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 811-5227
Name of Fund: Apex Municipal Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Apex Municipal
Fund, Inc., 800 Scudders Mill Road, Plainsboro, NJ 08536. Mailing
address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 06/30/04
Date of reporting period: 07/01/03 - 06/30/04
Item 1 - Report to Stockholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Apex Municipal
Fund, Inc.
Annual Report
June 30, 2004
[LOGO] Merrill Lynch Investment Managers
Apex Municipal Fund, Inc.
Quality Profile (unaudited)
The quality ratings of securities in the Fund as of June 30, 2004 were as
follows:
--------------------------------------------------------------------------------
Percent of
Total
S&P Rating/Moody's Rating Investments
--------------------------------------------------------------------------------
AAA/Aaa ................................................. 1.7%
A/A ..................................................... 4.8
BBB/Baa ................................................. 18.3
BB/Ba ................................................... 19.4
B/B ..................................................... 10.4
CCC/Caa ................................................. 3.0
NR (Not Rated) .......................................... 41.7
Other* .................................................. 0.7
--------------------------------------------------------------------------------
* Temporary investments in short-term variable rate municipal securities.
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 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, 2004
A Letter From the President
Dear Shareholder
As we ended the current period, all eyes were on the Federal Reserve Board
(Fed). In a much-anticipated move, the Fed raised the Federal Funds rate on June
30 for the first time in four years, bringing the target rate to 1.25%, up from
a 45-year low of 1%. The 25 basis point (.25%) increase was the first, but is
not expected to be the last, this year as the Fed moves to "normalize" interest
rates in the face of increasing inflation. The Fed has reiterated its intention
to take a "measured" approach to interest rate increases in an effort to avoid
upsetting the economy or the financial markets. Still, in its very deliberate
wording, the Fed has stated that it may move more aggressively if inflation and
economic growth indicate the need.
In any case, interest rates are likely to remain low by historical standards for
some time, particularly if the Fed does maintain its commitment to a gradual
tightening. To provide some perspective, the Federal Funds rate was at 6.5%
before the current easing cycle began in 2001 and had reached double-digits in
the late 1970s and early 1980s.
The transition to higher interest rates can cause concern among equity and fixed
income investors alike. For bond investors, rising interest rates means the
value of older bonds declines because they carry the former lower interest
rates. However, because municipal bonds offer the advantage of tax-exempt
income, they continue to be an attractive alternative for many fixed income
investors. For the 12-month period ended June 30, 2004, municipal bonds
outperformed their taxable counterparts with a return of +.76% for the Lehman
Brothers Municipal Bond Index compared to +.32% for the Lehman Brothers
Aggregate Bond Index.
June month-end also brought the transfer of power in Iraq. Like the Fed
tightening, this was a pivotal event. However, the outcome and the market
repercussions are less easy to predict. We do know that markets will always
fluctuate and that there are many uncertainties -- including the possibility of
geopolitical events -- that can translate into negative market movements. Still,
the U.S. economy is much stronger today than it was just one year ago. With this
in mind, we encourage you to revisit your portfolio and your asset allocation
strategy to ensure you are well positioned to take advantage of the
opportunities that lie ahead. Importantly, you should consult with your
financial advisor, who can help you assess the market and economic environment
and then develop a strategy most suitable for your circumstances and financial
goals.
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/ Terry K. Glenn
Terry K. Glenn
President and Director
APEX MUNICIPAL FUND, INC. JUNE 30, 2004 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
The Fund significantly outperformed the Lipper High Yield Municipal Debt
Fund's category for the year, benefiting from an above-average exposure to
corporate-related tax-exempt debt.
Describe the recent market environment relative to municipal bonds.
Amid significant volatility, long-term bond yields ended the 12-month period
considerably higher than where they began. The increase in yields and
corresponding fall in prices resulted from concerns that a resurgent economy
would lead to inflation, which in turn would encourage the Federal Reserve Board
(Fed) to raise short-term interest rates. In fact, the Fed did increase interest
rates 25 basis points (.25%) on June 30, 2004, but suggested that its approach
to future rate hikes would be gradual.
As the period began, bond yields were on the rise as an increasing amount of
data indicated a fast-improving economy. By mid-August 2003, yields on U.S.
Treasury bonds had risen to 5.45%, but fell to 4.65% in mid-March 2004 as
investors seemed certain that poor job growth meant the Fed would maintain rates
at current low levels for some time. In early April, yields began to rise again,
prompted by unexpected gains in job growth, improvements in consumer confidence
and rising consumer spending. Investors reversed their prior expectations and
concluded that the Fed would indeed be forced to raise interest rates to ward
off potential inflation. By mid-May, long-term U.S. Treasury bond yields had
risen above 5.45%. Later, as fears of inflation diminished somewhat, yields on
the U.S. Treasury benchmark bond fell once more, but -- at 5.29% -- still ended
the period 70 basis points above year-ago levels. The yield on the 10-year U.S.
Treasury note stood at 4.58% on June 30, 2004, an increase of more than 100
basis points over the 12-month period.
Tax-exempt issues also saw considerable variability in yields, though the
volatility was more subdued than in the U.S. Treasury market. Yields on
long-term revenue bonds, as measured by the Bond Buyer Revenue Bond Index, rose
approximately 40 basis points during the year. Thirty-year bonds rated AAA saw
their yields rise more than 55 basis points to 5.02%, as reported by Municipal
Market Data, while yields on AAA-rated bonds with 10-year maturities rose more
than 70 basis points to 3.95%.
The more marked increase in 10-year bond yields may be attributed to the fact
that several large issues have been heavily concentrated in the 10-year -
20-year range. The resulting supply imbalance prompted higher intermediate bond
yields (and lower prices). Longer-maturity and lower-rated issues continued to
benefit from more favorable supply/demand factors and, therefore, experienced
less price depreciation.
Overall, more than $370 billion in new long-term tax-exempt bonds were issued
nationwide during the period, a 5% decline compared to the prior 12 months.
New-issue municipal volume is expected to be manageable for the remainder of
2004 and should continue to support the tax-exempt market's favorable technical
position. This, in turn, should allow the municipal market to outperform its
taxable counterparts in the coming months.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended June 30, 2004, the Common Stock of Apex Municipal
Fund, Inc. had net annualized yields of 6.24% and 6.90%, based on a year-end per
share net asset value of $9.13 and a per share market price of $8.26,
respectively, and $.570 per share income dividends. Over the same period, the
total investment return on the Fund's Common Stock was +8.64%, based on a change
in per share net asset value from $8.99 to $9.13, and assuming reinvestment of
$.569 per share ordinary income dividends and $.003 per share capital gains
distributions.
The Fund's total return for the year, based on net asset value, significantly
exceeded the +5.04% average return of the Lipper High Yield Municipal Debt Funds
category for the 12 months ended June 30, 2004. (Funds in this Lipper category
invest at least 50% of their assets in lower-rated municipal debt issues.) The
primary reason for the Fund's outperformance was its sector concentrations in
corporate-related tax-exempt debt. This included above-average market weightings
in cyclically oriented industries such as airlines, forest products and
chemicals. Given the accelerating economic recovery in the United States, Fund
performance has benefited from tighter credit spreads and the extra income
generated by these economically sensitive holdings.
4 APEX MUNICIPAL FUND, INC. JUNE 30, 2004
For the six-month period ended June 30, 2004, the total investment return on the
Fund's Common Stock was +3.15%, based on a change in per share net asset value
from $9.15 to $9.13, and assuming reinvestment of $.287 per share income
dividends.
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
included in this report. As a closed-end fund, the Fund's shares may trade in
the secondary market at a premium or discount to the Fund's net asset value. As
a result, total investment returns based on changes in the market value of the
Fund'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 period?
Our portfolio strategy continued to focus on capturing relative value within the
high yield arena as a means to enhance returns over time. This involved an
investment process geared toward improved diversification and careful security
selection.
In terms of sector allocation, the cyclical nature of many of the portfolio's
holdings reflects our belief that the improving economy, a moderate pace of
inflation and the Federal Reserve Board's measured approach to interest rate
increases will sustain investors' risk tolerance and the current trend toward
narrower credit spreads.
While maintaining the industry concentrations mentioned earlier, we also
established or added to positions in a variety of other sectors, including
transportation, education, health care and tax-backed debt. The latter
represents an increased exposure to general obligation (GO) debt issued by the
State of California, which continues to trade at attractive levels amid
stabilizing credit fundamentals. The new purchases enabled us to satisfy a
larger goal of bringing the Fund's GO weighting in line with the market average.
For some time, we had underweighted this sector because we had concerns about
issuers' deteriorating fiscal health. Recent evidence of a gradual, broad-based
increase in tax revenues, however, has caused us to revisit this stance.
How would you characterize the Fund's position at the close of the period?
We expect to maintain our focus on the general themes of increased
diversification and yield enhancement in the months ahead. Given the Fund's
current above-market concentration in credits rated BBB and BB, we intend to
explore opportunities to boost the portfolio's income through a reallocation
strategy designed to increase exposure to non-rated securities, which are
currently at a below-market weighting in the portfolio.
Any further contraction in credit spreads will likely prompt us to reduce
exposure in our overweight sectors, most notably airlines. Nevertheless, we
remain optimistic about the prospects for an accelerating economic recovery and
will look to maintain much of the portfolio's current asset allocation.
Theodore R. Jaeckel Jr.
Vice President and Portfolio Manager
July 1, 2004
APEX MUNICIPAL FUND, INC. JUNE 30, 2004 5
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (in Thousands)
S&P Moody's Face
State Ratings@ Ratings@ Amount Municipal Bonds Value
====================================================================================================================================
Alabama--0.6% B NR* $ 1,000 Brewton, Alabama, IDB, PCR, Refunding (Container Corporation of
America--Jefferson Smurfit Corp. Project), 8% due 4/01/2009 $ 1,023
====================================================================================================================================
Alaska--1.1% NR* NR* 2,000 Alaska Industrial Development and Expert Authority Revenue
Bonds (Williams Lynxs Alaska Cargoport), AMT, 8% due 5/01/2023 2,033
====================================================================================================================================
Arizona--3.0% Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds (Sun
King Apartments Project):
NR* Ba1 920 Series A, 6.75% due 5/01/2031 761
NR* NR* 1,500 Sub-Series C, 9.50% due 11/01/2031 1,168
NR* Caa2 4,000 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds
(America West Airlines Inc. Project), AMT, 6.30% due 4/01/2023 3,000
NR* Baa2 500 Yavapai County, Arizona, IDA, Hospital Facility Revenue Bonds
(Yavapai Regional Medical Center), Series A, 6% due 8/01/2033 502
====================================================================================================================================
California--3.7% BBB A3 1,800 California State, GO, 5% due 2/01/2033 1,721
California State, Various Purpose, GO:
BBB A3 1,300 5.25% due 11/01/2025 1,309
BBB A3 820 5.25% due 4/01/2034 814
Golden State Tobacco Securitization Corporation of California,
Tobacco Settlement Revenue Bonds:
BBB Baa3 1,075 Series 2003-A-1, 6.75% due 6/01/2039 958
BBB- Baa1 1,860 Series B, 5.50% due 6/01/2043 1,836
====================================================================================================================================
Colorado--5.5% NR* Baa2 3,000 Denver, Colorado, Urban Renewal Authority, Tax Increment
Revenue Bonds (Pavilions), AMT, 7.75% due 9/01/2016 3,168
NR* NR* 2,800 Elk Valley, Colorado, Public Improvement Revenue Bonds (Public
Improvement Fee), Series A, 7.30% due 9/01/2022 2,898
A1 VMIG1+ 500 Moffat County, Colorado, PCR, Refunding (Pacificorp Projects),
VRDN, 1.08% due 5/01/2013 (a)(e) 500
NR* NR* 1,235 North Range, Colorado, Metropolitan District Number 1, GO,
7.25% due 12/15/2031 1,223
NR* NR* 2,000 Plaza Metropolitan District No. 1, Colorado, Tax Allocation
Revenue Bonds (Public Improvement Fees), 8% due 12/01/2025 2,044
====================================================================================================================================
Connecticut--0.7% NR* B1 1,220 New Haven, Connecticut, Facility Revenue Bonds (Hill Health
Corporation Project), 9.25% due 5/01/2017 1,225
====================================================================================================================================
Florida--7.7% NR* NR* 865 Arbor Greene Community Development District, Florida, Special
Assessment Revenue Bonds, 7.60% due 5/01/2018 895
NR* NR* 800 Capital Projects Finance Authority, Florida, Continuing Care
Retirement Revenue Bonds (Glenridge on Palmer Ranch), Series A,
8% due 6/01/2032 811
NR* NR* 2,500 Hillsborough County, Florida, IDA, Exempt Facilities Revenue
Bonds (National Gypsum), AMT, Series A, 7.125% due 4/01/2030 2,620
NR* NR* 895 Lakewood Ranch, Florida, Community Development District Number
5, Special Assessment Revenue Refunding Bonds, Series A, 6.70%
due 5/01/2031 930
NR* NR* 1,605 Orlando, Florida, Urban Community Development District, Capital
Improvement Special Assessment Bonds, Series A, 6.95%
due 5/01/2033 1,685
NR* NR* 3,004 Parkway Center, Florida, Community Development District Special
Assessment Refunding Bonds, Series B, 8% due 5/01/2010 2,478
B- B1 1,700 Santa Rosa Bay Bridge Authority, Florida, Revenue Bonds, 6.25%
due 7/01/2028 1,431
NR* NR* 2,760 Tampa Palms, Florida, Open Space and Transportation Community
Development District Revenue Bonds, Capital Improvement
(Richmond Place Project), 7.50% due 5/01/2018 2,891
====================================================================================================================================
Portfolio Abbreviations
To simplify the listings of Apex Municipal Fund, Inc.'s portfolio holdings in
the Schedule of Investments, we have abbreviated the names of many of the
securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
EDA Economic Development Authority
GO General Obligation Bonds
IDA Industrial Development Authority
IDB Industrial Development Board
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
VRDN Variable Rate Demand Notes
6 APEX MUNICIPAL FUND, INC. JUNE 30, 2004
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings@ Ratings@ Amount Municipal Bonds Value
====================================================================================================================================
Georgia--2.5% NR* NR* $ 2,000 Atlanta, Georgia, Tax Allocation Revenue Bonds (Atlantic
Station Project), 7.90% due 12/01/2024 $ 2,074
BBB NR* 1,500 Milledgeville--Baldwin County, Georgia, Development Authority
Revenue Bonds (Georgia College and State University Foundation),
5.25% due 9/01/2019 1,486
NR* NR* 830 Savannah, Georgia, EDA, Revenue Bonds (Marshes of Skidaway),
First Mortgage, Series A, 7.40% due 1/01/2034 827
====================================================================================================================================
Idaho--0.8% NR* NR* 1,470 Idaho Health Facilities Authority, Revenue Refunding Bonds
(Valley Vista Care Corporation), Series A, 7.75% due 11/15/2016 1,467
====================================================================================================================================
Illinois--3.4% CCC Caa2 3,000 Chicago, Illinois, O'Hare International Airport, Special
Facility Revenue Refunding Bonds (American Airlines Inc.
Project), 8.20% due 12/01/2024 2,370
NR* NR* 400 Chicago, Illinois, Special Assessment Bonds (Lake Shore East),
6.75% due 12/01/2032 408
NR* NR* 3,190 Illinois Development Finance Authority Revenue Bonds (Primary
Health Care Centers Facilities Acquisition Program), 7.75%
due 12/01/2016 3,372
====================================================================================================================================
Indiana--1.9% NR* NR* 2,600 Indiana State Educational Facilities Authority, Revenue
Refunding Bonds (Saint Joseph's College Project), 7%
due 10/01/2029 2,700
NR* NR* 1,820 Indianapolis, Indiana, M/F Revenue Bonds (Lake Nora Fox Club
Project), Series B, 7.50% due 10/01/2029 (b) 692
====================================================================================================================================
Iowa--2.6% NR* NR* 3,910 Iowa Finance Authority, Health Care Facilities Revenue
Refunding Bonds (Care Initiatives Project), 9.25% due 7/01/2025 4,575
====================================================================================================================================
Louisiana--3.6% B NR* 825 Hodge, Louisiana, Utility Revenue Refunding Bonds (Stone
Container Corporation), AMT, 7.45% due 3/01/2024 832
BB- NR* 5,500 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain
Company Project), 7.50% due 7/01/2013 5,668
====================================================================================================================================
Maine--0.5% BB Ba2 840 Maine Finance Authority, Solid Waste Recycling Facilities
Revenue Bonds (Great Northern Paper Project--Bowater), AMT,
7.75% due 10/01/2022 843
====================================================================================================================================
Maryland--2.1% AAA NR* 1,875 Anne Arundel County, Maryland, Special Obligation Revenue Bonds
(Arundel Mills Project), 7.10% due 7/01/2009 (d) 2,232
NR* NR* 1,500 Maryland State Energy Financing Administration, Limited
Obligation Revenue Bonds (Cogeneration--AES Warrior Run), AMT,
7.40% due 9/01/2019 1,531
====================================================================================================================================
Massachusetts--4.7% BBB NR* 825 Massachusetts State Development Finance Agency, Resource
Recovery Revenue Bonds (Ogden Haverhill Associates), AMT,
Series A, 6.70% due 12/01/2014 860
Massachusetts State Development Finance Agency, Revenue
Refunding Bonds (Eastern Nazarene College):
BB+ NR* 1,245 5.625% due 4/01/2019 1,117
BB+ NR* 1,220 5.625% due 4/01/2029 1,026
BBB- NR* 850 Massachusetts State Health and Educational Facilities Authority,
Revenue Bonds (Jordan Hospital), Series E, 6.75% due 10/01/2033 863
NR* Ba2 3,000 Massachusetts State Health and Educational Facilities Authority,
Revenue Refunding Bonds (Bay Cove Human Services Issue), Series
A, 5.90% due 4/01/2028 2,806
NR* NR* 1,300 Massachusetts State Industrial Finance Agency Revenue Bonds,
Sewer Facility (Resource Control Composting), AMT, 9.25%
due 6/01/2010 1,309
BBB NR* 500 Massachusetts State Industrial Financial Agency, Resource
Recovery Revenue Refunding Bonds (Ogden Haverhill Project), AMT,
Series A, 5.60% due 12/01/2019 481
====================================================================================================================================
Michigan--1.1% A NR* 1,000 Flint, Michigan, Hospital Building Authority, Revenue Refunding
Bonds (Hurley Medical Center), Series A, 6% due 7/01/2020 1,042
B Ba3 1,000 Michigan State Hospital Finance Authority, Revenue Refunding
Bonds (Detroit Medical Center Obligation Group), Series A,
6.50% due 8/15/2018 846
====================================================================================================================================
APEX MUNICIPAL FUND, INC. JUNE 30, 2004 7
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings@ Ratings@ Amount Municipal Bonds Value
====================================================================================================================================
Minnesota--0.7% NR* NR* $ 1,230 Saint Paul, Minnesota, Port Authority, Hotel Facility Revenue
Refunding Bonds (Radisson Kellogg Project), Series 2, 7.375%
due 8/01/2029 $ 1,234
====================================================================================================================================
Missouri--0.7% NR* NR* 1,200 Fenton, Missouri, Tax Increment Revenue Refunding and
Improvement Bonds (Gravois Bluffs), 7% due 10/01/2021 1,284
====================================================================================================================================
Nevada--0.2% NR* NR* 430 Clark County, Nevada, Improvement District No. 142 Special
Assessment, 6.375% due 8/01/2023 435
====================================================================================================================================
New Jersey--13.5% Camden County, New Jersey, Improvement Authority, Lease Revenue
Bonds (Holt Hauling & Warehousing), AMT, Series A (b):
NR* NR* 2,000 9.625% due 1/01/2011 281
NR* NR* 4,500 9.875% due 1/01/2021 632
CCC B2 6,000 Camden County, New Jersey, Pollution Control Financing
Authority, Solid Waste Resource Recovery Revenue Refunding
Bonds, AMT, Series A, 7.50% due 12/01/2010 5,857
NR* Ba3 1,500 New Jersey EDA, IDR, Refunding (Newark Airport Marriott Hotel),
7% due 10/01/2014 1,517
New Jersey EDA, Retirement Community Revenue Bonds, Series A:
NR* NR* 1,000 (Cedar Crest Village Inc. Facility), 7.25% due 11/15/2031 1,009
NR* NR* 3,700 (Seabrook Village Inc.), 8.125% due 11/15/2023 3,939
New Jersey EDA, Special Facility Revenue Bonds (Continental
Airlines Inc. Project), AMT:
B Caa2 3,050 6.625% due 9/15/2012 2,708
B Caa2 5,135 6.25% due 9/15/2029 3,755
BB+ NR* 1,870 New Jersey Health Care Facilities Financing Authority, Revenue
Bonds (Pascack Valley Hospital Association), 6.625%
due 7/01/2036 1,695
BBB Baa3 3,025 Tobacco Settlement Financing Corporation of New Jersey Revenue
Bonds, 6.75% due 6/01/2039 2,695
====================================================================================================================================
New Mexico--2.9% B+ Ba3 5,000 Farmington, New Mexico, PCR, Refunding (Tucson Electric Power
Co.--San Juan Project), Series A, 6.95% due 10/01/2020 5,158
====================================================================================================================================
New York--3.5% NR* NR* 1,000 Dutchess County, New York, IDA, Civic Facility Revenue Bonds
(Saint Francis Hospital), Series B, 7.50% due 3/01/2029 967
NR* NR* 350 New York City, New York, City IDA, Civic Facility Revenue Bonds,
Series C, 6.80% due 6/01/2028 358
BB+ Ba2 1,730 New York City, New York, City IDA, Special Facility Revenue
Bonds (British Airways PLC Project), AMT, 7.625% due 12/01/2032 1,717
Utica, New York, GO, Public Improvement:
BBB Baa3 700 9.25% due 8/15/2004 705
BBB Baa3 700 9.25% due 8/15/2005 744
BBB Baa3 635 9.25% due 8/15/2006 702
NR* NR* 1,180 Westchester County, New York, IDA, Continuing Care Retirement,
Mortgage Revenue Bonds (Kendal on Hudson Project), Series A,
6.50% due 1/01/2034 1,152
====================================================================================================================================
North Carolina--0.6% NR* NR* 1,000 North Carolina Medical Care Commission, Retirement Facilities,
First Mortgage Revenue Bonds (Givens Estates Project), Series A,
6.50% due 7/01/2032 1,003
====================================================================================================================================
Oklahoma--0.2% B- Caa2 420 Tulsa, Oklahoma, Municipal Airport Trust Revenue Refunding
Bonds (AMR Corporation), AMT, Series A, 5.80% due 6/01/2035 409
====================================================================================================================================
Oregon--0.7% NR* NR* 1,310 Western Generation Agency, Oregon, Cogeneration Project Revenue
Bonds (Wauna Cogeneration Project), AMT, Series B, 7.40%
due 1/01/2016 1,333
====================================================================================================================================
8 APEX MUNICIPAL FUND, INC. JUNE 30, 2004
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings@ Ratings@ Amount Municipal Bonds Value
====================================================================================================================================
Pennsylvania--5.5% NR* NR* $ 1,750 Chester County, Pennsylvania, Health and Education Facilities
Authority, Senior Living Revenue Refunding Bonds (Jenners Pond
Inc. Project), 7.625% due 7/01/2034 $ 1,745
Montgomery County, Pennsylvania, Higher Education and Health
Authority Revenue Bonds (Faulkeways at Gwynedd Project):
BBB NR* 900 6.75% due 11/15/2024 928
BBB NR* 925 6.75% due 11/15/2030 948
Philadelphia, Pennsylvania, Authority for IDR:
NR* Ba1 1,600 (Air Cargo), AMT, Series A, 7.50% due 1/01/2025 1,594
NR* NR* 4,460 Commercial Development, 7.75% due 12/01/2017 4,556
====================================================================================================================================
Tennessee--1.0% NR* NR* 1,800 Shelby County, Tennessee, Health, Educational and Housing
Facilities Board Revenue Bonds (Germantown Village), Series A,
7.25% due 12/01/2034 1,797
====================================================================================================================================
Texas--12.6% BBB- Baa3 1,000 Austin, Texas, Convention Center Revenue Bonds (Convention
Enterprises Inc.), First Tier, Series A, 6.70% due 1/01/2028 1,037
Brazos River Authority, Texas, PCR, Refunding, AMT:
BBB Baa2 2,530 (Texas Utility Company), Series A, 7.70% due 4/01/2033 2,896
BBB Baa2 2,870 (Utilities Electric Company), Series B, 5.05%
due 6/01/2030 2,960
BBB- NR* 1,220 Brazos River Authority, Texas, Revenue Refunding Bonds (Reliant
Energy Inc. Project), Series B, 7.75% due 12/01/2018 1,332
A A3 2,500 Brazos River, Texas, Harbor Navigation District, Brazoria
County Environmental Revenue Refunding Bonds (Dow Chemical
Company Project), AMT, Series A-7, 6.625% due 5/15/2033 2,661
BBB- Baa3 715 Dallas-Fort Worth, Texas, International Airport Facility,
Improvement Corporation Revenue Bonds (Learjet Inc.), AMT,
Series 2001-A-1, 6.15% due 1/01/2016 707
NR* NR* 1,660 Grand Prairie, Texas, Housing Finance Corporation Revenue Bonds
(Independent Senior Living Center), 7.75% due 1/01/2034 1,600
BBB Baa2 1,000 Gulf Coast, Texas, Waste Disposal Authority, Revenue Refunding
Bonds (International Paper Company), AMT, Series A, 6.10%
due 8/01/2024 1,014
A1 VMIG1+ 300 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Texas Children's Hospital), VRDN,
Series B-1, 1.01% due 10/01/2029 (c)(e) 300
NR* NR* 1,000 Houston, Texas, Health Facilities Development Corporation,
Retirement Facility Revenue Bonds (Buckingham Senior Living
Community), Series A, 7.125% due 2/15/2034 987
A- A3 1,700 Lower Colorado River Authority, Texas, PCR (Samsung Austin
Semiconductor), AMT, 6.375% due 4/01/2027 1,813
BBB NR* 945 Lufkin, Texas, Health Facilities Development Corporation,
Health System Revenue Bonds (Memorial Health System of East
Texas), 5.70% due 2/15/2028 881
BBB- Ba2 2,310 Matagorda County, Texas, Navigation District Number 1, Revenue
Refunding Bonds (Reliant Energy Inc.), Series C, 8%
due 5/01/2029 2,542
A1 NR* 400 North Central Texas, Health Facility Development Corporation
Revenue Bonds (Methodist Hospitals--Dallas), VRDN, Series B,
1.10% due 10/01/2015 (c)(e) 400
BB Ba3 1,330 Port Corpus Christi, Texas, Individual Development Corporation,
Environmental Facilities Revenue Bonds (Citgo Petroleum
Corporation Project), AMT, 8.25% due 11/01/2031 1,402
====================================================================================================================================
Utah--1.3% NR* NR* 2,240 Carbon County, Utah, Solid Waste Disposal Revenue Refunding
Bonds (Laidlaw Environmental), AMT, Series A, 7.45%
due 7/01/2017 2,308
====================================================================================================================================
APEX MUNICIPAL FUND, INC. JUNE 30, 2004 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (concluded) (in Thousands)
S&P Moody's Face
State Ratings@ Ratings@ Amount Municipal Bonds Value
====================================================================================================================================
Virginia--6.6% NR* NR* $ 2,490 Dulles Town Center, Virginia, Community Development Authority,
Special Assessment Tax (Dulles Town Center Project), 6.25%
due 3/01/2026 $ 2,520
NR* NR* 3,000 Pittsylvania County, Virginia, IDA Revenue Refunding Bonds,
Exempt Facility, AMT, Series A, 7.50% due 1/01/2014 2,586
Pocahontas Parkway Association, Virginia, Toll Road Revenue
Bonds:
NR* B1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2034 364
BB Ba2 32,600 Senior Series B, 5.875%** due 8/15/2025 6,319
====================================================================================================================================
West Virginia--0.4% B- B2 875 Princeton, West Virginia, Hospital Revenue Refunding Bonds
(Community Hospital Association Inc. Project), 6.20%
due 5/01/2013 728
====================================================================================================================================
Wisconsin--0.8% NR* NR* 1,320 Wisconsin State Health and Educational Facilities Authority
Revenue Bonds (New Castle Place Project), Series A, 7%
due 12/01/2031 1,326
====================================================================================================================================
Wyoming--1.0% BB+ Ba3 1,800 Sweetwater County, Wyoming, Solid Waste Disposal Revenue Bonds
(FMC Corporation Project), AMT, Series A, 7% due 6/01/2024 1,814
====================================================================================================================================
Virgin Islands--1.2% BBB- Baa3 2,100 Virgin Islands Government Refinery Facilities Revenue Refunding
Bonds (Hovensa Coker Project), AMT, 6.50% due 7/01/2021 2,222
----------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Cost--$184,998)--98.9% 176,927
====================================================================================================================================
Total Investments (Cost--$184,998)--98.9% 176,927
Other Assets Less Liabilities--1.1% 2,056
--------
Net Assets--100.0% $178,983
========
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
+ Highest short-term rating by Moody's Investors Service, Inc.
@ Ratings of issues shown are unaudited.
(a) AMBAC Insured.
(b) Non-income producing security.
(c) MBIA Insured.
(d) Prerefunded.
(e) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at June 30,
2004.
See Notes to Financial Statements.
10 APEX MUNICIPAL FUND, INC. JUNE 30, 2004
Statement of Assets, Liabilities and Capital
As of June 30, 2004
================================================================================================================
Assets
----------------------------------------------------------------------------------------------------------------
Investments, in unaffiliated securities, at value
(identified cost--$184,997,857) ........................ $ 176,927,037
Cash .................................................... 48,085
Receivables:
Interest ............................................. $ 3,091,819
Securities sold ...................................... 947,595 4,039,414
-----------
Prepaid expenses ........................................ 1,206
-------------
Total assets ............................................ 181,015,742
-------------
================================================================================================================
Liabilities
----------------------------------------------------------------------------------------------------------------
Payables:
Securities purchased ................................. 1,908,486
Dividends to shareholders ............................ 84,206
Investment adviser ................................... 9,514
Other affiliates ..................................... 943 2,003,149
-----------
Accrued expenses ........................................ 29,351
-------------
Total liabilities ....................................... 2,032,500
-------------
================================================================================================================
Net Assets
----------------------------------------------------------------------------------------------------------------
Net Assets .............................................. $ 178,983,242
=============
================================================================================================================
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 ........................ 199,958,756
Undistributed investment income--net .................... $ 2,169,276
Accumulated realized capital losses on investments--net . (17,033,643)
Unrealized depreciation on investments--net ............. (8,070,820)
-----------
Total accumulated losses--net ........................... (22,935,187)
-------------
Total capital--Equivalent to $9.13 net asset value per
share of Common Stock (market price--$8.26) ............ $ 178,983,242
=============
See Notes to Financial Statements
APEX MUNICIPAL FUND, INC. JUNE 30, 2004 11
[LOGO] Merrill Lynch Investment Managers
Statement of Operations
For the Year Ended June 30, 2004
================================================================================================================
Investment Income
----------------------------------------------------------------------------------------------------------------
Interest ................................................ $ 13,081,121
================================================================================================================
Expenses
----------------------------------------------------------------------------------------------------------------
Investment advisory fees ................................ $ 1,160,343
Accounting services ..................................... 68,627
Transfer agent fees ..................................... 46,219
Printing and shareholder reports ........................ 40,368
Professional fees ....................................... 23,502
Listing fees ............................................ 20,800
Pricing fees ............................................ 13,645
Directors' fees and expenses ............................ 12,608
Custodian fees .......................................... 11,341
Other ................................................... 20,433
-----------
Total expenses .......................................... 1,417,886
-------------
Investment income--net .................................. 11,663,235
-------------
================================================================================================================
Realized & Unrealized Gain on Investments--Net
----------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ....................... 51,260
Change in unrealized depreciation on investments--net ... 2,365,416
-------------
Total realized and unrealized gain on investments--net .. 2,416,676
-------------
Net Increase in Net Assets Resulting from Operations .... $ 14,079,911
=============
See Notes to Financial Statements.
12 APEX MUNICIPAL FUND, INC. JUNE 30, 2004
Statements of Changes in Net Assets
For the Year Ended
June 30,
----------------------------
Increase (Decrease) in Net Assets: 2004 2003
================================================================================================================
Operations
----------------------------------------------------------------------------------------------------------------
Investment income--net .................................. $11,663,235 $ 11,396,416
Realized gain (loss) on investments--net ................ 51,260 (1,270,071)
Change in unrealized depreciation on investments--net ... 2,365,416 (4,173,234)
----------------------------
Net increase in net assets resulting from operations .... 14,079,911 5,953,111
----------------------------
================================================================================================================
Dividends & Distributions to Shareholders
----------------------------------------------------------------------------------------------------------------
Investment income--net .................................. (11,150,541) (10,930,489)
Realized gain on investments--net ....................... (61,886) --
----------------------------
Net decrease in net assets resulting from dividends and
distributions to shareholders .......................... (11,212,427) (10,930,489)
----------------------------
================================================================================================================
Net Assets
----------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ................. 2,867,484 (4,977,378)
Beginning of year ....................................... 176,115,758 181,093,136
----------------------------
End of year* ............................................ $178,983,242 $ 176,115,758
============================
* Undistributed investment income--net ............... $ 2,169,276 $ 1,561,994
============================
See Notes to Financial Statements
APEX MUNICIPAL FUND, INC. JUNE 30, 2004 13
[LOGO] Merrill Lynch Investment Managers
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended June 30,
---------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
===================================================================================================================================
Per Share Operating Performance
-----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year .................... $ 8.99 $ 9.24 $ 9.45 $ 9.33 $ 10.37
--------------------------------------------------------
Investment income--net ................................ .60+ .58+ .58 .59 .66
Realized and unrealized gain (loss) on investments--net .11 (.27) (.22) .13 (1.03)
--------------------------------------------------------
Total from investment operations ...................... .71 .31 .36 .72 (.37)
--------------------------------------------------------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net ............................. (.57) (.56) (.57) (.60) (.67)
Realized gain on investments--net .................. --** -- -- -- --
--------------------------------------------------------
Total dividends and distributions to Common Stock
shareholders ......................................... (.57) (.56) (.57) (.60) (.67)
--------------------------------------------------------
Net asset value, end of year .......................... $ 9.13 $ 8.99 $ 9.24 $ 9.45 $ 9.33
========================================================
Market price per share, end of year ................... $ 8.26 $ 8.48 $ 8.39 $ 9.10 $ 8.9375
========================================================
===================================================================================================================================
Total Investment Return*
-----------------------------------------------------------------------------------------------------------------------------------
Based on market price per share ....................... 4.20% 8.18% (1.64%) 9.05% (6.22%)
========================================================
Based on net asset value per share .................... 8.64% 4.13% 4.31% 8.48% (3.23%)
========================================================
===================================================================================================================================
Ratios to Average Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Expenses .............................................. .79% .90% .87% .82% .81%
========================================================
Investment income--net ................................ 6.52% 6.56% 6.19% 6.35% 6.71%
========================================================
===================================================================================================================================
Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ................ $178,983 $176,116 $181,093 $185,246 $182,879
========================================================
Portfolio turnover .................................... 19% 24% 25% 17% 20%
========================================================
* Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the 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, 2004
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 is listed on
the New York Stock Exchange under the symbol APX. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained by the
Fund's pricing service from one or more dealers that make markets in the
securities. Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of such exchanges.
Options written or purchased are valued at the last sale price in the case of
exchange-traded options. In the case of options traded in the over-the-counter
market, valuation is the last asked price (options written) or the last bid
price (options purchased). Swap agreements are valued by quoted fair values
received daily by the Fund from the counterparty. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Options -- The Fund may write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked-to-market to reflect
the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent
of the premiums received or paid (or gain or loss to the extent the cost
of the closing transaction exceeds the premium paid or received).
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 all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
APEX MUNICIPAL FUND, INC. JUNE 30, 2004 15
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
(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) Reclassifications -- 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, $7,056,648 has been reclassified between paid-in capital in excess of par
and accumulated realized capital losses on investments and $94,588 has been
reclassified between accumulated realized capital losses on investments and
undistributed net investment income as a result of permanent differences
attributable to the expiration of a capital loss carryforward, payments received
on a defaulted security and amortization methods for premiums and discounts on
fixed income securities. These reclassifications have 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.
For the year ended June 30, 2004, the Fund reimbursed FAM $3,635 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, 2004 were $34,948,383 and $34,058,642, respectively.
Net realized gains for the year ended June 30, 2004 and net unrealized
depreciation as of June 30, 2004 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains Depreciation
--------------------------------------------------------------------------------
Long-term investments ................... $ 51,260 $(8,070,820)
------------------------------
Total ................................... $ 51,260 $(8,070,820)
==============================
For the year ended June 30, 2004, net unrealized depreciation for federal income
tax purposes aggregated $7,839,849, of which $7,078,139 related to appreciated
securities and $14,917,988 related to depreciated securities. The aggregate cost
of investments at June 30, 2004 for federal income tax purposes was
$184,766,886.
4. Common Stock Transactions:
At June 30, 2004, 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 29, 2004 to shareholders of record on July
15, 2004.
The tax character of distributions paid during the fiscal years ended June 30,
2004 and June 30, 2003 was as follows:
--------------------------------------------------------------------------------
6/30/2004 6/30/2003
--------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income .................... $11,150,541 $10,930,489
Ordinary income ...................... 61,886 --
------------------------------
Total distributions ...................... $11,212,427 $10,930,489
==============================
As of June 30, 2004, the components of accumulated losses on a tax basis were as
follows:
-----------------------------------------------------------------------------
Undistributed tax-exempt income--net .................... $ 2,636,703
Undistributed long-term capital gains--net .............. --
------------
Total undistributed earnings--net ....................... 2,636,703
Capital loss carryforward ................................ (16,465,384)*
Unrealized losses--net .................................. (9,106,506)**
------------
Total accumulated losses--net ........................... $(22,935,187)
============
* On June 30, 2004, the Fund had a net capital loss carryforward of
$16,465,384, of which $1,311,769 expires in 2005, $938,156 expires in
2006, $2,975,000 expires in 2008, $5,341,699 expires in 2009, $2,075,987
expires in 2010, $2,163,492 expires in 2011 and $1,659,281 expires in
2012. This amount will be available to offset like amounts of any future
taxable gains.
** The difference between book-basis and tax-basis net unrealized losses 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, 2004
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, 2004, 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of June 30, 2004, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Apex
Municipal Fund, Inc. as of June 30, 2004, 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, 2004
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, 2004 qualify as tax-exempt
interest dividends for federal income tax purposes.
Additionally, the Fund paid a taxable ordinary income distribution of $.003158
per share to shareholders of record on December 17, 2003.
Please retain this information for your records.
APEX MUNICIPAL FUND, INC. JUNE 30, 2004 17
[LOGO] Merrill Lynch Investment Managers
Automatic Dividend Reinvestment Plan (unaudited)
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, 2004
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, 2004 19
[LOGO] Merrill Lynch Investment Managers
About Inverse Floaters
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of reduced or
eliminated interest payments and losses of invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed rate, tax-exempt securities. To the extent the Fund invests in
inverse securities, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities.
Proxy Results
During the six-month period ended June 30, 2004, Apex Municipal Fund, Inc.'s
shareholders voted on the following proposal. The proposal was approved at a
shareholders' meeting on April 27, 2004. A description of the proposal and
number of shares voted are as follows:
----------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
----------------------------------------------------------------------------------------------------------
1. To elect the Fund's Board of Directors:
Andre F. Perold 17,602,484 563,123
Robert S. Salomon, Jr. 17,594,824 570,783
----------------------------------------------------------------------------------------------------------
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, 2004
Officers and Directors (unaudited)
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
------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 1999 to President of the Merrill Lynch Investment Managers, 125 Funds None
Glenn* Princeton, NJ and present L.P. ("MLIM")/Fund Asset Management, L.P. 160 Portfolios
08543-9011 Director and ("FAM")--Advised Funds since 1999; Chairman
Age: 63 1989 to (Americas Region) of MLIM from 2000 to 2002;
present Executive Vice President of MLIM and FAM (which
terms as used herein include their corporate
predecessors) from 1983 to 2002; President of
FAM Distributors, Inc. ("FAMD") from 1986 to 2002
and Director thereof from 1991 to 2002; Executive
Vice President and Director of Princeton Services,
Inc. ("Princeton Services") from 1993 to 2002;
President of Princeton Administrators, L.P. from
1989 to 2002; Director of Financial Data Services,
Inc. since 1985.
------------------------------------------------------------------------------------------------------------------------
* Mr. Glenn 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. Glenn is an "interested person," as described in the Investment Company Act, of
the Fund based on his present and former positions with MLIM, FAM, FAMD, Princeton Services and Princeton
Administrators, L.P. The Director's term is unlimited. Directors serve until their resignation, removal or death, or
until December 31 of the year in which they turn 72. As Fund President, Mr. Glenn 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: 60 Holding Corporation since 1980; Partner, Squire,
Sanders & Dempsey from 1980 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Joe Grills P.O. Box 9095 Director 1994 to Member of the Committee of Investment of 38 Funds Kimco
Princeton, NJ present Employee Benefit Assets of the Association of 55 Portfolios Realty
08543-9095 Financial Professionals ("CIEBA") since 1986; Corporation
Age: 69 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 Management Company since 1992 and
Vice Chairman thereof since 1998; 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 and Vice Chairman
thereof since 2002; 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, 2004 21
[LOGO] Merrill Lynch Investment Managers
Officers and Directors (unaudited) (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: 65 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; Limited Partner,
Hypertech LP since 1996.
------------------------------------------------------------------------------------------------------------------------------------
Andre F. P.O. Box 9095 Director 2002 to Harvard Business School: George Gund Professor 38 Funds None
Perold Princeton, NJ present of Finance and Banking since 2000; Senior 55 Portfolios
08543-9095 Associate Dean, Director of Faculty Recruiting
Age: 52 since 2001; Finance Area Chair from 1996 to
2001; Sylvan C. Coleman Professor of Financial
Management from 1993 to 2000; Director,
Genbel Securities Limited and Gensee Bank from
1999 to 2003; Director, Stockback, Inc. from 2000
to 2002; Director, Sanlam Limited from 2001 to
2003; Trustee, Commonfund from 1989 to 2001;
Director, Sanlam Investment Management from
1999 to 2001; Director, Bulldogresearch.com from
2000 to 2001; Director, Quantec Limited from 1991
to 1999; Director and Chairman of the Board of
UNX Inc. since 2003.
------------------------------------------------------------------------------------------------------------------------------------
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: 61 the Board of Governors thereof from 1994 to 1997;
Shareholder, Poole, Kelly & Ramo, Attorneys at Law,
P.C. from 1977 to 1993; Director, Coopers, Inc.
since 1999; Director of ECMC Group (service to
provider 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.
------------------------------------------------------------------------------------------------------------------------------------
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 55 Portfolios
Jr. 08543-9095 Brothers Asset Management from 1992 until 1995;
Age: 67 Chairman of Salomon Brothers equity mutual funds
from 1992 until 1995; regular columnist with Forbes
magazine from 1992 to 2002; Director of Stock
Research and U.S. Equity Strategist at Salomon
Brothers from 1975 until 1991; Trustee, Commonfund
from 1980 to 2001.
------------------------------------------------------------------------------------------------------------------------------------
Stephen B. P.O. Box 9095 Director 1989 to Chairman of Fernwood Associates (investment 39 Funds None
Swensrud Princeton, NJ present adviser) since 1996; Principal, Fernwood Associates 55 Portfolios
08543-9095 (financial consultants) since 1975; Chairman of
Age: 71 R.P.P. Corporation (manufacturing company) since
1978; Director of International Mobile
Communications, Incorporated (telecommunications
company) since 1998.
------------------------------------------------------------------------------------------------------------------------
* The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of
the year in which they turn 72.
22 APEX MUNICIPAL FUND, INC. JUNE 30, 2004
Officers and Directors (unaudited) (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
Burke Princeton, NJ President present since 1999; Senior Vice President and Treasurer of Princeton Services since
08543-9011 and and 1999; Vice President of FAMD since 1999; Director of MLIM Taxation
Age: 44 Treasurer 1999 to since 1990.
present
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9011 Senior 2002 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
Jacob Princeton, NJ Vice present Management) of MLIM from 1997 to 2000.
08543-9011 President
Age: 53
------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 Senior 2002 to Managing Director of MLIM since 2000 and Director (Municipal Tax-Exempt Fund
Loffredo Princeton, NJ Vice present Management) of MLIM from 1998 to 2000.
08543-9011 President
Age: 40
------------------------------------------------------------------------------------------------------------------------------------
Theodore P.O. Box 9011 Vice 1997 to Director (Municipal Tax-Exempt Fund Management) of MLIM since 2000; Vice
R. Jaeckel Princeton, NJ President present President of MLIM from 1994 to 2000.
Jr. 08543-9011
Age: 44
------------------------------------------------------------------------------------------------------------------------------------
Phillip S. P.O. Box 9011 Secretary 2004 to First Vice President of MLIM since 2001; Director (Legal Advisory) of MLIM from
Gillespie Princeton, NJ present 2000 to 2001; Vice President of MLIM from 1999 to 2000 and Attorney associated
08543-9011 with MLIM since 1998.
Age: 40
------------------------------------------------------------------------------------------------------------------------
* 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
New York, NY 10286
NYSE Symbol
APX
APEX MUNICIPAL FUND, INC. JUNE 30, 2004 23
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Apex Municipal Fund, Inc. seeks to provide shareholders with high current income
exempt from federal income taxes by investing primarily in a portfolio of
medium-to-lower grade or unrated municipal obligations, the interest on which is
exempt from federal income taxes in the opinion of bond counsel to the issuer.
This report, including the financial information herein, is transmitted to
shareholders of Apex Municipal Fund, Inc. for their information. It is not a
prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
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 -- 6/04
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, (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, 2004 - $31,200
Fiscal Year Ending June 30, 2003 - $24,000
(b) Audit-Related Fees - Fiscal Year Ending June 30, 2004 - $0
Fiscal Year Ending June 30, 2003 - $0
(c) Tax Fees - Fiscal Year Ending June 30, 2004 - $5,610
Fiscal Year Ending June 30, 2003 - $4,800
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending June 30, 2004 - $0
Fiscal Year Ending June 30, 2003 - $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, 2004 - $16,114,216
Fiscal Year Ending June 30, 2003 - $17,689,695
(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) - $541,640, 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
Joe Grills
Herbert I. London
Andre F. Perold
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 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 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 10 - Controls and Procedures
10(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.
10(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 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - See Item 2
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(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/ Terry K. Glenn
----------------------------
Terry K. Glenn,
President of
Apex Municipal Fund, Inc.
Date: August 13, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Terry K. Glenn
----------------------------
Terry K. Glenn,
President of
Apex Municipal Fund, Inc.
Date: August 13, 2004
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
Apex Municipal Fund, Inc.
Date: August 13, 2004