxable securities to remain
stable for a while. While not as cheap as they were at year-end, municipals
continue to be fairly cheap relative to Treasurys.
We continue to favor the 20-year part of the yield curve, currently the
cheapest part of the curve. The yield curve may steepen further. In this
environment, premium bonds generally offer the greatest return potential for
their effective duration, giving investors a higher yield without significantly
increasing market risk.
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 Review of
Insured Municipal Income Fund Inc. or a fund in the PaineWebber Family of
Funds,1 please contact your Financial Advisor.
Sincerely,
<TABLE>
<S> <C>
/s/ Elbridge T. Gerry, III
/s/ Margo Alexander Elbridge T. Gerry, III
Senior Vice President
Margo Alexander Mitchell Hutchins Asset Management Inc.
Chairman and Chief Executive Officer Portfolio Manager, Insured Municipal
Mitchell Hutchins Asset Management Inc. Income Fund Inc.
/s/ Brian M. Storms /s/ Richard S. Murphy
Brian M. Storms Richard S. Murphy
President and Chief Operating Officer Senior Vice President
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
Portfolio Manager, Insured Municipal
Income Fund Inc.
</TABLE>
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended March 31, 1999, and reflects our views at
the time of its writing. Of course, these views may change in response to
changing circumstances. We encourage you to consult your Financial Advisor
regarding your personal investment program.
*Weightings represent percentages of portfolio assets as of March 31, 1999. The
Fund's portfolio is actively managed and its composition will vary over time.
1Mutual 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, 1999
<TABLE>
<CAPTION>
Principal Principal Moody's S&P Moody's S&P
Amount Amount Rating Rating Maturity Interest Rating Rating Maturity Interest
(000) (000) (unaudited) (unaudited) Dates Rates (unaudited) (unaudited) Dates Rates Value
- -------- ---------- ---------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Long-Term Municipal Bonds--98.20%
Alabama--1.50%
$1,590 Alabama Water Pollution Control Authority--
Revolving Fund Loan Series A (AMBAC Insured) ........... Aaa AAA 08/15/17 6.750% $ 1,786,174
5,400 Birmingham Special Care Facilities Finance Authority--
Birmingham Baptist Medical Center (MBIA Insured) ....... Aaa AAA 08/15/23 5.500 5,302,908
------------
7,089,082
------------
Alaska--1.07%
5,000 Anchorage General Obligation Bonds
(AMBAC Insured) ........................................ Aaa AAA 06/01/23 6.250 5,025,050
------------
California--2.26%
30 California State (FGIC Insured) .......................... Aaa AAA 11/01/12 7.000 34,779
970 California State (Pre-refunded with U.S Government
Securities to 11/01/04 @ 102) (FGIC Insured) ........... Aaa AAA 11/01/12 7.000 1,145,910
1,585 Contra Costa Water District (FGIC Insured) ............... Aaa AAA 10/01/13 6.000 1,713,686
5,000 Los Angeles County Sales Tax Commission--
Sales Tax Revenue Series B (FGIC Insured) .............. Aaa AAA 07/01/15 6.500 5,377,200
2,250 Los Angeles Wastewater System (MBIA Insured) ............. Aaa AAA 06/01/20 5.700 2,361,712
------------
10,633,287
------------
Delaware--2.27%
10,000 Delaware State Economic Development Authority
Delmarva Power (MBIA Insured) .......................... Aaa AAA 06/01/21 5.900 10,692,800
------------
District of Columbia--0.93%
4,000 District of Columbia Hospital Revenue Bonds--
Medlantic Health Care Group (MBIA Insured) ............. Aaa AAA 08/15/14 5.750 4,381,400
------------
Illinois--15.85%
4,000 Illinois Development Finance Authority Pollution Refunding
Commonwealth Edison Company Project
Series D (AMBAC Insured) ............................... Aaa AAA 03/01/15 6.750 4,513,080
4,500 Illinois Health Facilities Authority Franciscan Sisters
Health Care (MBIA Insured) ............................. Aaa AAA 09/01/18 5.750 4,945,635
10,000 Illinois Municipal Electric Agency (AMBAC Insured) ....... Aaa AAA 02/01/21 5.750 10,573,600
8,000 Central Lake County Joint Action Water Agency
(FGIC Insured) ......................................... Aaa AAA 05/01/20 5.375 8,096,800
17,220 Chicago 911 System (FGIC Insured) ........................ Aaa AAA 01/01/23 5.625 17,715,936
11,400 Chicago--O'Hare International Airport (MBIA Insured) ..... Aaa AAA 01/01/15 5.500 to 6.375 12,407,130
4,600 Chicago Public Building Commission (MBIA Insured) ........ Aaa AAA 12/01/18 5.750 5,055,538
8,000 Regional Transportation Authority (AMBAC Insured) ........ Aaa AAA 06/01/22 6.125 8,437,760
2,750 Regional Transportation Authority (FGIC Insured) ......... Aaa AAA 06/01/23 to
06/01/25 5.850 to 7.100 2,962,910
------------
74,708,389
------------
</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--4.81%
$ 2,500 Indiana Health Facilities Finance Authority--
Columbus Regional Hospital (CGIC Insured) .............. Aaa AAA 08/15/22 5.500% $ 2,548,225
7,835 Indianapolis Gas & Utilities (FGIC Insured) .............. Aaa AAA 06/01/21 5.375 7,930,665
12,000 Marion County Convention Center (AMBAC Insured) .......... Aaa AAA 06/01/21 5.500 12,204,240
------------
22,683,130
------------
Iowa--1.02%
4,625 Ames Hospital Authority--Mary Greeley Medical Center
(AMBAC Insured) ........................................ Aaa AAA 08/15/22 5.750 4,817,123
------------
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 1,265,184
17,530 Louisville & Jefferson County (AMBAC Insured) ............ Aaa AAA 05/15/24 to 6.500 to
05/15/25 6.750 20,155,089
------------
21,420,273
------------
Louisiana--3.16%
2,000 Louisiana Public Facilities Authority--
Alton Oschner Hospital (AMBAC Insured) ................. Aaa AAA 05/15/17 6.000 2,100,020
8,500 Louisiana Public Facilities Authority--
Alton Oschner Hospital (MBIA Insured) .................. Aaa AAA 05/15/11 5.750 8,947,440
1,710 Louisiana Public Facilities Authority--
Tulane University (FGIC Insured) ....................... Aaa AAA 02/15/18 5.750 1,793,055
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 2,031,680
------------
14,872,195
------------
Maine--2.11%
4,785 Maine Health & Higher Educational Facilities
Authority Revenue (FSA Insured) ........................ NR AAA 07/01/23 5.500 5,016,259
3,135 Maine Health & Higher Educational Facilities
Authority Revenue (FSA Insured) ........................ Aaa AAA 07/01/23 to
07/01/24 5.500 to 7.000 3,216,407
1,470 Maine Health & Higher Educational Facilities
Authority Revenue (Pre-refunded with
U.S. Government Securities to 07/01/04 @102)
(FSA Insured) .......................................... Aaa AAA 07/01/24 7.000 1,707,581
------------
9,940,247
------------
Massachusetts--2.30%
10,000 Massachusetts State Health & Educational Facility
Brigham & Woman's Hospital (MBIA Insured) .............. Aaa AAA 07/01/24 6.750 10,863,400
------------
</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)
Michigan--1.55%
$ 7,020 Michigan State Housing Finance Authority
(AMBAC Insured) ........................................ Aaa AAA 04/01/23 5.900% $ 7,325,581
------------
Nevada--5.76%
7,750 Clark County Airport--McCarran International Airport
(AMBAC Insured) ........................................ Aaa AAA 07/01/22 6.000 8,423,243
4,000 Clark County General Obligation Bonds
(AMBAC Insured) ........................................ Aaa AAA 06/01/16 6.000 4,264,920
2,000 Clark County Sanitation District (FGIC Insured) .......... Aaa AAA 07/01/11 5.700 2,136,780
11,500 Washoe County Gas and Water Sierra Power (MBIA Insured) .. Aaa AAA 06/01/23 5.900 12,305,805
------------
27,130,748
------------
New Hampshire--1.30%
5,000 New Hampshire Higher Education & Health Authority--
Lakes Region Hospital (FGIC Insured .................... Aaa AAA 01/01/17 5.500 5,110,650
1,000 New Hampshire Higher Education & Health Authority--
University of New Hampshire (MBIA Insured) ............. Aaa AAA 07/01/24 5.750 1,039,160
------------
6,149,810
------------
New Jersey--1.18%
5,000 Salem County Industrial Pollution Control Refunding
Public Service Electric and Gas Series D
(MBIA Insured) ......................................... Aaa AAA 10/01/29 6.550 5,585,800
------------
New Mexico--3.11%
8,850 Gallup Pollution Control Revenue Plains Electric
(MBIA Insured) ......................................... Aaa AAA 08/15/17 6.650 9,447,198
4,700 Santa Fe Water Revenue (AMBAC Insured) ................... Aaa AAA 06/01/24 6.300 5,218,269
------------
14,665,467
------------
New York--0.90%
2,115 New York New York Series J (MBIA Insured) ................ Aaa AAA 08/01/13 5.375 2,223,965
2,000 Long Island Power Authority New York Electric Systems
Revenue General Series A (FSA Insured) ................. Aaa AAA 12/01/22 5.125 2,000,700
------------
4,224,665
------------
North Carolina--0.90%
4,000 Piedmont Triad Airport Authority
Airport Revenue Series A (MBIA Insured) ................ Aaa AAA 07/01/16 6.750 4,230,800
------------
Ohio--0.74%
3,000 Cleveland Public Power Systems Revenue--
First Mortgage Series A (MBIA Insured) ................. Aaa AAA 11/15/24 7.000 3,511,890
------------
</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)
Pennsylvania--10.83%
$16,435 Pennsylvania Intergovernmental Cooperative Authority
(MBIA Insured) ......................................... Aaa AAA 06/15/15 to 5.600 to
06/15/23 5.625% $ 17,586,261
2,675 Pennsylvania Intergovernmental Cooperative Authority
Philadelphia Funding Program (FGIC Insured) ............ Aaa AAA 06/15/14 7.000 3,108,751
6,130 North Wales Water Authority (FGIC Insured) ............... Aaa AAA 11/01/16 5.500 6,396,532
2,000 Philadelphia Pennsylvania (FSA Insured) .................. Aaa AAA 03/15/13 to
03/15/14 5.250 2,069,130
3,750 Philadelphia Pennsylvania School District Series A
(MBIA Insured). ........................................ Aaa AAA 04/01/16 5.250 3,834,938
17,500 Philadelphia Water & Waste Water Revenue
(FSA Insured) .......................................... Aaa AAA 06/15/15 5.500 18,073,475
------------
51,069,087
------------
Rhode Island--7.02%
14,000 Rhode Island Convention Center Authority
(AMBAC Insured) ........................................ Aaa AAA 05/15/27 5.750 14,646,380
5,140 Rhode Island Depositors Economic Protection
Corporation (FSA Insured) .............................. NR AAA 08/01/14 5.750 5,665,359
4,860 Rhode Island Depositors Economic Protection
Corporation (FSA Insured) ............................. Aaa AAA 08/01/14 5.750 5,384,686
7,000 Rhode Island Depositors Economic Protection
Corporation (MBIA Insured) ............................. Aaa AAA 08/01/21 5.250 7,398,090
------------
33,094,515
------------
South Carolina--3.92%
15,000 South Carolina Public Services Authority
(MBIA Insured) ......................................... Aaa AAA 07/01/21 to 5.500 to
07/01/31 6.000 15,637,850
2,625 Charleston County Hospital Facilities Authority--
Bon Secours Health System (FSA Insured) ................ Aaa AAA 08/15/25 5.625 2,816,625
------------
18,454,475
------------
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 5,229,850
------------
</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)
Texas--10.97%
$ 7,000 Austin Utilities System (AMBAC Insured) .................. Aaa AAA 11/15/16 5.750% $ 7,375,130
7,945 Bexar Metropolitan Water District
Waterworks Systems Revenue (MBIA Insured) .............. Aaa AAA 05/01/22 5.875 8,519,265
5,730 Bexar Metropolitan Water District
Waterworks Systems Revenue (Pre-refunded with
U.S. Government Securities to 05/01/05 @ 102)
(MBIA Insured) ......................................... NR AAA 05/01/22 5.875 6,394,909
10,000 Lubbock Health Facilities--Methodist Hospital
(AMBAC Insured) ........................................ Aaa AAA 12/01/22 5.900 11,101,600
9,005 Matagorda County Navigation District 1 Revenue--
Houston Light & Power (AMBAC Insured) .................. Aaa AAA 03/01/27 6.700 9,789,065
4,955 San Antonio Water Revenue (MBIA Insured) ................. Aaa AAA 05/15/16 6.000 5,229,507
720 San Antonio Water Revenue
(Pre-refunded with U.S. Government Securities to
05/15/11 @ 100) (MBIA Insured) ......................... NR AAA 05/15/16 6.000 803,455
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 2,480,496
------------
51,693,427
------------
Washington--2.09%
4,000 Washington State Health Care Facilities--
Tacoma Hospital (FGIC Insured) ......................... Aaa AAA 08/15/22 5.750 4,321,600
5,000 Metropolitan Seattle Sewer (MBIA Insured) ................ Aaa AAA 01/01/33 6.300 5,519,550
------------
9,841,150
------------
West Virginia--3.92%
5,220 West Virginia School Building Authority
(MBIA Insured) ......................................... Aaa AAA 07/01/20 6.000 5,392,208
2,245 West Virginia State Water Development Authority
(FSA Insured) .......................................... Aaa AAA 11/01/29 5.750 2,390,027
10,000 Marshall County Pollution Authority Ohio Power
(MBIA Insured). ........................................ Aaa AAA 04/01/22 5.900 10,683,000
------------
18,465,235
------------
Wisconsin--1.08%
1,500 Wisconsin Health & Educational Facilities--
Bellin Memorial Hospital (AMBAC Insured) ............... Aaa AAA 02/15/19 5.500 1,526,970
3,500 Wisconsin State Health & Educational Facilities--
Hospital Sisters Health System (MBIA Insured) .......... Aaa AAA 06/01/18 5.375 3,548,265
------------
5,075,235
------------
Total Long-Term Municipal Bonds (cost--$430,203,666) .............. 462,874,111
------------
</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--0.53%
Massachusetts--0.19%
$ 900 Massachusetts State ...................................... VMIG1 A1+ 04/01/99 2.900%* $ 900,000
------------
New York--0.25%
1,193 New York State Dormitory Authority Revenue
(Metropolitan Museum of Art) ........................... VMIG1 A1+ 04/01/99 2.750* 1,193,000
------------
Wisconsin--0.09%
400 Wisconsin State Health Facilities Authority Revenue ...... VMIG1 A1+ 04/01/99 3.050* 400,000
------------
Total Short-Term Municipal Notes (cost--$2,493,000) ............... 2,493,000
------------
Total Investments (cost--$432,696,666)--98.73% .................... 465,367,111
Other assets in excess of liabilities--1.27% ...................... 5,993,609
------------
Net Assets--100.00% ............................................... $471,360,720
============
</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, 1999.
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, 1999
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost--$432,696,666) ......................................... $465,367,111
Interest receivable .............................................................................. 7,467,425
Other assets ..................................................................................... 4,523
------------
Total assets ..................................................................................... 472,839,059
------------
Liabilities
Payable to custodian ............................................................................. 580,895
Payable to investment adviser and administrator .................................................. 310,307
Dividends payable to preferred shareholders ...................................................... 253,219
Accrued expenses and other liabilities ........................................................... 333,918
------------
Total liabilities ................................................................................ 1,478,339
------------
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 ...................................................... 302,697,425
Undistributed net investment income .............................................................. 781,273
Accumulated net realized loss from investment transactions ....................................... (14,788,423)
Net unrealized appreciation of investments ....................................................... 32,670,445
------------
Net assets applicable to common shareholders ..................................................... 321,360,720
------------
Total net assets ................................................................................. $471,360,720
============
Net asset value per common share ($321,360,720 applicable to 20,628,363 common
shares outstanding) ............................................................................ $15.58
======
</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, 1999
--------------
<S> <C>
Investment income:
Interest .......................................................................... $25,804,469
-----------
Expenses:
Investment advisory and administration ............................................ 4,238,176
Auction Preferred Shares expenses ................................................. 444,865
Custody and accounting ............................................................ 281,404
Legal and audit ................................................................... 134,013
Reports and notices to shareholders ............................................... 109,260
Transfer agency and service fees .................................................. 46,196
Amortization of organizational expenses ........................................... 11,327
Directors' fees ................................................................... 10,500
Other expenses .................................................................... 7,249
-----------
5,282,990
Less: Fee waiver from adviser and administrator ................................... (588,636)
-----------
Net expenses ...................................................................... 4,694,354
-----------
Net investment income ............................................................. 21,110,115
-----------
Realized and unrealized gains from investment activities:
Net realized gain from investment transactions .................................... 14,887
Net change in unrealized appreciation/depreciation of investments ................. 3,450,143
-----------
Net realized and unrealized gains from investment activities ...................... 3,465,030
-----------
Net increase in net assets resulting from operations .............................. $24,575,145
===========
</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,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
From operations:
Net investment income .......................................................... $ 21,110,115 $ 21,171,723
Net realized gains from investment transactions ................................ 14,887 1,287
Net change in unrealized appreciation/depreciation of investments .............. 3,450,143 27,096,902
------------ ------------
Net increase in net assets resulting from operations ........................... 24,575,145 48,269,912
------------ ------------
Dividends from:
Net investment income--common stockholders ..................................... 15,842,583) (15,842,583)
Net investment income--preferred stockholders .................................. (5,133,034) (5,424,512)
------------ ------------
Total dividends to stockholders ................................................ (20,975,617) (21,267,095)
------------ ------------
Net increase in net assets ..................................................... 3,599,528 27,002,817
Net assets:
Beginning of year .............................................................. 467,761,192 440,758,375
------------ ------------
End of year (including undistributed net investment income of
$781,273 and $640,438, respectively) ......................................... $471,360,720 $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 Year
Ended
March 31, 1999
--------------
<S> <C>
Cash flows provided by (used for) operating activities:
Interest received ........................................................ $25,630,905
Expenses paid (net of fee waivers) ....................................... (3,994,297)
Sale of short-term portfolio investments, net ............................ 7,450,000
Purchase of long-term portfolio investments .............................. (32,210,108)
Sale of long-term portfolio investments .................................. 24,088,611
-----------
Net cash flows provided by operating activities .......................... 20,965,111
-----------
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 ...... (5,178,028)
-----------
Net cash flows used for financing activities ............................. (21,020,611)
-----------
Net decrease in cash ..................................................... (55,500)
Cash at beginning of year ................................................ 55,500
-----------
Cash at end of year ...................................................... $ 0
===========
Reconciliation of Net Increase in Net Assets Resulting from Operations to
Net Cash Flows Provided by Operating Activities:
Net increase in net assets resulting from operations ..................... $24,575,145
-----------
Increase in investments, at value ........................................ (4,236,252)
Increase in interest receivable .......................................... (73,839)
Amortization of deferred organizational expenses ......................... 11,327
Decrease in other assets ................................................. 3,688
Increase in payable to investment adviser and administrator .............. 2,352
Increase in payable to custodian ......................................... 580,895
Increase in accrued expenses and other liabilities ....................... 101,795
-----------
Total adjustments ........................................................ (3,610,034)
-----------
Net cash flows provided by operating activities .......................... $20,965,111
===========
</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 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 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,
1999, Mitchell Hutchins voluntarily waived $588,636 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,
1999 was substantially the same as the cost of securities for financial
statement purposes.
At March 31, 1999, 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) ...... $32,813,057
Gross depreciation (from investments having an excess of cost over value) ...... (142,612)
-----------
Net unrealized appreciation of investments ..................................... $32,670,445
===========
</TABLE>
For the year ended March 31, 1999, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $32,210,108 and
$24,088,611, 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, 1999, the Fund had a net capital loss carryforward of
$14,788,423 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.
To reflect reclassifications for the Fund arising from permanent "book/tax"
differences for the year ended March 31, 1999, undistributed net investment
income was increased by $6,337 and paid-in-capital was decreased by $6,337.
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, 16,690 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 2.400% to 4.125% for the year ended
March 31, 1999.
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 year is
presented below:
<TABLE>
<CAPTION>
For the Years Ended March 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............................... $ 15.40 $ 14.10 $ 14.11 $ 13.42 $ 13.42
------- ------- ------- ------- -------
Net investment income ............................................ 1.02 1.03 1.05 1.06 1.02**
Net realized and unrealized gains (losses) from investments ...... 0.18 1.30 (0.03) 0.67 0.04**
------- ------- ------- ------- -------
Net increase from investment operations .......................... 1.20 2.33 1.02 1.73 1.06
------- ------- ------- ------- -------
Dividends and distributions:
From net investment income--common stockholders ................ (0.77) (0.77) (0.77) (0.76) (0.79)
From net investment income--preferred stockholders ............. (0.25) (0.26) (0.26) (0.28) (0.25)
In excess of net investment income--common stockholders ........ -- -- -- -- (0.02)
In excess of net investment income--preferred stockholders ..... -- -- -- -- (0.00)++
------- ------- ------- ------- -------
Total dividends and distributions to stockholders ................ (1.02) (1.03) (1.03) (1.04) (1.06)
------- ------- ------- ------- -------
Net asset value, end of year ..................................... $ 15.58 $ 15.40 $ 14.10 $ 14.11 $ 13.42
======= ======= ======= ======= =======
Per share market value, end of year .............................. $ 14.25 $ 13.56 $ 12.00 $ 12.13 $ 11.13
======= ======= ======= ======= =======
Total investment return (1) ...................................... 10.96% 19.70% 5.45% 16.13% (8.17)%
======= ======= ======= ======= =======
Ratios to average net assets attributable to common shares:
Total expenses net of waivers from adviser ..................... 1.46% 1.49% 1.38% 1.33% 1.74%
Total expenses before waivers from adviser ..................... 1.65% 1.74% 1.76% 1.65% 1.74%
Net investment income before preferred stock dividends ......... 6.58% 6.84% 7.37% 7.45% 7.94%
Preferred stock dividends ...................................... 1.60% 1.75% 1.81% 1.97% 2.02%
Net investment income available to common stockholders ......... 4.98% 5.09% 5.56% 5.48% 5.92%
Supplemental data:
Net assets, end of year (000's) ................................ $471,361 $467,761 $440,758 $441,040 $426,795
Portfolio turnover rate ........................................ 5% 6% 0% 4% 4%
Asset coverage per share of preferred stock, end of year ....... $157,120 $155,920 $146,919 $147,013 $142,265
</TABLE>
- -------------
++ Actual amount calculates to $0.00499 per common share.
** 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 year 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 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, 1999, 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, 1999 by correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material aspects, the financial position of Insured
Municipal Income Fund Inc. at March 31, 1999, 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/ Ernest & Young LLP
New York, New York
May 14, 1999
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,
1999) 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 1999. 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 2000. 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 - (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 $61 billion in assets under management as of April
30, 1999.
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.
An annual meeting of shareholders of the Fund was held on July 16, 1998. At
the meeting Margo N. Alexander, RichardQ.Armstrong, E. Garrett Bewkes, Jr.,
Richard R. Burt, Mary C. Farrell, Meyer Feldberg, George W. Gowen,
FredericV.Malek, and Carl W. Schafer were elected to serve as directors until
the next annual meeting of shareholders, or until their successors are elected
and qualified; and Ernst & Young, LLP was ratified as independent auditors for
the Fund for the fiscal year ended March 31, 1999. Such shares represent 96.82%
of the outstanding shares of common stock of the Fund entitled to vote at this
meeting, including a quorum of the Fund's APS with respect to the election of
the two directors to be elected by the APS, and constitute a quorum for the
conduct of business at this meeting. The following shares were voted for the
proposal indicated below:
ALL SHARES VOTING AS A SINGLE CLASS:
PROPOSAL 1
- -----------
<TABLE>
<CAPTION>
Shares Voted For as
To vote for or against Shares a % of Total Shares Withhold
the election of: Voted For Shares Voted Authority
--------- ------------ ---------
<S> <C> <C> <C>
Richard Q. Armstrong 19,751,287 98.88% 224,344
E. Garrett Bewkes, Jr. 19,719,311 98.72 256,320
Richard R. Burt 19,736,109 98.80 239,522
Mary C. Farrell 19,752,632 98.88 223,000
George W. Gowen 19,726,435 98.75 249,196
Frederic V. Malek 19,744,092 98.84 231,540
Carl W. Schafer 19,748,001 98.86 227,630
</TABLE>
18
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (CONTINUED)
PROPOSAL 2
- -----------
<TABLE>
<CAPTION>
Shares Voted For as
Shares a % of Total Shares Voted Shares
Voted For Shares Voted Against Abstain
--------- ------------ ------- -------
<S> <C> <C> <C> <C>
Ratification of the selection
of Ernst & Young LLP as
the independent auditors of
Insured Municipal Income
Fund Inc. for the fiscal year
ending March 31, 1999 19,764,608 98.96% 87,567 120,812
</TABLE>
AUCTION PREFERRED SHARES:
PROPOSAL 3
- ----------
<TABLE>
<CAPTION>
Shares Voted For as
To vote for or against Shares a % of Total Shares Withhold
the election of: Voted For Shares Voted Authority
--------- ------------ ---------
<S> <C> <C> <C>
Margo N. Alexander 2,644 100% 0
Meyer Feldberg 2,644 100 0
</TABLE>
YEAR 2000 RISKS
Like other funds and financial and business organizations around the world,
the Fund could be adversely affected if the computer system 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 system 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. In
addition, issuers of securities in which the Fund invests may be adversely
affected by year 2000 related problems. This could have an impact on the value
of the Fund's investments and share price.
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.
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
19
<PAGE>
INSURED MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (CONCLUDED)
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.
20
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21
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22
<PAGE>
- --------------------------------------------------------------------------------
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
Brian M. Storms
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>
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PaineWebber |
(C)1999 PaineWebber Incorporated |
Member SIPC | M A R C H 3 1 , 1 9 9 9
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