UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07528
-------------------------
Insured Municipal Income Fund Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
51 West 52nd Street, New York, New York 10019-6114
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(Address of principal executive offices) (Zip code)
Mark F. Kemper, Esq.
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, NY 10019-6114
(Name and address of agent for service)
Copy to:
Jack W. Murphy, Esq.
Dechert LLP
1775 I Street, N.W.
Washington, DC 20006-2401
Registrant's telephone number, including area code: 212-882 5000
Date of fiscal year end: March 31
Date of reporting period: September 30, 2004
ITEM 1. REPORTS TO STOCKHOLDERS.
[UBS GLOBAL ASSET MANAGEMENT LOGO]
INSURED MUNICIPAL INCOME FUND INC.
SEMIANNUAL REPORT
SEPTEMBER 30, 2004
INSURED MUNICIPAL INCOME FUND INC.
November 15, 2004
DEAR SHAREHOLDER,
We present you with the semiannual report for Insured Municipal Income Fund Inc.
(the "Fund") for the six months ended September 30, 2004.
PERFORMANCE
Over the six-month period, the Fund's net asset value return was 1.77%. On a
market price basis, the Fund's return declined 4.18%. During the same time
period, the Fund's peer group, as measured by the Lipper Insured Municipal Debt
Funds (Leveraged) median, generated net asset value and market price returns of
1.48% and -2.09%, respectively. (For more performance information, please refer
to "Performance At A Glance" on page 5.)
The Fund used leverage during the period--38.8% of total assets as of September
30, 2004--which added slightly to the Fund's yield. Leverage can magnify returns
on the upside and on the downside, and can create wider dispersions of returns
within the Fund's peer group.
The Fund traded at a discount to NAV at the end of September. This discount was
wider than the average of the funds in its Lipper peer group.
A Fund trades at a discount when the market price at which its shares trade is
less than its net asset value (NAV). Alternately, a fund trades at a premium
when the market price at which its shares trade is more than its NAV. The market
price is the price the market is willing to pay for shares of a fund at a given
time, and may be influenced by a range of factors, including supply and demand
and market conditions. NAV per common share is determined by dividing the value
of the Fund's securities, cash and other assets, less all liabilities, by the
total number of common shares outstanding.
AN INTERVIEW WITH PORTFOLIO MANAGER WILLIAM VERONDA
Q. CAN YOU DESCRIBE THE ECONOMIC ENVIRONMENT DURING THE REPORTING PERIOD?
A. The economy continued to expand, although it lost some traction as the
reporting period progressed. In the first quarter of 2004, gross domestic
product (GDP) came in at 4.5%, up from 4.1% in the prior quarter. Second
quarter GDP
[SIDENOTE]
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GOAL:
High level of current income exempt from federal income tax, consistent with
preservation of capital.
PORTFOLIO MANAGER:
William Veronda
UBS Global Asset Management (US) Inc.
COMMENCEMENT:
June 8, 1993
NYSE SYMBOL:
PIF
DIVIDEND PAYMENT:
Monthly
1
then fell to 3.3%. During its August 10, 2004 meeting, the Federal Reserve
Board (the "Fed") stated that, "In recent months, output growth has
moderated and the pace of improvement in labor-market conditions has
slowed." There was no shortage of economic data to substantiate the Fed's
findings.
Q. HOW DID THE FED REACT TO THESE ECONOMIC CONDITIONS?
A. After many months of speculation, the Fed raised the federal funds rate (or
"fed funds" rate)--the rate that banks charge one another for funds they
borrow on an overnight basis--from 1.00% to 1.25% on June 30, 2004. The Fed
raised rates again at its subsequent meetings on August 10, 2004 and
September 21, 2004, to 1.50% and 1.75%, respectively. In doing so, it noted
that, "Even after this action, the stance of monetary policy remains
accommodative and, coupled with robust underlying growth in productivity, is
providing ongoing support to economic activity." Market perception grew that
the Fed, through its statements and in its actions, was paving the way to
continue raising rates in the future.
Q. HOW DID YOU POSITION THE FUND'S PORTFOLIO DURING THE REPORTING PERIOD?
A. The Fund's duration was shorter relative to its benchmark during the period,
as we believed that yields would continue to rise given the ongoing strength
of the economy. While this positioning enhanced performance in the first
half of the period, it detracted from results over the last three months.
However, our yield curve positioning helped offset some of this performance,
as our expectations for a flattening yield curve were met (the curve
flattens when the gap between short- and long-term yields narrows). In
particular, in recent months we emphasized securities in the 5- to 10-year
and 20- to 30-year portions of the curve, while holding underweight
positions in the 1- to 5-year and the 10- to 15-year ranges of the curve.
Q. WHAT HAS BEEN YOUR APPROACH IN TERMS OF THE CALIFORNIA MUNICIPAL MARKET?
A. California was one of a number of states that saw its fiscal situation
improve during the six-month period. Thus, we added a number of California
issues to our portfolio, including a block of the state's Economic Recovery
Bonds. Overall, the Fund's California holdings enhanced results over the
period covered by this report.
Another state that has shored up its balance sheet in recent months is
Massachusetts. We are, therefore, looking to increase the Fund's exposure to
this state's municipal securities.
Q. WHAT IS YOUR VIEW ON THE HEALTHCARE SECTOR?
A. Given declining government reimbursements, we remain negative on the
healthcare sector in general. However, using our research capabilities, we
identified a number of securities that we believe offer attractive yields
and, in our opinion, more than compensate investors for the potential risks.
2
Q. THE TROUBLES IN THE AIRLINE SECTOR HAVE BEEN WELL-DOCUMENTED. DOES THE FUND
HAVE ANY EXPOSURE TO THIS AREA?
A. While the airline industry is experiencing high-profile issues, we continue
to find attractive opportunities in the airport sector. Over the last year,
both business and consumer flight trends have improved. Given the
expectations for a continuation of an economic expansion, we expect
airfreight usage will remain strong. An example of a portfolio holding in
this area is Cleveland Ohio Airport bonds (1.8%)* that mature in 2014.
Q. WERE THERE ANY OTHER STRATEGIES THAT AFFECTED THE FUND'S PERFORMANCE DURING
THE PERIOD?
A. As we mentioned in our last report to you, we increased the Fund's leverage
from approximately 33% to 40% at the end of December 2003. Although leverage
can cause the Fund's short-term volatility to increase, it also better
positions us to seek our goal of a high level of current income exempt from
federal income tax, consistent with the preservation of capital. We
therefore maintained the Fund's leverage at roughly 40% over the period.
Q. HOW DO YOU ANTICIPATE POSITIONING THE FUND'S PORTFOLIO GOING FORWARD?
A. Although the US economy experienced a "soft patch" during the third quarter,
it now appears that this may have been overstated. In addition, aside from
stubbornly high oil prices, inflation remains low. We believe the Fed will
continue to raise interest rates--in fact, on November 10, 2004, the Fed
raised the federal funds rate another 25 basis points to 2.00%--and, as
such, we expect to retain our short duration position. We also anticipate
remaining focused on the 5- to 10-year and 20- to 30-year portions of the
yield curve.
We will continue to look for opportunities in the general obligation market,
in particular issues from the state of California. Having said that, we
expect to avoid securities in the 1- to 5-year range, as we do not believe
they are attractive given the underlying risks. On a national level, we will
seek higher-yielding securities that appear attractive given their
risk/reward characteristics.
* As a percentage of net assets applicable to common shareholders as of
September 30, 2004.
3
We thank you for your continued support and welcome any comments or questions
you may have. For additional information on the UBS Funds* please contact your
financial advisor or visit us at www.ubs.com.
Sincerely,
/s/ Joseph A. Varnas /s/ William Veronda
JOSEPH A. VARNAS WILLIAM VERONDA
PRESIDENT PORTFOLIO MANAGER
Insured Municipal Income Fund Inc. Insured Municipal Income Fund Inc.
MANAGING DIRECTOR EXECUTIVE DIRECTOR
UBS Global Asset Management (US) Inc. UBS Global Asset Management (US) Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the six months ended September 30, 2004, and reflects our views
at the time of its writing. Of course, these views may change in response to
changing circumstances, and they do not guarantee the future performance of the
markets or the Fund. We encourage you to consult your financial advisor
regarding your personal investment program.
* Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding investment objectives, risks,
charges and expenses, and should be read carefully before investing.
4
PERFORMANCE AT A GLANCE (UNAUDITED)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 9/30/04
NET ASSET VALUE RETURNS 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------------
Insured Municipal Income Fund Inc. 1.77% 4.38% 6.49% 7.44%
Lipper Insured Municipal Debt Funds
(Leveraged) Median 1.48 5.99 8.18 7.33
MARKET PRICE RETURNS
Insured Municipal Income Fund Inc. -4.18 3.59 7.95 8.79
Lipper Insured Municipal Debt Funds
(Leveraged) Median -2.09 6.17 8.40 8.09
Past performance does not predict future performance. The return and principal
value of an investment will fluctuate, so that an investor's shares, when sold,
may be worth more or less than their original cost. NAV return assumes, for
illustration only, that dividends were reinvested at the net asset value on the
payable dates. NAV and market price returns for periods of less than one year
are cumulative. Returns do not reflect the deduction of taxes that a shareholder
could pay on Fund distributions.
Lipper peer group data calculated by Lipper Inc.; used with permission. The
Lipper Median is the return of the fund that places in the middle of the peer
group.
SHARE PRICE, DIVIDEND AND YIELDS AS OF 9/30/04
Market Price $ 13.47
Net Asset Value (per share applicable to common shareholders) $ 15.26
12-Month Net Investment Income Dividend (ended 9/30/04) $ 0.81
September 2004 Dividend $ 0.065
Market Yield* 5.79%
NAV Yield* 5.11%
IPO Yield* 5.20%
* Market yield is calculated by multiplying the September dividend by 12 and
dividing by the month-end market price. NAV yield is calculated by
multiplying the September dividend by 12 and dividing by the month-end net
asset value. IPO yield is calculated by multiplying the September dividend
by 12 and dividing by the initial public offering price. Prices and yields
will vary.
5
PORTFOLIO STATISTICS (UNAUDITED)
CHARACTERISTICS 9/30/04 3/31/04 9/30/03
------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common
Shareholders (mm) $ 314.7 $ 317.6 $ 323.1
Weighted Average Maturity 11.1 yrs 10.7 yrs 13.5 yrs
Weighted Average Duration 4.8 yrs 4.8 yrs 5.2 yrs
Weighted Average Coupon 4.7% 4.3% 4.9%
Leverage** 38.8% 39.8% 31.7%
Callable/Maturing Within Five Years* 13.8% 14.4% 14.7%
Callable/Maturing Beyond Five Years* 86.2% 85.6% 85.3%
PORTFOLIO COMPOSITION*** 9/30/04 3/31/04 9/30/03
-------------------------------------------------------------------------------------------------------
Long-Term Municipal Bonds 143.5% 143.8% 128.8%
Short-Term Municipal Notes 21.6 20.6 15.9
Futures (0.0)**** (0.1) --
Other Assets Less Liabilities 1.6 1.8 1.7
Liquidation Value of Auction Preferred Shares (66.7) (66.1) (46.4)
TOTAL 100.0% 100.0% 100.0%
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CREDIT QUALITY*** 9/30/04 3/31/04 9/30/03
-------------------------------------------------------------------------------------------------------
AAA/Aaa 143.5% 143.8% 128.8%
A1/P1/SP-1/MIG-1 21.6 20.6 15.9
Other Assets Less Liabilities 1.6 1.7 1.7
Liquidation Value of Auction Preferred Shares (66.7) (66.1) (46.4)
TOTAL 100.0% 100.0% 100.0%
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TOP 5 STATES*** 9/30/04 3/31/04 9/30/03
-------------------------------------------------------------------------------------------------------
California 40.6% California 26.3% Texas 27.6%
Texas 28.6 New York 23.5 California 21.0
New York 18.5 Texas 22.0 Illinois 19.1
Illinois 13.1 Illinois 14.3 New York 13.0
Washington 9.9 Washington 11.6 Massachusetts 7.0
TOTAL 110.7% 97.7% 87.7%
-------------------------------------------------------------------------------------------------------
TOP FIVE SECTORS*** 9/30/04 3/31/04 9/30/03
-------------------------------------------------------------------------------------------------------
Power 33.5% Power 37.4% Power 33.6%
Escrow-to-maturity 20.1 Water 26.8 Water 30.8
Water & Sewer 15.7 Escrow-to-maturity 20.1 Escrow-to-maturity 16.1
Hospital 13.7 Pre-refunded 15.8 Hospital 10.1
Airport 9.4 Hospital 11.8 Airport 8.4
TOTAL 92.4% 111.9% 99.0%
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* Weightings represent percentages of portfolio assets as of the dates
indicated. The Fund's portfolio is actively managed and its composition
will vary over time.
** As a percentage of total assets as of the dates indicated.
*** As a percentage of net assets applicable to common shareholders as of the
dates indicated. Credit quality ratings designated by Standard & Poor's
Rating Group and Moody's Investor Services, Inc. Both are independent
rating agencies.
**** Represents less than 0.05% of net assets applicable to common shareholders.
6
INSURED MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--143.48%
ALABAMA--0.53%
$ 1,590 Alabama Water Pollution Control
Authority Revolving Fund
Loan-Series A (AMBAC Insured) Aaa AAA 08/15/17 6.750% $ 1,660,612
----------------------------------------------------------------------------------------------------------------------------
CALIFORNIA--40.65%
4,000 California State Department of
Water Resources Power Supply
Revenue-Series A (AMBAC
Insured) Aaa AAA 05/01/14 5.500 4,562,640
10,000 California State Department of
Water Resources Power Supply
Revenue-Series A (AMBAC
Insured) Aaa AAA 05/01/16 5.500 11,359,700
3,060 California State Department of
Water Resources Power Supply
Revenue-Series A
(MBIA Insured) Aaa AAA 05/01/12 5.250 3,445,897
4,000 California State Department of
Water Resources Revenue-
Series W (FSA Insured) Aaa AAA 12/01/14 5.500 4,649,960
2,500 California State Economic
Recovery-Series A
(FGIC Insured) Aaa AAA 07/01/14 5.250 2,842,100
8,000 California State Economic
Recovery-Series A
(MBIA Insured) Aaa AAA 07/01/12 5.000 8,917,440
3,000 California State Economic
Recovery-Series A
(MBIA Insured) Aaa AAA 07/01/15 5.000 3,319,290
30 California State General
Obligation (FGIC Insured) Aaa AAA 11/01/12 7.000 30,730
3,305 Chino Valley Unified School
District-Series A (FSA Insured) Aaa AAA 08/01/26 5.000 3,409,603
3,125 Contra Costa Water District
Water Revenue-Series L
(FSA Insured) Aaa AAA 10/01/19 5.000 3,335,000
5,000 Contra Costa Water District
Water Revenue-Refunding-
Series M (FSA Insured) Aaa AAA 10/01/18 5.000 5,402,350
3,200 Livermore-Amador Valley Water
Management Agency Sewer
Revenue-Series A
(AMBAC Insured) Aaa AAA 08/01/14 5.250 3,565,696
7
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
CALIFORNIA--(CONTINUED)
$ 2,000 Long Beach Finance Authority
Lease Revenue-Aquarium of
the South Pacific
(AMBAC Insured) Aaa AAA 11/01/15 5.500% $ 2,262,440
6,340 Los Angeles County
Metropolitan Transportation
Authority Sales Tax Revenue-
Refunding-Proposition C-
(MBIA Insured) Aaa AAA 07/01/12 5.250 7,174,661
8,475 Los Angeles County Sanitation
Districts Financing Authority
Revenue-Capital Project-
Series A (FSA Insured) Aaa AAA 10/01/20 5.000 9,044,351
5,000 Los Angeles General Obligation-
Series A (MBIA Insured) Aaa AAA 09/01/21 5.000 5,270,400
3,000 Los Angeles University School
District-Series A (FSA Insured) Aaa AAA 07/01/20 5.250 3,279,090
5,000 Los Angeles Water & Power
Revenue-Power Systems-
Series A (MBIA-IBC Insured) NR AAA 07/01/24 5.000 5,113,450
7,000 Los Angeles Water & Power
Revenue-Power Systems-
Series A-A-1 (FSA Insured) Aaa AAA 07/01/21 5.250 7,578,130
3,000 Los Angeles Water & Power
Revenue-Power Systems-
Series A-SubSeries A-2
(MBIA Insured) Aaa AAA 07/01/16 5.000 3,272,760
6,000 Los Angeles Water & Power
Revenue-Power Systems-
Series B (FSA Insured) Aaa AAA 07/01/25 5.000 6,223,440
1,000 Marin Municipal Water District
Water Revenue
(AMBAC Insured) Aaa AAA 07/01/18 5.000 1,070,850
6,520 Placentia-Yorba Linda Unified
School District-Series A
(FGIC Insured) Aaa AAA 08/01/26 5.000 6,706,863
7,000 Sacramento Municipal Utility
Revenue-Mud-Series R
(MBIA Insured) Aaa AAA 08/15/19 5.000 7,512,890
4,000 San Francisco City & County
Airport Commission International
Airport-Second Series 27B
(FGIC Insured) Aaa AAA 05/01/15 5.250 4,393,640
8
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
CALIFORNIA--(CONCLUDED)
$ 5,580 Southern California Public Power
Authority Transmission Project
Revenue-Refunding
(FGIC Insured) Aaa AAA 07/01/12 7.300%# $ 4,189,910
127,933,281
----------------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA--2.28%
2,650 District of Columbia General
Obligation-Series B
(AMBAC Insured) Aaa AAA 06/01/16 5.000 2,858,502
4,000 District of Columbia Hospital
Revenue-Medlantic
Healthcare-Series A
(Escrowed to Maturity)
(MBIA Insured) Aaa AAA 08/15/14 5.750 4,319,840
7,178,342
----------------------------------------------------------------------------------------------------------------------------
FLORIDA--1.01%
3,000 Miami-Dade County Expressway
Authority Toll System Revenue-
Series B (FGIC Insured) Aaa AAA 07/01/26 5.250 3,183,120
----------------------------------------------------------------------------------------------------------------------------
GEORGIA--1.04%
1,015 Columbus Building Authority
Lease Revenue-Series A
(FGIC Insured) Aaa AAA 01/01/16 5.250 1,134,009
2,000 Georgia Municipal Electric
Authority Power Revenue-
Series A (FSA Insured) Aaa AAA 01/01/18 5.000 2,137,840
3,271,849
----------------------------------------------------------------------------------------------------------------------------
ILLINOIS--11.25%
1,500 Chicago General Obligation-
Series A (FSA Insured) Aaa AAA 01/01/25 5.000 1,549,260
2,000 Chicago General Obligation-
Series A (FSA Insured) Aaa AAA 01/01/26 5.000 2,052,000
8,400 Chicago O'Hare International
Airport Revenue-Second Lien-
Series A (MBIA Insured) Aaa AAA 01/01/15 6.375 8,658,216
1,000 Chicago Project & Refunding-
Series A (MBIA Insured) Aaa AAA 01/01/14 5.500 1,129,660
4,000 Illinois Development Finance
Authority Pollution Control
Revenue-Commonwealth
Edison Co. Project-Series D
(AMBAC Insured) Aaa AAA 03/01/15 6.750 4,157,520
9
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
ILLINOIS--(CONCLUDED)
$ 4,500 Illinois Health Facilities Authority
Revenue-Franciscan Sisters
Health Care-Series C (Escrowed
to Maturity) (MBIA Insured) Aaa AAA 09/01/18 5.750% $ 5,277,375
2,000 Illinois Sales Tax Revenue-Series 2
(FGIC Insured) Aaa AAA 06/15/16 5.500 2,314,700
3,000 Kane McHenry Cook & De Kalb
Counties-United School
District No. 300 (MBIA Insured) Aaa AAA 12/01/15 5.500 3,391,590
5,000 Metropolitan Pier & Exposition
Authority-Illinois Dedicated
State Tax Capital Appreciation-
Series A-2002 (FGIC Insured) Aaa AAA 06/15/10 6.650# 4,118,200
2,395 Metropolitan Pier & Exposition
Authority-Illinois Dedicated
State Tax-Pre-refunded-
Series A-2002 (FGIC Insured) Aaa AAA 12/15/23 5.500 2,764,596
35,413,117
----------------------------------------------------------------------------------------------------------------------------
INDIANA--0.35%
1,000 Indiana University Revenue-
Student Fee-Series 0
(FGIC Insured) Aaa AAA 08/01/18 5.250 1,095,340
----------------------------------------------------------------------------------------------------------------------------
MAINE--1.55%
4,785 Maine Health & Higher
Educational Facilities Authority
Revenue-Series A (Escrowed
to Maturity) (FSA Insured) Aaa AAA 07/01/23 5.500 4,886,490
----------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--0.96%
2,800 Massachusetts Water Pollution
Abatement Trust MWRA
Program-Series A Aaa AAA 08/01/20 5.250 3,017,672
----------------------------------------------------------------------------------------------------------------------------
MICHIGAN--2.53%
4,475 Eastern Michigan University
Revenue-Series A
(FGIC Insured) Aaa AAA 06/01/19 5.000 4,782,969
2,880 Michigan Municipal Bond
Authority Clean Water
Revenue Fund Aaa AAA 10/01/19 5.250 3,173,472
7,956,441
----------------------------------------------------------------------------------------------------------------------------
10
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
MINNESOTA--1.70%
$ 5,015 Minneapolis & St. Paul
Metropolitan Airports
Commission Airport Revenue-
SubSeries A (MBIA Insured) Aaa AAA 01/01/19 5.000% $ 5,342,479
----------------------------------------------------------------------------------------------------------------------------
MISSOURI--1.69%
1,740 St. Louis Airport Revenue-Capital
Improvement Project-Series A
(MBIA Insured) Aaa AAA 07/01/15 5.375 1,947,217
2,035 St. Louis Airport Revenue-Capital
Improvement Project-Series A
(MBIA Insured) Aaa AAA 07/01/16 5.375 2,268,882
1,000 St. Louis Airport Revenue-Capital
Improvement Project-Series A
(MBIA Insured) Aaa AAA 07/01/18 5.375 1,106,280
5,322,379
----------------------------------------------------------------------------------------------------------------------------
NEVADA--3.70%
4,000 Washoe County Gas & Water
Facilities Revenue-Sierra Pacific
Power Co. Project-Series B
(MBIA Insured) Aaa AAA 06/01/23 5.900 4,052,800
7,500 Washoe County Water Facilities
Revenue-Sierra Pacific
Power Co. Project-Series A
(MBIA Insured) Aaa AAA 06/01/23 5.900 7,599,000
11,651,800
----------------------------------------------------------------------------------------------------------------------------
NEW JERSEY--1.62%
5,000 Salem County Industrial Pollution
Control Finance Authority
Revenue-Public Service
Electric & Gas-Series D
(MBIA Insured) Aaa AAA 10/01/29 6.550 5,100,700
----------------------------------------------------------------------------------------------------------------------------
NEW MEXICO--8.11%
8,850 Gallup Pollution Control
Revenue-Plains Electric
Generation (MBIA Insured) Aaa AAA 08/15/17 6.650 9,091,251
15,000 New Mexico Finance Authority
State Transportation Revenue-
Senior Lien-Series A
(MBIA Insured)+ Aaa AAA 06/15/20 5.250 16,444,800
25,536,051
----------------------------------------------------------------------------------------------------------------------------
11
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
NEW YORK--12.52%
$ 3,000 New York State Dormitory
Authority Revenue-Series B
(FGIC Insured) Aaa AAA 11/15/29 5.250% $ 3,347,490
3,000 New York State Dormitory
Authority Revenue-Sloan
Kettering Center-Series 1
(MBIA Insured) Aaa AAA 07/01/16 5.000 3,265,770
2,000 Long Island Power Authority
Electric System Revenue-
Series A (FSA Insured) Aaa AAA 12/01/22 5.125 2,123,140
5,650 Metropolitan Transportation
Authority Dedicated Tax Fund-
Series A (FSA Insured) Aaa AAA 11/15/24 5.250 6,014,538
5,000 Metropolitan Transportation
Authority Revenue-Series A
(AMBAC Insured) Aaa AAA 11/15/16 5.500 5,626,400
4,000 Metropolitan Transportation
Authority Revenue-Series A
(FGIC Insured) Aaa AAA 11/15/17 5.000 4,350,960
1,200 New York City General
Obligation-Series F
(MBIA-IBC Insured) Aaa AAA 08/01/12 5.750 1,391,880
11,555 Triborough Bridge & Tunnel
Authority Revenue-General
Purpose-Series Y Aa3 AAA 01/01/12 6.000 13,286,517
39,406,695
----------------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA--1.23%
3,505 Charlotte Certificates of
Participation Refunding-
Convention Facilities Project-
Series A (MBIA Insured) Aaa AAA 08/01/12 5.000 3,870,536
----------------------------------------------------------------------------------------------------------------------------
OHIO--2.41%
5,000 Cleveland Airport Systems
Revenue-Series A (FSA Insured) Aaa AAA 01/01/14 5.250 5,513,850
1,870 Ohio Water Development
Authority-Pollution Control
Facilities Revenue-Water
Control Loan Fund-Water
Quality Series (MBIA Insured) Aaa AAA 06/01/13 5.500 2,061,544
7,575,394
----------------------------------------------------------------------------------------------------------------------------
12
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
PENNSYLVANIA--1.99%
$ 1,000 Philadelphia General Obligation
(FSA Insured) Aaa AAA 03/15/13 5.250% $ 1,105,030
1,000 Philadelphia General Obligation
(FSA Insured) Aaa AAA 03/15/14 5.250 1,105,030
3,750 Philadelphia School District-
Series A (MBIA Insured) Aaa AAA 04/01/16 5.250 4,047,150
6,257,210
----------------------------------------------------------------------------------------------------------------------------
PUERTO RICO--1.76%
5,000 Puerto Rico Public Finance Corp.
Commonwealth Appropriation-
Series A (FGIC Insured) Aaa AAA 08/01/31 5.250 5,560,550
----------------------------------------------------------------------------------------------------------------------------
RHODE ISLAND--6.22%
10,000 Rhode Island Depositors
Economic Protection Corp.
Special Obligation-Series A
(Escrowed to Maturity)
(FSA Insured) Aaa AAA 08/01/14 5.750 11,758,946
7,000 Rhode Island Depositors
Economic Protection Corp.
Special Obligation-Series B
(Pre-refunded with U.S.
Government Securities to
02/01/11 @ 100) (MBIA Insured) Aaa AAA 08/01/21 5.250 7,835,100
19,594,046
----------------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA--1.21%
2,625 Charleston County Hospital
Facilities Revenue-Bon Secours
Health System Project
(Escrowed to Maturity)
(FSA Insured) Aaa AAA 08/15/25 5.625 2,684,168
1,000 Myrtle Beach Water & Sewer
Revenue System (FGIC Insured) Aaa AAA 03/01/15 5.375 1,119,430
3,803,598
----------------------------------------------------------------------------------------------------------------------------
TEXAS--22.39%
2,000 Corpus Christi Utilities System
Revenue-Refunding &
Improvement (FSA Insured) Aaa AAA 07/15/17 5.250 2,206,060
5,170 Fort Bend Independent School
District Refunding-Series A
(PSF-GTD Insured) NR AAA 08/15/26 5.250 5,455,022
2,120 Frisco Certificates Obligation-
Series A (FGIC Insured) Aaa AAA 02/15/14 5.250 2,350,190
13
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
TEXAS--(CONCLUDED)
$ 3,000 Harris County Toll Road Sub-Lien
(FGIC Insured) Aaa AAA 08/01/09 6.000% $ 3,430,230
13,500 Houston Utility Systems
Revenue-Refunding-First Lien-
Series A (FGIC Insured) Aaa AAA 05/15/23 5.250 14,468,490
6,000 Houston Water & Sewer System
Revenue-Junior Lien-Series A
(FSA Insured) Aaa AAA 12/01/15 5.500 6,775,020
2,000 Irving Independent School District
Refunding-Capital
Appreciation-Series A
(PSF-GTD Insured) Aaa AAA 02/15/12 4.960# 1,503,920
2,000 Jefferson County (FGIC Insured) Aaa AAA 08/01/20 5.250 2,151,320
10,000 Lubbock Health Facilities
Development Corp.-Hospital
Revenue-Methodist
Hospital- Series A
(Pre-refunded with U.S.
Government Securities
to 12/01/05 @ 100)
(AMBAC Insured) Aaa AAA 12/01/22 5.900 10,486,400
4,115 San Antonio Electric & Gas
Revenue-(Escrowed to Maturity) Aa1 AAA 02/01/19 5.650 4,850,104
4,000 San Antonio Electric & Gas
Revenue-Unrefunded
(FSA-CR Insured) Aaa AAA 02/01/12 5.000 4,423,200
155 San Antonio Water Revenue-
(MBIA Insured) Aaa AAA 05/15/16 6.000 170,486
720 San Antonio Water Revenue-
(Pre-refunded with U.S.
Government Securities to
05/15/07 @ 100)
(MBIA Insured) Aaa AAA 05/15/16 6.000 835,978
6,110 Texas A&M University Fund
Refunded Aaa NR 07/01/17 5.250 6,735,358
4,170 Williamson County General
Obligation (FSA Insured) Aaa AAA 02/15/17 5.500 4,642,669
70,484,447
----------------------------------------------------------------------------------------------------------------------------
UTAH--2.13%
2,000 Utah Municipal Power System
Revenue-Payson Power Project-
Series A (FSA Insured) Aaa AAA 04/01/17 5.250 2,196,840
14
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONCLUDED)
UTAH--(CONCLUDED)
$ 2,085 Utah Municipal Power System
Revenue-Payson Power
Project-Series A (FSA Insured) Aaa AAA 04/01/18 5.000% $ 2,230,929
2,055 Utah Water Finance Agency
Revenue-Pooled Loan
Financing Program-Series C
(AMBAC Insured) Aaa NR 10/01/18 5.250 2,270,200
6,697,969
----------------------------------------------------------------------------------------------------------------------------
WASHINGTON--9.05%
5,210 Washington State Public Power
Supply Revenue
Refunding-Systems Nuclear
Project No. 2-Series A
(MBIA Insured) Aaa AAA 07/01/11 6.550# 4,080,941
2,220 Cowlitz County School District
No. 458 Kelso (FSA Insured) Aaa NR 12/01/15 5.750 2,558,151
1,000 Cowlitz County School District
No. 458 Kelso (FSA Insured) Aaa NR 12/01/18 5.750 1,148,690
2,000 Energy Northwest Electric
Revenue-Columbia Generator
Station-Series F (MBIA Insured) Aaa AAA 07/01/18 5.000 2,138,720
2,175 Energy Northwest Electric
Revenue-Project No. 1-Series A
(MBIA Insured) Aaa AAA 07/01/15 5.750 2,496,682
2,000 King County School District
No. 403 Renton (FGIC Insured) Aaa AAA 12/01/14 5.250 2,177,400
5,000 Seattle Water Systems Revenue
(MBIA Insured) Aaa AAA 09/01/19 5.000 5,337,050
3,625 Snohomish County School
District No. 015 Edmonds
(FGIC Insured) Aaa AAA 12/01/15 5.250 3,901,008
4,315 Spokane County-Refunding
-Series B (MBIA Insured) Aaa AAA 12/01/10 5.000 4,640,437
28,479,079
----------------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA--3.20%
10,000 Marshall County Pollution
Control Revenue-Ohio Power
Project-Series D (MBIA Insured) Aaa AAA 04/01/22 5.900 10,069,000
----------------------------------------------------------------------------------------------------------------------------
WISCONSIN--0.40%
1,105 Ladysmith-Hawkins School
District Refunding
(FGIC Insured) Aaa NR 04/01/20 5.500 1,259,910
----------------------------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Bonds (cost--$436,741,414) 451,608,107
----------------------------------------------------------------------------------------------------------------------------
15
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL NOTES--21.62%
ILLINOIS--1.87%
$ 5,900 Illinois Health Facilities Authority
Revenue-Resurrection
Health-Series A (FSA Insured) VMIG-1 A-1 10/01/04 1.740%* $ 5,900,000
----------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--3.77%
3,680 Massachusetts State Health &
Education Facilities Authority
Revenue-Capital Asset
Program-Series B
(MBIA Insured) VMIG-1 A-1+ 10/01/04 1.740* 3,680,000
3,400 Massachusetts State Health &
Education Facilities Authority
Revenue-Capital Asset
Program-Series C
(MBIA Insured) VMIG-1 A-1+ 10/01/04 1.740* 3,400,000
4,800 Massachusetts State Health &
Education Facilities Authority
Revenue-Capital Asset
Program-Series D
(MBIA Insured) VMIG-1 NR 10/01/04 1.720* 4,800,000
11,880,000
----------------------------------------------------------------------------------------------------------------------------
MISSOURI--1.02%
3,200 Missouri Health & Educational
Facilities Authority Health
Facilities Revenue-Cox Health
Systems (AMBAC Insured) VMIG-1 A-1 10/01/04 1.800* 3,200,000
----------------------------------------------------------------------------------------------------------------------------
NEVADA--1.91%
6,000 Clark County School District-
Series A (FSA Insured) VMIG-1 A-1+ 10/01/04 1.650* 6,000,000
----------------------------------------------------------------------------------------------------------------------------
NEW YORK--5.99%
5,000 New York City General
Obligation-Series B-
SubSeries B-4 (MBIA Insured) VMIG-1 A-1+ 10/01/04 1.730* 5,000,000
3,060 New York City General
Obligation-Series B-
SubSeries B-6 (MBIA Insured) VMIG-1 A-1 10/01/04 1.700* 3,060,000
6,200 New York City General
Obligation-Series H-
SubSeries H-2 (MBIA Insured) VMIG-1 A-1 10/01/04 1.700* 6,200,000
4,600 New York City Municipal Water
Finance Authority Water &
Sewer Systems Revenue-
Series C (FGIC Insured) VMIG-1 A-1+ 10/01/04 1.730* 4,600,000
18,860,000
----------------------------------------------------------------------------------------------------------------------------
16
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL NOTES--(CONCLUDED)
TEXAS--6.20%
$ 9,000 Harris County Health Facilities
Development Corporate
Hospital Revenue-Texas
Childrens Hospital-Series B-1
(MBIA Insured) VMIG-1 A-1+ 10/01/04 1.750%* $ 9,000,000
10,500 Harris County Health Facilities
Development Corporate
Special Facilities Revenue-
Texas Medical Center Project-
Series B (FSA Insured) VMIG-1 A-1+ 10/01/04 1.720* 10,500,000
19,500,000
----------------------------------------------------------------------------------------------------------------------------
WASHINGTON--0.86%
2,700 Washington State Health Care
Facilities-Authority Revenue-
Providence Services-Series A
(MBIA Insured) VMIG-1 A-1+ 10/01/04 1.720* 2,700,000
----------------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Notes (cost--$68,040,000) 68,040,000
----------------------------------------------------------------------------------------------------------------------------
Total Investments (cost--$504,781,414)--165.10% 519,648,107
Other assets in excess of liabilities--1.62% 5,091,969
Liquidation Value of Auction Preferred Shares--(66.72%) (210,000,000)
Net Assets applicable to shareholders--100.00% $ 314,740,076
----------------------------------------------------------------------------------------------------------------------------
* 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, 2004.
# Interest rates shown reflect yield to maturity at purchase date for zero
coupon bonds.
+ Entire or partial amount pledged as collateral for futures transactions.
NR -- Not Rated
AMBAC -- American Municipal Bond Assurance Corporation
CR -- Custodial Receipts
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
GTD -- Guaranteed
IBC -- Insured Bond Certificate
MBIA -- Municipal Bond Investors Assurance
PSF -- Permanent School Fund
NUMBER OF IN EXPIRATION UNREALIZED
CONTRACTS CONTRACTS TO RECEIVE EXCHANGE FOR DATES DEPRECIATION
----------------------------------------------------------------------------------------------
FUTURES CONTRACTS
U.S. Treasury Note
50 5 Year Futures $ 5,537,500 December 2004 $ (41,406)
U.S. Treasury Note
95 10 Year Futures 10,699,375 December 2004 (41,875)
----------------------------------------------------------------------------------------------
$ (83,281)
----------------------------------------------------------------------------------------------
See accompanying notes to financial statements
17
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES -- SEPTEMBER 30, 2004 (UNAUDITED)
ASSETS:
Investments in securities, at value (cost--$504,781,414) $ 519,648,107
Cash 3,383,305
Receivable for investments sold 11,283,842
Interest receivable 6,247,577
Receivable for variation margin 14,842
Other assets 29,476
Total assets 540,607,149
LIABILITIES:
Payable for investments purchased 15,530,760
Payable to investment advisor and administrator 258,549
Dividends payable to auction preferred shareholders 33,839
Accrued expenses and other liabilities 43,925
Total liabilities 15,867,073
Auction Preferred Shares Series A, B, C, D, E & F-4,200
non-participating shares authorized, issued and outstanding;
$0.001 par value; $50,000 liquidation value per share 210,000,000
Net assets applicable to common shareholders $ 314,740,076
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Common Stock--$0.001 par value; 199,997,000 shares authorized;
20,628,363 shares issued and outstanding 301,976,191
Undistributed net investment income 655,701
Accumulated net realized loss from investment activities and
futures (2,675,228)
Net unrealized appreciation of investments and futures 14,783,412
Net assets applicable to common shareholders $ 314,740,076
Net asset value per common share ($314,740,076 applicable to
20,628,363 common shares outstanding) $ 15.26
--------------------------------------------------------------------------------------
See accompanying notes to financial statements
18
STATEMENT OF OPERATIONS
FOR THE SIX
MONTHS ENDED
SEPTEMBER 30, 2004
(UNAUDITED)
--------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 10,681,529
EXPENSES:
Investment advisory and administration fees 2,338,620
Auction Preferred Shares expenses 392,160
Custody and accounting 155,908
Professional fees 58,473
Reports and notices to shareholders 27,842
Directors' fees 7,223
Transfer agency fees 4,957
Other expenses 55,098
3,040,281
Less: Fee waivers from investment advisor and administrator (607,086)
Net expenses 2,433,195
Net investment income 8,248,334
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized losses from:
Investments (518,957)
Futures (346,445)
Net change in unrealized appreciation/depreciation of:
Investments (1,150,556)
Futures 151,719
Net realized and unrealized loss from investment activities (1,864,239)
Dividends to auction preferred shareholders from net investment
income (1,167,340)
Net increase in net assets applicable to common shareholders
resulting from operations $ 5,216,755
See accompanying notes to financial statements
19
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
FOR THE SIX
MONTHS ENDED FOR THE
SEPTEMBER 30, 2004 YEAR ENDED
(UNAUDITED) MARCH 31, 2004
------------------------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $ 8,248,334 $ 17,284,000
Net realized gain (loss) from investment activites
and futures (865,402) 8,867,105
Net change in unrealized appreciation/depreciation of
investments and futures (998,837) (8,816,660)
COMMON SHARE EQUIVALENT OF DIVIDEND AND DISTRIBUTIONS TO
AUCTION PREFERRED SHAREHOLDERS FROM:
Net investment income (1,167,340) (1,410,363)
Net realized gains from investment activities -- (335,308)
Total dividends and distributions paid to auction
preferred shareholders (1,167,340) (1,745,671)
Net increase in net assets applicable to common
shareholders resulting from operations 5,216,755 15,588,774
DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (8,045,064) (17,327,825)
Net realized gains from investment activities -- (5,029,195)
Total dividends and distributions to common shareholders (8,045,064) (22,357,020)
Auction Preferred Shares offering expenses -- (723,487)
Net decrease in net assets applicable to common
shareholders (2,828,309) (7,491,733)
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 317,568,385 325,060,118
End of period $ 314,740,076 $ 317,568,385
------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ 655,701 $ 1,619,771
------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements
20
INSURED MUNICIPAL INCOME FUND INC.
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
under the Investment Company Act of 1940, as amended, as a closed-end
diversified management investment company. 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. There can be no assurance that the
Fund's investment objective will be achieved.
In the normal course of business the Fund may enter into contracts that contain
a variety of representations or that provide indemnification for certain
liabilities. The Fund's maximum exposure under these arrangements is unknown, as
this would involve future claims that may be made against the Fund that have not
yet occurred. However, the Fund has not had prior claims or losses pursuant to
these contracts and expects the risk of loss to be remote.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires the Fund's 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--The Fund calculates net asset values based on the
current market value, where available, for its portfolio's securities. The Fund
normally obtains market values for its securities from independent pricing
sources and broker-dealers. Independent pricing sources may use last reported
sale prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. A matrix system
incorporates parameters such as security quality, maturity and coupon, and/or
research and evaluations by its staff, including review of broker-dealer market
price quotations, if available, in determining the valuation of the portfolio
securities. If a market value is not available from an independent pricing
source for a particular security, that security is valued at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors (the "Board"). The amortized cost method of valuation, which
approximates market value, generally is used to value short-term debt
instruments with sixty days or less remaining to maturity, unless the Board
determines that this does not represent fair value. Securities traded in the
over-the-counter ("OTC") market are valued at the last bid price available on
the valuation date prior to valuation.
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 investments.
21
FUTURES CONTRACTS--Upon entering into a financial futures contract, the Fund is
required to deposit in a segregated account with its custodian, in the name of
the futures broker through which the transaction was effected, an amount of cash
and/or municipal obligations equal to a certain percentage of the contract
amount. This amount is known as the "initial margin." Subsequent payments, known
as "variation margin" are made or received by the Fund each day, depending on
the daily fluctuations in the value of the underlying financial futures
contracts. Such variation margin is recorded for financial statement purposes on
a daily basis as unrealized gain or loss until the financial futures contract is
closed, at which time the net gain or loss is reclassified to realized gain or
loss on futures. Variation margin calls could be substantial in the event of
adverse price movements.
Using financial futures contracts involves various market risks. If the Fund was
unable to liquidate a futures position due to the absence of a liquid secondary
market or the imposition of price limits, it could incur substantial losses. The
Fund would continue to be subject to market risk with respect to the position.
In addition, the Fund would continue to be required to make variation margin
payments and might be required to maintain the position being hedged or to
maintain cash or securities in a segregated account. Furthermore, certain
characteristics of the futures market might increase the risk that movements in
the prices of the financial futures contracts might not correlate perfectly with
movements in the prices of the investments being hedged, including temporary
price distortion.
DIVIDENDS AND DISTRIBUTIONS--The Fund intends to pay monthly dividends to common
shareholders 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 auction preferred shares. The dividend rate on the common
stock is adjusted as necessary to reflect the earnings rate of the Fund.
Dividends and distributions to common shareholders are recorded on the
ex-dividend date. Dividends to auction preferred shareholders are accrued daily.
The amount of dividends from net investment income and distributions from net
realized capital gains is determined in accordance with federal income tax
regulations, which may differ from U.S. 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.
22
INVESTMENT ADVISOR AND ADMINISTRATOR
The Board has approved an investment advisory and administration contract
("Advisory Contract") with UBS Global Asset Management (US) Inc. ("UBS Global
AM"), under which UBS Global AM serves as investment advisor and administrator
of the Fund. UBS Global AM is an indirect wholly owned asset management
subsidiary of UBS AG, an internationally diversified organization with
headquarters in Zurich, Switzerland and operations in many areas of the
financial services industry. In accordance with the Advisory Contract, the Fund
pays UBS Global AM an investment advisory and administration fee, which is
accrued weekly and paid monthly, at the annual rate of 0.90% of the Fund's
average weekly net assets applicable to holders of common and Auction Preferred
Shares. UBS Global AM had agreed to waive 0.20% of the advisory and
administration fee, so that the Fund's effective fee was 0.70% of average weekly
net assets applicable to holders of common and Auction Preferred Shares.
Effective August 1, 2004, the Fund's management fee waiver increased to 0.30%,
reducing the effective management fee to 0.60%. This waiver will continue
indefinitely unless the Board agrees to any change. At September 30, 2004, the
Fund owed UBS Global AM $258,549, which is $387,923 investment advisory and
administration fees less fees waived of $129,374. For the six months ended
September 30, 2004, UBS Global AM waived $607,086 in investment advisory and
administration fees from the Fund.
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, 600 shares of Auction Preferred Shares Series D, 600 shares of Auction
Preferred Shares Series E and 600 shares of Auction Preferred Shares Series F
which are referred to herein collectively as the "APS." All shares of each
series of APS have liquidation preference of $50,000 per share plus an amount
equal to accumulated but unpaid dividends upon liquidation.
Dividends, which are cumulative, are generally reset every 7 days for each
Series of APS. Dividend rates ranged from 0.750% to 1.590% for the six months
ended September 30, 2004.
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
APS will vote separately as a class on certain matters, as required by law. The
holders of the APS have the right to elect two directors of the Fund.
23
The redemption of the Fund's APS is outside of the control of the Fund because
it is redeemable upon the occurrence of an event that is not solely within the
control of the Fund.
Offering expenses of $723,487 were charged to paid-in-capital of the Fund in
connection with the offering of APS during the year ended March 31, 2004.
PURCHASES AND SALES OF SECURITIES
For the six months ended September 30, 2004, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $113,492,514 and
$116,165,833, 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, net
realized capital gains and certain other amounts, if any, the Fund intends not
to be subject to a federal excise tax.
The tax character of distributions paid during the fiscal year ended March 31,
2004 was as follows:
DISTRIBUTIONS PAID FROM: 2004
--------------------------------------------------------------------------------------
Tax-exempt income $ 18,738,188
Net long-term capital gains 5,364,503
Total distributions paid $ 24,102,691
--------------------------------------------------------------------------------------
The tax character of distributions paid and the components of accumulated
earnings (deficit) on a tax basis for the current fiscal year will be calculated
after the Fund's fiscal year ending March 31, 2005.
The tax cost of investments and the components of net unrealized appreciation of
investments at September 30, 2004 were as follows:
Tax cost of investments $ 504,781,414
--------------------------------------------------------------------------------------
Gross unrealized appreciation 15,853,398
Gross unrealized depreciation (986,705)
Net unrealized appreciation $ 14,866,693
--------------------------------------------------------------------------------------
24
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below:
FOR THE
SIX MONTHS ENDED
SEPTEMBER 30, FOR THE YEARS ENDED MARCH 31,
2004 -----------------------------------------------------
(UNAUDITED) 2004 2003 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.39 $ 15.76 $ 15.15 $ 15.30 $ 14.54 $ 15.58
Net investment income 0.40 0.84 0.97 1.01 1.04 1.04
Net realized and unrealized gains (losses) from
investment activities (0.08) 0.00# 0.58 (0.26) 0.79 (1.05)
Common share equivalent of dividends and
distributions paid to auction preferred
shareholders from:
Net investment income (0.06) (0.07) (0.10) (0.17) (0.31) (0.26)
Net realized gains from investment activities -- (0.02) -- -- -- --
Total dividends and distributions paid to
auction preferred shareholders (0.06) (0.09) (0.10) (0.17) (0.31) (0.26)
Net increase (decrease) from operations 0.26 0.75 1.45 0.58 1.52 (0.27)
Dividends and distributions paid to common
shareholders from:
Net investment income (0.39) (0.84) (0.84) (0.73) (0.76) (0.77)
Net realized gains from investment activities -- (0.24) -- -- -- --
Total dividends and distributions to common
shareholders (0.39) (1.08) (0.84) (0.73) (0.76) (0.77)
Auction Preferred Shares offering expenses -- (0.04) -- -- -- --
NET ASSET VALUE, END OF PERIOD $ 15.26 $ 15.39 $ 15.76 $ 15.15 $ 15.30 $ 14.54
MARKET VALUE, END OF PERIOD $ 13.47 $ 14.48 $ 13.98 $ 13.42 $ 13.11 $ 12.00
TOTAL INVESTMENT RETURN(1) (4.18)% 11.75% 10.61% 8.04% 16.02% (10.49)%
RATIO TO AVERAGE NET ASSETS ATTRIBUTABLE TO
COMMON SHARES:
Total expenses, net of fee waivers by advisor 1.57%* 1.35% 1.41% 1.42% 1.44% 1.44%
Total expenses, before fee waivers by advisor 1.96%* 1.62% 1.60% 1.61% 1.63% 1.63%
Net investment income before Auction Preferred
Shares dividends 5.34%* 5.42% 6.23% 6.57% 7.00% 7.05%
Auction Preferred Shares dividends from net
investment income 0.76%* 0.44% 0.61% 1.11% 2.10% 1.75%
Net investment income available to common
shareholders, net of fee waivers by advisor 4.58%* 4.98% 5.62% 5.46% 4.90% 5.30%
Net investment income available to common
shareholders, before fee waivers by advisor 4.19%* 4.71% 5.43% 5.27% 4.71% 5.11%
SUPPLEMENTAL DATA:
Net assets applicable to common shareholders,
end of period (000's) $ 314,740 $ 317,568 $ 325,060 $ 312,552 $ 315,568 $ 299,876
Portfolio turnover 25% 37% 24% 14% 2% 8%
Asset coverage per share of Auction Preferred
Shares, end of period $ 124,938 $ 125,612 $ 158,353 $ 154,184 $ 155,189 $ 149,959
-----------------------------------------------------------------------------------------------------------------------------
* Annualized.
(1) Total investment return is calculated assuming a $10,000 purchase of common
stock at the current market price on the first day of each period reported
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 shareholders at prices obtained under the Fund's Dividend
Reinvestment Plan. Total investment return does not reflect brokerage
commissions and has not been annualized for the period less than one year.
Returns do not reflect the deduction of taxes that a shareholder could pay
on Fund distributions.
# Represents less than $0.005.
25
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 advisor and administrator is UBS Global Asset
Management (US) Inc. ("UBS Global AM"), an indirect wholly owned asset
management subsidiary of UBS AG, which had approximately $49.5 billion in assets
under management as of September 30, 2004.
SHAREHOLDER INFORMATION
The Fund's NYSE trading symbol is "PIF." Comparative net asset value and market
price information about the Fund is published weekly in THE WALL STREET JOURNAL,
THE NEW YORK TIMES AND BARRON'S, as well as in numerous other publications.
An annual meeting of shareholders of the Fund was held on July 15, 2004. At the
meeting Margo N. Alexander, Richard Q. Armstrong, David J. Beaubien, Richard R.
Burt, Meyer Feldberg, Carl W. Schafer, and William D. White were elected to
serve as directors until the next annual meeting of shareholders, or until their
successors are elected and qualified or until they resign or are otherwise
removed. The shares were voted as indicated below:
COMMON STOCK AND APS SHARES VOTING AS A SINGLE CLASS SHARES
SHARES
SHARES WITHHOLD
TO VOTE FOR OR WITHHOLD AUTHORITY IN THE ELECTION OF: VOTED FOR AUTHORITY
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Richard Q. Armstrong 19,454,736 398,253
David J. Beaubien 19,450,949 402,040
Richard R. Burt 19,455,375 397,614
Carl W. Schafer 19,447,421 405,568
William D. White 19,449,629 403,360
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AUCTION PREFERRED SHARES
SHARES
SHARES WITHHOLD
TO VOTE FOR OR WITHHOLD AUTHORITY IN THE ELECTION OF: VOTED FOR AUTHORITY
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Margo N. Alexander 3,963 0
Meyer Feldberg 3,963 0
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The Fund was informed that there were no broker non-votes. (Broker non-votes are
shares held in street name for which the broker indicates that instructions have
not been received from the beneficial owners or other
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persons entitled to vote and for which the broker does not have discretionary
voting authority.)
PROXY VOTING POLICIES AND PROCEDURES AND RECORD
You may obtain a description of the Fund's proxy voting policies and procedures,
and its proxy voting record, without charge, upon request by contacting the Fund
directly at 1-800-647 1568, online on the Fund's Web site
www.ubs.com/ubsglobalam-proxy, or on the EDGAR Database on the SEC's website
(http://www.sec.gov).
QUARTERLY FORM N-Q PORTFOLIO SCHEDULE
The Fund will file its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third quarters of
each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's
website at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0330. Additionally, you may obtain copies of Forms N-Q from the Fund
upon request by calling 1-800-647-1568.
DIVIDEND REINVESTMENT PLAN
The Fund's Board has established a Dividend Reinvestment Plan (the "Plan")
under which all common shareholders whose shares are registered in their own
names, or in the name of UBS Financial Services Inc. or its nominee, will have
all dividends and other distributions on their shares of common stock
automatically reinvested in additional shares of common stock, unless such
common shareholders elect to receive cash. Common shareholders 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 shareholders to participate in the Plan may change if their
shares are transferred into the name of another broker or nominee.
A common shareholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and common shareholders
who have previously terminated participation in the Plan may rejoin it at any
time. Changes in elections must be made in writing to the Fund's transfer agent
and should include the shareholder's name and address as they appear on the
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 common shareholder 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.
27
Additional shares of common stock acquired under the Plan will be purchased in
the open market, on the NYSE or otherwise, 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 shareholder 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 currently 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.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan with respect to any
dividend or other distribution if notice of the change is sent to Plan
participants at least 30 days before the record date for such distribution. The
Plan also may be amended or terminated by the transfer agent by at least 30
days' written notice to all Plan participants. Additional information regarding
the Plan may be obtained from, and all correspondence concerning the Plan should
be directed to, the transfer agent at PFPC Inc., P.O. Box 43027, Providence,
Rhode Island 02940-3027. For further information regarding the Plan, you may
also contact the transfer agent directly at 1-800-331-1710.
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DIRECTORS
Richard Q. Armstrong
CHAIRMAN
Margo N. Alexander
David J. Beaubien
Richard R. Burt
Meyer Feldberg
Carl W. Schafer
William D. White
PRINCIPAL OFFICERS
Joseph A. Varnas
PRESIDENT
Mark F. Kemper
VICE PRESIDENT AND SECRETARY
Thomas Disbrow
VICE PRESIDENT AND TREASURER
Elbridge T. Gerry III
VICE PRESIDENT
W. Douglas Beck
VICE PRESIDENT
INVESTMENT ADVISOR AND ADMINISTRATOR
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, New York 10019-6114
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 USE IN THE PURCHASE OR
SALE OF SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THIS REPORT.
(C) 2004 UBS GLOBAL ASSET MANAGEMENT (US) INC. ALL RIGHTS RESERVED.
[UBS LOGO] Presorted
Standard
US Postage
PAID
Smithtown, NY
Permit 700
UBS GLOBAL ASSET MANAGEMENT (US) INC.
51 West 52nd Street
New York, NY 10019
ITEM 2. CODE OF ETHICS.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 6. SCHEDULE OF INVESTMENTS.
Included as part of the report to shareholders filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
There were no purchases made by or on behalf of the registrant or any
"affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Securities
Exchange Act of 1934, as amended, of shares of the registrant's equity
securities made in the period covered by this report.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The registrant's Board has established a Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee will consider
nominees recommended by shareholders
if a vacancy occurs among those board members who are not "interested persons"
as defined in Section 2(a)(19) of the Investment Company Act of 1940, as
amended. In order to recommend a nominee, a shareholder should send a letter to
the chairperson of the Nominating and Corporate Governance Committee, Mr. Meyer
Feldberg, care of the Secretary of the registrant at UBS Global Asset Management
(US) Inc., 51 West 52nd Street, New York, New York 10019-6114, and indicate on
the envelope "Nominating and Corporate Governance Committee." The shareholder's
letter should state the nominee's name and should include the nominee's resume
or curriculum vitae, and must be accompanied by a written consent of the
individual to stand for election if nominated for the Board and to serve if
elected by shareholders.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act
of 1940, as amended) are effective based on their evaluation of these
controls and procedures as of a date within 90 days of the filing date
of this document.
(b) The registrant's principal executive officer and principal financial
officer are aware of no changes in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal half-year that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
ITEM 12. EXHIBITS.
(a) (1) Code of Ethics - Form N-CSR disclosure requirement not applicable to
this filing of a semi-annual report.
(a) (2) Certifications of principal executive officer and principal
financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 is attached hereto as Exhibit EX-99.CERT.
(b) Certifications of principal executive officer and principal financial
officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is
attached hereto as Exhibit EX-99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Insured Municipal Income Fund Inc.
By: /s/ Joseph A. Varnas
--------------------
Joseph A. Varnas
President
Date: December 3, 2004
----------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Joseph A. Varnas
--------------------
Joseph A. Varnas
President
Date: December 3, 2004
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By: /s/ Thomas Disbrow
------------------
Thomas Disbrow
Treasurer
Date: December 3, 2004
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