UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-05227
Name of Fund: Apex Municipal Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Apex Municipal Fund, Inc., 800 Scudders Mill Road, Plainsboro,
NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 06/30/06
Date of reporting period: 07/01/05 - 12/31/05
Item 1 - Report to Stockholders
Apex Municipal
Fund, Inc.
Semi-Annual Report
December 31, 2005
Apex Municipal Fund, Inc.
Portfolio Information as of December 31, 2005
Percent of
Quality Ratings by Total
S&P/Moody's Investments
--------------------------------------------------------------------------------
A/A ..................................................... 2.4%
BBB/Baa ................................................. 19.3
BB/Ba ................................................... 15.7
B/B ..................................................... 7.0
CCC/Caa ................................................. 3.8
NR (Not Rated) .......................................... 49.6
Other* .................................................. 2.2
--------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments, anticipation notes
and variable rate demand notes.
Officers and Directors
Robert C. Doll, Jr., President and Director
James H. Bodurtha, Director
Kenneth A. Froot, Director
Joe Grills, Director
Herbert I. London, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Stephen B. Swensrud, Director
Donald C. Burke, Vice President and Treasurer
Kenneth A. Jacob, Senior Vice President
John M. Loffredo, Senior Vice President
Theodore R. Jaeckel Jr., Vice President
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
The Bank of New York
101 Barclay Street -- 11 East
New York, NY 10286
NYSE Symbol
APX
--------------------------------------------------------------------------------
Effective January 1, 2006, Stephen B. Swensrud retired as Director of Apex
Municipal Fund, Inc. The Fund's Board of Directors wishes Mr. Swensrud well in
his retirement.
--------------------------------------------------------------------------------
2 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005
A Letter From the President
Dear Shareholder
On balance, 2005 was a year of "muddling through" for the U.S. financial
markets, as oil prices reached new record highs, the Federal Reserve Board (the
Fed) increased the target federal funds rate from 2.25% to 4.25%, the housing
market and the consumer finally showed some signs of slowing, and Hurricanes
Katrina and Rita ravaged the Gulf Coast, causing yet untold economic damage.
Although they struggled, stocks managed to post their third straight year of
positive performance. The year was equally uncertain for fixed income markets,
which were bemused by a flattening yield curve and a number of significant
credit events that brought a slowdown in high yield market returns. Notably, the
one-year results for the major asset classes -- stocks, bonds and cash -- were
the closest they have been in more than 100 years. For the 12- and six-month
periods ended December 31, 2005, most of the major market indexes managed to
land in positive territory:
Total Returns as of December 31, 2005 6-month 12-month
===================================================================================================
U.S. equities (Standard & Poor's 500 Index) + 5.77% + 4.91%
---------------------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) + 5.88 + 4.55
---------------------------------------------------------------------------------------------------
International equities (MSCI Europe Australasia Far East Index) +14.88 +13.54
---------------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.08 + 2.43
---------------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.60 + 3.51
---------------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) + 1.48 + 2.26
---------------------------------------------------------------------------------------------------
In hindsight, these numbers are reasonably good given the headwinds facing the
markets in 2005. U.S. equities found support in strong corporate earnings, low
core inflation and healthy company balance sheets. Strength in the global
economy and non-U.S. equity markets helped, as did robust dividend-distribution,
share-buyback and merger-and-acquisition activity. International stocks had an
excellent year, with many markets benefiting from strong economic statistics,
trade surpluses and solid finances. In the U.S. bond market, long-term yields
remained low and, at year-end, the Treasury curve appeared ready to invert.
As 2006 begins, the largest question marks center on the Fed's future moves, the
U.S. consumer's ability (or inability) to continue spending, the direction of
the U.S. dollar following a year of appreciation and the potential for continued
strong economic and corporate earnings growth. As you turn the calendar and
consider how these factors might impact your investments, remember that the new
year is a good time to meet with your financial advisor to review your financial
goals, and to make portfolio changes where necessary. For investing insights and
timely "food for thought" for investors, we also invite you to visit Shareholder
magazine at www.mlim.ml.com/shareholdermagazine.
As always, we thank you for trusting Merrill Lynch Investment Managers with your
investment assets, and we look forward to serving you in the new year and
beyond.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Director
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005 3
A Discussion With Your Fund's Portfolio Manager
The Fund outperformed the Lipper High Yield Municipal Debt Funds category
average for the period, as we continued our efforts to diversify the portfolio
among sectors and issuers.
Describe the recent market environment relative to municipal bonds.
Long-term bond yields generally rose over the past six months, while their
prices, which move in the opposite direction, fell. The decline in bond prices,
and corresponding rise in yields, came as investors continued to focus on
potential inflationary pressures and a strengthening U.S. economy. For the third
quarter of 2005, gross domestic product grew at a faster-than-expected rate of
4.1%. By period-end, 30-year U.S. Treasury bond yields stood at 4.54%, up 35
basis points (.35%) compared to six months earlier.
The Federal Reserve Board (the Fed) continued to raise short-term interest rates
at each of its meetings during the period, lifting the federal funds target rate
to 4.25%. Investors did not expect the current interest rate tightening cycle to
be curtailed in early 2006. Accordingly, the yield curve continued to flatten,
indicating that short-term interest rates were rising more than longer-term
rates. During the past six months, 10-year Treasury note yields rose 45 basis
points to 4.39%, slightly more than the increase seen in long-bond yields.
Tax-exempt bond yields exhibited a similar pattern during the period. According
to Municipal Market Data, the yield on AAA-rated issues maturing in 30 years
increased by 13 basis points to 4.39%, while the yield on AAA-rated issues
maturing in 10 years rose 31 basis points to 3.76%.
Municipalities issued more than $408 billion in new tax-exempt debt in 2005,
nearly 14% over the prior year's issuance and establishing a new annual record.
During the six-month period ended December 31, 2005, more than $200 billion in
new long-term municipal bonds was underwritten, an 18% increase over the same
six months of 2004. Meanwhile, the volume of refunding issues in 2005 increased
by more than 47% compared to 2004 as issuers took advantage of declining
long-term bond yields and a flattening yield curve to refinance outstanding
higher-couponed debt.
Investor demand for municipal product has generally remained positive. The most
current statistics from the Investment Company Institute indicate that,
year-to-date through November 2005, net new cash flows into long-term municipal
bond funds amounted to $6.25 billion -- a significant improvement from the $12.7
billion net outflow seen during the same period in 2004. In December, however,
surging equity prices and holiday seasonal factors led to reduced investor
interest in long-term tax-exempt bond funds.
In early 2006, we look for the municipal bond market to at least match the
performance of the U.S. Treasury market. The fundamentals for the tax-exempt
bond market appear very favorable, and continued positive cash flows are
anticipated. With municipal bonds currently yielding up to 98% of comparable
U.S. Treasury bond yields, and given the prospects for reduced annual issuance
in 2006, we believe the municipal bond market could enjoy solid results in the
coming months.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended December 31, 2005, the Common Stock of Apex
Municipal Fund, Inc. had net annualized yields of 5.83% and 5.84%, based on a
period-end per share net asset value of $9.83 and a per share market price of
$9.82, respectively, and $.289 per share income dividends. Over the same period,
the total investment return on the Fund's Common Stock was +3.13%, based on a
change in per share net asset value from $9.82 to $9.83, and assuming
reinvestment of all distributions.
The Fund's total return, based on net asset value, exceeded the +2.11% average
return of the Lipper High Yield Municipal Debt Funds category for the six-month
period. (Funds in this Lipper category invest at least 50% of their assets in
lower-rated municipal debt issues.) The relative outperformance is largely
attributable to our continued above-market exposure to industrial development
bonds as well as tax-backed revenue bonds, both of which benefited from the
ongoing contraction of credit spreads. In addition, our below-market exposure to
the poor-performing multi-family housing sector contributed to relative results.
This sector historically experiences the highest default rate in the high yield
tax-exempt arena, and our underweighting versus many of our competitors proved
to be an important factor in the Fund's outperformance.
4 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005
A further positive influence on performance came from our holdings in
airline-backed debt. This sector lagged for the majority of the period, but
enjoyed strong results in December against a backdrop of lower oil prices,
stronger passenger volumes and investors' increased optimism about airlines'
business prospects.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial Highlights section of
this report. As a closed-end fund, the Fund's shares may trade in the secondary
market at a premium or discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the Fund's
Common Stock can vary significantly from total investment returns based on
changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
As the market provided opportunities, we continued to trim the Fund's overweight
exposure to corporate-related debt -- the industrial development bonds in the
portfolio that outperformed. In particular, we reduced positions in the
chemicals, tobacco and forest products industries. We also started to pare back
exposure to airlines prior to the decline in that sector. We put those efforts
on hold temporarily in an effort to exit our airline-related investments at more
attractive levels and, in fact, reduced exposure to Continental Airlines Inc.
modestly in the latter half of the period as conditions improved. The portfolio
continues to maintain exposure to this credit and others within the industry.
The six-month period also brought the early redemption of one of the Fund's most
significant holdings -- an industrial development bond backed by a full-service
agricultural company known as Conti Group. Representing approximately 2.7% of
the portfolio's net assets, the bond was one of the Fund's largest and
longest-held investments. Proceeds from the redemption were invested in the
health care and hotels and lodging sectors, both of which we find to exhibit
stable credit outlooks.
How would you characterize the Fund's position at the close of the period?
Looking ahead, we expect to make further progress in reducing our overweight
position in industrial development bonds. A fuller recovery in the airline
sector would likely prompt renewed efforts to trim exposure there as well.
Given the extent to which credit spreads have contracted over the better part of
the past two years - three years, we are finding fewer compelling investment
opportunities in the high yield investment arena. Having said that, we continue
to use that dynamic to trim the portfolio's weaker holdings and believe we have
made significant strides in that respect over the past six months. At the same
time, we continue to scour the market for suitable opportunities in an effort to
provide our shareholders with an attractive level of income and enhance the
Fund's returns over time.
Theodore R. Jaeckel Jr., CFA
Vice President and Portfolio Manager
January 10, 2006
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005 5
Schedule of Investments (in Thousands)
Face
Amount Municipal Bonds Value
====================================================================================
Alabama--0.5%
$ 1,000 Brewton, Alabama, IDB, PCR, Refunding (Container
Corporation of America--Jefferson Smurfit Corp.
Project), 8% due 4/01/2009 $ 1,018
====================================================================================
Alaska--1.0%
2,000 Alaska Industrial Development and Expert Authority
Revenue Bonds (Williams Lynxs Alaska Cargoport),
AMT, 8% due 5/01/2023 1,898
====================================================================================
Arizona--3.6%
1,000 Maricopa County, Arizona, IDA, Education Revenue
Bonds (Arizona Charter Schools Project 1), Series A,
6.625% due 7/01/2020 1,005
Maricopa County, Arizona, IDA, M/F Housing Revenue
Bonds (Sun King Apartments Project), Series A:
80 5.875% due 11/01/2008 77
20 6% due 11/01/2010 19
1,020 6.75% due 5/01/2031 871
4,000 Phoenix, Arizona, IDA, Airport Facility, Revenue
Refunding Bonds (America West Airlines Inc. Project),
AMT, 6.30% due 4/01/2023 3,244
1,000 Pima County, Arizona, IDA, Education Revenue Bonds
(Arizona Charter Schools Project), Series E, 7.25%
due 7/01/2031 1,083
500 Yavapai County, Arizona, IDA, Hospital Facility Revenue
Bonds (Yavapai Regional Medical Center), Series A,
6% due 8/01/2033 538
====================================================================================
California--2.2%
1,800 California State, GO, 5% due 2/01/2033 1,852
1,300 California State, Various Purpose, GO, 5.25%
due 11/01/2025 1,385
1,000 Fontana, California, Special Tax, Refunding (Community
Facilities District Number 22--Sierra), 6%
due 9/01/2034 1,052
====================================================================================
Colorado--5.3%
2,765 Denver, Colorado, Urban Renewal Authority, Tax
Increment Revenue Bonds (Pavilions), AMT, 7.75%
due 9/01/2016 2,874
2,800 Elk Valley, Colorado, Public Improvement Revenue
Bonds (Public Improvement Fee), Series A, 7.30%
due 9/01/2022 2,997
1,235 North Range, Colorado, Metropolitan District Number 1,
GO, 7.25% due 12/15/2031 1,306
2,000 Plaza Metropolitan District Number 1, Colorado, Tax
Allocation Revenue Bonds (Public Improvement Fees),
8% due 12/01/2025 2,205
830 Southlands, Colorado, Medical District, GO
(Metropolitan District Number 1), 7.125%
due 12/01/2034 905
====================================================================================
Connecticut--1.6%
1,650 Bridgeport, Connecticut, Senior Living Facilities Revenue
Bonds (3030 Park Retirement Community Project),
7.25% due 4/01/2035 1,401
490 Connecticut State Development Authority, Airport
Facility Revenue Bonds (LearJet Inc. Project), AMT,
7.95% due 4/01/2026 585
1,160 New Haven, Connecticut, Facility Revenue Bonds (Hill
Health Corporation Project), 9.25% due 5/01/2017 1,163
====================================================================================
Florida--8.0%
785 Arbor Greene Community Development District, Florida,
Special Assessment Revenue Bonds, 7.60% due 5/01/2018 811
800 Capital Projects Finance Authority, Florida, Continuing
Care Retirement Revenue Bonds (Glenridge on
Palmer Ranch), Series A, 8% due 6/01/2032 886
2,500 Hillsborough County, Florida, IDA, Exempt Facilities
Revenue Bonds (National Gypsum Company), AMT,
Series A, 7.125% due 4/01/2030 2,783
845 Lakewood Ranch, Florida, Community Development
District Number 5, Special Assessment Revenue
Refunding Bonds, Series A, 6.70% due 5/01/2031 901
Midtown Miami, Florida, Community Development
District, Special Assessment Revenue Bonds, Series A:
1,500 6% due 5/01/2024 1,599
1,350 6.25% due 5/01/2037 1,436
820 Orlando, Florida, Greater Orlando Aviation Authority,
Airport Facilities Revenue Bonds (JetBlue Airways
Corp.), AMT, 6.375% due 11/15/2026 802
1,555 Orlando, Florida, Urban Community Development
District, Capital Improvement Special Assessment
Bonds, Series A, 6.95% due 5/01/2033 1,684
1,700 Santa Rosa Bay Bridge Authority, Florida, Revenue
Bonds, 6.25% due 7/01/2028 1,711
2,640 Tampa Palms, Florida, Open Space and Transportation
Community Development District Revenue Bonds,
Capital Improvement (Richmond Place Project),
7.50% due 5/01/2018 2,722
====================================================================================
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)
BAN Bond Anticipation Notes
EDA Economic Development Authority
GO General Obligation Bonds
IDA Industrial Development Authority
IDB Industrial Development Board
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
VRDN Variable Rate Demand Notes
6 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
====================================================================================
Georgia--3.7%
Atlanta, Georgia, Tax Allocation Bonds:
$ 2,000 (Atlantic Station Project), 7.90% due 12/01/2024 $ 2,170
410 (Eastside Project), Series B, 5.40% due 1/01/2020 411
Brunswick and Glynn County, Georgia, Development
Authority, First Mortgage Revenue Bonds (Coastal
Community Retirement Corporation Project), Series A:
830 7.125% due 1/01/2025 843
1,185 7.25% due 1/01/2035 1,203
1,580 Fulton County, Georgia, Development Authority, PCR
(General Motors Corporation), Refunding, VRDN, 8%
due 4/01/2010 (e) 1,580
830 Savannah, Georgia, EDA, Revenue Bonds (Marshes of
Skidaway), First Mortgage, Series A, 7.40%
due 1/01/2034 876
====================================================================================
Idaho--0.8%
1,470 Idaho Health Facilities Authority, Revenue Refunding
Bonds (Valley Vista Care Corporation), Series A,
7.75% due 11/15/2016 1,497
====================================================================================
Illinois--8.0%
1,845 Caseyville, Illinois, Senior Tax Increment Revenue Bonds
(Forest Lakes Project), 7% due 12/30/2022 1,943
3,000 Chicago, Illinois, O'Hare International Airport, Special
Facility Revenue Refunding Bonds (American Airlines
Inc. Project), 8.20% due 12/01/2024 2,838
Illinois Development Finance Authority Revenue Bonds
(Primary Health Care Centers Facilities
Acquisition Program):
585 7.75% due 12/01/2006 (a) 618
2,605 7.75% due 12/01/2016 2,706
Illinois State Finance Authority Revenue Bonds:
2,050 (Clare At Water Tower Project), Series A, 6.125%
due 5/15/2038 2,055
430 (Landing At Plymouth Place Project), Series A,
6% due 5/15/2037 432
490 (Primary Health Care Centers Program), 6.60%
due 7/01/2024 503
755 Lincolnshire, Illinois, Special Service Area Number 1,
Special Tax Bonds (Sedgebrook Project), 6.25%
due 3/01/2034 803
2,400 Lombard, Illinois, Public Facilities Corporation, First
Tier Revenue Bonds (Conference Center and Hotel),
Series A-1, 7.125% due 1/01/2036 2,523
265 Naperville, Illinois, IDR (General Motors Corporation),
Refunding, VRDN, 8% due 12/01/2012 (e) 265
760 Village of Wheeling, Illinois, Revenue Bonds (North
Milwaukee/Lake-Cook Tax Increment Financing (TIF)
Redevelopment Project), 6% due 1/01/2025 746
====================================================================================
Iowa--2.4%
3,855 Iowa Finance Authority, Health Care Facilities, Revenue
Refunding Bonds (Care Initiatives Project), 9.25%
due 7/01/2025 4,634
====================================================================================
Kansas--0.5%
1,230 Wyandotte County, Kansas, Kansas City Unified
Government Revenue Refunding Bonds (General
Motors Corporation Project), 6% due 6/01/2025 884
====================================================================================
Louisiana--1.3%
1,300 Louisiana Public Facilities Authority, Hospital Revenue
Bonds (Franciscan Missionaries of Our Lady Health
System, Inc.), Series A, 5.25% due 8/15/2036 1,338
1,290 New Orleans, Louisiana, Sewer Service Revenue Notes,
BAN, 3% due 7/26/2006 1,251
====================================================================================
Maine--0.5%
840 Maine Finance Authority, Solid Waste Recycling
Facilities Revenue Bonds (Great Northern Paper
Project--Bowater), AMT, 7.75% due 10/01/2022 854
====================================================================================
Maryland--0.8%
1,500 Maryland State Energy Financing Administration,
Limited Obligation Revenue Bonds (Cogeneration --
AES Warrior Run), AMT, 7.40% due 9/01/2019 1,522
====================================================================================
Massachusetts--4.7%
1,845 Massachusetts State Development Finance Agency,
First Mortgage Revenue Bonds (Overlook
Communities Inc.), Series A, 6.25% due 7/01/2034 1,885
Massachusetts State Development Finance Agency,
Revenue Refunding Bonds (Eastern Nazarene College):
1,245 5.625% due 4/01/2019 1,257
1,220 5.625% due 4/01/2029 1,222
850 Massachusetts State Health and Educational Facilities
Authority Revenue Bonds (Jordan Hospital), Series E,
6.75% due 10/01/2033 931
Massachusetts State Health and Educational Facilities
Authority, Revenue Refunding Bonds:
2,100 (Bay Cove Human Services Issue), Series A, 5.90%
due 4/01/2028 2,120
500 (Milton Hospital), Series, 5.50% due 7/01/2016 512
1,200 Massachusetts State Industrial Finance Agency
Revenue Bonds, Sewer Facility (Resource Control
Composting), AMT, 9.25% due 6/01/2010 1,210
====================================================================================
Michigan--0.6%
1,150 Macomb County, Michigan, Hospital Finance Authority,
Hospital Revenue Bonds (Mount Clemens General
Hospital), Series B, 5.875% due 11/15/2034 1,167
====================================================================================
Minnesota--0.7%
1,230 Saint Paul, Minnesota, Port Authority, Hotel Facility,
Revenue Refunding Bonds (Radisson Kellogg Project),
Series 2, 7.375% due 8/01/2029 1,286
====================================================================================
Missouri--1.2%
1,200 Fenton, Missouri, Tax Increment Revenue Refunding
and Improvement Bonds (Gravois Bluffs), 7%
due 10/01/2021 1,287
1,000 Kansas City, Missouri, IDA, First Mortgage Health
Facilities Revenue Bonds (Bishop Spencer Place),
Series A, 6.50% due 1/01/2035 1,051
====================================================================================
Nevada--0.2%
430 Clark County, Nevada, Improvement District Number
142 Special Assessment, 6.375% due 8/01/2023 444
====================================================================================
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005 7
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
====================================================================================
New Jersey--13.6%
Camden County, New Jersey, Improvement Authority,
Lease Revenue Bonds (Holt Hauling & Warehousing),
AMT, Series A (b)(c):
$ 2,000 9.625% due 1/01/2011 $ 280
4,500 9.875% due 1/01/2021 630
6,000 Camden County, New Jersey, Pollution Control
Financing Authority, Solid Waste Resource Recovery,
Revenue Refunding Bonds, AMT, Series A, 7.50%
due 12/01/2010 6,091
2,170 New Jersey EDA, Cigarette Tax Revenue Bonds, 5.50%
due 6/15/2024 2,268
1,500 New Jersey EDA, IDR, Refunding (Newark Airport
Marriott Hotel), 7% due 10/01/2014 1,542
New Jersey EDA, Retirement Community Revenue
Bonds, Series A:
1,000 (Cedar Crest Village Inc. Facility), 7.25%
due 11/15/2031 1,085
3,700 (Seabrook Village Inc.), 8.125% due 11/15/2023 4,194
New Jersey EDA, Special Facility Revenue Bonds
(Continental Airlines Inc. Project), AMT:
3,050 6.625% due 9/15/2012 3,016
3,000 6.25% due 9/15/2029 2,790
1,870 New Jersey Health Care Facilities Financing Authority
Revenue Bonds (Pascack Valley Hospital Association),
6.625% due 7/01/2036 1,848
Tobacco Settlement Financing Corporation of New
Jersey, Asset-Backed Revenue Bonds:
1,265 5.75% due 6/01/2032 1,314
1,075 7% due 6/01/2041 1,225
====================================================================================
New Mexico--2.7%
5,000 Farmington, New Mexico, PCR, Refunding (Tucson
Electric Power Co.--San Juan Project), Series A,
6.95% due 10/01/2020 5,218
====================================================================================
New York--5.5%
1,000 Dutchess County, New York, IDA, Civic Facility Revenue
Bonds (Saint Francis Hospital), Series B, 7.50%
due 3/01/2029 1,093
New York City, New York, City IDA, Civic Facility
Revenue Bonds:
350 Series C, 6.80% due 6/01/2028 378
1,495 (Special Needs Facility Pooled Program), Series C-1,
6.50% due 7/01/2024 1,418
1,730 New York City, New York, City IDA, Special Facility
Revenue Bonds (British Airways Plc Project), AMT,
7.625% due 12/01/2032 1,867
2,080 New York State Dormitory Authority, Non-State
Supported Debt, Revenue Bonds (Mount Sinai--NYU
Medical Center Health System), 5.50% due 7/01/2026 2,106
1,865 New York State Dormitory Authority, Non-State
Supported Debt, Revenue Refunding Bonds (Mount
Sinai Hospital), Series C, 5.50% due 7/01/2026 1,888
635 Utica, New York, GO, Public Improvement, 9.25%
due 8/15/2006 652
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 1,261
====================================================================================
North Carolina--0.6%
1,000 North Carolina Medical Care Commission, Retirement
Facilities, First Mortgage Revenue Bonds (Givens
Estates Project), Series A, 6.50% due 7/01/2032 1,071
====================================================================================
Oklahoma--0.4%
750 Norman, Oklahoma, Regional Hospital Authority,
Hospital Revenue Bonds, 5.375% due 9/01/2029 759
====================================================================================
Oregon--0.7%
1,310 Western Generation Agency, Oregon, Cogeneration
Project Revenue Bonds (Wauna Cogeneration Project),
AMT, Series B, 7.40% due 1/01/2016 1,328
====================================================================================
Pennsylvania--6.8%
1,160 Bucks County, Pennsylvania, IDA, Retirement
Community Revenue Bonds (Ann's Choice Inc.),
Series A, 6.125% due 1/01/2025 1,202
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 1,992
Montgomery County, Pennsylvania, Higher Education
and Health Authority Revenue Bonds (Faulkeways at
Gwynedd Project):
900 6.75% due 11/15/2024 955
925 6.75% due 11/15/2030 978
1,700 Montgomery County, Pennsylvania, IDA, Revenue Bonds
(Whitemarsh Continuing Care Project), 6.25%
due 2/01/2035 1,781
Philadelphia, Pennsylvania, Authority for IDR:
1,600 (Air Cargo), AMT, Series A, 7.50% due 1/01/2025 1,709
4,460 Commercial Development, 7.75% due 12/01/2017 4,513
====================================================================================
Rhode Island--1.0%
1,750 Central Falls, Rhode Island, Detention Facility
Corporation, Detention Facility, Revenue Refunding
Bonds, 7.25% due 7/15/2035 1,887
====================================================================================
South Carolina--0.3%
615 South Carolina Jobs, EDA, Economic Development
Revenue Refunding Bonds (Westminster Presbyterian
Center), 5.375% due 11/15/2030 609
====================================================================================
Tennessee--1.0%
1,800 Shelby County, Tennessee, Health, Educational and
Housing Facilities Board Revenue Bonds
(Germantown Village), Series A, 7.25% due 12/01/2034 1,846
====================================================================================
Texas--7.7%
1,000 Austin, Texas, Convention Center Revenue Bonds
(Convention Enterprises Inc.), First Tier, Series A,
6.70% due 1/01/2028 1,070
Brazos River Authority, Texas, PCR, Refunding, AMT:
2,530 (Texas Utility Company), Series A, 7.70%
due 4/01/2033 2,970
2,760 (Utilities Electric Company), Series B, 5.05%
due 6/01/2030 2,777
1,220 Brazos River Authority, Texas, Revenue Refunding Bonds
(Reliant Energy Inc. Project), Series B, 7.75%
due 12/01/2018 1,338
830 Grand Prairie, Texas, Housing Finance Corporation
Revenue Bonds (Independent Senior Living Center),
7.75% due 1/01/2034 868
8 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005
Schedule of Investments (concluded) (in Thousands)
Face
Amount Municipal Bonds Value
====================================================================================
Texas (concluded)
$ 1,000 Houston, Texas, Health Facilities Development
Corporation, Retirement Facility Revenue Bonds
(Buckingham Senior Living Community), Series A,
7.125% due 2/15/2034 $ 1,098
875 Kerrville, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds (Sid Peterson
Memorial Hospital Project), 5.375% due 8/15/2035 891
2,310 Matagorda County, Texas, Navigation District Number 1,
Revenue Refunding Bonds (Reliant Energy Inc.),
Series C, 8% due 5/01/2029 2,509
1,330 Port Corpus Christi, Texas, Individual Development
Corporation, Environmental Facilities Revenue Bonds
(Citgo Petroleum Corporation Project), AMT, 8.25%
due 11/01/2031 1,405
====================================================================================
Utah--1.2%
2,240 Carbon County, Utah, Solid Waste Disposal, Revenue
Refunding Bonds (Laidlaw Environmental), AMT,
Series A, 7.45% due 7/01/2017 2,367
====================================================================================
Virginia--5.2%
2,480 Dulles Town Center, Virginia, Community Development
Authority, Special Assessment Tax (Dulles Town
Center Project), 6.25% due 3/01/2026 2,616
22,600 Pocahontas Parkway Association, Virginia, Toll Road
Revenue Bonds, Senior Series B, 5.888%**
due 8/15/2025 7,416
====================================================================================
West Virginia--0.5%
875 Princeton, West Virginia, Hospital Revenue Refunding
Bonds (Community Hospital Association Inc. Project),
6.20% due 5/01/2013 860
====================================================================================
Wisconsin--0.7%
1,320 Wisconsin State Health and Educational Facilities
Authority Revenue Bonds (New Castle Place Project),
Series A, 7% due 12/01/2031 1,367
====================================================================================
U.S. Virgin Islands--1.2%
2,100 Virgin Islands Government Refinery Facilities, Revenue
Refunding Bonds (Hovensa Coker Project), AMT,
6.50% due 7/01/2021 2,379
------------------------------------------------------------------------------------
Total Municipal Bonds
(Cost--$182,028)--96.7% 186,405
====================================================================================
====================================================================================
Shares
Held Short-Term Securities
====================================================================================
1,001 Merrill Lynch Institutional Tax-Exempt Fund (d) 1,001
====================================================================================
Total Short-Term Securities
(Cost--$1,001)--0.5% 1,001
====================================================================================
Total Investments (Cost--$183,029*)--97.2% 187,406
Other Assets Less Liabilities--2.8% 5,438
--------
Net Assets--100.0% $192,844
========
* The cost and unrealized appreciation (depreciation) of investments as of
December 31, 2005, as computed for federal income tax purposes, were as
follows:
Aggregate cost ............................................ $182,691
========
Gross unrealized appreciation ............................. $ 11,960
Gross unrealized depreciation ............................. (7,245)
--------
Net unrealized appreciation ............................... $ 4,715
========
** Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase.
(a) Prerefunded.
(b) Non-income producing security; issuer filed for bankruptcy or is in
default of interest payments.
(c) Restricted securities as to resale, representing 0.5% of net assets, were
as follows:
--------------------------------------------------------------------------
Acquisition
Issue Dates Cost Value
--------------------------------------------------------------------------
Camden County, New Jersey,
Improvement Authority, Lease
Revenue Bonds (Holt Hauling &
Warehousing), AMT, Series A,
9.625% due 1/01/2011 1/29/1997 $2,116 $280
Camden County, New Jersey,
Improvement Authority, Lease
Revenue Bonds (Holt Hauling &
Warehousing), AMT, Series A, 2/06/1996-
9.875% due 1/01/2021 1/29/1997 4,644 630
--------------------------------------------------------------------------
Total $6,760 $910
====================
(d) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Institutional Tax-Exempt Fund (2,699) $34
--------------------------------------------------------------------------
(e) Security may have a maturity of more than one year at time of issuance,
but has variable rate and demand features that qualify it as a short-term
security. The rate disclosed is that currently in effect. This rate
changes periodically based upon prevailing market rates.
See Notes to Financial Statements.
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005 9
Statement of Assets, Liabilities and Capital
As of December 31, 2005
===================================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$182,027,217) .... $ 186,404,515
Investments in affiliated securities, at value (identified cost--$1,001,394) ........ 1,001,394
Cash ................................................................................ 80,452
Receivables:
Interest ......................................................................... $ 3,137,392
Securities sold .................................................................. 2,344,883 5,482,275
-------------
Prepaid expenses .................................................................... 1,204
-------------
Total assets ........................................................................ 192,969,840
-------------
===================================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Payables:
Investment adviser ............................................................... 98,908
Other affiliates ................................................................. 6,474 105,382
-------------
Accrued expenses .................................................................... 20,793
-------------
Total liabilities ................................................................... 126,175
-------------
===================================================================================================================================
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets .......................................................................... $ 192,843,665
=============
===================================================================================================================================
Capital
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value, 150,000,000 shares authorized; 19,621,673 shares issued
and outstanding .................................................................... $ 1,962,167
Paid-in capital in excess of par .................................................... 198,889,411
Undistributed investment income--net ................................................ $ 2,294,214
Accumulated realized capital losses--net ............................................ (14,679,425)
Unrealized appreciation--net ........................................................ 4,377,298
-------------
Total accumulated losses--net ....................................................... (8,007,913)
-------------
Total capital--Equivalent to $9.83 net asset value per share of Common Stock
(market price--$9.82) .............................................................. $ 192,843,665
=============
See Notes to Financial Statements.
10 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005
Statement of Operations
For the Six Months Ended December 31, 2005
===================================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------------------
Interest ................................................................ $ 6,454,810
Dividends from affiliates ............................................... 34,139
-------------
Total income ............................................................ 6,488,949
-------------
===================================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ................................................ $ 635,705
Accounting services ..................................................... 37,735
Transfer agent fees ..................................................... 26,376
Professional fees ....................................................... 23,963
Printing and shareholder reports ........................................ 20,763
Listing fees ............................................................ 9,504
Directors' fees and expenses ............................................ 8,644
Pricing fees ............................................................ 7,768
Custodian fees .......................................................... 5,901
Other ................................................................... 13,554
-------------
Total expenses before reimbursement ..................................... 789,913
Reimbursement of expenses ............................................... (2,889)
-------------
Total expenses after reimbursement ...................................... 787,024
-------------
Investment income--net .................................................. 5,701,925
-------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
-----------------------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ....................................... 885,334
Change in unrealized appreciation on investments--net ................... (817,007)
-------------
Total realized and unrealized gain--net ................................. 68,327
-------------
Net Increase in Net Assets Resulting from Operations .................... $ 5,770,252
=============
See Notes to Financial Statements.
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005 11
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 2005 2005
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net .................................................. $ 5,701,925 $ 11,357,440
Realized gain--net ...................................................... 885,334 157,115
Change in unrealized appreciation/depreciation--net ..................... (817,007) 13,265,125
-------------------------------
Net increase in net assets resulting from operations .................... 5,770,252 24,779,680
-------------------------------
===================================================================================================================================
Dividends to Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net .................................................. (5,646,709) (11,287,718)
-------------------------------
Net decrease in net assets resulting from dividends to shareholders ..... (5,646,709) (11,287,718)
-------------------------------
===================================================================================================================================
Common Stock Transactions
-----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets derived from Common Stock issued to
shareholders in reinvestment of dividends ............................. 244,918 --
-------------------------------
===================================================================================================================================
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ............................................ 368,461 13,491,962
Beginning of period ..................................................... 192,475,204 178,983,242
-------------------------------
End of period* .......................................................... $ 192,843,665 $ 192,475,204
===============================
* Undistributed investment income--net ............................... $ 2,294,214 $ 2,238,998
===============================
See Notes to Financial Statements.
12 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005
Financial Highlights
For the Six
Months Ended For the Year Ended June 30,
The following per share data and ratios have been derived December 31, --------------------------------------------------
from information provided in the financial statements. 2005 2005 2004 2003 2002
================================================================================================================================
Per Share Operating Performance
--------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ...... $ 9.82 $ 9.13 $ 8.99 $ 9.24 $ 9.45
-----------------------------------------------------------------
Investment income--net .................... .29+ .58+ .60+ .58+ .58
Realized and unrealized gain (loss)--net .. .01 .69 .11 (.27) (.22)
-----------------------------------------------------------------
Total from investment operations .......... .30 1.27 .71 .31 .36
-----------------------------------------------------------------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net ................. (.29) (.58) (.57) (.56) (.57)
Realized gain--net ..................... -- -- --*** -- --
-----------------------------------------------------------------
Total dividends and distributions to Common
Stock shareholders ....................... (.29) (.58) (.57) (.56) (.57)
-----------------------------------------------------------------
Net asset value, end of period ............ $ 9.83 $ 9.82 $ 9.13 $ 8.99 $ 9.24
=================================================================
Market price per share, end of period ..... $ 9.82 $ 9.48 $ 8.26 $ 8.48 $ 8.39
=================================================================
================================================================================================================================
Total Investment Return**
--------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ........ 3.13%@ 14.67% 8.64% 4.13% 4.31%
=================================================================
Based on market price per share ........... 6.72%@ 22.36% 4.20% 8.18% (1.64%)
=================================================================
================================================================================================================================
Ratios to Average Net Assets
--------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement ............ .80%* .80% .79% .90% .87%
=================================================================
Expenses .................................. .81%* .80% .79% .90% .87%
=================================================================
Investment income--net .................... 5.83%* 6.11% 6.52% 6.56% 6.19%
=================================================================
================================================================================================================================
Supplemental Data
--------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) .. $192,844 $192,475 $178,983 $176,116 $181,093
=================================================================
Portfolio turnover ........................ 11% 22% 19% 24% 25%
=================================================================
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
*** Amount is less than $(.01) per share.
+ Based on average shares outstanding.
@ Aggregate total investment return.
See Notes to Financial Statements.
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005 13
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. These unaudited financial statements reflect all adjustments, which
are, in the opinion of management, necessary to present a fair statement of the
results for the interim period. All such adjustments are of a normal, recurring
nature. The Fund determines and makes available for publication the net asset
value of its Common Stock on a daily basis. The Fund's Common Stock shares are
listed on the New York Stock Exchange under the symbol APX. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter ("OTC") markets and are valued at the last available bid price
in the OTC market or on the basis of values as obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general direction
of the Board of Directors. Such valuations and procedures are reviewed
periodically by the Board of Directors of the Fund. Financial futures contracts
and options thereon, which are traded on exchanges, are valued at their closing
prices as of the close of such exchanges. Options written or purchased are
valued at the last sale price in the case of exchange-traded options. In the
case of options traded in the OTC market, valuation is the last asked price
(options written) or the last bid price (options purchased). Swap agreements are
valued by quoted fair values received daily by the Fund's pricing service.
Short-term investments with a remaining maturity of 60 days or less are valued
at amortized cost, which approximates market value, under which method the
investment is valued at cost and any premium or discount is amortized on a
straight line basis to maturity. Investments in open-end investment companies
are valued at their net asset value each business day. Securities and other
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Fund.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Options -- The Fund may write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked-to-market to reflect
the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent
of the premiums received or paid (or gain or loss to the extent the cost
of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
o Forward interest rate swaps -- The Fund may enter into forward interest
rate swaps. In a forward interest rate swap, the Fund and the counterparty
agree to make periodic net payments on a specified notional contract
amount, commencing on a specified future effective date, unless terminated
earlier. When the agreement is closed, the Fund records a realized gain or
loss in an amount equal to the value of the agreement.
14 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005
Notes to Financial Statements (concluded)
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund amortizes all premiums and discounts on debt securities.
(e) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .65% of the Fund's average daily net assets. FAM has agreed to
reimburse its management fee by the amount of management fees the Fund pays to
FAM indirectly through its investment in Merrill Lynch Institutional Tax-Exempt
Fund. For the six months ended December 31, 2005, FAM reimbursed the Fund in the
amount of $2,889.
For the six months ended December 31, 2005, the Fund reimbursed FAM $2,186 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended December 31, 2005 were $20,293,981 and $24,880,563, respectively.
4. Common Stock Transactions:
At December 31, 2005, the Fund had one class of shares of Common Stock, par
value $.10 per share, of which 150,000,000 shares were authorized.
Shares issued and outstanding for the six months ended December 31, 2005
increased by 24,941 as a result of dividend reinvestment. Shares issued and
outstanding for the year ended June 30, 2005 remained constant.
5. Subsequent Event:
The Fund paid a tax-exempt income dividend to holders of Common Stock in the
amount of $.049000 per share on January 30, 2006 to shareholders of record on
January 18, 2006.
6. Capital Loss Carryfoward:
On June 30, 2005, the Fund had a net capital loss carryforward of $15,188,907,
of which $938,156 expires in 2006, $2,975,000 expires in 2008, $5,341,699
expires in 2009, $2,075,987 expires in 2010, $2,163,492 expires in 2011,
$1,659,281 expires in 2012 and $35,292 expires in 2013. This amount will be
available to offset like amounts of any future taxable gains.
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005 15
Disclosure of Investment Advisory Agreement
Activities and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director whose
only affiliation with Fund Asset Management, L.P. (the "Investment Adviser") or
other Merrill Lynch affiliates is as a director of the Fund and certain other
funds advised by the Investment Adviser or its affiliates. The Co-chairmen of
the Board are also independent directors. New director nominees are chosen as
nominees by a Nominating Committee comprised of independent directors. All
independent directors also are members of the Board's Audit Committee and the
independent directors meet in executive session at each in-person Board meeting.
The Board and the Audit Committee meet in person for at least two days each
quarter and conduct other in-person and telephone meetings throughout the year,
some of which are formal Board meetings, and some of which are informational
meetings. The independent counsel to the independent directors attends all
in-person Board and Audit Committee meetings and other meetings at the
independent directors' request.
Investment Advisory Agreement - Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment advisory
agreement (the "Investment Advisory Agreement"). The Board assesses the nature,
scope and quality of the services provided to the Fund by the personnel of the
Investment Adviser and its affiliates, including administrative services,
shareholder services, oversight of fund accounting, marketing services and
assistance in meeting legal and regulatory requirements. The Board also receives
and assesses information regarding the services provided to the Fund by certain
unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates. Among the matters considered are: (a)
fees (in addition to management fees) paid to the Investment Adviser and its
affiliates by the Fund; (b) Fund operating expenses paid to third parties; (c)
the resources devoted to and compliance reports relating to the Fund's
investment objective, policies and restrictions, and its compliance with its
Code of Ethics and the Investment Adviser's compliance policies and procedures;
and (d) the nature, cost and character of non-investment management services
provided by the Investment Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by the
Investment Adviser to be of high quality. The Board also believes that the
Investment Adviser is financially sound and well managed and notes that the
Investment Adviser is affiliated with one of America's largest financial firms.
The Board works closely with the Investment Adviser in overseeing the Investment
Adviser's efforts to achieve good performance. As part of this effort, the Board
discusses portfolio manager effectiveness and, when performance is not
satisfactory, discusses with the Investment Adviser taking steps such as
changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement, the Board requests and receives materials specifically
relating to the Fund's Investment Advisory Agreement. These materials include
(a) information compiled by Lipper Inc. ("Lipper") on the fees and expenses and
the investment performance of the Fund as compared to a comparable group of
funds as classified by Lipper; (b) information comparing the Fund's market price
with its net asset value per share; (c) a discussion by the Fund's portfolio
management team of investment strategies used by the Fund during its most recent
fiscal year; (d) information on the profitability to the Investment Adviser and
its affiliates of the Investment Advisory Agreement and other relationships with
the Fund; and (e) information provided by the Investment Adviser concerning
investment advisory fees charged to other clients, such as other mutual funds
and offshore funds under similar investment mandates. The Board also considers
other matters it deems important to the approval process such as services
related to the valuation and pricing of Fund portfolio holdings, allocation of
Fund portfolio transactions, the Fund's portfolio turnover statistics, and
direct and indirect benefits to the Investment Adviser and its affiliates from
their relationship with the Fund.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement which occurred in November 2005, the independent directors' and
Board's review included the following:
16 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005
Services Provided by the Investment Adviser -- The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, including the
investment advisory services and the resulting performance of the Fund. The
Board focused primarily on the Investment Adviser's investment advisory services
and the Fund's investment performance. The Board compared Fund performance --
both including and excluding the effects of the Fund's fees and expenses -- to
the performance of a comparable group of funds, and the performance of a
relevant index or combination of indexes. While the Board reviews performance
data at least quarterly, consistent with the Investment Adviser's investment
goals, the Board attaches more importance to performance over relatively long
periods of time, typically three to five years. For the periods ended August 31,
2005, the Fund's performance after fees and expenses ranked in the first
quintile for each of the three- and five-year periods and in the second quintile
for the one-year period. Considering these factors, the Board concluded that the
nature and quality of these services supported the continuation of the
Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process -- The Board reviews
at least annually the Fund's investment objectives and strategies. The Board
discusses with senior management of the Investment Adviser responsible for
investment operations and the senior management of the Investment Adviser's
municipal investing group the strategies being used to achieve the stated
objectives. Among other things, the Board considers the size, education and
experience of the Investment Adviser's investment staff, its use of technology,
and the Investment Adviser's approach to training and retaining portfolio
managers and other research, advisory and management personnel. The Board
reviews the Investment Adviser's compensation policies and practices with
respect to the Fund's portfolio managers. The Board also considered the
experience of the Fund's portfolio manager and noted that Mr. Jaeckel has more
than fifteen years of experience in portfolio management. The Investment Adviser
and its investment staff have extensive experience in analyzing and managing the
types of investments used by the Fund. The Board concluded that the Fund
benefits from that expertise.
Management Fees and Other Expenses -- The Board reviews the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory and
administrative service fees and the effects of any fee waivers -- compared to
the other funds in its Lipper category. It also compares the Fund's total
expenses to those of other, comparable funds. The Board did not consider the
services provided to and the fees charged by the Investment Adviser to other
types of clients with similar investment mandates because the Investment Adviser
advised the Board that it had no comparable investment mandates from its
clients. The Fund's contractual and actual management fee rates were slightly
higher than, and the Fund's actual total expenses were equal to, the median fees
and expenses charged by comparable funds as determined by Lipper. The Board has
concluded that the Fund's management fee and fee rate and overall expense ratio
are reasonable compared to those of other comparable funds.
Profitability -- The Board considers the cost of the services provided to the
Fund by the Investment Adviser, and the Investment Adviser's and its affiliates'
profits relating to the management of the Fund and the MLIM/FAM-advised funds.
As part of its analysis, the Board reviewed the Investment Adviser's methodology
in allocating its costs to the management of the Fund and concluded that there
was a reasonable basis for the allocation. The Board also considered federal
court decisions discussing an investment adviser's profitability and
profitability levels considered to be reasonable in those decisions. The Board
believes the Investment Adviser's profits are acceptable in relation to the
nature and quality of services provided.
Economies of Scale -- The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable the
Fund to participate in these economies of scale. The Board considered economies
of scale to the extent applicable to the Fund's closed-end structure and
determined that the Fund appropriately benefits from any economies of scale and
no changes were currently necessary.
Conclusion
After the independent directors deliberated in executive session, the entire
Board, including all of the independent directors, approved the renewal of the
existing Investment Advisory Agreement, concluding that the advisory fee was
reasonable in relation to the services provided and that a contract renewal was
in the best interests of the shareholders.
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005 17
About Inverse Floaters
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of reduced or
eliminated interest payments and losses of invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed rate, tax-exempt securities. To the extent the Fund invests in
inverse securities, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities. As of December 31, 2005, none of the Fund's total
net assets were invested in these securities.
Dividend Policy
The Fund's dividend policy is to distribute all or a portion of its net
investment income to its shareholders on a monthly basis. In order to provide
shareholders with a more stable level of dividend distributions, the Fund may at
times pay out less than the entire amount of net investment income earned in any
particular month and may at times in any particular month pay out such
accumulated but undistributed income in addition to net investment income
earned in that month. As a result, the dividends paid by the Fund for any
particular month may be more or less than the amount of net investment income
earned by the Fund during such month. The Fund's current accumulated but
undistributed net investment income, if any, is disclosed in the Statement of
Assets, Liabilities and Capital, which comprises part of the financial
information included in this report.
18 APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
APEX MUNICIPAL FUND, INC. DECEMBER 31, 2005 19
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
--------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
Apex Municipal Fund, Inc. seeks to provide shareholders with high current income
exempt from federal income taxes by investing primarily in a portfolio of
medium-to-lower grade or unrated municipal obligations, the interest on which is
exempt from federal income taxes in the opinion of bond counsel to the issuer.
This report, including the financial information herein, is transmitted to
shareholders of Apex Municipal Fund, Inc. for their information. It is not a
prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-637-3863; (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 -- 12/05
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this
semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable to this semi-annual report
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the last fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Apex Municipal Fund, Inc.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Apex Municipal Fund, Inc.
Date: February 21, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Apex Municipal Fund, Inc.
Date: February 21, 2006
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
Apex Municipal Fund, Inc.
Date: February 21, 2006