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 811-05227
Name of Fund: Apex Municipal Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, 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: 06/30/05
Date of reporting period: 07/01/04 - 06/30/05
Item 1 - Report to Stockholders
Apex Municipal
Fund, Inc.
Annual Report
June 30, 2005
Apex Municipal Fund, Inc.
Portfolio Information as of June 30, 2005
Percent of
Total
Quality Ratings by S&P/Moody's Investments
--------------------------------------------------------------------------------
A/A ..................................................... 2.8%
BBB/Baa ................................................. 17.1
BB/Ba ................................................... 18.4
B/B ..................................................... 11.2
CCC/Caa ................................................. 3.0
NR (Not Rated) .......................................... 45.6
Other* .................................................. 1.9
--------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments.
Availability of Quarterly Schedule of Investments
The Fund files 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 Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
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 Web
site at 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.
2 APEX MUNICIPAL FUND, INC. JUNE 30, 2005
A Letter From the President
Dear Shareholder
The financial markets continued to face a number of crosscurrents over the past
several months. On June 30, 2005, the Federal Reserve Board (the Fed) increased
the federal funds rate for the ninth consecutive time since June 2004, bringing
the target short-term interest rate to 3.25%. During the same week, first
quarter 2005 U.S. gross domestic product growth was revised upward to 3.8% --
behind the 4.4% annualized growth rate recorded for all of 2004 but ahead of
many economists' expectations. Signs of a slowing economy, coupled with easing
inflationary fears, have prompted some observers to believe that the Fed may
soon end its monetary tightening campaign.
After ending 2004 in a strong rally, U.S. equity markets have struggled to
record meaningful gains in 2005. Continued high oil prices and Fed interest rate
hikes have exerted downward pressure on stocks. Offsetting this somewhat have
been surprisingly strong corporate earnings and lower long-term bond yields.
Outside U.S. borders, results have been mixed. Several European markets have
been performing well despite ongoing economic problems. In Asia, many markets
have benefited from higher economic growth rates and relatively attractive
valuations, although Japanese stocks have struggled as a result of slowing
exports and high oil prices.
In the bond markets, the yield curve flattening "conundrum" continued. As
short-term yields increased in concert with Fed interest rate hikes, yields on
longer-term bonds declined (as their prices, which move opposite yields,
increased). Over the past year, the two-year Treasury yield rose 96 basis points
(.96%) while the 10-year Treasury yield declined 68 basis points. At period-end,
the spread between the two-year and 10-year Treasury yields was just 28 basis
points.
Amid these conditions, the major market benchmarks posted six-month and 12-month
returns as follows:
Total Returns as of June 30, 2005 6-month 12-month
=======================================================================================
U.S. equities (Standard & Poor's 500 Index) -0.81% + 6.32%
---------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) -1.25% + 9.45%
---------------------------------------------------------------------------------------
International equities (MSCI Europe Australasia Far East Index) -1.17% +13.65%
---------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) +2.51% + 6.80%
---------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +2.89% + 8.24%
---------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) +0.77% +10.10%
---------------------------------------------------------------------------------------
Entering the second half of 2005, we expect more of the same type of "muddle
through" environment that has befallen financial markets in the first half of
the year. Nevertheless, opportunities do exist and we encourage you to work with
your financial advisor to diversify your portfolio among a variety of asset
types. This can help to diffuse risk while also tapping into the potential
benefits of a broader range of investment alternatives. We thank you for
trusting Merrill Lynch Investment Managers with your investment assets, and we
look forward to serving you in the months and years ahead.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Director
APEX MUNICIPAL FUND, INC. JUNE 30, 2005 3
A Discussion With Your Fund's Portfolio Manager
The Fund's total return exceeded the Lipper High Yield Municipal Debt
Funds category average for the fiscal year, reflecting both favorable sector
allocations and positive security selection.
Describe the recent market environment relative to municipal bonds.
Over the past year, long-term bond yields declined as their prices, which move
in the opposite direction, increased. In the meantime, the Federal Reserve Board
(the Fed) raised short-term interest rates at each of its meetings during the
past year, lifting the federal funds target from 1% in June 2004 to 3.25% by
period-end. As longer-term bond yields declined and short-term yields moved
upward in unison with the Fed interest rate hikes, the yield curve flattened
considerably. Over the 12 months ended June 30, 2005, 30-year U.S. Treasury bond
yields declined 113 basis points (1.13%) to 4.16% and yields on the 10-year
Treasury note fell 68 basis points to 3.94%.
In the tax-exempt market, yields on 30-year revenue bonds, as measured by the
Bond Buyer Revenue Bond Index, fell 57 basis points to 4.77%. According to
Municipal Market Data, yields on AAA-rated issues maturing in 30 years declined
76 basis points to 4.26%, while AAA-rated bonds maturing in 10 years saw their
yields decline 50 basis points to 3.45%.
The declining tax-exempt bond yields have prompted municipalities to both issue
new debt and refund outstanding, higher-couponed issues. Over the past year,
more than $377 billion in new long-term tax-exempt bonds was issued, a slight
increase versus last year's total of $372 billion. In recent months, the pace of
new bond issuance has strengthened. During the first six months of 2005, more
than $206 billion in new municipal bonds was underwritten, an increase of 8.6%
compared to the same six months in 2004. The new issuance was boosted by a
greater than 55% increase in refunding issues, which have been heavily weighted
in the 10-year - 20-year maturity range to lower the overall interest cost of
the refunding issue. This concentration has placed pressure on intermediate
tax-exempt bond yields while supporting longer-term bond prices.
Investor demand for municipal product generally has remained positive. According
to statistics from the Investment Company Institute, through May 31, 2005,
year-to-date net new cash flows into long-term municipal bond funds have
exceeded $1.35 billion. This represents a significant improvement from the $7.86
billion net outflow seen during the same period in 2004. Recent June weekly
figures from AMG Data Service have also shown continued positive flows.
Throughout much of the past six months, high yield tax-exempt bond funds have
been the principal target for these new cash inflows. During June, these
lower-rated/ non-rated bond funds received an average of $150 million per week.
The need to invest these cash flows has led to very strong demand for
lower-rated issues and a consequent narrowing of credit spreads. Additionally,
thus far in 2005, the percentage of new issues bearing an insurer's guarantee
has risen to nearly 60%, up from 53.6% during the same period a year ago. The
increasing percentage of insured issuance has further reduced the availability
of lower-rated municipal securities, lending more support to higher prices for
these issues.
Looking forward, the tax-exempt market's technical position remains generally
favorable. Municipal bond issues have underperformed in recent months as U.S.
Treasury bonds have enjoyed increased demand from foreign governments which are
unable to benefit from the tax advantage inherent in tax-exempt products.
However, this underperformance has resulted in attractive tax-exempt bond yield
ratios, which should continue to attract both traditional and nontraditional
investors to the marketplace, especially should new municipal bond issuance
remain modest.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended June 30, 2005, the Common Stock of Apex Municipal
Fund, Inc. had net annualized yields of 5.87% and 6.08%, based on a year-end per
share net asset value of $9.82 and a per share market price of $9.48,
respectively, and $.576 per share income dividends. Over the same period, the
total investment return on the Fund's Common Stock was +14.67%, based on a
change in per share net asset value from $9.13 to $9.82, and assuming
reinvestment of all distributions.
The Fund's total return for the year, based on net asset value, outpaced the
+14.24% average return of the Lipper High Yield Municipal Debt Funds category.
(Funds in this Lipper category invest at least 50% of their assets in
lower-rated municipal debt issues.) The positive performance is attributed to
the sector allocations that we implemented some time ago and have kept largely
intact. Specifically, the Fund's overweight exposure to corporate-related
tax-exempt debt in the transportation and health care sectors, as well as
tax-backed
4 APEX MUNICIPAL FUND, INC. JUNE 30, 2005
and assessment-related residential and commercial real estate projects,
contributed to the strong relative performance. These sectors benefited from the
ongoing contraction of credit spreads, a trend that was particularly
advantageous in the airline and tobacco sectors, two of the market's top
performers. The narrowing of spreads has been supported by a generally improving
economy, a moderate pace of inflation and the Fed's measured approach to
interest rate increases, which generally served to sustain investors' appetite
for risk.
In terms of specific securities, we saw strong performance from capital
appreciation bonds (or zero coupon bonds) representing toll road financing for
the Pocahontas Parkway in Virginia. In conjunction with the toll road's opening
in 2002 and the subsequent increase in traffic, spreads on these bonds narrowed
significantly, making it a meaningful contributor to Fund performance.
For the six-month period ended June 30, 2005, the total investment return on the
Fund's Common Stock was +6.33%, based on a change in per share net asset value
from $9.53 to $9.82, and assuming reinvestment of all distributions.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (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 of
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's
Common Stock can vary significantly from total investment returns based on
changes in the Fund's net asset value.
What changes were made to the portfolio during the year?
We continued to trim our exposure to corporate-related sectors through tactical
sales as the market provided opportunities. Because the corporate sector tends
to be the most volatile in the municipal market, our goal was to realize profits
while also preparing the Fund for an eventual turn in the credit cycle (that is,
widening credit spreads). Offsetting these sales, we increased the Fund's
position in the tax-backed sector, specifically commercial and residential real
estate, as well as long-term care, a subsector of health care. Long-term care
focuses on the construction of retirement facilities that provide a range of
continuing-care options, including independent living arrangements, assisted
living and skilled nursing facilities.
Reflecting our move out of corporates and into the other two sectors, many of
the holdings sold have been in the B, BB and BBB rating categories. In turn,
those bonds we purchased have tended to be non-rated. While ostensibly this may
appear to indicate a reduction in the portfolio's average credit quality, we
actually view many of the non-rated issues we have added as more solid credits
than some of the corporate bonds we have sold. They tend to exhibit lower
volatility and, in some cases, higher degrees of liquidity. As mentioned in
previous reports to shareholders, another reason for effecting this trade is our
desire to achieve more market-neutral weightings in each of these categories. We
have been overweight in the B-BBB range for some time, and underweight in
non-rated issues. By reallocating assets to lower-rated issues, we have
effectively been able to boost portfolio income and increase the Fund's dividend
reserves.
Finally, we maintained our exposure to debt issued by the State of California,
which has continued to benefit Fund performance as spreads tightened. We believe
additional upside could exist in the California market, especially if the state
pursues refinancing opportunities in the current low interest rate environment.
How would you characterize the Fund's position at the close of the period?
We continue to focus on capturing relative value within the high yield municipal
arena as a means of enhancing Fund returns over time. At period-end, the Fund
remained overweight in the B-BBB range, although less so than at the beginning
of the period. We expect to continue our strategy of trimming our exposure in
this area. We have made strides in terms of diversifying the portfolio over the
past year, and look forward to reporting on our progress in the next report to
shareholders.
Theodore R. Jaeckel Jr., CFA
Vice President and Portfolio Manager
July 7, 2005
APEX MUNICIPAL FUND, INC. JUNE 30, 2005 5
Schedule of Investments (in Thousands)
Face
State Amount Municipal Bonds Value
====================================================================================================================================
Alabama--0.5% $ 1,000 Brewton, Alabama, IDB, PCR, Refunding (Container Corporation of America--Jefferson
Smurfit Corp. Project), 8% due 4/01/2009 $ 1,024
====================================================================================================================================
Alaska--1.1% 2,000 Alaska Industrial Development and Expert Authority Revenue Bonds (Williams Lynxs Alaska
Cargoport), AMT, 8% due 5/01/2023 2,091
====================================================================================================================================
Arizona--4.0% 1,000 Maricopa County, Arizona, IDA, Education Revenue Bonds (Arizona Charter Schools
Project 1), Series A, 6.625% due 7/01/2020 994
Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds (Sun King Apartments Project):
80 Series A, 5.875% due 11/01/2008 77
20 Series A, 6% due 11/01/2010 19
970 Series A, 6.75% due 5/01/2031 828
1,500 Sub-Series C, 9.50% due 11/01/2031 1,250
4,000 Phoenix, Arizona, IDA, Airport Facility, Revenue Refunding Bonds (America West Airlines
Inc. Project), AMT, 6.30% due 4/01/2023 2,962
1,000 Pima County, Arizona, IDA, Education Revenue Bonds (Arizona Charter Schools Project),
Series E, 7.25% due 7/01/2031 1,075
500 Yavapai County, Arizona, IDA, Hospital Facility Revenue Bonds (Yavapai Regional Medical
Center), Series A, 6% due 8/01/2033 543
====================================================================================================================================
California--3.3% 1,800 California State, GO, 5% due 2/01/2033 1,894
1,300 California State, Various Purpose, GO, 5.25% due 11/01/2025 1,420
1,000 Fontana, California, Special Tax, Refunding (Community Facilities District Number 22--
Sierra), 6% due 9/01/2034 1,033
1,860 Golden State Tobacco Securitization Corporation of California, Tobacco Settlement
Revenue Bonds, Series B, 5.50% due 6/01/2043 2,045
====================================================================================================================================
Colorado--5.5% 2,920 Denver, Colorado, Urban Renewal Authority, Tax Increment Revenue Bonds (Pavilions),
AMT, 7.75% due 9/01/2016 3,080
2,800 Elk Valley, Colorado, Public Improvement Revenue Bonds (Public Improvement Fee),
Series A, 7.30% due 9/01/2022 3,024
1,235 North Range, Colorado, Metropolitan District Number 1, GO, 7.25% due 12/15/2031 1,253
2,000 Plaza Metropolitan District Number 1, Colorado, Tax Allocation Revenue Bonds (Public
Improvement Fees), 8% due 12/01/2025 2,228
830 Southlands, Colorado, Medical District, GO (Metropolitan District Number 1),
7.125% due 12/01/2034 915
====================================================================================================================================
Connecticut--1.8% 1,650 Bridgeport, Connecticut, Senior Living Facilities Revenue Bonds (3030 Park Retirement
Community Project), 7.25% due 4/01/2035 1,712
490 Connecticut State Development Authority, Airport Facility Revenue Bonds (LearJet Inc.
Project), AMT, 7.95% due 4/01/2026 586
1,160 New Haven, Connecticut, Facility Revenue Bonds (Hill Health Corporation Project),
9.25% due 5/01/2017 1,163
====================================================================================================================================
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
6 APEX MUNICIPAL FUND, INC. JUNE 30, 2005
Schedule of Investments (continued) (in Thousands)
Face
State Amount Municipal Bonds Value
====================================================================================================================================
Florida--7.6% $ 805 Arbor Greene Community Development District, Florida, Special Assessment Revenue Bonds,
7.60% due 5/01/2018 $ 842
800 Capital Projects Finance Authority, Florida, Continuing Care Retirement Revenue Bonds
(Glenridge on Palmer Ranch), Series A, 8% due 6/01/2032 889
2,500 Hillsborough County, Florida, IDA, Exempt Facilities Revenue Bonds (National Gypsum
Company), AMT, Series A, 7.125% due 4/01/2030 2,819
870 Lakewood Ranch, Florida, Community Development District Number 5, Special Assessment
Revenue Refunding Bonds, Series A, 6.70% due 5/01/2031 922
Midtown Miami, Florida, Community Development District, Special Assessment Revenue
Bonds, Series A:
1,500 6% due 5/01/2024 1,568
1,350 6.25% due 5/01/2037 1,432
1,580 Orlando, Florida, Urban Community Development District, Capital Improvement Special
Assessment Bonds, Series A, 6.95% due 5/01/2033 1,708
1,700 Santa Rosa Bay Bridge Authority, Florida, Revenue Bonds, 6.25% due 7/01/2028 1,683
2,640 Tampa Palms, Florida, Open Space and Transportation Community Development District
Revenue Bonds, Capital Improvement (Richmond Place Project), 7.50% due 5/01/2018 2,765
====================================================================================================================================
Georgia--2.7% 2,000 Atlanta, Georgia, Tax Allocation Bonds (Atlantic Station Project), 7.90% due 12/01/2024 2,190
Brunswick & Glynn County, Georgia, Development Authority, First Mortgage Revenue Bonds
(Coastal Community Retirement Corporation Project), Series A:
830 7.125% due 1/01/2025 877
1,185 7.25% due 1/01/2035 1,266
830 Savannah, Georgia, EDA, Revenue Bonds (Marshes of Skidaway), First Mortgage, Series A,
7.40% due 1/01/2034 868
====================================================================================================================================
Idaho--0.8% 1,470 Idaho Health Facilities Authority, Revenue Refunding Bonds (Valley Vista Care
Corporation), Series A, 7.75% due 11/15/2016 1,495
====================================================================================================================================
Illinois--5.1% 1,845 Caseyville, Illinois, Senior Tax Increment Revenue Bonds (Forest Lakes Project),
7% due 12/30/2022 1,863
3,000 Chicago, Illinois, O'Hare International Airport, Special Facility Revenue Refunding
Bonds (American Airlines Inc. Project), 8.20% due 12/01/2024 2,847
400 Chicago, Illinois, Special Assessment Bonds (Lake Shore East), 6.75% due 12/01/2032 417
Illinois Development Finance Authority Revenue Bonds (Primary Health Care Centers
Facilities Acquisition Program):
585 7.75% due 12/01/2006 (a) 634
2,605 7.75% due 12/01/2016 2,729
490 Illinois State Finance Authority Revenue Bonds (Primary Health Care Centers Program),
6.60% due 7/01/2024 501
755 Lincolnshire, Illinois, Special Service Area Number 1, Special Tax Bonds (Sedgebrook
Project), 6.25% due 3/01/2034 805
====================================================================================================================================
Iowa--2.5% 3,855 Iowa Finance Authority, Health Care Facilities, Revenue Refunding Bonds (Care
Initiatives Project), 9.25% due 7/01/2025 4,725
====================================================================================================================================
Louisiana--3.0% 5,500 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain Company Project),
7.50% due 7/01/2013 5,688
====================================================================================================================================
Maine--0.4% 840 Maine Finance Authority, Solid Waste Recycling Facilities Revenue Bonds (Great Northern
Paper Project--Bowater), AMT, 7.75% due 10/01/2022 844
====================================================================================================================================
Maryland--0.8% 1,500 Maryland State Energy Financing Administration, Limited Obligation Revenue Bonds
(Cogeneration--AES Warrior Run), AMT, 7.40% due 9/01/2019 1,532
====================================================================================================================================
Massachusetts--5.0% 1,845 Massachusetts State Development Finance Agency, First Mortgage Revenue Bonds
(Overlook Communities Inc.), Series A, 6.25% due 7/01/2034 1,873
Massachusetts State Development Finance Agency, Revenue Refunding Bonds (Eastern
Nazarene College):
1,245 5.625% due 4/01/2019 1,268
1,220 5.625% due 4/01/2029 1,226
850 Massachusetts State Health and Educational Facilities Authority Revenue Bonds (Jordan
Hospital), Series E, 6.75% due 10/01/2033 945
Massachusetts State Health and Educational Facilities Authority, Revenue Refunding
Bonds:
2,100 (Bay Cove Human Services Issue), Series A, 5.90% due 4/01/2028 2,106
1,000 (Milton Hospital), Series, 5.50% due 7/01/2016 1,020
1,200 Massachusetts State Industrial Finance Agency Revenue Bonds, Sewer Facility (Resource
Control Composting), AMT, 9.25% due 6/01/2010 1,210
APEX MUNICIPAL FUND, INC. JUNE 30, 2005 7
Schedule of Investments (continued) (in Thousands)
Face
State Amount Municipal Bonds Value
====================================================================================================================================
Michigan--0.6% $ 1,150 Macomb County, Michigan, Hospital Finance Authority, Hospital Revenue Bonds (Mount
Clemens General Hospital), Series B, 5.875% due 11/15/2034 $ 1,169
====================================================================================================================================
Minnesota--0.9% 1,230 Saint Paul, Minnesota, Port Authority, Hotel Facility, Revenue Refunding Bonds
(Radisson Kellogg Project), Series 2, 7.375% due 8/01/2029 1,296
365 Virginia, Minnesota, Housing and Redevelopment Authority, Health Care Facility Lease
Revenue Bonds, 5.375% due 10/01/2030 382
====================================================================================================================================
Missouri--1.2% 1,200 Fenton, Missouri, Tax Increment Revenue Refunding and Improvement Bonds (Gravois
Bluffs), 7% due 10/01/2021 1,299
1,000 Kansas City, Missouri, IDA, First Mortgage Health Facilities Revenue Bonds (Bishop
Spencer Place), Series A, 6.50% due 1/01/2035 1,051
====================================================================================================================================
Nevada--0.2% 430 Clark County, Nevada, Improvement District Number 142 Special Assessment, 6.375%
due 8/01/2023 443
====================================================================================================================================
New Jersey--14.8% Camden County, New Jersey, Improvement Authority, Lease Revenue Bonds (Holt Hauling &
Warehousing), AMT, Series A (b)(c):
2,000 9.625% due 1/01/2011 257
4,500 9.875% due 1/01/2021 577
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 6,030
2,170 New Jersey EDA, Cigarette Tax Revenue Bonds, 5.50% due 6/15/2024 2,313
1,500 New Jersey EDA, IDR, Refunding (Newark Airport Marriott Hotel), 7% due 10/01/2014 1,561
New Jersey EDA, Retirement Community Revenue Bonds:
1,000 (Cedar Crest Village Inc. Facility), Series A, 7.25% due 11/15/2031 1,083
3,700 (Seabrook Village Inc.), Series A, 8.125% due 11/15/2023 4,194
New Jersey EDA, Special Facility Revenue Bonds (Continental Airlines Inc. Project),
AMT:
3,050 6.625% due 9/15/2012 2,911
4,305 6.25% due 9/15/2029 3,742
1,870 New Jersey Health Care Facilities Financing Authority Revenue Bonds (Pascack Valley
Hospital Association), 6.625% due 7/01/2036 1,860
Tobacco Settlement Financing Corporation of New Jersey Revenue Bonds:
2,540 5.75% due 6/01/2032 2,640
1,075 7% due 6/01/2041 1,228
====================================================================================================================================
New Mexico--2.7% 5,000 Farmington, New Mexico, PCR, Refunding (Tucson Electric Power Co.--San Juan Project),
Series A, 6.95% due 10/01/2020 5,249
====================================================================================================================================
New York--4.9% 1,000 Dutchess County, New York, IDA, Civic Facility Revenue Bonds (Saint Francis Hospital),
Series B, 7.50% due 3/01/2029 1,060
New York City, New York, City IDA, Civic Facility Revenue Bonds:
350 Series C, 6.80% due 6/01/2028 373
1,495 (Special Needs Facility Pooled Program), Series C-1, 6.50% due 7/01/2024 1,444
1,730 New York City, New York, City IDA, Special Facility Revenue Bonds (British Airways Plc
Project), AMT, 7.625% due 12/01/2032 1,932
1,865 New York State Dormitory Authority, Non-State Supported Debt, Revenue Refunding Bonds
(Mount Sinai Hospital), Series C, 5.50% due 7/01/2026 1,891
Utica, New York, GO, Public Improvement:
700 9.25% due 8/15/2005 704
635 9.25% due 8/15/2006 669
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 1,257
====================================================================================================================================
North Carolina--0.6% 1,000 North Carolina Medical Care Commission, Retirement Facilities, First Mortgage Revenue
Bonds (Givens Estates Project), Series A, 6.50% due 7/01/2032 1,072
====================================================================================================================================
Oregon--0.7% 1,310 Western Generation Agency, Oregon, Cogeneration Project Revenue Bonds (Wauna
Cogeneration Project), AMT, Series B, 7.40% due 1/01/2016 1,330
====================================================================================================================================
8 APEX MUNICIPAL FUND, INC. JUNE 30, 2005
Schedule of Investments (continued) (in Thousands)
Face
State Amount Municipal Bonds Value
====================================================================================================================================
Pennsylvania--6.2% $ 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 $ 1,932
Montgomery County, Pennsylvania, Higher Education and Health Authority Revenue Bonds
(Faulkeways at Gwynedd Project):
900 6.75% due 11/15/2024 965
925 6.75% due 11/15/2030 988
1,700 Montgomery County, Pennsylvania, IDA, Revenue Bonds (Whitemarsh Continuing Care
Project), 6.25% due 2/01/2035 1,808
Philadelphia, Pennsylvania, Authority for IDR:
1,600 (Air Cargo), AMT, Series A, 7.50% due 1/01/2025 1,675
4,460 Commercial Development, 7.75% due 12/01/2017 4,558
====================================================================================================================================
Rhode Island--0.9% 1,750 Central Falls, Rhode Island, Detention Facility Corporation, Detention Facility,
Revenue Refunding Bonds, 7.25% due 7/15/2035 1,775
====================================================================================================================================
Tennessee--1.0% 1,800 Shelby County, Tennessee, Health, Educational and Housing Facilities Board Revenue
Bonds (Germantown Village), Series A, 7.25% due 12/01/2034 1,888
====================================================================================================================================
Texas--8.9% 1,000 Austin, Texas, Convention Center Revenue Bonds (Convention Enterprises Inc.), First
Tier, Series A, 6.70% due 1/01/2028 1,081
Brazos River Authority, Texas, PCR, Refunding, AMT:
2,530 (Texas Utility Company), Series A, 7.70% due 4/01/2033 3,008
2,760 (Utilities Electric Company), Series B, 5.05% due 6/01/2030 2,805
1,220 Brazos River Authority, Texas, Revenue Refunding Bonds (Reliant Energy Inc. Project),
Series B, 7.75% due 12/01/2018 1,354
1,660 Grand Prairie, Texas, Housing Finance Corporation Revenue Bonds (Independent Senior
Living Center), 7.75% due 1/01/2034 1,722
1,000 Houston, Texas, Health Facilities Development Corporation, Retirement Facility Revenue
Bonds (Buckingham Senior Living Community), Series A, 7.125% due 2/15/2034 1,095
2,310 Matagorda County, Texas, Navigation District Number 1, Revenue Refunding Bonds (Reliant
Energy Inc.), Series C, 8% due 5/01/2029 2,544
1,330 Port Corpus Christi, Texas, Individual Development Corporation, Environmental
Facilities Revenue Bonds (Citgo Petroleum Corporation Project), AMT, 8.25%
due 11/01/2031 1,426
2,000 Port Corpus Christi, Texas, Revenue Refunding Bonds (Celanese Project), AMT, Series B,
6.70% due 11/01/2030 2,115
====================================================================================================================================
Utah--1.2% 2,240 Carbon County, Utah, Solid Waste Disposal, Revenue Refunding Bonds (Laidlaw
Environmental), AMT, Series A, 7.45% due 7/01/2017 2,340
====================================================================================================================================
Virginia--5.4% 2,480 Dulles Town Center, Virginia, Community Development Authority, Special Assessment Tax
(Dulles Town Center Project), 6.25% due 3/01/2026 2,563
22,600 Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds, Senior Series B,
5.888%** due 8/15/2025 7,223
560 Tobacco Settlement Financing Corporation of Virginia, Asset-Backed Revenue Bonds,
5.625% due 6/01/2037 575
====================================================================================================================================
West Virginia--0.4% 875 Princeton, West Virginia, Hospital Revenue Refunding Bonds (Community Hospital
Association Inc. Project), 6.20% due 5/01/2013 817
====================================================================================================================================
Wisconsin--0.7% 1,320 Wisconsin State Health and Educational Facilities Authority Revenue Bonds (New Castle
Place Project), Series A, 7% due 12/01/2031 1,361
====================================================================================================================================
Wyoming--0.9% 1,800 Sweetwater County, Wyoming, Solid Waste Disposal Revenue Bonds (FMC Corporation
Project), AMT, Series A, 7% due 6/01/2024 1,820
====================================================================================================================================
APEX MUNICIPAL FUND, INC. JUNE 30, 2005 9
Schedule of Investments (concluded) (in Thousands)
Face
Amount Municipal Bonds Value
====================================================================================================================================
U.S. Virgin $ 2,100 Virgin Islands Government Refinery Facilities, Revenue Refunding Bonds (Hovensa Coker
Islands--1.2% Project), AMT, 6.50% due 7/01/2021 $ 2,399
------------------------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Cost--$182,432)--97.5% 187,627
====================================================================================================================================
Shares
Held Short-Term Securities
====================================================================================================================================
3,700 Merrill Lynch Institutional Tax-Exempt Fund (d) 3,700
------------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$3,700)--1.9% 3,700
====================================================================================================================================
Total Investments (Cost--$186,132*)--99.4% 191,327
Other Assets Less Liabilities--0.6% 1,148
--------
Net Assets--100.0% $192,475
========
* The cost and unrealized appreciation (depreciation) of investments as of
June 30, 2005, as computed for federal income tax purposes, were as
follows:
(in Thousands)
--------------------------------------------------------------------------
Aggregate cost .............................................. $185,837
========
Gross unrealized appreciation ............................... $ 12,870
Gross unrealized depreciation ............................... (7,380)
--------
Net unrealized appreciation ................................. $ 5,490
========
** Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase by the Fund.
(a) Prerefunded.
(b) Non-income producing security; issuer filed for bankruptcy or is in
default of interest payments.
(c) Restricted securities as to resale, representing 0.4% of net assets, were
as follows:
(in Thousands)
--------------------------------------------------------------------------
Acquisition
Issue Date(s) Cost Value
--------------------------------------------------------------------------
Camden County, New Jersey
Improvement Authority, Lease
Revenue Bonds (Holt Hauling
& Warehousing), AMT, Series A,
9.625% due 1/01/2011 1/29/1997 $2,116 $ 257
Camden County, New Jersey
Improvement Authority, Lease
Revenue Bonds (Holt Hauling
& Warehousing), AMT, Series A, 2/06/1996 -
9.875% due 1/01/2021 1/29/1997 4,644 577
--------------------------------------------------------------------------
Total $6,760 $ 834
================
(d) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) were as follows:
(in Thousands)
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Institutional
Tax-Exempt Fund 3,700 $6
--------------------------------------------------------------------------
See Notes to Financial Statements.
10 APEX MUNICIPAL FUND, INC. JUNE 30, 2005
Statement of Assets, Liabilities and Capital
As of June 30, 2005
=======================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$182,432,206) ............................ $ 187,626,511
Investments in affiliated securities, at value
(identified cost--$3,700,000) .............................. 3,700,000
Cash ........................................................ 96,789
Receivables:
Interest ................................................. $ 3,083,286
Securities sold .......................................... 55,000
Dividends from affiliates ................................ 234 3,138,520
-------------
Prepaid expenses ............................................ 1,205
-------------
Total assets ................................................ 194,563,025
-------------
=======================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------
Payables:
Securities purchased ..................................... 1,883,238
Investment adviser ....................................... 84,737
Dividends to shareholders ................................ 80,585
Other affiliates ......................................... 1,970 2,050,530
-------------
Accrued expenses ............................................ 37,291
-------------
Total liabilities ........................................... 2,087,821
-------------
=======================================================================================================================
Net Assets
-----------------------------------------------------------------------------------------------------------------------
Net Assets .................................................. $ 192,475,204
=============
=======================================================================================================================
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 ............................ 198,646,987
Undistributed investment income--net ........................ $ 2,238,998
Accumulated realized capital losses--net .................... (15,564,759)
Unrealized appreciation--net ................................ 5,194,305
-------------
Total accumulated losses--net ............................... (8,131,456)
-------------
Total capital--Equivalent to $9.82 net asset value per
share of Common Stock (market price--$9.48) ................ $ 192,475,204
=============
See Notes to Financial Statements.
APEX MUNICIPAL FUND, INC. JUNE 30, 2005 11
Statement of Operations
For the Year Ended June 30, 2005
=======================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------
Interest .................................................... $ 12,840,970
Dividends from affiliates ................................... 6,393
-------------
Total income ................................................ 12,847,363
-------------
=======================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------
Investment advisory fees .................................... $ 1,208,776
Accounting services ......................................... 73,113
Professional fees ........................................... 46,235
Transfer agent fees ......................................... 41,452
Printing and shareholder reports ............................ 40,707
Listing fees ................................................ 19,117
Directors' fees and expenses ................................ 16,268
Pricing fees ................................................ 14,010
Custodian fees .............................................. 11,587
Other ....................................................... 19,205
-------------
Total expenses before reimbursement ......................... 1,490,470
Reimbursement of expenses ................................... (547)
-------------
Total expenses after reimbursement .......................... 1,489,923
-------------
Investment income--net ...................................... 11,357,440
-------------
=======================================================================================================================
Realized & Unrealized Gain--Net
-----------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ........................... 157,115
Change in unrealized appreciation/depreciation on
investments--net ........................................... 13,265,125
-------------
Total realized and unrealized gain--net ..................... 13,422,240
-------------
Net Increase in Net Assets Resulting from Operations ........ $ 24,779,680
=============
See Notes to Financial Statements.
12 APEX MUNICIPAL FUND, INC. JUNE 30, 2005
Statements of Changes in Net Assets
For the Year Ended
June 30,
-------------------------------
Increase (Decrease) in Net Assets: 2005 2004
=======================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------
Investment income--net ...................................... $ 11,357,440 $ 11,663,235
Realized gain--net .......................................... 157,115 51,260
Change in unrealized appreciation/depreciation--net ......... 13,265,125 2,365,416
-------------------------------
Net increase in net assets resulting from operations ........ 24,779,680 14,079,911
-------------------------------
=======================================================================================================================
Dividends & Distributions to Shareholders
-----------------------------------------------------------------------------------------------------------------------
Investment income--net ...................................... (11,287,718) (11,150,541)
Realized gain--net .......................................... -- (61,886)
-------------------------------
Net decrease in net assets resulting from dividends and
distributions to shareholders .............................. (11,287,718) (11,212,427)
-------------------------------
=======================================================================================================================
Net Assets
-----------------------------------------------------------------------------------------------------------------------
Total increase in net assets ................................ 13,491,962 2,867,484
Beginning of year ........................................... 178,983,242 176,115,758
-------------------------------
End of year* ................................................ $ 192,475,204 $ 178,983,242
===============================
* Undistributed investment income--net ................... $ 2,238,998 $ 2,169,276
===============================
See Notes to Financial Statements.
APEX MUNICIPAL FUND, INC. JUNE 30, 2005 13
Financial Highlights
For the Year Ended June 30,
The following per share data and ratios have been derived -----------------------------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
===================================================================================================================================
Per Share Operating Performance
-----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ........ $ 9.13 $ 8.99 $ 9.24 $ 9.45 $ 9.33
-----------------------------------------------------------------------
Investment income--net .................... .58+ .60+ .58+ .58 .59
Realized and unrealized gain (loss)--net .. .69 .11 (.27) (.22) .13
-----------------------------------------------------------------------
Total from investment operations .......... 1.27 .71 .31 .36 .72
-----------------------------------------------------------------------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net ................. (.58) (.57) (.56) (.57) (.60)
Realized gain--net ..................... -- --** -- -- --
-----------------------------------------------------------------------
Total dividends and distributions to Common
Stock shareholders ....................... (.58) (.57) (.56) (.57) (.60)
-----------------------------------------------------------------------
Net asset value, end of year .............. $ 9.82 $ 9.13 $ 8.99 $ 9.24 $ 9.45
=======================================================================
Market price per share, end of year ....... $ 9.48 $ 8.26 $ 8.48 $ 8.39 $ 9.10
=======================================================================
===================================================================================================================================
Total Investment Return*
-----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ........ 14.67% 8.64% 4.13% 4.31% 8.48%
=======================================================================
Based on market price per share ........... 22.36% 4.20% 8.18% (1.64%) 9.05%
=======================================================================
===================================================================================================================================
Ratios to Average Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement ............ .80% .79% .90% .87% .82%
=======================================================================
Expenses .................................. .80% .79% .90% .87% .82%
=======================================================================
Investment income--net .................... 6.11% 6.52% 6.56% 6.19% 6.35%
=======================================================================
===================================================================================================================================
Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) .... $192,475 $178,983 $176,116 $181,093 $185,246
=======================================================================
Portfolio turnover ........................ 22% 19% 24% 25% 17%
=======================================================================
* 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 effect of sales
charges.
** Amount is less than $(.01) per share.
+ Based on average shares outstanding.
See Notes to Financial Statements.
14 APEX MUNICIPAL FUND, INC. JUNE 30, 2005
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 U.S. generally accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from these
estimates. The Fund determines and makes available for publication the net asset
value of its Common Stock on a daily basis. The Fund's Common Stock shares are
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 ("OTC") markets and are valued at the last available bid price
in the OTC market or on the basis of values as obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general direction
of the Board of Directors. Such valuations and procedures are reviewed
periodically by the Board of Directors of the Fund. 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 OTC 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's pricing service.
Short-term investments with a remaining maturity of 60 days or less are valued
at amortized cost, which approximates market value, under which method the
investment is valued at cost and any premium or discount is amortized on a
straight line basis to maturity. Investments in open-end investment companies
are valued at their net asset value each business day. Securities and other
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.
(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).
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 net 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
APEX MUNICIPAL FUND, INC. JUNE 30, 2005 15
Notes to Financial Statements (concluded)
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.
(f) Reclassification -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the current
year, $1,311,769 has been reclassified between paid-in capital in excess of par
and accumulated net realized capital losses as a result of permanent differences
attributable to the expiration of capital loss carryforwards. This
reclassification has no effect on net assets or net asset values per share.
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 daily net assets. FAM has agreed to
reimburse its management fee by the amount of management fees the Fund pays to
FAM indirectly through its investment in Merrill Lynch Institutional Tax-Exempt
Fund. For the year ended June 30, 2005, FAM reimbursed the Fund in the amount of
$547.
For the year ended June 30, 2005, the Fund reimbursed FAM $4,044 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
year ended June 30, 2005 were $39,388,919 and $41,527,271, respectively.
4. Common Stock Transactions:
At June 30, 2005, the Fund had one class of shares of Common Stock, par value
$.10 per share, of which 150,000,000 shares were authorized.
5. Distributions to Shareholders:
The Fund paid a tax-exempt income dividend to holders of Common Stock in the
amount of $.048000 per share on July 28, 2005 to shareholders of record on July
14, 2005.
The tax character of distributions paid by the Fund during the fiscal years
ended June 30, 2005 and June 30, 2004 was as follows:
--------------------------------------------------------------------------------
6/30/2005 6/30/2004
--------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income ..................... $11,287,718 $11,150,541
Ordinary income ....................... -- 61,886
-------------------------------
Total distributions .................... $11,287,718 $11,212,427
===============================
As of June 30, 2005, the components of accumulated losses on a tax basis were as
follows:
------------------------------------------------------------------------------
Undistributed tax exempt income--net .................... $ 2,409,450
Undistributed long-term capital gains--net .............. --
------------
Total undistributed earnings--net ....................... 2,409,450
Capital loss carryforward ............................... (15,188,907)*
Unrealized gains--net ................................... 4,648,001**
------------
Total accumulated losses--net ........................... $ (8,131,456)
============
* On June 30, 2005, the Fund had a net capital loss carryforward of
$15,188,907, of which $938,156 expires in 2006, $2,975,000 expires in
2008, $5,341,699 expires in 2009, $2,075,987 expires in 2010, $2,163,492
expires in 2011, $1,659,281 expires in 2012 and $35,292 expires in 2013.
This amount will be available to offset like amounts of any future taxable
gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the difference between book and tax amortization
methods for premiums and discounts on fixed income securities, book/tax
differences in the accrual of income on securities in default and the
deferral of post-October capital losses for tax purposes.
16 APEX MUNICIPAL FUND, INC. JUNE 30, 2005
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Apex Municipal Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of Apex Municipal Fund, Inc. as of June
30, 2005, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of June 30, 2005, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Apex
Municipal Fund, Inc. as of June 30, 2005, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and its financial highlights for each of the five years in
the period then ended, in conformity with U.S. generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 11, 2005
Fund Certification (unaudited)
In May 2005, the Fund filed its Chief Executive Officer Certification for the
prior year with the New York Stock Exchange pursuant to Section 303A.12(a) of
the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
Important Tax Information (unaudited)
All of the net investment income distributions paid monthly by Apex Municipal
Fund, Inc. during its taxable year ended June 30, 2005 qualify as tax-exempt
interest dividends for federal income tax purposes.
APEX MUNICIPAL FUND, INC. JUNE 30, 2005 17
Automatic Dividend Reinvestment Plan
The following description of the Fund's Automatic Dividend Reinvestment Plan
(the "Plan") is sent to you annually as required by federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock otherwise elects,
all dividend and capital gains distributions will be automatically reinvested by
The Bank of New York (the "Plan Agent"), as agent for shareholders in
administering the Plan, in additional shares of Common Stock of the Fund.
Holders of Common Stock who elect not to participate in the Plan will receive
all distributions in cash paid by check mailed directly to the shareholder of
record (or, if the shares are held in street or other nominee name then to such
nominee) by The Bank of New York, as dividend paying agent. Such participants
may elect not to participate in the Plan and to receive all distributions of
dividends and capital gains in cash by sending written instructions to The Bank
of New York, as dividend paying agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date; otherwise such
termination will be effective with respect to any subsequently declared dividend
or distribution.
Whenever the Fund declares an income dividend or capital gains distribution
(collectively referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash and participants in the Plan will
receive the equivalent in shares of Common Stock. The shares will be acquired by
the Plan Agent for the participant's account, depending upon the circumstances
described below, either (i) through receipt of additional unissued but
authorized shares of Common Stock from the Fund ("newly issued shares") or (ii)
by purchase of outstanding shares of Common Stock on the open market
("open-market purchases") on the New York Stock Exchange or elsewhere. If, on
the payment date for the dividend, the net asset value per share of the Common
Stock is equal to or less than the market price per share of the Common Stock
plus estimated brokerage commissions (such conditions being referred to herein
as "market premium"), the Plan Agent will invest the dividend amount in newly
issued shares on behalf of the participant. The number of newly issued shares of
Common Stock to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued, provided that the maximum discount from the then
current market price per share on the date of issuance may not exceed 5%. If, on
the dividend payment date, the net asset value per share is greater than the
market value (such condition being referred to herein as "market discount"), the
Plan Agent will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan Agent
will have until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. It is contemplated that the Fund
will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisitions of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date determined by dividing the
uninvested portion of the dividend by the net asset value per share.
18 APEX MUNICIPAL FUND, INC. JUNE 30, 2005
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which hold shares
of others who are the beneficial owners, the Plan Agent will administer the Plan
on the basis of the number of shares certified from time to time by the record
shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal, state or local income tax that may be payable (or
required to be withheld) on such dividends.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus commissions
of the Fund's shares is above the net asset value, participants in the Plan will
receive shares of the Fund at less than they could otherwise purchase them and
will have shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market price plus
commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
The value of shares acquired pursuant to the Plan will generally be excluded
from gross income to the extent that the cash amount reinvested would be
excluded from gross income. If, when the Fund's shares are trading at a premium
over net asset value, the Fund issues shares pursuant to the Plan that have a
greater fair market value than the amount of cash reinvested, it is possible
that all or a portion of such discount (which may not exceed 5% of the fair
market value of the Fund's shares) could be viewed as a taxable distribution. If
the discount is viewed as a taxable distribution, it is also possible that the
taxable character of this discount would be allocable to all the shareholders,
including shareholders who do not participate in the Plan. Thus, shareholders
who do not participate in the Plan might be required to report as ordinary
income a portion of their distributions equal to their allocable share of the
discount.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at
The Bank of New York, Church Street Station, P.O. Box 11258, New York, NY
10286-1258, Telephone: 800-432-8224.
APEX MUNICIPAL FUND, INC. JUNE 30, 2005 19
Proxy Results
During the six-month period ended June 30, 2005, Apex Municipal Fund, Inc.`s
shareholders voted on the following proposals. Proposal 1 was approved at a
shareholders' meeting on April 28, 2005. With respect to Proposal 2, the
proposal was adjourned until May 27, 2005 at which time it passed. A description
of the proposals and number of shares voted were as follows:
-----------------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
-----------------------------------------------------------------------------------------------------------------
1. To elect the Fund's Directors: Robert C. Doll, Jr. 9,904,223 263,875
James H. Bodurtha 9,902,456 265,642
Herbert I. London 9,895,356 272,742
Stephen B. Swensrud 9,893,905 274,193
-----------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
-----------------------------------------------------------------------------------------------------------------
2. To approve an amendment to fundamental investment restriction. 7,364,302 409,729 231,249
-----------------------------------------------------------------------------------------------------------------
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. As of June 30, 2005, none of the Fund's total net
assets were invested 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.
20 APEX MUNICIPAL FUND, INC. JUNE 30, 2005
Officers and Directors
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to President of the MLIM/FAM-advised funds since 2005; 125 Funds None
Doll, Jr.* Princeton, NJ and present President of MLIM and FAM since 2001; Co-Head 169 Portfolios
08543-9011 Director (Americas Region) thereof from 2000 to 2001 and
Age: 50 Senior Vice President from 1999 to 2001; President
and Director of Princeton Services, Inc. ("Princeton
Services") since 2001; President of Princeton
Administrators, L.P. ("Princeton Administrators")
since 2001; Chief Investment Officer of Oppenheimer
Funds, Inc. in 1999 and Executive Vice President
thereof from 1991 to 1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which MLIM or
FAM acts as investment adviser. Mr. Doll is an "interested person," as defined in the Investment Company Act, of the
Fund based on his current positions with MLIM, FAM, Princeton Services and Princeton Administrators. Directors serve
until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund President,
Mr. Doll serves at the pleasure of the Board of Directors.
====================================================================================================================================
Independent Directors*
------------------------------------------------------------------------------------------------------------------------------------
James H. P.O. Box 9095 Director 2002 to Director, The China Business Group, Inc. since 38 Funds None
Bodurtha** Princeton, NJ present 1996 and Executive Vice President thereof from 55 Portfolios
08543-9095 1996 to 2003; Chairman of the Board, Berkshire
Age: 61 Holding Corporation since 1980; Partner, Squire,
Sanders & Dempsey from 1980 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9095 Director 2005 to Professor, Harvard University since 1992; Professor, 38 Funds None
Froot Princeton, NJ present Massachusetts Institute of Technology from 1986 55 Portfolios
08543-9095 to 1992.
Age: 47
------------------------------------------------------------------------------------------------------------------------------------
Joe P.O. Box 9095 Director 1994 to Member of the Committee of Investment of 38 Funds Kimco
Grills** Princeton, NJ present Employee Benefit Assets of the Association of 55 Portfolios Realty
08543-9095 Financial Professionals ("CIEBA") since 1986; Corporation
Age: 70 Member of CIEBA's Executive Committee since 1988
and its Chairman from 1991 to 1992; Assistant
Treasurer of International Business Machines
Corporation ("IBM") and Chief Investment Officer
of IBM Retirement Funds from 1986 to 1993;
Member of the Investment Advisory Committee
of the State of New York Common Retirement Fund
since 1989; Member of the Investment Advisory
Committee of the Howard Hughes Medical Institute
from 1997 to 2000; Director, Duke University
Management Company from 1992 to 2004, Vice
Chairman thereof from 1998 to 2004 and Director
Emeritus thereof since 2004; Director, LaSalle Street
Fund from 1995 to 2001; Director, Kimco Realty
Corporation since 1997; Member of the Investment
Advisory Committee of the Virginia Retirement
System since 1998; Vice Chairman thereof from
2002 to 2005 and Chairman thereof since 2005;
Director, Montpelier Foundation since 1998 and
its Vice Chairman since 2000; Member of the
Investment Committee of the Woodberry Forest
School since 2000; Member of the Investment
Committee of the National Trust for Historic
Preservation since 2000.
APEX MUNICIPAL FUND, INC. JUNE 30, 2005 21
Officers and Directors (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Independent Directors* (concluded)
------------------------------------------------------------------------------------------------------------------------------------
Herbert I. P.O. Box 9095 Director 2002 to John M. Olin Professor of Humanities, New York 38 Funds None
London Princeton, NJ present University since 1993 and Professor thereof since 55 Portfolios
08543-9095 1980; President, Hudson Institute since 1997
Age: 66 and Trustee thereof since 1980; Dean, Gallatin
Division of New York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corp.
from 1991 to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9095 Director 2002 to Shareholder, Modrall, Sperling, Roehl, Harris & 38 Funds None
Cooper Princeton, NJ present Sisk, P.A. since 1993; President, American Bar 55 Portfolios
Ramo 08543-9095 Association from 1995 to 1996 and Member of
Age: 62 the Board of Governors thereof from 1994 to 1997;
Shareholder, Poole, Kelly & Ramo, Attorneys at Law,
P.C. from 1977 to 1993; Director, ECMC Group
(service provider to students, schools and lenders)
since 2001; Director, United New Mexico Bank
(now Wells Fargo) from 1983 to 1988; Director,
First National Bank of New Mexico (now Wells
Fargo) from 1975 to 1976; Vice President, American
Law Institute since 2004.
------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Director 1996 to Principal of STI Management (investment adviser) 38 Funds None
Salomon, Princeton, NJ present since 1994; Chairman and CEO of Salomon Brothers 55 Portfolios
Jr. 08543-9095 Asset Management from 1992 to 1995; Chairman
Age: 68 of Salomon Brothers Equity Mutual Funds from
1992 to 1995; regular columnist with Forbes
Magazine from 1992 to 2002; Director of Stock
Research and U.S. Equity Strategist at Salomon
Brothers Inc. from 1975 to 1991; Trustee,
Commonfund from 1980 to 2001.
------------------------------------------------------------------------------------------------------------------------------------
Stephen B. P.O. Box 9095 Director 1989 to Chairman of Fernwood Advisors, Inc. (investment 39 Funds None
Swensrud Princeton, NJ present adviser) since 1996; Principal, Fernwood Associates 56 Portfolios
08543-9095 (financial consultants) since 1975; Chairman of
Age: 72 R.P.P. Corporation (manufacturing company)
since 1978; Director of International Mobile
Communications, Incorporated (telecommunications)
since 1998.
------------------------------------------------------------------------------------------------------------------------
* Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Co-Chairman of the Board and the Audit Committee.
22 APEX MUNICIPAL FUND, INC. JUNE 30, 2005
Officers and Directors (concluded)
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1993 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
08543-9011 and and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999; Vice
Age: 45 Treasurer 1999 to President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM from 1990
present to 2001; Vice President, Treasurer and Secretary of the IQ Funds since 2004.
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9011 Senior 2003 to Managing Director of MLIM since 2000; Director (Tax-Exempt Fund Management) of
Jacob Princeton, NJ Vice present MLIM from 1997 to 2000.
08543-9011 President
Age: 54
------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 Senior 2003 to Managing Director of MLIM since 2000; Director (Tax-Exempt Fund Management) of
Loffredo Princeton, NJ Vice present MLIM from 1997 to 2000.
08543-9011 President
Age: 41
------------------------------------------------------------------------------------------------------------------------------------
Theodore R. P.O. Box 9011 Vice 1997 to Managing Director of MLIM since 2005; Director (Municipal Tax-Exempt Fund
Jaeckel Princeton, NJ President present Management) of MLIM from 1997 to 2005; Vice President of MLIM from 1991 to 1997.
Jr. 08543-9011
Age: 45
------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
Hiller Princeton, NJ Compliance present Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Compliance
08543-9011 Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
Age: 53 Investment Management from 2002 to 2004; Managing Director and Global Director of
Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance
Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential
Financial from 1995 to 2000; Senior Counsel in the Commission's Division of
Enforcement in Washington, D.C. from 1990 to 1995.
------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
Pellegrino Princeton, NJ present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD and
08543-9011 Princeton Services since 2004.
Age: 45
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
The Bank of New York
101 Barclay Street -- 11 East
New York, NY 10286
NYSE Symbol
APX
APEX MUNICIPAL FUND, INC. JUNE 30, 2005 23
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
--------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Apex Municipal Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
#10955 -- 6/05
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Joe Grills,
(2) Andre F. Perold (resigned as of October 1, 2004), (3) Robert S.
Salomon, Jr., and (4) Stephen B. Swensrud.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending June 30, 2005 - $27,500
Fiscal Year Ending June 30, 2004 - $31,200
(b) Audit-Related Fees - Fiscal Year Ending June 30, 2005 - $0
Fiscal Year Ending June 30, 2004 - $0
(c) Tax Fees - Fiscal Year Ending June 30, 2005 - $5,700
Fiscal Year Ending June 30, 2004 - $5,610
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending June 30, 2005 - $0
Fiscal Year Ending June 30, 2004 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending June 30, 2005 - $8,181,305
Fiscal Year Ending June 30, 2004 - $16,114,216
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $945,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
James H. Bodurtha
Kenneth A. Froot (as of June 1, 2005)
Joe Grills
Herbert I. London
Andre F. Perold (resigned as of October 1, 2004)
Roberta Cooper Ramo
Robert S. Solomon, Jr.
Stephen B. Swensrud
Item 6 - Schedule of Investments - Not Applicable
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 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable at this time
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(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.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - 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/ Robert C. Doll, Jr.
----------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Apex Municipal Fund, Inc.
Date: August 19, 2005
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/ Robert C. Doll, Jr.
----------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Apex Municipal Fund, Inc.
Date: August 19, 2005
By: /s/ Donald C. Burke
----------------------------------
Donald C. Burke,
Chief Financial Officer of
Apex Municipal Fund, Inc.
Date: August 19, 2005