UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-5729
Name of Fund: Apex Municipal Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Apex Municipal
Fund, Inc., 800 Scudders Mill Road, Plainsboro, NJ 08536. Mailing
address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 06/30/04
Date of reporting period: 07/01/03 - 12/31/03
Item 1 - Report to Shareholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Apex Municipal
Fund, Inc.
Semi-Annual Report
December 31, 2003
[LOGO] Merrill Lynch Investment Managers
Apex Municipal Fund, Inc.
Quality Profile
The quality ratings of securities in the Fund as of December 31, 2003 were as
follows:
--------------------------------------------------------------------------------
Percent of
Total
S&P Rating/Moody's Rating Investments
--------------------------------------------------------------------------------
A/A .................................................................. 2.5%
BBB/Baa .............................................................. 19.6
BB/Ba ................................................................ 16.1
B/B .................................................................. 13.2
CCC/Caa .............................................................. 2.9
NR (Not Rated) ....................................................... 45.5
Other+ ............................................................... 0.2
--------------------------------------------------------------------------------
+ Temporary investments in short-term variable rate municipal securities.
Officers and Directors
Terry K. Glenn, President and Director
James H. Bodurtha, Director
Joe Grills, Director
Herbert I. London, Director
Andre F. Perold, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Stephen B. Swensrud, Director
Kenneth A. Jacob, Senior Vice President
John M. Loffredo, Senior Vice President
Theodore R. Jaeckel Jr., Vice President
Donald C. Burke, Vice President and Treasurer
Brian D. Stewart, Secretary
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
The Bank of New York
101 Barclay Street
New York, NY 10286
NYSE Symbol
APX
2 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003
A Letter From the President
Dear Shareholder
In my 35 years in the asset management business, 2003 was among the more
memorable. The year, which opened with unrelenting economic uncertainty and a
dismal continuation of a three-year equity market slump, vigorously reversed
course in the months that followed. However, amid the good economic news, fixed
income investments, which had become the asset class of choice during the
preceding three-year equity market decline, faced new challenges.
Throughout 2003, the Federal Reserve Board remained focused on averting
deflation and ensuring a sustained economic recovery. This translated into an
uninterrupted easing monetary policy and the lowest interest rates in decades.
The Federal Funds rate, which opened the year at 1.25%, ended it at 1% -- the
lowest level since 1958.
Municipal bond yields rose and fell during the year in reaction to geopolitical
events, equity market performance, economic activity and employment figures. By
the end of December, long-term municipal revenue bond yields -- which move
opposite of price levels -- were slightly lower than they were one year earlier,
at 5.04% as measured by the Bond Buyer Revenue Bond Index. With many state
deficits at record levels, municipalities issued more than $380 billion in new
long-term tax-exempt bonds during 2003. The availability of bonds, together with
attractive yield ratios relative to U.S. Treasury issues, made municipal bonds a
popular fixed income investment alternative.
Throughout the year, our portfolio managers continued to work diligently to
deliver on our commitment to provide superior performance within reasonable
expectations for risk and return. This included striving to outperform our peers
and the market indexes. With that said, remember that the advice and guidance of
a skilled financial advisor often can mean the difference between successful and
unsuccessful investing. A financial professional can help you choose those
investments that will best serve you as you plan for your financial future.
In closing, I wish to share one final note regarding the look of our shareholder
communications. Our portfolio manager commentaries have been trimmed and
organized in such a way that you can get the information you need at a glance,
in plain language. Today's markets can be confusing. We want to help you put it
all in perspective. The report's new size also allows us certain mailing
efficiencies. Any cost savings in production or postage are passed on to the
Fund and, ultimately, to Fund shareholders.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the New Year and beyond.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
The Fund was effectively able to maintain a competitive dividend yield
during the period and provide an attractive total return exceeding that of its
Lipper category average.
Describe the market environment relative to municipal bonds during the period.
A stronger U.S. economy led to higher yields for both municipal securities and
long-term U.S. Treasury bonds during the past six months. Municipal bonds
generally outperformed their taxable counterparts during the period, and
continue to offer attractive investment potential for the months ahead.
During the third quarter of 2003, the economy grew 8.2%, the fastest quarterly
growth in nearly 20 years and well above the 1.4% rate registered in the first
quarter of 2003. The positive financial environment helped generate rising stock
prices, with the Standard & Poor's 500 Index appreciating 15.14% during the past
six months. The stock market's expansion put additional upward pressure on
long-term interest rates. Accordingly, yields on long-term U.S. Treasury issues
-- at 5.07% as of December 31, 2003 -- were approximately 50 basis points (.50%)
higher than they were six months earlier.
Like taxable bonds, tax-exempt bond yields generally rose over the six months as
well. Long-term revenue bond yields, as measured by the Bond Buyer Revenue Bond
Index, rose seven basis points during the past six months. Thirty-year bonds
with a credit rating of Aaa -- the highest rating possible -- saw a yield
increase of almost 20 basis points, according to Municipal Market Data. With
tax-exempt money market rates at or below 1%, and low nominal municipal bond
yields in general, many investors moved increasingly further out on the
municipal yield curve to generate the desired level of tax-exempt income. This
maturity extension helped support the strong demand for and performance of
tax-exempt products in recent months.
An improvement in supply/demand dynamics also contributed to the municipal bond
market's favorable performance and relative outperformance of the U.S. Treasury
market in the past six months. As the period progressed and bond yields rose,
the pace of new municipal bond issuance declined. For 2003 as a whole, for
example, municipal issuance was 6.8% greater than in 2002. However, during the
second half of 2003, municipal issuance was actually 5.5% below that of the same
six months in 2002. The declining trend was especially pronounced during the
final quarter of 2003, which saw $95 billion in new issuance, a 10% decrease
compared to the fourth quarter of 2002. This decline in supply has helped
strengthen the municipal market's positive technical position and enhanced
recent performance. New-issue supply is expected to remain manageable in early
2004 and should help support the tax-exempt market's current position as an
attractive fixed income investment alternative.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended December 31, 2003, Apex Municipal Fund, Inc. had
net annualized yields of 6.11% and 6.63%, based on a period-end per share net
asset value of $9.15 and a per share market price of $8.44, respectively, and
$.282 per share income dividends. Over the same period, the Fund's total
investment return was +5.32%, based on a change in per share net asset value
from $8.99 to $9.15, and assuming reinvestment of $.282 per share ordinary
income dividends and $.003 per share capital gains distributions.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund (as measured by the trading price of the
Fund's shares on the New York Stock Exchange), and assuming reinvestment of
dividends, please refer to the Financial Highlights section included in this
report. As a closed-end fund, the Fund's shares may trade in the secondary
market at a premium or discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the Fund can
vary significantly from total investment return based on changes in the Fund's
net asset value.
The Fund's performance, based on net asset value, significantly exceeded that of
its comparable Lipper category of High Yield Municipal Debt Funds, which had an
average return of +4.06% for the six-month period. (Funds in this Lipper
category invest at least 50% of their assets in lower-rated municipal debt
issues.) We attribute the outperformance to the Fund's competitive distribution
yield as well as an overweight position in airline bonds. Valuations in the
airline sector rebounded strongly from the distressed levels reached during the
industry-wide decline that followed the September 2001 terrorist attacks.
4 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003
What changes were made to the portfolio during the period?
Credit spreads contracted significantly in recent months, reflecting investors'
increased appetite for higher yields and willingness to assume the associated
risk. This spread contraction provided us with an opportunity to restructure
portions of the portfolio. Several of the Fund's holdings that were purchased at
a discount appreciated strongly during the period. Where appropriate, we sold
these holdings and reinvested the proceeds in higher-yielding securities in
sectors that we felt offered greater value.
For example, typical new investments have been in the tax-backed and long-term
care sectors. In both cases, we see the potential for credit-quality
improvement, which we believe could translate into relative price appreciation.
Through this type of thoughtful investment research, we are seeking to generate
excess return for our shareholders in the form of a competitive distribution
yield and the potential for modest growth of capital.
How would you characterize the portfolio's position at the close of the period?
Given our expectation for a continued contraction in credit spreads --
suggesting rising prices and falling yields for high yield bonds -- we ended the
period with an overweight bias toward speculative-grade and non-rated
securities. We also maintained a significant weighting in bonds backed by
revenues from airlines and other economically sensitive industrial companies.
This positioning reflects our confidence in the economic recovery.
Having said that, we recognize that the airline industry still faces significant
challenges and is subject to event risk -- that is, the possibility that an
unexpected event could suddenly derail the industry's recent progress. For that
reason, further gains in the sector would be viewed as an opportunity to reduce
the portfolio's exposure and reinvest the proceeds in areas we believe could
offer better value ahead.
Theodore R. Jaeckel Jr.
Vice President and Portfolio Manager
January 8, 2004
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003 5
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Schedule of Investments (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
===================================================================================================================================
Alabama--0.6% B NR* $ 1,000 Brewton, Alabama, IDB, PCR, Refunding (Container Corporation of
America--Jefferson Smurfit Corp. Project), 8% due 4/01/2009 $ 1,032
===================================================================================================================================
Alaska--1.1% NR* NR* 2,000 Alaska Industrial Development and Expert Authority Revenue Bonds
(Williams Lynxs Alaska Cargoport), AMT, 8% due 5/01/2023 2,070
===================================================================================================================================
Arizona--2.9% Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds (Sun
King Apartments Project):
NR* Ba1 510 Series A, 6.75% due 5/01/2031 410
NR* NR* 1,500 Sub-Series C, 9.50% due 11/01/2031 1,185
NR* Caa3 4,000 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds
(America West Airlines Inc. Project), AMT, 6.30% due 4/01/2023 3,100
NR* Baa2 500 Yavapai County, Arizona, IDA, Hospital Facility Revenue Bonds
(Yavapai Regional Medical Center), Series A, 6% due 8/01/2033 511
===================================================================================================================================
California--1.8% BBB Baa1 1,300 California State, Various Purpose, GO, 5.25% due 11/01/2025 1,312
BBB- Baa2 1,860 Golden State Tobacco Securitization Corporation of California,
Tobacco Settlement Revenue Bonds, Series B, 5.50% due 6/01/2043 1,828
===================================================================================================================================
Colorado--6.9% NR* Baa2 3,000 Denver, Colorado, Urban Renewal Authority, Tax Increment Revenue
Bonds (Pavilions), AMT, 7.75% due 9/01/2016 3,209
NR* NR* 2,800 Elk Valley, Colorado, Public Improvement Revenue Bonds (Public
Improvement Fee), Series A, 7.30% due 9/01/2022 2,894
NR* NR* 1,640 Lincoln Park, Colorado, Metropolitan District, GO, Refunding,
7.75% due 12/01/2026 1,701
A1 VMIG1+ 200 Moffat County, Colorado, PCR, Refunding (Pacificorp Projects),
VRDN, 1.22% due 5/01/2013 (a)(c) 200
NR* NR* 1,235 North Range, Colorado, Metropolitan District Number 1, GO,
7.25% due 12/15/2031 1,244
BB+ Ba1 1,145 Northwest Parkway, Colorado, Public Highway Authority Revenue
Bonds, First Tier, Sub-Series D, 7.125% due 6/15/2041 1,175
NR* NR* 2,000 Plaza Metropolitan District No. 1, Colorado, Tax Allocation
Revenue Bonds (Public Improvement Fees), 8% due 12/01/2025 2,016
===================================================================================================================================
Connecticut--0.7% NR* B1 1,255 New Haven, Connecticut, Facility Revenue Bonds (Hill Health
Corporation Project), 9.25% due 5/01/2017 1,265
===================================================================================================================================
Florida--7.6% NR* NR* 885 Arbor Greene Community Development District, Florida, Special
Assessment Revenue Bonds, 7.60% due 5/01/2018 923
NR* NR* 685 Bonnet Creek Resort, Florida, Community Development District,
Special Assessment Revenue Bonds, 7.50% due 5/01/2034 722
NR* NR* 800 Capital Projects Finance Authority, Florida, Continuing Care
Retirement Revenue Bonds (Glenridge on Palmer Ranch), Series A,
8% due 6/01/2032 819
NR* NR* 2,500 Hillsborough County, Florida, IDA, Exempt Facilities Revenue
Bonds (National Gypsum), AMT, Series A, 7.125% due 4/01/2030 2,679
NR* NR* 910 Lakewood Ranch, Florida, Community Development District
Number 5, Special Assessment Revenue Refunding Bonds, Series A,
6.70% due 5/01/2031 950
NR* NR* 1,650 Orlando, Florida, Urban Community Development District, Capital
Improvement Special Assessment Bonds, Series A, 6.95%
due 5/01/2033 1,733
NR* NR* 3,480 Parkway Center, Florida, Community Development District Special
Assessment Refunding Bonds, Series B, 8% due 5/01/2010 (b) 2,706
NR* NR* 2,880 Tampa Palms, Florida, Open Space and Transportation Community
Development District Revenue Bonds, Capital Improvement
(Richmond Place Project), 7.50% due 5/01/2018 3,036
===================================================================================================================================
Portfolio Abbreviations
To simplify the listings of Apex Municipal Fund, Inc.'s portfolio holdings in
the Schedule of Investments, we have abbreviated the names of many of the
securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
EDA Economic Development Authority
GO General Obligation Bonds
IDA Industrial Development Authority
IDB Industrial Development Board
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
VRDN Variable Rate Demand Notes
6 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
===================================================================================================================================
Georgia--1.6% NR* NR* $ 2,000 Atlanta, Georgia, Tax Allocation Revenue Bonds (Atlantic
Station Project), 7.90% due 12/01/2024 $ 2,068
NR* NR* 830 Savannah, Georgia, EDA, Revenue Bonds (Marshes of Skidaway),
First Mortgage, Series A, 7.40% due 1/01/2034 837
===================================================================================================================================
Idaho--0.8% NR* NR* 1,470 Idaho Health Facilities Authority Revenue Refunding Bonds
(Valley Vista Care Corporation), Series A, 7.75% due 11/15/2016 1,484
===================================================================================================================================
Illinois--3.3% CCC Caa2 3,000 Chicago, Illinois, O'Hare International Airport, Special
Facility Revenue Refunding Bonds (American Airlines Inc.
Project), 8.20% due 12/01/2024 2,090
NR* NR* 400 Chicago, Illinois, Special Assessment Bonds (Lake Shore East),
6.75% due 12/01/2032 401
NR* NR* 3,190 Illinois Development Finance Authority Revenue Bonds (Primary
Health Care Centers Facilities Acquisition Program), 7.75%
due 12/01/2016 3,407
===================================================================================================================================
Indiana--2.0% NR* NR* 2,600 Indiana State Educational Facilities Authority, Revenue
Refunding Bonds (Saint Joseph's College Project), 7%
due 10/01/2029 2,754
NR* NR* 1,820 Indianapolis, Indiana, M/F Revenue Bonds (Lake Nora Fox Club
Project), Series B, 7.50% due 10/01/2029 (b) 728
===================================================================================================================================
Iowa--2.6% NR* NR* 3,965 Iowa Finance Authority, Health Care Facilities Revenue
Refunding Bonds (Care Initiatives Project), 9.25% due 7/01/2025 4,600
===================================================================================================================================
Louisiana--3.6% B NR* 825 Hodge, Louisiana, Utility Revenue Refunding Bonds (Stone
Container Corporation), AMT, 7.45% due 3/01/2024 855
BB- NR* 5,500 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain
Company Project), 7.50% due 7/01/2013 5,606
===================================================================================================================================
Maine--0.5% BB+ Ba1 840 Maine Finance Authority, Solid Waste Recycling Facilities
Revenue Bonds (Great Northern Paper Project--Bowater), AMT,
7.75% due 10/01/2022 842
===================================================================================================================================
Maryland--2.0% NR* NR* 1,875 Anne Arundel County, Maryland, Special Obligation Revenue Bonds
(Arundel Mills Project), 7.10% due 7/01/2029 2,031
NR* NR* 1,500 Maryland State Energy Financing Administration, Limited
Obligation Revenue Bonds (Cogeneration--AES Warrior Run), AMT,
7.40% due 9/01/2019 1,526
===================================================================================================================================
Massachusetts--4.6% BBB NR* 825 Massachusetts State Development Finance Agency, Resource
Recovery Revenue Bonds (Ogden Haverhill Associates), AMT,
Series A, 6.70% due 12/01/2014 876
Massachusetts State Development Finance Agency, Revenue
Refunding Bonds (Eastern Nazarine College):
BB+ NR* 1,245 5.625% due 4/01/2019 1,012
BB+ NR* 1,220 5.625% due 4/01/2029 920
BBB- NR* 850 Massachusetts State Health and Educational Facilities Authority
Revenue Bonds (Jordan Hospital), Series E, 6.75% due 10/01/2033 837
NR* Ba2 3,000 Massachusetts State Health and Educational Facilities Authority,
Revenue Refunding Bonds (Bay Cove Human Services Issue),
Series A, 5.90% due 4/01/2028 2,574
NR* NR* 1,500 Massachusetts State Industrial Finance Agency Revenue Bonds,
Sewer Facility (Resource Control Composting), AMT, 9.25%
due 6/01/2010 1,512
BBB NR* 500 Massachusetts State Industrial Financial Agency, Resource
Recovery Revenue Refunding Bonds (Ogden Haverhill Project), AMT,
Series A, 5.60% due 12/01/2019 486
===================================================================================================================================
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003 7
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
===================================================================================================================================
Michigan--1.0% BBB- Baa3 $ 1,000 Flint, Michigan, Hospital Building Authority, Revenue Refunding
Bonds (Hurley Medical Center), 6% due 7/01/2020 $ 952
B Ba1 1,000 Michigan State Hospital Finance Authority, Revenue Refunding
Bonds (Detroit Medical Center Obligation Group), Series A, 6.50%
due 8/15/2018 740
===================================================================================================================================
Minnesota--0.7% NR* NR* 1,230 Saint Paul, Minnesota, Port Authority, Hotel Facility Revenue
Refunding Bonds (Radisson Kellogg Project), Series 2, 7.375%
due 8/01/2029 1,254
===================================================================================================================================
Missouri--0.7% NR* NR* 1,200 Fenton, Missouri, Tax Increment Revenue Refunding and
Improvement Bonds (Gravois Bluffs), 7% due 10/01/2021 1,299
===================================================================================================================================
Nevada--0.2% NR* NR* 430 Clark County, Nevada, Improvement District No. 142 Special
Assessment, 6.375% due 8/01/2023 435
===================================================================================================================================
New Jersey--12.5% Camden County, New Jersey, Improvement Authority, Lease Revenue
Bonds (Holt Hauling & Warehousing), AMT, Series A (b):
NR* NR* 2,000 9.625% due 1/01/2011 360
NR* NR* 4,500 9.875% due 1/01/2021 810
CCC B2 6,000 Camden County, New Jersey, Pollution Control Financing
Authority, Solid Waste Resource Recovery Revenue Refunding
Bonds, AMT, Series A, 7.50% due 12/01/2010 5,828
NR* Ba3 1,500 New Jersey EDA, IDR, Refunding (Newark Airport Marriott Hotel),
7% due 10/01/2014 1,503
New Jersey EDA, Retirement Community Revenue Bonds, Series A:
NR* NR* 1,000 (Cedar Crest Village Inc. Facility), 7.25% due 11/15/2031 1,018
NR* NR* 3,700 (Seabrook Village Inc.), 8.125% due 11/15/2023 3,852
New Jersey EDA, Special Facility Revenue Bonds (Continental
Airlines Inc. Project), AMT:
B Caa2 3,050 6.625% due 9/15/2012 2,838
B Caa2 2,035 6.25% due 9/15/2029 1,692
BB+ NR* 1,515 New Jersey Health Care Facilities Financing Authority Revenue
Bonds (Pascack Valley Hospital Association), 6.625% due 7/01/2036 1,521
BBB Baa2 3,025 Tobacco Settlement Financing Corporation of New Jersey Revenue
Bonds, 6.75% due 6/01/2039 2,976
===================================================================================================================================
New Mexico--3.0% B+ Ba3 5,000 Farmington, New Mexico, PCR, Refunding (Tucson Electric
Power Co.--San Juan Project), Series A, 6.95% due 10/01/2020 5,258
===================================================================================================================================
New York--3.0% NR* NR* 350 New York City, New York, City IDA, Civic Facility Revenue Bonds,
Series C, 6.80% due 6/01/2028 364
BB+ Ba2 1,730 New York City, New York, City IDA, Special Facility Revenue
Bonds (British Airways PLC Project), AMT, 7.625% due 12/01/2032 1,703
Utica, New York, GO, Public Improvement:
BBB Baa3 700 9.25% due 8/15/2004 727
BBB Baa3 700 9.25% due 8/15/2005 765
BBB Baa3 635 9.25% due 8/15/2006 722
NR* NR* 1,180 Westchester County, New York, IDA, Continuing Care Retirement,
Mortgage Revenue Bonds (Kendal on Hudson Project), Series A,
6.50% due 1/01/2034 1,173
===================================================================================================================================
North Carolina--0.6% NR* NR* 1,000 North Carolina Medical Care Commission, Retirement Facilities,
First Mortgage Revenue Bonds (Givens Estates Project), Series A,
6.50% due 7/01/2032 1,014
===================================================================================================================================
8 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
===================================================================================================================================
Ohio--1.5% B- Caa2 $ 3,135 Cleveland, Ohio, Airport Special Revenue Refunding Bonds
(Continental Airlines Inc. Project), AMT, 5.70% due 12/01/2019 $ 2,556
NR* VMIG-1+ 200 Montgomery County, Ohio, Revenue Refunding Bonds (Miami Valley
Hospital), VRDN, Series A, 1.22% due 11/15/2022 (a) 200
===================================================================================================================================
Oklahoma--0.2% B- Caa2 420 Tulsa, Oklahoma, Municipal Airport Trust Revenue Refunding Bonds
(AMR Corporation), AMT, Series A, 5.80% due 6/01/2035 406
===================================================================================================================================
Oregon--0.7% NR* NR* 1,310 Western Generation Agency, Oregon, Cogeneration Project Revenue
Bonds (Wauna Cogeneration Project), AMT, Series B, 7.40% due
1/01/2016 1,343
===================================================================================================================================
Pennsylvania--5.5% NR* NR* 1,750 Chester County, Pennsylvania, Health and Education Facilities
Authority, Senior Living Revenue Refunding Bonds (Jenners Pond
Inc. Project), 7.625% due 7/01/2034 1,737
Montgomery County, Pennsylvania, Higher Education and Health
Authority Revenue Bonds (Faulkeways at Gwynedd Project):
BBB NR* 900 6.75% due 11/15/2024 942
BBB NR* 925 6.75% due 11/15/2030 964
Philadelphia, Pennsylvania, Authority for IDR:
NR* Ba1 1,600 (Air Cargo), AMT, Series A, 7.50% due 1/01/2025 1,622
NR* NR* 4,460 Commercial Development, 7.75% due 12/01/2017 4,530
===================================================================================================================================
Tennessee--1.0% NR* NR* 1,800 Shelby County, Tennessee, Health, Educational & Housing
Facilities Board Revenue Bonds (Germantown Village), Series A,
7.25% due 12/01/2034 1,779
===================================================================================================================================
Texas--12.6% BBB- Baa3 1,000 Austin, Texas, Convention Center Revenue Bonds (Convention
Enterprises Inc.), First Tier, Series A, 6.70% due 1/01/2028 1,061
Brazos River Authority, Texas, PCR, Refunding, AMT:
BBB Baa2 2,530 (Texas Utility Company), Series A, 7.70% due 4/01/2033 2,852
BBB Baa2 2,870 (Utilities Electric Company), Series B, 5.05% due 6/01/2030 2,999
BBB- Ba1 1,220 Brazos River Authority, Texas, Revenue Refunding Bonds (Reliant
Energy Inc. Project), Series B, 7.75% due 12/01/2018 1,325
A- A3 2,500 Brazos River, Texas, Harbor Navigation District, Brazoria County
Environmental Revenue Refunding Bonds (Dow Chemical Company
Project), AMT, Series A-7, 6.625% due 5/15/2033 2,679
NR* NR* 1,660 Grand Prairie, Texas, Housing Finance Corporation Revenue Bonds,
(Independent Senior Living Center), 7.75% due 1/01/2034 1,613
BBB Baa2 1,750 Gulf Coast, Texas, Waste Disposal Authority Revenue Refunding
Bonds (International Paper Company), AMT, Series A, 6.10%
due 8/01/2024 1,817
A- A3 1,700 Lower Colorado River Authority, Texas, PCR (Samsung Austin
Semiconductor), AMT, 6.375% due 4/01/2027 1,792
BBB- NR* 945 Lufkin, Texas, Health Facilities Development Corporation, Health
System Revenue Bonds (Memorial Health System of East Texas),
5.70% due 2/15/2028 846
BBB- Ba1 2,310 Matagorda County, Texas, Navigation District Number 1 Revenue
Refunding Bonds (Reliant Energy Inc.), Series C, 8% due 5/01/2029 2,519
BB Ba3 1,330 Port Corpus Christi, Texas, Individual Development Corporation,
Environmental Facilities Revenue Bonds (Citgo Petroleum
Corporation Project), AMT, 8.25% due 11/01/2031 1,391
NR* Baa3 1,740 Texas State Student Housing Corporation, Student Housing Revenue
Bonds (MidWestern State University Project), 6.50% due 9/01/2022 1,750
===================================================================================================================================
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (concluded) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
===================================================================================================================================
Utah--1.3% NR* NR* $ 2,240 Carbon County, Utah, Solid Waste Disposal Revenue Refunding
Bonds (Laidlaw Environmental), AMT, Series A, 7.45% due 7/01/2017 $ 2,346
===================================================================================================================================
Virgin Islands--1.2% BBB- Baa3 2,100 Virgin Islands Government Refinery Facilities Revenue Refunding
Bonds (Hovensa Coker Project), AMT, 6.50% due 7/01/2021 2,193
===================================================================================================================================
Virginia--6.5% NR* NR* 2,495 Dulles Town Center, Virginia, Community Development Authority,
Special Assessment Tax (Dulles Town Center Project), 6.25%
due 3/01/2026 2,500
NR* NR* 3,000 Pittsylvania County, Virginia, IDA Revenue Refunding Bonds,
Exempt Facility, AMT, Series A, 7.50% due 1/01/2014 2,961
Pocahontas Parkway Association, Virginia, Toll Road Revenue
Bonds:
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2033 183
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2034 162
BB NR* 32,600 Senior Series B, 5.875%** due 8/15/2025 5,911
===================================================================================================================================
Washington--1.4% NR* NR* 2,600 Port Seattle, Washington, Special Facilities Revenue Bonds
(Northwest Airlines Project), AMT, 7.25% due 4/01/2030 2,487
===================================================================================================================================
West Virginia--0.4% B- B2 875 Princeton, West Virginia, Hospital Revenue Refunding Bonds
(Community Hospital Association Inc. Project), 6.20%
due 5/01/2013 738
===================================================================================================================================
Wisconsin--0.7% NR* NR* 1,320 Wisconsin State Health and Educational Facilities Authority
Revenue Bonds (New Castle Place Project), Series A, 7%
due 12/01/2031 1,319
===================================================================================================================================
Wyoming--1.0% BB+ Ba3 1,800 Sweetwater County, Wyoming, Solid Waste Disposal Revenue Bonds
(FMC Corporation Project), AMT, Series A, 7% due 6/01/2024 1,817
===================================================================================================================================
Total Municipal Bonds (Cost--$184,640)--98.3% 176,310
===================================================================================================================================
Total Investments (Cost--$184,640)--98.3% 176,310
Other Assets Less Liabilities--1.7% 2,976
--------
Net Assets--100.0% $179,286
========
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
+ Highest short-term rating by Moody's Investors Service, Inc.
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at December
31, 2003.
(b) Non-income producing security.
(c) AMBAC Insured.
See Notes to Financial Statements.
10 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003
Statement of Assets, Liabilities and Capital
As of December 31, 2003
===================================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Investments, at value (identified cost--$184,640,212) ................. $ 176,309,744
Cash .................................................................. 71,061
Receivables:
Interest ........................................................... $ 2,963,802
Securities sold .................................................... 100,000 3,063,802
-------------
Prepaid expenses ...................................................... 1,203
-------------
Total assets .......................................................... 179,445,810
-------------
===================================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Payables:
Dividends and Distributions to shareholders ........................ 87,724
Investment adviser ................................................. 12,715
Other affiliates ................................................... 1,915 102,354
-------------
Accrued expenses ...................................................... 57,265
-------------
Total liabilities ..................................................... 159,619
-------------
===================================================================================================================================
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets ............................................................ $ 179,286,191
=============
===================================================================================================================================
Capital
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value, 150,000,000 shares authorized;
19,596,732 shares issued and outstanding ............................ $ 1,959,673
Paid-in capital in excess of par ...................................... 207,015,404
Undistributed investment income--net .................................. $ 1,853,598
Accumulated realized capital losses on investments--net ............... (23,212,016)
Unrealized depreciation on investments--net ........................... (8,330,468)
-------------
Total accumulated losses--net ......................................... (29,688,886)
-------------
Total capital--Equivalent to $9.15 net asset value per share of
Common Stock (market price--$8.44) .................................. $ 179,286,191
=============
See Notes to Financial Statements.
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003 11
[LOGO] Merrill Lynch Investment Managers
Statement of Operations
For the Six Months Ended December 31, 2003
===================================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------------------
Interest .............................................................. $ 6,605,677
===================================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees .............................................. $ 579,504
Accounting services ................................................... 38,798
Transfer agent fees ................................................... 24,761
Printing and shareholder reports ...................................... 22,282
Listing fees .......................................................... 16,463
Professional fees ..................................................... 14,635
Pricing fees .......................................................... 7,563
Directors' fees and expenses .......................................... 7,128
Custodian fees ........................................................ 6,096
Other ................................................................. 8,677
-------------
Total expenses ........................................................ 725,907
-------------
Investment income--net ................................................ 5,879,770
-------------
===================================================================================================================================
Realized & Unrealized Gain on Investments--Net
-----------------------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ..................................... 773,061
Change in unrealized depreciation on investments--net ................. 2,105,768
-------------
Total realized and unrealized gain on investments--net ................ 2,878,829
-------------
Net Increase in Net Assets Resulting from Operations .................. $ 8,758,599
=============
See Notes to Financial Statements.
12 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 2003 2003
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ................................................ $ 5,879,770 $ 11,396,416
Realized gain (loss) on investments--net .............................. 773,061 (1,270,071)
Change in unrealized depreciation on investments--net ................. 2,105,768 (4,173,234)
--------------------------------
Net increase in net assets resulting from operations .................. 8,758,599 5,953,111
--------------------------------
===================================================================================================================================
Dividends to Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ................................................ (5,588,166) (10,930,489)
--------------------------------
Net decrease in net assets resulting from dividends to shareholders ... (5,588,166) (10,930,489)
--------------------------------
===================================================================================================================================
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ............................... 3,170,433 (4,977,378)
Beginning of period ................................................... 176,115,758 181,093,136
--------------------------------
End of period* ........................................................ $ 179,286,191 $ 176,115,758
================================
* Undistributed investment income--net ............................. $ 1,853,598 $ 1,561,994
================================
See Notes to Financial Statements.
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003 13
[LOGO] Merrill Lynch Investment Managers
Financial Highlights
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended For the Year Ended June 30,
December 31, ---------------------------------------------
Increase (Decrease) in Net Asset Value: 2003 2003 2002 2001 2000
=================================================================================================================================
Per Share Operating Performance
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .................. $ 8.99 $ 9.24 $ 9.45 $ 9.33 $ 10.37
-----------------------------------------------------------
Investment income--net ................................ .30++ .58++ .58 .59 .66
Realized and unrealized gain (loss) on investments--net .14 (.27) (.22) .13 (1.03)
-----------------------------------------------------------
Total from investment operations ...................... .44 .31 .36 .72 (.37)
-----------------------------------------------------------
Less dividends from investment income--net ............ (.28) (.56) (.57) (.60) (.67)
-----------------------------------------------------------
Net asset value, end of period ........................ $ 9.15 $ 8.99 $ 9.24 $ 9.45 $ 9.33
===========================================================
Market price per share, end of period ................. $ 8.44 $ 8.48 $ 8.39 $ 9.10 $ 8.9375
===========================================================
=================================================================================================================================
Total Investment Return*
---------------------------------------------------------------------------------------------------------------------------------
Based on market price per share ....................... 2.99%+ 8.18% (1.64%) 9.05% (6.22%)
===========================================================
Based on net asset value per share .................... 5.32%+ 4.13% 4.31% 8.48% (3.23%)
===========================================================
=================================================================================================================================
Ratios to Average Net Assets
---------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement ........................ .81%** .90% .87% .82% .81%
===========================================================
Expenses .............................................. .81%** .90% .87% .82% .81%
===========================================================
Investment income--net ................................ 6.58%** 6.56% 6.19% 6.35% 6.71%
===========================================================
=================================================================================================================================
Supplemental Data
---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) .............. $179,286 $176,116 $181,093 $185,246 $182,879
===========================================================
Portfolio turnover .................................... 10% 24% 25% 17% 20%
===========================================================
* Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
** Annualized.
+ Aggregate total investment return.
++ Based on average shares outstanding.
See Notes to Financial Statements.
14 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003
Notes to Financial Statements
1. Significant Accounting Policies:
Apex Municipal Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the result for the interim period
presented. All such adjustments are of a normal, recurring nature. The Fund
determines and makes available for publication the net asset value of its Common
Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock
Exchange under the symbol APX. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained by the
Fund's pricing service from one or more dealers that make markets in the
securities. Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of such exchanges.
Options written or purchased are valued at the last sale price in the case of
exchange-traded options. In the case of options traded in the over-the-counter
market, valuation is the last asked price (options written) or the last bid
price (options purchased). Swap agreements are valued by quoted fair values
received daily by the Fund from the counterparty. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Options -- The Fund may write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked to market to reflect
the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent
of the premiums received or paid (or gain or loss to the extent the cost
of the closing transaction exceeds the premium paid or received).
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003 15
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
Written and purchased options are non-income producing investments.
o Forward interest rate swaps -- The Fund may enter into forward interest
rate swaps. In a forward interest rate swap, the Fund and the counterparty
agree to make periodic payments on a specified notional contract amount,
commencing on a specified future effective date, unless terminated
earlier. When the agreement is closed, the Fund records a realized gain or
loss in an amount equal to the value of the agreement.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund amortizes all premiums and discounts on debt securities.
(e) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .65% of the Fund's average weekly net assets.
For the six months ended December 31, 2003, the Fund reimbursed FAM $2,180 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended December 31, 2003 were $19,051,230 and $18,080,265, respectively.
Net realized gains for the six months ended December 31, 2003 and net unrealized
losses as of December 31, 2003 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains Losses
--------------------------------------------------------------------------------
Long-term investments ............... $ 773,061 $(8,330,468)
--------------------------------
Total ............................... $ 773,061 $(8,330,468)
================================
For the six months ended December 31, 2003, net unrealized depreciation for
Federal income tax purposes aggregated $8,125,272, of which $7,164,382 related
to appreciated securities and $15,289,654 related to depreciated securities. The
aggregate cost of investments at December 31, 2003 for Federal income tax
purposes was $184,435,016.
16 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003
Notes to Financial Statements (concluded)
4. Common Stock Transactions:
At December 31, 2003, the Fund had one class of shares of Common Stock, par
value $.10 per share, of which 150,000,000 shares were authorized. Shares issued
and outstanding during the six months ended December 31, 2003 and the year ended
June 30, 2003 remained constant.
5. Subsequent Event:
On January 6, 2004, the Fund's Board of Directors declared a tax-exempt income
dividend to Common Stock shareholders in the amount of $.048000 per share,
payable on January 29, 2004 to shareholders of record as of January 16, 2004.
6. Capital Loss Carryforward:
On June 30, 2003 the Fund had a net capital loss carryforward of approximately
$21,862,751, of which $7,056,648 expires in 2004, $1,311,769 expires in 2005,
$938,156 expires in 2006, $2,975,000 expires in 2008, $5,341,699 expires in
2009, $2,075,987 expires in 2010 and $2,163,492 expires in 2011. This amount
will be available to offset like amounts of any future taxable gains.
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003 17
[LOGO] Merrill Lynch Investment Managers
About Inverse Floaters
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of reduced or
eliminated interest payments and losses of invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed rate, tax-exempt securities. To the extent the Fund invests in
inverse securities, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities.
Dividend Policy
The Fund's dividend policy is to distribute all or a portion of its net
investment income to its shareholders on a monthly basis. In order to provide
shareholders with a more stable level of dividend distributions, the Fund may at
times pay out less than the entire amount of net investment income earned in any
particular month and may at times in any particular month pay out such
accumulated but undistributed income in addition to net investment income earned
in that month. As a result, the dividends paid by the Fund for any particular
month may be more or less than the amount of net investment income earned by the
Fund during such month. The Fund's current accumulated but undistributed net
investment income, if any, is disclosed in the Statement of Assets, Liabilities
and Capital, which comprises part of the financial information included in this
report.
18 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this website
http://www.icsdelivery.com/live and follow the instructions. When you visit this
site, you will obtain a personal identification number (PIN). You will need this
PIN should you wish to update your e-mail address, choose to discontinue this
service and/or make any other changes to the service. This service is not
available for certain retirement accounts at this time.
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2003 19
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Apex Municipal Fund, Inc. seeks to provide shareholders with high current income
exempt from Federal income taxes by investing primarily in a portfolio of
medium-to-lower grade or unrated municipal obligations, the interest on which is
exempt from Federal income taxes in the opinion of bond counsel to the issuer.
This report, including the financial information herein, is transmitted to
shareholders of Apex Municipal Fund, Inc. for their information. It is not a
prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
Apex Municipal Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
#10955 -- 12/03
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this
semi-annual report
Item 6 - Reserved
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill Lynch
Investment Managers, L.P. and/or Fund Asset Management, L.P. (the
"Investment Adviser") authority to vote all proxies relating to the
Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to the
voting of proxies related to the portfolio securities held in the
account of one or more of its clients, including a Fund. Pursuant to
these Proxy Voting Procedures, the Investment Adviser's primary
objective when voting proxies is to make proxy voting decisions solely
in the best interests of each Fund and its shareholders, and to act in
a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser considers
the interests of its clients, including the Funds, and not the
interests of the Investment Adviser, when voting proxies and that real
(or perceived) material conflicts that may arise between the Investment
Adviser's interest and those of the Investment Adviser's clients are
properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment professionals
appointed by the CIO, portfolio managers and investment analysts
appointed by the CIO and any other personnel the CIO deems appropriate.
The Committee will also include two non-voting representatives from the
Investment Adviser's Legal department appointed by the Investment
Adviser's General Counsel. The Committee's membership shall be limited
to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser's affiliates may serve as a
member of the Committee or participate in its decision making (except
to the extent such person is asked by the Committee to present
information to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser might
be asked to do so). The Committee determines how to vote the proxies of
all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes
are consistent with the best interests of those clients and are free
from unwarranted and inappropriate influences. The Committee
establishes general proxy voting policies for the Investment Adviser
and is responsible for determining how those policies are applied to
specific proxy votes, in light of each issuer's unique structure,
management, strategic options and, in certain circumstances, probable
economic and other anticipated consequences of alternate actions. In so
doing, the Committee may determine to vote a particular proxy in a
manner contrary to its generally stated policies. In addition, the
Committee will be responsible for ensuring that all reporting and
recordkeeping requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not
to adopt a specific voting policy applicable to that issue. The
Investment Adviser believes that certain proxy voting issues require
investment analysis - such as approval of mergers and other significant
corporate transactions - akin to investment decisions, and are,
therefore, not suitable for general guidelines. The Committee may elect
to adopt a common position for the Investment Adviser on certain proxy
votes that are akin to investment decisions, or determine to permit the
portfolio manager to make individual decisions on how best to maximize
economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that
the Investment Adviser will generally seek to vote proxies over which
the Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in conjunction
with a Fund's portfolio manager, may determine that the Fund's specific
circumstances require that its proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Investment Adviser
generally will not seek to vote proxies related to portfolio securities
that are on loan, although it may do so under certain circumstances. In
addition, the Investment Adviser will vote proxies related to
securities of foreign issuers only on a best efforts basis and may
elect not to vote at all in certain countries where the Committee
determines that the costs associated with voting generally outweigh the
benefits. The Committee may at any time override these general policies
if it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent
fiduciary, the powers of the Committee shall pass to a subcommittee,
appointed by the CIO (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by the CIO. The CIO
shall appoint to the subcommittee, where appropriate, only persons
whose job responsibilities do not include contact with the Client and
whose job evaluations would not be affected by the Investment Adviser's
relationship with the Client (or failure to retain such relationship).
The subcommittee shall determine whether and how to vote all proxies on
behalf of the Investment Adviser's clients or, if the proxy matter is,
in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting guidelines
or, on matters where the Investment Adviser's policy is case-by-case,
does not follow the voting recommendation of any proxy voting service
or other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies relating
to the Client may be voted unless the Secretary, or in the Secretary's
absence, the Assistant Secretary of the Committee concurs that the
subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring
proxy issues that are not expected to involve unusual circumstances.
These policies are guidelines only, and the Investment Adviser may
elect to vote differently from the recommendation set forth in a voting
guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at any
time upon the request of a Committee member and may be amended or
deleted upon the vote of a majority of Committee members present at a
Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors of issuers
other than investment companies. As a general matter, the Committee
believes that a company's Board of Directors (rather than shareholders) is
most likely to have access to important, nonpublic information regarding a
company's business and prospects, and is therefore best-positioned to set
corporate policy and oversee management. The Committee, therefore,
believes that the foundation of good corporate governance is the election
of qualified, independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of the
corporation in a manner that will seek to maximize shareholder value over
time. In individual cases, the Committee may look at a nominee's history
of representing shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent auditors. As
a general matter, the Committee believes that corporate auditors have a
responsibility to represent the interests of shareholders and provide an
independent view on the propriety of financial reporting decisions of
corporate management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the Committee may
look at an auditors' history of representing shareholder interests as
auditor of other companies, to the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits. As a
general matter, the Committee favors disclosure of an issuer's
compensation and benefit policies and opposes excessive compensation, but
believes that compensation matters are normally best determined by an
issuer's board of directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set arbitrary
restrictions on compensation or benefits will, therefore, generally not be
supported.
o Proposals related to requests, principally from management, for approval
of amendments that would alter an issuer's capital structure. As a general
matter, the Committee will support requests that enhance the rights of
common shareholders and oppose requests that appear to be unreasonably
dilutive.
o Proposals related to requests for approval of amendments to an issuer's
charter or by-laws. As a general matter, the Committee opposes poison pill
provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the Committee
believes that a fund's Board of Directors (rather than its shareholders)
is best-positioned to set fund policy and oversee management. However, the
Committee opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective, that the
Investment Company Act envisions will be approved directly by
shareholders.
o Proposals related to limiting corporate conduct in some manner that
relates to the shareholder's environmental or social concerns. The
Committee generally believes that annual shareholder meetings are
inappropriate forums for discussion of larger social issues, and opposes
shareholder resolutions "micromanaging" corporate conduct or requesting
release of information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the Committee
is generally supportive of proposals to require corporate disclosure of
matters that seem relevant and material to the economic interests of
shareholders, the Committee is generally not supportive of proposals to
require disclosure of corporate matters for other purposes.
Item 8 - Reserved
Item 9 - Controls and Procedures
9(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to the
filing date of this report.
9(b) - There were no significant changes in the registrant's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Item 10 - Exhibits attached hereto
10(a) - Not Applicable
10(b) - Attached hereto
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.
Apex Municipal Fund, Inc.
By: /s/ Terry K. Glenn
------------------------------
Terry K. Glenn,
President of
Apex Municipal Fund, Inc.
Date: February 23, 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/ Terry K. Glenn
------------------------------
Terry K. Glenn,
President of
Apex Municipal Fund, Inc.
Date: February 23, 2004
By: /s/ Donald C. Burke
------------------------------
Donald C. Burke,
Chief Financial Officer of
Apex Municipal Fund, Inc.
Date: February 23, 2004