[LOGO] Merrill Lynch Investment Managers
Annual Report
June 30, 2001
Apex
Municipal Fund,
Inc.
www.mlim.ml.com
APEX MUNICIPAL FUND, INC.
Managed 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 consistent yield to the current trading price of shares
of Common Stock of the Fund, 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.
Quality Profile
The quality ratings of securities in the Fund as of June 30, 2001 were as
follows:
--------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
--------------------------------------------------------------------------------
AAA/Aaa ........................................................... 7.2%
BBB/Baa ........................................................... 13.9
BB/Ba ............................................................. 15.3
B/B ............................................................... 6.2
CCC/Caa ........................................................... 0.1
NR (Not Rated) .................................................... 55.0
Other+ ............................................................ 0.5
--------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
Apex Municipal Fund, Inc., June 30, 2001
DEAR SHAREHOLDER
For the year ended June 30, 2001, Apex Municipal Fund, Inc. earned $0.596 per
share income dividends, which included earned and unpaid dividends of $0.049.
This represents a net annualized yield of 6.30%, based on a month-end net asset
value of $9.45 per share. Over the same period, the Fund's total investment
return was +8.48%, based on a change in per share net asset value from $9.33 to
$9.45, and assuming reinvestment of $0.597 per share income dividends. For the
six-month period ended June 30, 2001, the Fund's total investment return was
+5.54%, based on a change in per share net asset value from $9.26 to $9.45, and
assuming reinvestment of $0.301 per share income dividends.
The Municipal Market Environment
During the six-month period ended June 30, 2001, among considerable weekly
volatility, long-term fixed-income bond yields generally moved higher. So far in
2001, investors generally focused on the actions taken by the Federal Reserve
Board to reverse the ongoing US economic slowdown. US economic growth fell into
the 1%-2% range in 2001 after expanding at more than 5% during the first half of
2000. In mid-December 2000, the Federal Reserve Board announced that economic
conditions warranted the cessation of the series of short-term interest rate
increases initiated in February 2000. Citing declining consumer confidence and
weakening industrial production, the Federal Reserve Board at each of their
meetings in January, February and March of this year lowered short-term interest
rates in an effort to promote stronger US economic growth. Given continued weak
equity markets, investors focused on the declining supply of US Treasury
securities and forecasts of sizeable Federal budget surpluses. This positive
economic environment fostered a significant decline in US Treasury bond yields.
By late March 2001, US Treasury bond yields declined approximately 20 basis
points (0.20%) to 5.25%.
Despite additional actions by the Federal Reserve Board in April, May and June,
fixed-income securities were unable to maintain their earlier market gains.
Recovering US stock markets, especially the NASDAQ, caused many investors to
reallocate assets out of US Treasury securities to equities. Additionally, many
investors believed that the 275 basis point decline in short-term interest rates
engineered by the Federal Reserve Board over the last six months would
eventually rekindle a strong US economy with concomitant inflationary pressures.
In recent months, recovering equity markets, renewed inflationary fears, and the
expectation that the US economy will resume strong growth in late 2001 put
consistent pressures on fixed-income issues. By the end of June 2001, long-term
US Treasury bond yields rose to 5.75%, an increase of approximately 30 basis
points over the last six months.
During the last six months, tax-exempt bond yields also reacted to the Federal
Reserve Board actions and equity market volatility. However, this reaction was
muted in both intensity and degree. In early 2001, municipal bond yields traded
in a narrow range supported by a strong US Treasury market and continued
investor demand. As it became apparent that any proposed changes in the Federal
tax system were unlikely to have any immediate, material impact on existing
Federal tax brackets, tax-exempt bond yields responded by moving higher in early
2001. By late March 2001, long-term uninsured revenue bond yields, as measured
by the Bond Buyer Revenue Bond Index, approached 5.40%, a decline of
approximately 10 basis points from the end of December 2000. Similar to the US
Treasury market, tax-exempt bond yields were pushed higher during the remainder
of the period by equity market improvement in April, as well as the possibility
that the Federal Reserve Board was close to the end of its current interest rate
easing cycle. At the end of June 2001, long-term municipal bond yields rose to
approximately 5.50%, although over the past six months, they rose approximately
five basis points.
The recent relative outperformance of the tax-exempt bond market was
particularly impressive given the dramatic increase in long-term municipal bond
issuance during the June 2001 quarter. Historically, low municipal bond yields
have continued to allow municipalities to refund outstanding, high-couponed
debt. Also, as yields rose in early April, tax-exempt issuers rushed to issue
new financing, fearing higher yields in the coming months. During the past six
months, almost $135 billion in long-term tax-exempt bonds was issued, an
increase of over 40% compared to the same period a year ago. During the
three-month period ended June 30, 2001, tax-exempt bond issuance was
particularly heavy, with more than $75 billion in long-term municipal bonds
underwritten, an increase of over 45% compared to the same three-month period a
year ago.
Historically, June has been a period of weak investor demand for tax-exempt
products as investors are often forced to liquidate bond positions to meet
Federal and state tax payments. In recent months, there was no appreciable
selling by retail accounts. It has been noted that, thus far in 2001, new net
cash inflows into municipal bond mutual funds have reached $4 billion compared
to new net cash outflows of more than $13 billion for the same period a year
ago. This suggests that the positive technical structure of the municipal market
has remained intact. Also, the months of June and July tend to be periods of
strong retail demand in response to the larger-coupon income payments and
proceeds from bond maturities these months generate. Additionally, short-term
tax-exempt interest rates are poised to move lower. Seasonal tax pressures have
kept short-term municipal rates artificially high, although not as high as in
recent years. As these pressures abate, short-term interest rates are likely to
decline below 3%. As short-term interest rates decline, investors have tended to
extend maturities to take advantage of the steep municipal yield curve. We
believe all of these factors should enhance the tax-exempt market's technical
position in the coming months.
Looking forward, the municipal market's direction appears uncertain. Should the
US economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary policy to a greater extent than investors currently
expect. The prospect of two or three additional interest rate easings may push
fixed-income bond yields, including municipal bond yields, lower. However,
should the cumulative 275 basis point reduction in short-term interest rates by
the Federal Reserve Board and the economic stimulus produced by recent Federal
tax reform combine to restore consumer confidence and economic activity,
tax-exempt bond yields may not decline further. Given the strong technical
position of the municipal bond market, we believe the tax-exempt market is
poised to continue to outperform its taxable counterpart in the coming months.
Portfolio Strategy
During the six-month period ended June 30, 2001, the high-yield tax-exempt
market saw a marked improvement in valuations for much of the high-yield sector,
in contrast to the prior six-month period, in which the high-yield tax-exempt
market deteriorated significantly. The more constructive environment was
attributable to the abrupt and forceful easing of monetary policy in January
2001 by the Federal Reserve Board in response to a rapid deterioration in
economic fundamentals. Encouraged by prospects of steadily declining short-term
interest rates, fixed-income investors increased exposure to speculative-grade
credits in anticipation of the stimulative effect of an easing in monetary
policy. Implicit in the decision to reallocate asset weightings in this manner
has been the belief that credit spreads already reflect current weak economic
conditions. The anticipatory nature of markets suggests that investors are
looking beyond present circumstances and are now beginning to discount an
eventual economic rebound. In effect, the investors are demonstrating their
conviction that the Federal Reserve Board will be successful in its efforts to
reignite growth.
While these developments suggest a brighter outlook ahead, the months leading up
to the Federal Reserve Board's first rate reduction proved to be a difficult
environment for investors in the high-yield market. Poor liquidity and anemic
investor demand continued to chip away at valuations. The effect was all the
more pronounced as the late year bond market rally was largely confined to the
higher
2 & 3
Apex Municipal Fund, Inc., June 30, 2001
investment-grade sectors. By year end, with investor sentiment at its nadir and
credit spreads near their widest point in several years, the stage was set for
the Federal Reserve Board's surprise move and the ensuing turnaround.
Our investment strategy remains largely unchanged. We have consistently sought
to manage reinvestment risk in an effort to stabilize the Fund's dividend stream
in a variety of interest rate environments. The distressed nature of the
high-yield market provided the opportunity to continue the gradual restructuring
of the Fund at some of the most attractive yields in recent years. Recent
additions to the Fund included a senior living project in North Carolina and tax
increment financing in Missouri. Despite the well-publicized financial woes
affecting California's two largest privately owned utilities, the utility sector
remains a favorite given current trends toward consolidation within the
industry. The Fund had no exposure to either utility and was unaffected by the
subsequent decline in market value of their respective debt obligations. Apart
from the debt issued by Southern California Edison and Pacific Gas and Electric,
the utility sector has been one of the best-performing groups in the tax-exempt
high-yield market. Notwithstanding our favorable outlook, this outperformance
prompted us to reduce our exposure modestly as a means of funding new purchases.
In Conclusion
We appreciate your ongoing interest in Apex Municipal Fund, Inc., and we look
forward to serving your investment needs in the months and years to come.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Theodore R. Jaeckel Jr.
Theodore R. Jaeckel Jr.
Vice President and Portfolio Manager
/s/ John M. Loffredo
John M. Loffredo
Vice President and Portfolio Manager
June 30, 2001
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
Alabama--0.7% B NR* $ 1,000 Brewton, Alabama, IDB, PCR, Refunding (Container Corporation of
America--Jefferson Smurfit Corp. Project), 8% due 4/01/2009 $ 1,022
CCC NR* 5,285 Mobile, Alabama, IDB, Solid Waste Disposal Revenue Refunding Bonds
(Mobile Energy Services Co. Project), 6.95% due 1/01/2020 (g) 264
====================================================================================================================================
Alaska--1.4% NR* NR* 2,000 Alaska Industrial Development and Expert Authority Revenue Bonds
(Williams Lynxs Alaska Cargoport), AMT, 8% due 5/01/2023 2,022
A1+ VMIG1+ 500 Valdez, Alaska, Marine Terminal Revenue Refunding Bonds (Exxon
Pipeline Company Project), VRDN, Series A, 3.25% due 12/01/2033 (f) 500
====================================================================================================================================
Arizona--3.9% NR* NR* 1,505 Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds (Sun King
Apartments Project), Sub-Series C, 9.50% due 11/01/2031 1,540
NR* B3 4,000 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds
(America West Airlines Inc. Project), AMT, 6.30% due 4/01/2023 3,268
B+ Ba3 2,500 Pima County, Arizona, IDA, Industrial Revenue Refunding Bonds
(Tucson Electric Power Company Project), Series C, 6% due 9/01/2029 2,344
====================================================================================================================================
California--3.4% AAA NR* 5,500 Los Angeles, California, Department of Water and Power, Electric
Plant Revenue Bonds, RIB, Series 144, 8.09% due 6/15/2029 (b)(e) 6,326
====================================================================================================================================
Colorado--2.9% NR* NR* 3,000 Denver, Colorado, Urban Renewal Authority, Tax Increment Revenue
Bonds (Pavilions), AMT, 7.75% due 9/01/2016 3,190
NR* NR* 1,640 Lincoln Park, Colorado, Metropolitan District, GO, Refunding, 7.75%
due 12/01/2026 1,622
BB+ Ba1 595 Northwest Parkway, Colorado, Public Highway Authority Revenue Bonds,
First Tier, Sub-Series D, 7.125% due 6/15/2041 588
====================================================================================================================================
Connecticut--1.8% BBB Baa2 2,000 Connecticut State Development Authority, PCR, Refunding (Connecticut
Light and Power Company), Series A, 5.85% due 9/01/2028 1,992
NR* B1 1,350 New Haven, Connecticut, Facility Revenue Bonds (Hill Health
Corporation Project), 9.25% due 5/01/2017 1,387
====================================================================================================================================
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
RIB Residual Interest Bonds
VRDN Variable Rate Demand Notes
4 & 5
Apex Municipal Fund, Inc., June 30, 2001
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
Florida--8.4% NR* NR* $ 935 Arbor Greene Community Development District, Florida, Special
Assessment Revenue Bonds, 7.60% due 5/01/2018 $ 997
NR* NR* 2,500 Hillsborough County, Florida, IDA, Exempt Facilities Revenue Bonds
(National Gypsum), AMT, Series A, 7.125% due 4/01/2030 1,963
NR* NR* 3,000 Lee County, Florida, IDA, Health Care Facilities Revenue Bonds
(Cypress Cove Healthpark), Series A, 6.375% due 10/01/2025 2,589
NR* NR* 3,000 Orlando, Florida, Special Assessment Bonds (Conroy Road Interchange
Project), Series A, 5.80% due 5/01/2026 2,774
NR* NR* 3,800 Parkway Center, Florida, Community Development District, Special
Assessment Refunding Bonds, Series B, 8% due 5/01/2010 3,830
NR* NR* 3,300 Tampa Palms, Florida, Open Space and Transportation Community
Development District Revenue Bonds, Capital Improvement (Richmond
Place Project), 7.50% due 5/01/2018 3,487
====================================================================================================================================
Georgia--2.1% NR* NR* 3,760 Atlanta, Georgia, Urban Residential Finance Authority, M/F Mortgage
Revenue Bonds (Northside Plaza Apartments Project), AMT, 9.75%
due 11/01/2020 3,853
====================================================================================================================================
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 1,436
====================================================================================================================================
Illinois--1.9% NR* NR* 3,190 Illinois Development Finance Authority, Primary Health Care Centers
Facilities, Acquisition Program Revenue Bonds, 7.75% due 12/01/2016 3,443
====================================================================================================================================
Indiana--2.5% NR* NR* 2,600 Indiana State Educational Facilities Authority, Revenue Refunding
Bonds (Saint Joseph's College Project), 7% due 10/01/2029 2,720
NR* NR* 1,925 Indianapolis, Indiana, M/F Revenue Bonds (Lake Nora Fox Club Project),
Series B, 7.50% due 10/01/2029 1,890
====================================================================================================================================
Iowa--6.4% NR* NR* 10,000 Iowa Finance Authority, Health Care Facilities Revenue Refunding Bonds
(Care Initiatives Project), 9.25% due 7/01/2025 11,923
====================================================================================================================================
Louisiana--3.0% BB- NR* 5,500 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain
Company Project), 7.50% due 7/01/2013 5,570
====================================================================================================================================
Maryland--3.9% NR* NR* 1,875 Anne Arundel County, Maryland, Special Obligation Revenue Bonds
(Arundel Mills Project), 7.10% due 7/01/2029 2,001
NR* NR* 5,000 Maryland State Energy Financing Administration, Limited Obligation
Revenue Bonds (Cogeneration--AES Warrior Run), AMT, 7.40% due
9/01/2019 5,174
====================================================================================================================================
Massachusetts--3.0% NR* NR* 1,255 Boston, Massachusetts, Industrial Development Financing Authority,
Solid Waste Disposal Facility Revenue Bonds (Jet-A-Way Project),
AMT, 10.50% due 1/01/2011 1,303
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 2,443
NR* NR* 1,800 Massachusetts State Industrial Finance Agency Revenue Bonds, Sewer
Facility (Resource Control Composting), AMT, 9.25% due 6/01/2010 1,816
====================================================================================================================================
Minnesota--1.8% NR* NR* 3,220 Anoka, Minnesota, M/F Housing Revenue Bonds (Rainbow Plaza Apartments
Project), 9.375% due 12/01/2024 3,243
====================================================================================================================================
Mississippi--1.2% NR* VMIG1+ 355 Jackson County, Mississippi, PCR, Refunding (Chevron U.S.A. Inc.
Project), VRDN, 3.25% due 12/01/2016 (f) 355
BBB- Ba1 2,000 Mississippi Business Finance Corporation, Mississippi, PCR, Refunding
(System Energy Resources Inc. Project), 5.875% due 4/01/2022 1,880
====================================================================================================================================
Missouri--0.7% NR* NR* 1,200 Fenton, Missouri, Tax Increment Revenue Refunding and Improvement
Bonds (Gravois Bluffs), 7% due 10/01/2021 1,223
====================================================================================================================================
Nevada--1.1% BBB Baa2 2,500 Henderson, Nevada, Health Care Facility Revenue Bonds (Catholic
Healthcare West--Saint Rose Dominican Hospital), 5.375% due 7/01/2026 2,101
====================================================================================================================================
New Jersey--12.5% Camden County, New Jersey, Improvement Authority, Lease Revenue Bonds
(Holt Hauling & Warehousing), AMT, Series A:
NR* NR* 2,000 9.625% due 1/01/2011 1,874
NR* NR* 4,500 9.875% due 1/01/2021 4,216
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 5,814
NR* NR* 3,000 New Jersey EDA, Economic Development Revenue Bonds (Glimcher Properties
LP Project), AMT, 6% due 11/01/2028 2,676
BBB- NR* 1,500 New Jersey EDA, First Mortgage Revenue Bonds (Fellowship Village),
Series C, 5.50% due 1/01/2028 1,235
NR* NR* 1,500 New Jersey EDA, IDR, Refunding (Newark Airport Marriott Hotel), 7% due
10/01/2014 1,523
NR* NR* 3,700 New Jersey EDA, Retirement Community Revenue Bonds (Seabrook Village
Inc.), Series A, 8.125% due 11/15/2023 3,716
BBB- Baa3 2,000 New Jersey Health Care Facilities Financing Authority, Revenue
Refunding Bonds (Trinitas Hospital Obligation Group), 7.375% due
7/01/2015 2,060
====================================================================================================================================
New Mexico--2.7% B+ Ba3 5,000 Farmington, New Mexico, PCR, Refunding (Tucson Electric Power Co.--San
Juan Project), Series A, 6.95% due 10/01/2020 5,024
====================================================================================================================================
New York--1.8% Utica, New York, GO, Public Improvement:
BB Ba1 700 9.25% due 8/15/2004 761
BB Ba1 700 9.25% due 8/15/2005 777
BB Ba1 635 9.25% due 8/15/2006 720
BB Ba1 475 8.50% due 8/15/2013 529
BB Ba1 475 8.50% due 8/15/2014 529
====================================================================================================================================
North Carolina--0.9% NR* NR* 1,600 North Carolina Medical Care Commission, Health Care Facilities, First
Mortgage Revenue Refunding Bonds (Presbyterian Homes Project), 7% due
10/01/2031 1,665
====================================================================================================================================
Ohio--3.4% NR* Ba2 7,185 Cleveland, Ohio, Airport Special Revenue Refunding Bonds (Continental
Airlines Inc. Project), AMT, 5.70% due 12/01/2019 6,266
====================================================================================================================================
Oregon--1.6% NR* NR* 2,160 Klamath Falls, Oregon, Electric Revenue Refunding Bonds (Klamath
Cogeneration Project), Senior Lien, 6% due 1/01/2025 2,046
NR* NR* 1,000 Western Generation Agency, Oregon, Cogeneration Project Revenue Bonds
(Wauna Cogeneration Project), AMT, Series B, 7.40% due 1/01/2016 1,027
====================================================================================================================================
Pennsylvania--9.1% NR* Ba2 2,000 Lehigh County, Pennsylvania, General Purpose Authority, Revenue
Refunding Bonds (Kidspeace Obligation Group), 6% due 11/01/2023 1,696
Montgomery County, Pennsylvania, Higher Education and Health Authority,
Revenue Refunding Bonds (Faulkeways at Gwynedd Project):
BBB+ NR* 900 6.75% due 11/15/2024 922
BBB+ NR* 925 6.75% due 11/15/2030 944
6 & 7
Apex Municipal Fund, Inc., June 30, 2001
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
Pennsylvania 4 Northhampton Pulp LLC (d)(g) $ 530
(concluded) AAA Aaa $ 2,000 Pennsylvania State Higher Education Assistance Agency, Student Loan
Revenue Bonds, RIB, AMT, 6.173% due 3/01/2022 (a)(e) 2,115
AAA NR* 4,000 Pennsylvania State Higher Educational Facilities Authority, College
and University Revenue Bonds (Eastern College), Series B, 8% due
10/15/2006 (c) 4,868
NR* NR* 5,500 Philadelphia, Pennsylvania, Authority for IDR, Commercial Development,
AMT, 7.75% due 12/01/2017 5,791
====================================================================================================================================
South Carolina--0.5% BBB- NR* 1,000 South Carolina Jobs EDA Revenue Bonds (Myrtle Beach Convention Center),
Series A, 6.625% due 4/01/2036 1,004
====================================================================================================================================
Texas--4.0% BBB- Baa3 1,000 Austin, Texas, Convention Center Revenue Bonds (Convention Enterprises
Inc.), First Tier, Series A, 6.70% due 1/01/2028 1,015
BBB Baa2 6,500 Lower Colorado River Authority, Texas, PCR (Samsung Austin
Semiconductor), AMT, 6.375% due 4/01/2027 6,479
====================================================================================================================================
Utah--1.2% NR* NR* 2,240 Carbon County, Utah, Solid Waste Disposal Revenue Refunding Bonds
(Laidlaw Environmental), AMT, Series A, 7.45% due 7/01/2017 2,289
====================================================================================================================================
Virginia--8.2% NR* NR* 2,500 Dulles Town Center, Virginia, Community Development Authority, Special
Assessment Tax (Dulles Town Center Project), 6.25% due 3/01/2026 2,441
NR* NR* 4,215 Peninsula Ports Authority, Virginia, Revenue Refunding Bonds (Port
Facility--Zeigler Coal), 6.90% due 5/02/2022 2,740
NR* NR* 3,000 Pittsylvania County, Virginia, IDA, Revenue Refunding Bonds,
Exempt-Facility, AMT, Series A, 7.50% due 1/01/2014 2,878
Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds:
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2033 561
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2034 521
BBB- Baa3 32,600 Senior Series B, 5.875%** due 8/15/2025 6,098
====================================================================================================================================
Washington--1.4% NR* NR* 2,600 Port Seattle, Washington, Special Facilities Revenue Bonds (Northwest
Airlines Project), AMT, 7.25% due 4/01/2030 2,559
====================================================================================================================================
Total Investments (Cost--$187,991)--98.2% 181,988
Other Assets Less Liabilities--1.8% 3,258
--------
Net Assets--100.0% $185,246
========
====================================================================================================================================
(a) AMBAC Insured.
(b) FSA Insured.
(c) Prerefunded.
(d) These shares represent an equity interest in the reorganization of
Ponderosa Fibres PA. The security may be offered and sold to "qualified
institutional buyers" under Rule 144A of the Securities Act of 1933.
(e) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at June 30, 2001.
(f) 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,
2001.
(g) Non-income producing security.
* Not Rated.
** Represents a zero coupon 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 have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of June 30, 2001
==============================================================================================================
Assets: Investments, at value (identified cost--$187,991,181) ......... $ 181,988,382
Cash .......................................................... 140,866
Interest receivable ........................................... 3,350,693
Prepaid expenses and other assets ............................. 16,195
-------------
Total assets .................................................. 185,496,136
-------------
==============================================================================================================
Liabilities: Payables:
Dividends to shareholders ................................... $ 108,703
Investment adviser .......................................... 92,021 200,724
----------
Accrued expenses and other liabilities ........................ 49,101
-------------
Total liabilities ............................................. 249,825
-------------
==============================================================================================================
Net Assets: Net assets .................................................... $ 185,246,311
=============
==============================================================================================================
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 .............................. 211,626,481
Undistributed investment income--net .......................... 953,493
Accumulated realized capital losses on investments--net ....... (23,290,537)
Unrealized depreciation on investments--net ................... (6,002,799)
-------------
Total capital--Equivalent to $9.45 net asset value per share
of Common Stock (market price--$9.10) ......................... $ 185,246,311
=============
==============================================================================================================
See Notes to Financial Statements.
8 & 9
Apex Municipal Fund, Inc., June 30, 2001
STATEMENT OF OPERATIONS
For the Year Ended June 30, 2001
===================================================================================================================
Investment Interest and amortization of premium and discount earned ... $ 13,089,578
Income:
===================================================================================================================
Expenses: Investment advisory fees ................................... $1,186,788
Professional fees .......................................... 61,628
Accounting services ........................................ 55,796
Listing fees ............................................... 43,630
Directors' fees and expenses ............................... 40,482
Transfer agent fees ........................................ 30,550
Printing and shareholder reports ........................... 29,923
Custodian fees ............................................. 15,717
Pricing fees ............................................... 12,755
Other ...................................................... 15,435
----------
Total expenses ............................................. 1,492,704
------------
Investment income--net ..................................... 11,596,874
------------
===================================================================================================================
Realized & Unrealized Realized loss on investments--net .......................... (1,269,704)
Gain (Loss) on Change in unrealized depreciation on investments--net ...... 3,734,670
Investments--Net: ------------
Net Increase in Net Assets Resulting from Operations ....... $ 14,061,840
============
===================================================================================================================
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the Year
Ended June 30,
--------------------------------
Increase (Decrease) in Net Assets: 2001 2000
============================================================================================================================
Operations: Investment income--net ............................................... $ 11,596,874 $ 12,922,384
Realized loss on investments--net .................................... (1,269,704) (8,184,667)
Change in unrealized appreciation/depreciation on investments--net ... 3,734,670 (12,015,330)
------------- -------------
Net increase (decrease) in net assets resulting from operations ...... 14,061,840 (7,277,613)
------------- -------------
============================================================================================================================
Dividends to Investment income--net ............................................... (11,694,527) (13,041,174)
Shareholders: ------------- -------------
Net decrease in net assets resulting from dividends to shareholders .. (11,694,527) (13,041,174)
------------- -------------
============================================================================================================================
Net Assets: Total increase (decrease) in net assets .............................. 2,367,313 (20,318,787)
Beginning of year .................................................... 182,878,998 203,197,785
------------- -------------
End of year* ......................................................... $ 185,246,311 $ 182,878,998
============= =============
============================================================================================================================
* Undistributed investment income--net ................................. $ 953,493 $ 1,051,146
============= =============
============================================================================================================================
See Notes to Financial Statements.
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: 2001 2000 1999 1998 1997
===================================================================================================================================
Per Share Net asset value, beginning of year ....................... $ 9.33 $ 10.37 $ 10.60 $ 10.25 $ 10.01
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ................................... .59 .66 .63 .64 .64
Realized and unrealized gain (loss) on investments--net .. .13 (1.03) (.23) .35 .26
-------- -------- -------- -------- --------
Total from investment operations ......................... .72 (.37) .40 .99 .90
-------- -------- -------- -------- --------
Less dividends from investment income--net ............... (.60) (.67) (.63) (.64) (.66)
-------- -------- -------- -------- --------
Net asset value, end of year ............................. $ 9.45 $ 9.33 $ 10.37 $ 10.60 $ 10.25
======== ======== ======== ======== ========
Market price per share, end of year ...................... $ 9.10 $ 8.9375 $ 10.25 $ 10.50 $ 9.9375
======== ======== ======== ======== ========
===================================================================================================================================
Total Investment Based on market price per share .......................... 9.05% (6.22%) 3.68% 12.42% 16.66%
Return:* ======== ======== ======== ======== ========
Based on net asset value per share ....................... 8.48% (3.23%) 3.90% 10.03% 9.69%
======== ======== ======== ======== ========
===================================================================================================================================
Ratios to Average Expenses ................................................. .82% .81% .81% .86% .79%
Net Assets: ======== ======== ======== ======== ========
Investment income--net ................................... 6.35% 6.71% 5.93% 6.08% 6.34%
======== ======== ======== ======== ========
===================================================================================================================================
Supplemental Net assets, end of year (in thousands) ................... $185,246 $182,879 $203,198 $207,460 $200,372
Data: ======== ======== ======== ======== ========
Portfolio turnover ....................................... 17% 20% 40% 34% 79%
======== ======== ======== ======== ========
===================================================================================================================================
* 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.
See Notes to Financial Statements.
10 & 11
Apex Municipal Fund, Inc., June 30, 2001
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Apex Municipal Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company. The Fund's financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. The Fund determines
and makes available for publication the net asset value of its Common Stock on a
weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange
under the symbol APX. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such 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). Securities with remaining
maturities 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 to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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 for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
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 is authorized to 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.
(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 will adopt the provisions to amortize all premiums and discounts on debt
securities effective July 1, 2001, as now required under the new AICPA Audit and
Accounting Guide for Investment Companies. The cumulative effect of this
accounting change will have no impact on the total net assets of the Fund, but
will result in a $34,920 increase to the cost of securities and a corresponding
$34,920 decrease to net unrealized depreciation, based on debt securities held
as of June 30, 2001.
(e) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .65% of the Fund's average weekly net assets.
Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimburses FAM at its cost for
such services. For the year ended June 30, 2001, the Fund reimbursed FAM an
aggregate of $24,777 for the above-described services. The Fund entered into an
agreement with State Street Bank and Trust Company ("State Street"), effective
January 1, 2001, pursuant to which State Street provides certain accounting
services to the Fund. The Fund pays a fee for these services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 2001 were $32,987,549 and $30,827,448, respectively.
Net realized losses for the year ended June 30, 2001 and net unrealized losses
as of June 30, 2001 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
--------------------------------------------------------------------------------
Long-term investments .............. $(1,269,704) $(6,002,799)
----------- -----------
Total .............................. $(1,269,704) $(6,002,799)
=========== ===========
--------------------------------------------------------------------------------
As of June 30, 2001, net unrealized depreciation for Federal income tax purposes
aggregated $6,002,799, of which $6,289,210 related to appreciated securities and
$12,292,009 related to depreciated securities. The aggregate cost of investments
at June 30, 2001 for Federal income tax purposes was $187,991,181.
4. Common Stock Transactions:
At June 30, 2001, the Fund had one class of shares of Common Stock, par value
$.10 per share, of which 150,000,000 shares were authorized. Shares issued and
outstanding during the years ended June 30, 2001 and June 30, 2000 remained
constant.
5. Capital Loss Carryforward:
At June 30, 2001, the Fund had a net capital loss carryforward of approximately
$22,153,000, of which $2,775,000 expires in 2002, $1,754,000 expires in 2003,
$7,057,000 expires in 2004, $1,312,000 expires in 2005, $938,000 expires in
2006, $2,975,000 expires in 2008 and $5,342,000 expires in 2009. This amount
will be available to offset like amounts of any future taxable gains. Expired
capital loss carryforward in the amount of $3,879,734 has been reclassified to
paid-in capital in excess of par.
6. Subsequent Event:
On July 5, 2001, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.049283 per share,
payable on July 30, 2001 to shareholders of record as of July 17, 2001.
12 & 13
Apex Municipal Fund, Inc., June 30, 2001
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
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, 2001, the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years presented. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on the financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 at June 30, 2001 by correspondence with the custodian. 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, such financial statements and the financial highlights present
fairly, in all material respects, the financial position of Apex Municipal Fund,
Inc. as of June 30, 2001, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte & Touche LLP
New York, New York
August 3, 2001
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions declared monthly by Apex
Municipal Fund, Inc. during its taxable year ended June 30, 2001 qualify as
tax-exempt interest dividends for Federal income tax purposes.
Please retain this information for your records.
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.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Vincent R. Giordano, Senior Vice President
Theodore R. Jaeckel Jr., Vice President
John M. Loffredo, Vice President
Donald C. Burke, Vice President and Treasurer
Bradley J. Lucido, Secretary
Custodian & Transfer Agent
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
APX
14 & 15
[LOGO] Merrill Lynch Investment Managers
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[GRAPHIC OMITTED]
Apex Municipal Fund, Inc. seeks to provide shareholders with high current income
exempt from Federal income taxes by investing primarily in a portfolio of
medium-to-lower grade or unrated municipal obligations, the interest on which is
exempt from Federal income taxes in the opinion of bond counsel to the issuer.
This report, including the financial information herein, is transmitted to
shareholders of Apex Municipal Fund, Inc. for their information. It is not a
prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
Apex Municipal Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
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