UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-05227
Name of Fund: Apex Municipal Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Apex Municipal Fund, Inc., 800 Scudders Mill Road, Plainsboro,
NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 06/30/06
Date of reporting period: 07/01/05 - 06/30/06
Item 1 - Report to Stockholders
Annual Report
June 30, 2006
Apex Municipal
Fund, Inc.
Apex Municipal Fund, Inc.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company ("New BlackRock") that will be one of the world's largest
asset management firms with over $1 trillion in assets under management (based
on combined assets under management as of June 30, 2006) (the "Transaction").
The Transaction is expected to close at the end of the third quarter of 2006, at
which time the new company will operate under the BlackRock name. The Fund's
Board of Directors has approved a new investment advisory agreement with
BlackRock Advisors, Inc. or its successor on substantially the same terms and
for the same advisory fee as the current investment advisory agreement with the
Investment Adviser. If the new agreement is approved by the Fund's shareholders,
BlackRock Advisors, Inc. or its successor is expected to become the investment
adviser of the Fund upon the closing of the Transaction.
Portfolio Information as of June 30, 2006
Percent of
Quality Ratings by Total
S&P/Moody's Investments
--------------------------------------------------------------------------------
AAA/Aaa ................................................. 0.3%
A/A ..................................................... 3.4
BBB/Baa ................................................. 19.2
BB/Ba ................................................... 12.2
B/B ..................................................... 6.6
CCC/Caa ................................................. 5.5
NR (Not Rated) .......................................... 50.5
Other* .................................................. 2.3
--------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments, anticipation notes
and variable rate demand notes.
2 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
A Letter From the President
Dear Shareholder
By now, you have probably heard of the important changes unfolding at Merrill
Lynch Investment Managers ("MLIM"). We have been communicating with
shareholders, via letters like this and in a detailed proxy mailing, about
MLIM's impending union with another highly regarded investment manager --
BlackRock, Inc. ("BlackRock"). This transaction marks the next chapter in MLIM's
growth story and, we believe, will be a benefit to our investors.
MLIM, a division of Merrill Lynch with over $583 billion in assets under
management, is a leading investment manager offering more than 100 investment
strategies in vehicles ranging from mutual funds to institutional portfolios.
BlackRock, with $464.1 billion in assets under management, is one of the largest
publicly traded investment management firms in the United States managing assets
on behalf of institutional and individual investors worldwide through a variety
of equity, fixed income, liquidity and alternative investment products. At the
completion of the transaction, which is expected by the end of third quarter
2006, the resultant firm will be a top-10 investment manager worldwide with over
$1 trillion in assets under management.*
The combined company, to be known as BlackRock, will provide a wide selection of
high-quality investment solutions across a range of asset classes and investment
styles. The organization will have over 4,500 employees in 18 countries and a
major presence in key markets worldwide. MLIM and BlackRock possess
complementary capabilities that together create a well-rounded organization
uniting some of the finest money managers in the industry. The firms share
similar values and beliefs -- each strives for excellence in all areas, and both
make investment performance their single most important mission. As such, our
combination only reinforces our commitment to shareholders.
Most of MLIM's investment products -- including mutual funds, separately managed
accounts, annuities and variable insurance funds -- eventually will carry the
"BlackRock" name. This will be reflected in newspaper and online information
sources beginning in October. Your account statements will reflect the BlackRock
name beginning with the October month-end reporting period. Unless otherwise
communicated via a proxy statement, your funds will maintain the same investment
objectives that they do today. Importantly, the MLIM/BlackRock union will not
affect your brokerage account or your relationship with your financial advisor.
If you are a client of Merrill Lynch, you will remain a client of Merrill Lynch.
As always, we thank you for entrusting us with your investment assets. We look
forward to continuing to serve your investment needs with even greater strength
and scale as the new BlackRock.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.047 trillion in assets under management as of June 30, 2006.
Data, including assets under management, are as of June 30, 2006.
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 3
A Discussion With Your Fund's Portfolio Manager
The Fund outpaced the average return of the Lipper High Yield Municipal
Debt Funds category for the fiscal year, benefiting from the outperformance of
several individual holdings as credit spreads continued to contract in the
municipal market.
Describe the recent market environment relative to municipal bonds.
Long-term bond yields rose sharply during the 12-month period, with much of the
increase occurring in the final three months. Bond prices, which move opposite
of yields, declined as investors focused on solid economic growth, both globally
and in the United States, and renewed inflationary pressures deriving from
rising commodity prices.
The Federal Reserve Board (the Fed) increased short-term interest rates at each
of its meetings during the year, bringing the federal funds target rate to 5.25%
at period-end. The yield curve continued to flatten as short-term interest rates
rose more than longer-term interest rates. Over the past 12 months, 30-year U.S.
Treasury bond yields rose 100 basis points (1.00%) to 5.19% and 10-year U.S.
Treasury note yields rose 121 basis points to 5.15%, the highest level since May
2002.
While municipal bond yields also rose in recent months, the market's strong
technical position provided significant price support and allowed municipal bond
prices to decline much less than taxable bond prices. As measured by Municipal
Market Data, yields on AAA-rated issues maturing in 30 years rose 37 basis
points to 4.63% and yields on AAA-rated issues maturing in 10 years rose 69
basis points to 4.14%.
The municipal market has been supported by increased retail investor demand and
declining supply. Year-to-date, over $179 billion in new long-term tax-exempt
bonds was underwritten, a decline of 14% compared to the first half of 2005 and
the lowest initial semi-annual volume in the past four years. The decline has
largely been the result of a 52% drop in refunding activity so far this year.
Rising bond yields have made the refinancing of existing higher-couponed debt
less attractive, as the potential savings have rapidly diminished. In addition,
the improved fiscal conditions of many state and local governments have resulted
in lower borrowing trends, as many new municipal capital projects have been
financed from existing budget surpluses. At the same time, municipal bond fund
flows have remained positive. As reported by the Investment Company Institute,
open-end tax-exempt bond funds received net new cash inflows of over $6.2
billion in the first five months of 2006, compared to $1.4 billion during the
same period in 2005.
Looking ahead, the fundamentals for the municipal market appear positive. Demand
is expected to be sustained as investors receive cash flow from coupon income
and the proceeds of bond maturities and calls. In addition, new issuance should
be manageable. The favorable supply/ demand dynamic, coupled with attractive
yields relative to comparable U.S. Treasury bonds, should continue to support
the municipal market in the coming months.
How did the Fund perform during the fiscal year?
For the 12-month period ended June 30, 2006, the Common Stock of Apex Municipal
Fund, Inc. had net annualized yields of 5.89% and 5.69%, based on a year-end per
share net asset value of $9.90 and a per share market price of $10.25,
respectively, and $.583 per share income dividends. Over the same period, the
total investment return on the Fund's Common Stock was +7.00%, based on a change
in per share net asset value from $9.82 to $9.90, and assuming reinvestment of
all distributions.
The Fund's total return, based on net asset value, exceeded the +5.53% average
return of the Lipper High Yield Municipal Debt Funds category for the 12-month
period. (Funds in this Lipper category invest at least 50% of their assets in
lower-rated municipal debt issues.) Fund performance benefited from the
continued contraction of credit spreads in the municipal market, which had a
favorable impact on our positions in tax-backed and corporate-related debt,
where we have a significant concentration, as well as our health care-related
holdings. The greatest contribution to performance came from the Fund's
positions in airline-related debt. While this sector lagged in the first six
months, airlines resumed a strong rally in the latter half of the period that
resulted in considerable spread tightening. This proved beneficial to some of
our larger holdings in Continental Airlines, Inc., American Airlines, Inc. and
USAir. Also contributing significantly to performance was strong appreciation in
the portfolio's largest exposure -- the bonds of Pocahontas Parkway, a toll road
in Virginia that was constructed within the past few years. The road has been
signed over to an infrastructure financing entity, with the transaction expected
to close in the summer. Given this development, the toll road's outstanding debt
is expected to be defeased (or called at its first call date), which has
resulted in a price increase in the existing bonds.
4 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
For the six-month period ended June 30, 2006, the total investment return on the
Fund's Common Stock was +3.75%, based on a change in per share net asset value
from $9.83 to $9.90, and assuming reinvestment of all distributions.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial Highlights section of
this report. As a closed-end fund, the Fund's shares may trade in the secondary
market at a premium or discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the Fund's
Common Stock can vary significantly from total investment returns based on
changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
Portfolio activity was driven primarily by the need to reinvest the proceeds
from bonds that were called by their issuers prior to maturity. This is a
typical phenomenon in an environment where interest rates are low and credit
spreads are contracting, as issuers find it economical to refinance their
existing debt. As the portfolio's seasoned, higher-coupon holdings are called by
their issuers, our reinvestment prospects in the current environment are less
and less appealing. It is not possible to reinvest at the same levels as those
former holdings. This is an industry-wide experience that requires us -- and our
competitors -- to adjust to a lower interest rate environment.
Our efforts during the period also were focused on reducing exposure to weaker
credits that had participated in the spread rally. We sold a multi-family
housing bond and a couple of health care issues, while also trimming exposure to
the tobacco sector. Purchases during the period were largely confined to health
care-related issues and some tax-backed credits, largely because this is where
we have seen the most new issuance. We have found that the most attractive
prices available today are in the new-issue market, whereas opportunities in the
secondary market have been fairly sparse and priced rather aggressively.
How would you characterize the Fund's position at the close of the period?
In the conclusion of our last report to shareholders, we said that we had put
off reducing the Fund's overweight position in airlines because we wanted to
avoid selling at a low point. We have once again decided to delay implementing
that reduction, this time for different reasons. First, given the number of bond
calls we are experiencing and the struggle to maintain an attractive yield in
the current environment, we want to avoid selling our higher-yielding airline
holdings. Second, the airlines' business prospects are improving. As a result,
the prices of their bonds have done significantly better, and we believe there
is room for continued appreciation. Also, in light of the improvements in the
industry, airlines are experiencing increased demand from investors. So, whereas
the portfolio was overweight to this sector a year or two ago, that is no longer
the case as more of our competitors increase their airline exposure.
Looking ahead, we intend to continue trimming some of the portfolio's weaker
holdings while addressing bond calls as they arise. More so than ever, we
believe it is important to remain nimble in our approach, especially with
respect to new-issue bonds that come to market. We are taking a tactical
approach to these new purchases. We would not consider them longer-term core
holdings given the tight spreads that the market demands, but view them as an
opportunity to add value from a total return/price appreciation standpoint. We
maintain a positive outlook on the high yield municipal market, but believe the
prospect for further spread contraction is limited. For that reason, we intend
to remain flexible and cautious in our approach, taking opportunities to upgrade
our credit profile as they become available.
Theodore R. Jaeckel Jr., CFA
Vice President and Portfolio Manager
July 6, 2006
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 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 $ 1,012
=============================================================================================
Alaska--1.1%
2,000 Alaska Industrial Development and Expert Authority
Revenue Bonds (Williams Lynxs Alaska Cargoport),
AMT, 8% due 5/01/2023 2,103
=============================================================================================
Arizona--3.6%
900 Maricopa County, Arizona, IDA, Education Revenue
Bonds (Arizona Charter Schools Project 1), Series A,
6.625% due 7/01/2020 893
Maricopa County, Arizona, IDA, M/F Housing Revenue
Bonds (Sun King Apartments Project), Series A:
70 5.875% due 11/01/2008 68
20 6% due 11/01/2010 19
1,020 6.75% due 5/01/2031 868
3,660 Phoenix, Arizona, IDA, Airport Facility, Revenue
Refunding Bonds (America West Airlines, Inc. Project),
AMT, 6.30% due 4/01/2023 3,609
1,000 Pima County, Arizona, IDA, Education Revenue Bonds
(Arizona Charter Schools Project), Series E, 7.25%
due 7/01/2031 1,068
500 Yavapai County, Arizona, IDA, Hospital Facility Revenue
Bonds (Yavapai Regional Medical Center), Series A,
6% due 8/01/2033 526
=============================================================================================
California--2.2%
1,800 California State, GO, 5% due 2/01/2033 1,812
1,300 California State, Various Purpose, GO, 5.25%
due 11/01/2025 1,353
1,000 Fontana, California, Special Tax, Refunding (Community
Facilities District Number 22--Sierra),
6% due 9/01/2034 1,044
=============================================================================================
Colorado--5.5%
2,765 Denver, Colorado, Urban Renewal Authority, Tax
Increment Revenue Bonds (Pavilions), AMT, 7.75%
due 9/01/2016 2,834
2,800 Elk Valley, Colorado, Public Improvement Revenue
Bonds (Public Improvement Fee), Series A, 7.30%
due 9/01/2022 2,971
1,235 North Range, Colorado, Metropolitan District Number 1,
GO, 7.25% due 12/15/2031 1,318
Plaza Metropolitan District Number 1, Colorado, Tax
Allocation Revenue Bonds (Public Improvement Fees):
2,000 8% due 12/01/2025 2,184
500 8.125% due 12/01/2025 499
830 Southlands, Colorado, Medical District, GO
(Metropolitan District Number 1), 7.125%
due 12/01/2034 904
=============================================================================================
Connecticut--1.0%
1,650 Bridgeport, Connecticut, Senior Living Facilities Revenue
Bonds (3030 Park Retirement Community Project),
7.25% due 4/01/2035 1,384
490 Connecticut State Development Authority, Airport
Facility Revenue Bonds (LearJet Inc. Project), AMT,
7.95% due 4/01/2026 579
=============================================================================================
Florida--8.3%
750 Arbor Greene Community Development District, Florida,
Special Assessment Revenue Bonds, 7.60%
due 11/01/2006 (a) 766
800 Capital Projects Finance Authority, Florida, Continuing
Care Retirement Revenue Bonds (Glenridge on
Palmer Ranch), Series A, 8% due 6/01/2032 874
840 Halifax Hospital Medical Center, Florida, Hospital
Revenue Refunding Bonds, Series A, 5%
due 6/01/2038 812
850 Highlands County, Florida, Health Facilities Authority,
Hospital Revenue Bonds (Adventist Health System),
Series C, 5.25% due 11/15/2036 868
2,500 Hillsborough County, Florida, IDA, Exempt Facilities
Revenue Bonds (National Gypsum Company), AMT,
Series A, 7.125% due 4/01/2030 2,744
765 Lakewood Ranch, Florida, Community Development
District Number 5, Special Assessment Revenue
Refunding Bonds, Series A, 6.70% due 5/01/2031 809
Midtown Miami, Florida, Community Development
District, Special Assessment Revenue Bonds, Series A:
1,500 6% due 5/01/2024 1,607
1,350 6.25% due 5/01/2037 1,455
1,555 Orlando, Florida, Urban Community Development
District, Capital Improvement Special Assessment
Bonds, Series A, 6.95% due 5/01/2033 1,669
1,895 Santa Rosa Bay Bridge Authority, Florida, Revenue
Bonds, 6.25% due 7/01/2028 1,904
2,515 Tampa Palms, Florida, Open Space and Transportation
Community Development District Revenue Bonds,
Capital Improvement (Richmond Place Project),
7.50% due 5/01/2018 2,570
=============================================================================================
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. JUNE 30, 2006
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
=============================================================================================
Georgia--3.9%
Atlanta, Georgia, Tax Allocation Bonds:
$2,000 (Atlantic Station Project), 7.90% due 12/01/2024 $ 2,202
410 (Eastside Project), Series B, 5.40% due 1/01/2020 412
495 (Princeton Lakes Project), 5.50% due 1/01/2031 492
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 813
1,185 7.25% due 1/01/2035 1,158
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 862
=============================================================================================
Idaho--0.8%
1,470 Idaho Health Facilities Authority, Revenue Refunding
Bonds (Valley Vista Care Corporation), Series A, 7.75%
due 11/15/2016 1,534
=============================================================================================
Illinois--8.0%
1,845 Caseyville, Illinois, Senior Tax Increment Revenue Bonds
(Forest Lakes Project), 7% due 12/30/2022 1,911
3,000 Chicago, Illinois, O'Hare International Airport, Special
Facility Revenue Refunding Bonds (American Airlines,
Inc. Project), 8.20% due 12/01/2024 3,090
Illinois Development Finance Authority Revenue Bonds
(Primary Health Care Centers Facilities Acquisition Program):
585 7.75% due 12/01/2006 (a) 605
2,605 7.75% due 12/01/2016 2,678
490 6.60% due 7/01/2024 500
Illinois State Finance Authority Revenue Bonds Series A:
2,050 (Clare at Water Tower Project), 6.125% due 5/15/2038 2,083
430 (Landing at Plymouth Place Project), 6% due 5/15/2037 439
755 Lincolnshire, Illinois, Special Service Area Number 1,
Special Tax Bonds (Sedgebrook Project), 6.25%
due 3/01/2034 788
2,400 Lombard, Illinois, Public Facilities Corporation, First Tier
Revenue Bonds (Conference Center and Hotel),
Series A-1, 7.125% due 1/01/2036 2,532
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 727
=============================================================================================
Indiana--0.9%
840 Delaware County, Indiana, Hospital Authority, Hospital
Revenue Bonds (Cardinal Health System Obligated
Group), 5.25% due 8/01/2036 839
820 Vanderburgh County, Indiana, Redevelopment
Commission, Redevelopment District Tax Allocation
Bonds, 5.25% due 2/01/2031 832
=============================================================================================
Iowa--2.3%
3,855 Iowa Finance Authority, Health Care Facilities, Revenue
Refunding Bonds (Care Initiatives Project), 9.25%
due 7/01/2025 4,566
=============================================================================================
Kansas--0.6%
1,230 Wyandotte County, Kansas, Kansas City Unified
Government Revenue Refunding Bonds (General
Motors Corporation Project), 6% due 6/01/2025 1,169
=============================================================================================
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 1,319
1,290 New Orleans, Louisiana, Sewer Service Revenue Notes,
BAN, 3% due 7/26/2006 1,287
=============================================================================================
Maine--0.4%
840 Maine Finance Authority, Solid Waste Recycling
Facilities Revenue Bonds (Great Northern Paper
Project--Bowater), AMT, 7.75% due 10/01/2022 842
=============================================================================================
Maryland--1.0%
385 Baltimore, Maryland, Convention Center Hotel Revenue
Bonds, Sub-Series B, 5.875% due 9/01/2039 399
1,500 Maryland State Energy Financing Administration,
Limited Obligation Revenue Bonds (Cogeneration --
AES Warrior Run), AMT, 7.40% due 9/01/2019 1,513
=============================================================================================
Massachusetts--4.5%
1,845 Massachusetts State Development Finance Agency,
First Mortgage Revenue Bonds (Overlook
Communities Inc.), Series A, 6.25% due 7/01/2034 1,869
Massachusetts State Development Finance Agency,
Revenue Refunding Bonds (Eastern Nazarene College):
1,245 5.625% due 4/01/2019 1,260
1,220 5.625% due 4/01/2029 1,228
850 Massachusetts State Health and Educational Facilities
Authority Revenue Bonds (Jordan Hospital), Series E,
6.75% due 10/01/2033 912
Massachusetts State Health and Educational Facilities
Authority, Revenue Refunding Bonds:
2,000 (Bay Cove Human Services Issue), Series A, 5.90%
due 4/01/2028 2,008
500 (Milton Hospital), Series, 5.50% due 7/01/2016 503
1,000 Massachusetts State Industrial Finance Agency
Revenue Bonds, Sewer Facility (Resource Control
Composting), AMT, 9.25% due 6/01/2010 1,008
=============================================================================================
Michigan--1.3%
1,150 Macomb County, Michigan, Hospital Finance Authority,
Hospital Revenue Bonds (Mount Clemens General
Hospital), Series B, 5.875% due 11/15/2034 1,208
1,260 Monroe County, Michigan, Hospital Financing Authority,
Hospital Revenue Refunding Bonds (Mercy Memorial
Hospital Corporation), 5.50% due 6/01/2035 1,271
=============================================================================================
Minnesota--0.7%
1,230 Saint Paul, Minnesota, Port Authority, Hotel Facility,
Revenue Refunding Bonds (Radisson Kellogg Project),
Series 2, 7.375% due 8/01/2008 (a) 1,347
=============================================================================================
Missouri--1.2%
1,155 Fenton, Missouri, Tax Increment Revenue Refunding
and Improvement Bonds (Gravois Bluffs), 7%
due 10/01/2011 (a) 1,322
1,000 Kansas City, Missouri, IDA, First Mortgage Health
Facilities Revenue Bonds (Bishop Spencer Place),
Series A, 6.50% due 1/01/2035 1,041
=============================================================================================
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 7
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
=============================================================================================
Nevada--0.2%
$ 430 Clark County, Nevada, Improvement District Number 142,
Special Assessment Bonds, 6.375% due 8/01/2023 $ 443
=============================================================================================
New Hampshire--0.4%
835 New Hampshire Health and Education Facilities
Authority, Hospital Revenue Bonds (Catholic Medical
Center), 5% due 7/01/2036 820
=============================================================================================
New Jersey--13.4%
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 283
4,500 9.875% due 1/01/2021 637
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 6,032
2,170 New Jersey EDA, Cigarette Tax Revenue Bonds, 5.50%
due 6/15/2024 2,243
1,500 New Jersey EDA, IDR, Refunding (Newark Airport
Marriott Hotel), 7% due 10/01/2014 1,552
New Jersey EDA, Retirement Community Revenue Bonds:
1,000 (Cedar Crest Village Inc. Facility), Series A, 7.25%
due 11/15/2031 1,079
3,700 (Seabrook Village Inc.), Series A, 8.125%
due 11/15/2023 4,135
New Jersey EDA, Special Facility Revenue Bonds
(Continental Airlines, Inc. Project), AMT:
3,050 6.625% due 9/15/2012 3,246
1,750 6.25% due 9/15/2029 1,790
1,870 New Jersey Health Care Facilities Financing Authority
Revenue Bonds (Pascack Valley Hospital Association),
6.625% due 7/01/2036 1,938
2,760 New Jersey State Transportation Trust Fund Authority,
Transportation System Revenue Bonds, Series C,
5.05% due 12/15/2035 (f)(h) 632
Tobacco Settlement Financing Corporation of New
Jersey, Asset-Backed Revenue Bonds:
1,245 5.75% due 6/01/2032 1,299
1,075 7% due 6/01/2041 1,219
=============================================================================================
New Mexico--2.7%
5,000 Farmington, New Mexico, PCR, Refunding (Tucson
Electric Power Company--San Juan Project),
Series A, 6.95% due 10/01/2020 5,202
=============================================================================================
New York--5.2%
1,000 Dutchess County, New York, IDA, Civic Facility Revenue
Bonds (Saint Francis Hospital), Series B, 7.50%
due 3/01/2029 1,082
New York City, New York, City IDA, Civic Facility
Revenue Bonds:
350 Series C, 6.80% due 6/01/2028 375
830 (Special Needs Facility Pooled Program), Series C-1,
6.50% due 7/01/2024 840
1,730 New York City, New York, City IDA, Special Facility
Revenue Bonds (British Airways Plc Project), AMT,
7.625% due 12/01/2032 1,944
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 2,096
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 1,879
635 Utica, New York, GO, Public Improvement, 9.25%
due 8/15/2006 638
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 1,248
=============================================================================================
North Carolina--0.5%
1,000 North Carolina Medical Care Commission, Retirement
Facilities, First Mortgage Revenue Bonds (Givens
Estates Project), Series A, 6.50% due 7/01/2032 1,064
=============================================================================================
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 1,315
=============================================================================================
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 1,198
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 1,967
1,825 Montgomery County, Pennsylvania, Higher Education
and Health Authority Revenue Bonds (Faulkeways at
Gwynedd Project), 6.75% due 11/15/2009 (a) 1,992
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 1,742
4,460 Commercial Development, 7.75% due 12/01/2017 4,505
=============================================================================================
Rhode Island--1.0%
1,750 Central Falls, Rhode Island, Detention Facility
Corporation, Detention Facility, Revenue Refunding
Bonds, 7.25% due 7/15/2035 1,919
=============================================================================================
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 1,895
=============================================================================================
Texas--7.3%
1,000 Austin, Texas, Convention Center Revenue Bonds
(Convention Enterprises Inc.), First Tier, Series A,
6.70% due 1/01/2028 1,059
2,530 Brazos River Authority, Texas, PCR, Refunding (Texas
Utility Company), AMT, Series A, 7.70% due 4/01/2033 2,937
1,220 Brazos River Authority, Texas, Revenue Refunding Bonds
(Reliant Energy Inc. Project), Series B, 7.75%
due 12/01/2018 1,305
2,275 Dallas-Fort Worth, Texas, International Airport Facilities
Improvement Corporation Revenue Bonds (American
Airlines, Inc.), AMT, 7.25% due 11/01/2030 2,272
830 Grand Prairie, Texas, Housing Finance Corporation
Revenue Bonds (Independent Senior Living Center),
7.75% due 1/01/2034 855
1,000 Houston, Texas, Health Facilities Development
Corporation, Retirement Facility Revenue Bonds
(Buckingham Senior Living Community), Series A,
7.125% due 2/15/2034 1,099
8 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
Schedule of Investments (concluded) (in Thousands)
Face
Amount Municipal Bonds Value
=============================================================================================
Texas (concluded)
$ 875 Kerrville, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds (Sid Peterson
Memorial Hospital Project), 5.375% due 8/15/2035 $ 876
2,310 Matagorda County, Texas, Navigation District Number 1,
Revenue Refunding Bonds (Reliant Energy Inc.),
Series C, 8% due 5/01/2029 2,469
1,330 Port Corpus Christi, Texas, Individual Development
Corporation, Environmental Facilities Revenue Bonds
(Citgo Petroleum Corporation Project), AMT, 8.25%
due 11/01/2031 1,386
=============================================================================================
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 2,337
=============================================================================================
Virginia--1.3%
2,470 Dulles Town Center, Virginia, Community Development
Authority, Special Assessment Tax (Dulles Town
Center Project), 6.25% due 3/01/2026 2,577
=============================================================================================
West Virginia--0.6%
1,125 Princeton, West Virginia, Hospital Revenue Refunding
Bonds (Community Hospital Association Inc. Project),
6.20% due 5/01/2013 1,125
=============================================================================================
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 1,356
=============================================================================================
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 2,346
---------------------------------------------------------------------------------------------
Total Municipal Bonds
(Cost--$176,541)--93.3% 181,569
=============================================================================================
Shares
Held Short-Term Securities
=============================================================================================
1,101 Merrill Lynch Institutional Tax-Exempt Fund,
3.72% (d)(g) 1,101
---------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$1,101)--0.5% 1,101
=============================================================================================
Total Investments (Cost--$177,642*)--93.8% 182,670
Other Assets Less Liabilities--6.2% 11,976
--------
Net Assets--100.0% $194,646
========
* The cost and unrealized appreciation (depreciation) of investments as of
June 30, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ......................................... $177,276
========
Gross unrealized appreciation .......................... $ 11,625
Gross unrealized depreciation .......................... (6,231)
--------
Net unrealized appreciation ............................ $ 5,394
========
(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 $283
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 4,644 637
--------------------------------------------------------------------------
Total $6,760 $920
====================
(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 (2,599) $70
--------------------------------------------------------------------------
(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.
(f) AMBAC Insured.
(g) Represents the current yield as of 6/30/2006.
(h) Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase.
See Notes to Financial Statements.
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 9
Statement of Assets, Liabilities and Capital
As of June 30, 2006
================================================================================================================================
Assets
--------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$176,541,000) $ 181,568,813
Investments in affiliated securities, at value (identified cost--$1,101,148) .... 1,101,148
Cash ............................................................................ 95,317
Receivables:
Securities sold .............................................................. $ 7,895,762
Interest ..................................................................... 3,198,351
Custodian .................................................................... 939,128 12,033,241
-------------
Prepaid expenses ................................................................ 1,478
-------------
Total assets .................................................................... 194,799,997
-------------
================================================================================================================================
Liabilities
--------------------------------------------------------------------------------------------------------------------------------
Payables:
Investment adviser ........................................................... 96,820
Other affiliates ............................................................. 963 97,783
-------------
Accrued expenses ................................................................ 55,809
-------------
Total liabilities ............................................................... 153,592
-------------
================================================================================================================================
Net Assets
--------------------------------------------------------------------------------------------------------------------------------
Net Assets ...................................................................... $ 194,646,405
=============
================================================================================================================================
Capital
--------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value, 150,000,000 shares authorized; 19,669,911 shares
issued and outstanding ......................................................... $ 1,966,991
Paid-in capital in excess of par ................................................ 199,360,211
Undistributed investment income--net ............................................ $ 2,109,502
Accumulated realized capital losses--net ........................................ (13,818,112)
Unrealized appreciation--net .................................................... 5,027,813
-------------
Total accumulated losses--net ................................................... (6,680,797)
-------------
Total capital--Equivalent to $9.90 net asset value per share of Common Stock
(market price--$10.25) ......................................................... $ 194,646,405
=============
See Notes to Financial Statements.
10 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
Statement of Operations
For the Year Ended June 30, 2006
================================================================================================================================
Investment Income
--------------------------------------------------------------------------------------------------------------------------------
Interest ........................................................................ $ 12,781,166
Dividends from affiliates ....................................................... 70,327
-------------
Total income .................................................................... 12,851,493
-------------
================================================================================================================================
Expenses
--------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ........................................................ $ 1,259,511
Accounting services ............................................................. 76,806
Transfer agent fees ............................................................. 53,186
Professional fees ............................................................... 45,770
Printing and shareholder reports ................................................ 38,081
Directors' fees and expenses .................................................... 16,994
Listing fees .................................................................... 16,631
Pricing fees .................................................................... 16,021
Custodian fees .................................................................. 11,827
Other ........................................................................... 30,018
-------------
Total expenses before reimbursement ............................................. 1,564,845
Reimbursement of expenses ....................................................... (5,277)
-------------
Total expenses after reimbursement .............................................. 1,559,568
-------------
Investment income--net .......................................................... 11,291,925
-------------
================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
--------------------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ............................................... 1,746,648
Change in unrealized appreciation on investments--net ........................... (166,492)
-------------
Total realized and unrealized gain--net ......................................... 1,580,156
-------------
Net Increase in Net Assets Resulting from Operations ............................ $ 12,872,081
=============
See Notes to Financial Statements.
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 11
Statements of Changes in Net Assets
For the Year Ended
June 30,
-------------------------------
Increase (Decrease) in Net Assets: 2006 2005
================================================================================================================================
Operations
--------------------------------------------------------------------------------------------------------------------------------
Investment income--net .......................................................... $ 11,291,925 $ 11,357,440
Realized gain--net .............................................................. 1,746,648 157,115
Change in unrealized appreciation--net .......................................... (166,492) 13,265,125
-------------------------------
Net increase in net assets resulting from operations ............................ 12,872,081 24,779,680
-------------------------------
================================================================================================================================
Dividends to Shareholders
--------------------------------------------------------------------------------------------------------------------------------
Investment income--net .......................................................... (11,421,420) (11,287,718)
-------------------------------
Net decrease in net assets resulting from dividends to shareholders ............ (11,421,420) (11,287,718)
-------------------------------
================================================================================================================================
Common Stock Transactions
--------------------------------------------------------------------------------------------------------------------------------
Value of shares issued to shareholders in reinvestment of dividends ............. 720,540 --
-------------------------------
Net increase in net assets derived from Common Stock transactions ............... 720,540 --
-------------------------------
================================================================================================================================
Net Assets
--------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets .................................................... 2,171,201 13,491,962
Beginning of year ............................................................... 192,475,204 178,983,242
-------------------------------
End of year* .................................................................... $ 194,646,405 $ 192,475,204
===============================
* Undistributed investment income--net ........................................ $ 2,109,502 $ 2,238,998
===============================
See Notes to Financial Statements.
12 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
Financial Highlights
For the Year Ended June 30,
The following per share data and ratios have been derived ------------------------------------------------------------
from information provided in the financial statements. 2006 2005 2004 2003 2002
==================================================================================================================================
Per Share Operating Performance
----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ........................... $ 9.82 $ 9.13 $ 8.99 $ 9.24 $ 9.45
------------------------------------------------------------
Investment income--net ....................................... .58+ .58+ .60+ .58+ .58
Realized and unrealized gain (loss)--net ..................... .08 .69 .11 (.27) (.22)
------------------------------------------------------------
Total from investment operations ............................. .66 1.27 .71 .31 .36
------------------------------------------------------------
Less dividends and distributions to Common Stock shareholders:
Investment income--net .................................... (.58) (.58) (.57) (.56) (.57)
Realized gain--net ........................................ -- -- --** -- --
------------------------------------------------------------
Total dividends and distributions to Common Stock shareholders (.58) (.58) (.57) (.56) (.57)
------------------------------------------------------------
Net asset value, end of year ................................. $ 9.90 $ 9.82 $ 9.13 $ 8.99 $ 9.24
============================================================
Market price per share, end of year .......................... $ 10.25 $ 9.48 $ 8.26 $ 8.48 $ 8.39
============================================================
==================================================================================================================================
Total Investment Return*
----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ........................... 7.00% 14.67% 8.64% 4.13% 4.31%
============================================================
Based on market price per share .............................. 14.76% 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 year (in thousands) ....................... $194,646 $192,475 $178,983 $176,116 $181,093
============================================================
Portfolio turnover ........................................... 19% 22% 19% 24% 25%
============================================================
* 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.
See Notes to Financial Statements.
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 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. The Fund determines and makes available for publication the net asset
value of its Common Stock on a daily basis. The Fund's Common Stock shares are
listed on the New York Stock Exchange under the symbol APX. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter ("OTC") markets and are valued at the last available bid price
in the OTC market or on the basis of values as obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general direction
of the Board of Directors. Such valuations and procedures are reviewed
periodically by the Board of Directors of the Fund. Financial futures contracts
and options thereon, which are traded on exchanges, are valued at their closing
prices as of the close of such exchanges. Options written or purchased are
valued at the last sale price in the case of exchange-traded options. In the
case of options traded in the OTC market, valuation is the last asked price
(options written) or the last bid price (options purchased). Swap agreements are
valued by quoted fair values received daily by the Fund's pricing service.
Short-term investments with a remaining maturity of 60 days or less are valued
at amortized cost, which approximates market value, under which method the
investment is valued at cost and any premium or discount is amortized on a
straight line basis to maturity. Investments in open-end investment companies
are valued at their net asset value each business day. Securities and other
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Fund.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Options -- The Fund may write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked-to-market to reflect
the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent
of the premiums received or paid (or gain or loss to the extent the cost
of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
o Forward interest rate swaps -- The Fund may enter into forward interest
rate swaps. In a forward interest rate swap, the Fund and the counterparty
agree to make periodic net payments on a specified notional contract
amount, commencing on a specified future effective date, unless terminated
earlier. When the agreement is closed, the Fund records a realized gain or
loss in an amount equal to the value of the agreement.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
14 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
Notes to Financial Statements (concluded)
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund amortizes all premiums and discounts on debt securities.
(e) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
(f) Custodian -- The Fund recorded an amount receivable from the custodian
resulting from a timing difference of security transaction settlements.
(g) Reclassifications -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. There were no significant
reclassifications in the current year. These reclassifications have no effect on
net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .65% of the Fund's average daily net assets. FAM has agreed to
reimburse its management fee by the amount of management fees the Fund pays to
FAM indirectly through its investment in Merrill Lynch Institutional Tax-Exempt
Fund. For the year ended June 30, 2006, FAM reimbursed the Fund in the amount of
$5,277.
For the year ended June 30, 2006, the Fund reimbursed FAM $4,436 for certain
accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction is expected to
close at the end of the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 2006 were $35,298,380 and $46,473,215, respectively.
4. Common Stock Transactions:
At June 30, 2006, 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 year ended June 30, 2006 increased by
73,179 as a result of dividend reinvestment. Shares issued and outstanding for
the year ended June 30, 2005 remained constant.
5. Distributions to Shareholders:
The Fund paid a tax-exempt income dividend to holders of Common Stock in the
amount of $.049000 per share on July 28, 2006 to shareholders of record on July
17, 2006.
The tax character of distributions paid during the fiscal years ended June 30,
2006 and June 30, 2005 was as follows:
--------------------------------------------------------------------------------
6/30/2006 6/30/2005
--------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income .................... $11,421,420 $11,287,718
-------------------------------
Total distributions .................... $11,421,420 $11,287,718
===============================
As of June 30, 2006, the components of accumulated losses on a tax basis were as
follows:
-----------------------------------------------------------------------------
Undistributed tax-exempt income -- net ................... $ 2,027,586
Undistributed long-term capital gains -- net ............. --
------------
Total undistributed earnings -- net ...................... 2,027,586
Capital loss carryforward ................................ (13,818,112)*
Unrealized gains -- net .................................. 5,109,729**
------------
Total accumulated losses -- net .......................... $ (6,680,797)
============
* On June 30, 2006, the Fund had a net capital loss carryforward of
$13,818,112, of which $2,542,361 expires in 2008, $5,341,699 expires in
2009, $2,075,987 expires in 2010, $2,163,492 expires in 2011, $1,659,281
expires in 2012 and $35,292 expires in 2013. This amount will be available
to offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the difference between book and tax amortization
methods for premiums and discounts on fixed income securities and book/tax
differences in the accrual of income on securities in default.
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 15
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Apex Municipal Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of Apex Municipal Fund, Inc. as of June
30, 2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of June 30, 2006, by correspondence with the custodian.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Apex
Municipal Fund, Inc. as of June 30, 2006, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and its financial highlights for each of the five years in
the period then ended, in conformity with U.S. generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 23, 2006
Fund Certification (unaudited)
In May 2006, the Fund filed its Chief Executive Officer Certification for the
prior year with the New York Stock Exchange pursuant to Section 303A.12(a) of
the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
Important Tax Information (unaudited)
All of the net investment income distributions paid monthly by Apex Municipal
Fund, Inc. during its taxable year ended June 30, 2006 qualify as tax-exempt
interest dividends for federal income tax purposes.
16 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
Automatic Dividend Reinvestment Plan
How the Plan Works -- The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by The Bank of New York (the
"Plan Agent"). Under the Plan, whenever the Fund declares a dividend,
participants in the Plan will receive the equivalent in shares of Common Stock
of the Fund. The Plan Agent will acquire the shares for the participant's
account either (i) through receipt of additional unissued but authorized shares
of the Fund ("newly issued shares") or (ii) by purchase of outstanding shares of
Common Stock on the open market on the New York Stock Exchange or elsewhere. If,
on the dividend payment date, the Fund's net asset value per share is equal to
or less than the market price per share plus estimated brokerage commissions (a
condition often referred to as a "market premium"), the Plan Agent will invest
the dividend amount in newly issued shares. If the Fund's net asset value per
share is greater than the market price per share (a condition often referred to
as a "market discount"), the Plan Agent will invest the dividend amount by
purchasing on the open market additional shares. If the Plan Agent is unable to
invest the full dividend amount in open market purchases, or if the market
discount shifts to a market premium during the purchase period, the Plan Agent
will invest any uninvested portion in newly issued shares. The shares acquired
are credited to each shareholder's account. The amount credited is determined by
dividing the dollar amount of the dividend by either (i) when the shares are
newly issued, the net asset value per share on the date the shares are issued or
(ii) when shares are purchased in the open market, the average purchase price
per share.
Participation in the Plan -- Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by writing to the Plan Agent.
Benefits of the Plan -- The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares acquired
pursuant to the Plan receive voting rights. In addition, if the market price
plus commissions of the Fund's shares is above the net asset value, participants
in the Plan will receive shares of the Fund for less than they could otherwise
purchase them and with a cash value greater than the value of any cash
distribution they would have received. However, there may not be enough shares
available in the market to make distributions in shares at prices below the net
asset value. Also, since the Fund does not redeem shares, the price on resale
may be more or less than the net asset value.
Plan Fees -- There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders will
pay a pro rata share of any such commissions.
Tax Implications -- The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that may
be payable (or required to be withheld) on such dividends. Therefore, income and
capital gains may still be realized even though shareholders do not receive
cash. The value of shares acquired pursuant to the Plan will generally be
excluded from gross income to the extent that the cash amount reinvested would
be excluded from gross income. If, when the Fund's shares are trading at a
market premium, the Fund issues shares pursuant to the Plan that have a greater
fair market value than the amount of cash reinvested, it is possible that all or
a portion of the discount from the market value (which may not exceed 5% of the
fair market value of the Fund's shares) could be viewed as a taxable
distribution. If the discount is viewed as a taxable distribution, it is also
possible that the taxable character of this discount would be allocable to all
the shareholders, including shareholders who do not participate in the Plan.
Thus, shareholders who do not participate in the Plan might be required to
report as ordinary income a portion of their distributions equal to their
allocable share of the discount.
Contact Information -- All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at The Bank of
New York, Church Street Station, P.O. Box 11258, New York, NY 10286-1258,
Telephone: 800-432-8224.
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 17
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreement -- Matters Considered by the Board
In connection with the Transaction between Merrill Lynch and BlackRock, the
Fund's Board of Directors considered a new investment advisory agreement (the
"New Investment Advisory Agreement") between the Fund and BlackRock Advisors,
Inc. or its successor ("BlackRock Advisors"). If the New Investment Advisory
Agreement is approved by the Fund's shareholders, it will become effective upon
the closing of the Transaction, which is expected in the third quarter of 2006.
The Board discussed the New Investment Advisory Agreement at telephonic and
in-person meetings held during April and May 2006. The Board, including the
independent directors, approved the New Investment Advisory Agreement at a
meeting held on May 9, 2006.
To assist the Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent directors, through their independent legal counsel,
also requested and received additional information from Merrill Lynch and
BlackRock in connection with their consideration of the New Investment Advisory
Agreement. The additional information was provided in advance of the May 9, 2006
meeting. In addition, the independent directors consulted with their counsel and
Fund counsel on numerous occasions, discussing, among other things, the legal
standards and certain other considerations relevant to the directors'
deliberations.
At the Board meetings, the directors discussed with Merrill Lynch management and
certain BlackRock representatives the Transaction, its strategic rationale and
BlackRock's general plans and intentions regarding the Fund. At these Board
meetings, representatives of Merrill Lynch and BlackRock made presentations to
and responded to questions from the Board. The directors also inquired about the
plans for and anticipated roles and responsibilities of certain employees and
officers of the Investment Adviser and certain affiliates being transferred to
BlackRock in connection with the Transaction. The independent directors of the
Board also conferred separately and with their counsel about the Transaction and
other matters related to the Transaction on a number of occasions, including in
connection with the April and May 2006 meetings. After the presentations and
after reviewing the written materials provided, the independent directors met in
executive sessions with their counsel to consider the New Investment Advisory
Agreement.
In connection with the Board's review of the New Investment Advisory Agreement,
Merrill Lynch and/or BlackRock advised the directors about a variety of matters.
The advice included the following, among other matters:
o that there is not expected to be any diminution in the nature, quality and
extent of services provided to the Fund and its shareholders by BlackRock
Advisors, including compliance services;
o that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented
professionals;
o that the Fund should benefit from having access to BlackRock's state of
the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions(R) brand name;
o that BlackRock has no present intention to alter any applicable expense
waivers or reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek the approval of the Board
before making any changes;
o that in connection with the Transaction, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Investment Adviser (or its affiliates), respectively; and
o that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they have a different financial
interest in the matters that were being considered than do Fund
shareholders.
The directors considered the information provided by Merrill Lynch and BlackRock
above, and, among other factors, the following:
o the potential benefits to Fund shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies
of scale and access to investment opportunities;
18 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
o the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
o the compliance policies and procedures of BlackRock Advisors;
o the terms and conditions of the New Investment Advisory Agreement,
including the fact that the schedule of the Fund's total advisory fees
will not increase by virtue of the New Investment Advisory Agreement, but
will remain the same;
o that in November 2005, the Board performed a full annual review of the
investment advisory agreement currently in effect for the Fund (the
"Current Investment Advisory Agreement") as required by the 1940 Act and
has determined that the Investment Adviser has the capabilities, resources
and personnel necessary to provide the advisory and administrative
services currently provided to the Fund; and that the advisory and/or
management fees paid by the Fund, taking into account any applicable
agreed-upon fee waivers and breakpoints, represent reasonable compensation
to the Investment Adviser in light of the services provided, the costs to
the Investment Adviser of providing those services, economies of scale,
the fees and other expenses paid by similar funds (including information
provided by Lipper Inc. ["Lipper"]), and such other matters as the
directors have considered relevant in the exercise of their reasonable
judgment; and
o that Merrill Lynch agreed to pay all expenses of the Fund in connection
with the Board's consideration of the New Investment Advisory Agreement
and related agreements and all costs of shareholder approval of the New
Investment Advisory Agreement and as a result the Fund would bear no costs
in obtaining shareholder approval of the New Investment Advisory
Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, the Board assessed the
nature, scope and quality of the services to be provided to the Fund by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting and assistance in
meeting legal and regulatory requirements. In its review of the New Investment
Advisory Agreement, the Board also considered a range of information in
connection with its oversight of the services to be provided by BlackRock
Advisors and its affiliates. Among the matters considered were: (a) fees (in
addition to management fees) to be paid to BlackRock Advisors 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 BlackRock Advisors' compliance policies and procedures; and (d) the nature,
cost and character of non-investment management services to be provided by
BlackRock Advisors and its affiliates.
In the period prior to the Board meetings to consider renewal of the Current
Investment Advisory Agreement, the Board had requested and received materials
specifically relating to the Current Investment Advisory Agreement. These
materials included (a) information compiled by 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 on investment strategies used by the Fund during its most recent
fiscal year; (d) information on the profitability to the Investment Adviser of
the Current Investment Advisory Agreement and other payments received by the
Investment Adviser and its affiliates from the Fund; and (e) information
provided by the Investment Adviser concerning services related to the valuation
and pricing of Fund portfolio holdings, the Fund's portfolio turnover
statistics, and direct and indirect benefits to the Investment Adviser and its
affiliates from their relationship with the Fund.
In their deliberations, the directors considered information received in
connection with their most recent continuation of the Current Investment
Advisory Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the New Investment Advisory Agreement. The directors did not
identify any particular information that was all-important or controlling. The
directors, including a majority of the independent directors, concluded that the
terms of the New Investment Advisory Agreement are appropriate, that the fees to
be paid are reasonable in light of the services to be provided to the Fund, and
that the New Investment Advisory Agreement should be approved and recommended to
Fund shareholders.
Nature, Quality and Extent of Services Provided -- The Board reviewed the
nature, extent and quality of services
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 19
Disclosure of New Investment Advisory Agreement (continued)
provided by the Investment Adviser, including the investment advisory services
and the resulting performance of the Fund, as well as the nature, quality and
extent of services expected to be provided by BlackRock Advisors. The Board
focused primarily on the Investment Adviser's advisory services and the Fund's
investment performance, but also considered certain areas in which both the
Investment Adviser and the Fund receive services as part of the Merrill Lynch
complex. The Board compared the Fund's performance -- both including and
excluding the effects of 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.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the New Investment Advisory Agreement, the directors
considered, among other things, the expected impact of the Transaction on the
operations, facilities, organization and personnel of New BlackRock and how it
would affect the Fund; the ability of BlackRock Advisors to perform its duties
after the Transaction; and any anticipated changes to the current investment and
other practices of the Fund.
The directors were given information with respect to the potential benefits to
the Fund and its shareholders from having access to BlackRock's state of the art
technology and risk management analytic tools, including the investment tools
provided under the BlackRock Solutions brand name.
The directors were advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Fund will continue to be subject to
restrictions concerning certain transactions involving Merrill Lynch affiliates
(for example, transactions with a Merrill Lynch broker-dealer acting as
principal) absent revised or new regulatory relief. The directors were advised
that a revision of existing regulatory relief with respect to these restrictions
was being sought from the Securities and Exchange Commission and were advised of
the possibility of receipt of such revised regulatory relief. There can be no
assurance that such relief will be obtained.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the directors
determined that the nature and quality of services to be provided to the Fund
under the New Investment Advisory Agreement were expected to be as good or
better than that provided under the Current Investment Advisory Agreement. It
was noted, however, that it is expected that there will be changes in personnel
following the Transaction and the combination of the operations of the
Investment Adviser and its affiliates with those of BlackRock. The directors
noted that if current portfolio managers or other personnel cease to be
available, the Board would consider all available options, which could include
seeking the investment advisory or other services of BlackRock affiliates.
Accordingly, the directors concluded that, overall, they were satisfied at the
present time with assurances from BlackRock and BlackRock Advisors as to the
expected nature, extent and quality of the services to be provided to the Fund
under the New Investment Advisory Agreement.
Costs of Services Provided and Profitability -- It was noted that, in
conjunction with the recent review of the Current Investment Advisory Agreement,
the directors had received, among other things, a report from Lipper comparing
the Fund's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Investment Adviser or its
affiliates to other registered investment company clients for investment
management services. The Board reviewed 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 fees and the effects of any
fee waivers -- compared to the other funds in its Lipper category. They also
compared the Fund's total expenses to those of other comparable funds. The
information showed that the Fund had fees and expenses within the range of fees
and expenses of comparable funds. The Board concluded that the Fund's management
fee and fee rate and overall expense ratio are reasonable compared to those of
other comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the New Investment Advisory Agreement, the directors considered, among
other things, whether advisory fees or other expenses would change as a result
of the Transaction. Based on their review of the materials provided and the fact
that the New Investment Advisory Agreement is substantially similar to the
Current Investment Advisory Agreement in all material respects, including the
rate of compensation, the directors determined that the Transaction should not
increase the total fees payable, including any fee waivers or after any expense
caps or expense reimbursements, for advisory and administrative services. The
directors noted that it was not possible to predict how the Transaction would
affect BlackRock Advisors' profitability from its relationship with the Fund.
20 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
The directors discussed with BlackRock Advisors its general methodology to be
used in determining its profitability with respect to its relationship with the
Fund and noted that they expect to receive profitability information from
BlackRock Advisors on at least an annual basis.
Fees and 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 currently appropriately benefits from any
economies of scale and no changes were currently necessary.
In reviewing the Transaction, the directors considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the New Investment Advisory Agreement is
substantially similar to the Current Investment Advisory Agreement in all
material respects, including the rate of compensation, the directors determined
that as a result of the Transaction, the Fund's total advisory fees would be no
higher than the fees under its Current Investment Advisory Agreement. The
directors concluded that, because the rates for advisory fees for the Fund would
be no higher than its current fee rates, the proposed management fee structure,
including any fee waivers, was reasonable and that no additional changes were
currently necessary.
Fall-Out Benefits -- The directors considered whether the Fund would generate
any fall-out benefits to BlackRock Advisors. Fall-out benefits are indirect
profits from other activities that accrue to the adviser or its affiliates
solely because of the existence of the Fund. In evaluating the fall-out benefits
to be received by BlackRock Advisors under the New Investment Advisory
Agreement, the directors considered whether the Transaction would have an impact
on the fall-out benefits received by the Investment Adviser by virtue of the
Current Investment Advisory Agreement. Based on their review of the materials
provided, including materials received in connection with their most recent
approval or continuance of the Current Investment Advisory Agreement, and their
discussions with management of the Investment Adviser and BlackRock, the
directors determined that those benefits could include increased ability for
BlackRock to distribute shares of its funds and other investment products. The
directors noted that any such benefits were difficult to quantify with certainty
at this time, and indicated that they would continue to evaluate them going
forward.
Investment Performance -- The directors considered investment performance for
the Fund. The directors compared the Fund's performance -- both including and
excluding the effects of fees and expenses -- to the performance of a comparable
group of funds, and the performance of a relevant index or combination of
indexes. The comparative information received from Lipper showed Fund
performance at various levels within the range of performance of comparable
funds over different time periods. The directors believed the Fund's performance
was satisfactory. The Board noted BlackRock's considerable investment management
experience and capabilities, but was unable to predict what effect, if any,
consummation of the Transaction would have on the future performance of the
Fund.
Conclusion -- After the independent directors of the Fund deliberated in
executive session, the entire Board, including the independent directors,
approved the New Investment Advisory Agreement, concluding that the advisory fee
rate was reasonable in relation to the services provided and that the New
Investment Advisory Agreement was in the best interests of the shareholders. In
approving the New Investment Advisory Agreement, the Board noted that it
anticipated reviewing the continuance of the agreement in advance of the
expiration of the initial two-year period.
Contingent BlackRock Subadvisory Agreement -- Matters Considered by the Board
At the telephonic and in-person meetings held during April and May 2006 at which
the Board of Directors discussed and approved the New Investment Advisory
Agreement, the Board, including the independent directors, also discussed and
approved a contingent subadvisory agreement (the "Contingent Subadvisory
Agreement") between the Investment Adviser and BlackRock Advisors (the
"BlackRock Subadviser"). The Contingent Subadvisory Agreement is intended to
ensure that the Fund operate with efficient portfolio management services until
the closing of the Transaction, in the event that the Board deems it necessary
and in the best interests of the Fund and its shareholders that the BlackRock
Subadviser assist in managing the operations of the Fund during the interim
period until the closing of the
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 21
Disclosure of New Investment Advisory Agreement (concluded)
Transaction. If shareholders approve the Contingent Subadvisory Agreement, it
will take effect only upon recommendation from the Investment Adviser and upon
subsequent approval of the Board in the period up to the closing of the
Transaction. The effectiveness of the Contingent Subadvisory Agreement,
therefore, would be contingent on further Board approval after shareholders
approve it. Pursuant to the Contingent Subadvisory Agreement, the BlackRock
Subadviser would receive a monthly fee from the Investment Adviser equal to 50%
of the advisory fee received by the Investment Adviser. The Investment Adviser
would pay the BlackRock Subadviser out of its own resources. There would be no
increase in Fund expenses as a result of the Contingent Subadvisory Agreement.
In making its approval at the May in-person meeting, the Board considered the
Contingent Subadvisory Agreement in conjunction with the New Investment Advisory
Agreement and reviewed the same information and factors discussed above, and
came to the same conclusions. The Board also considered in conjunction with the
Contingent Subadvisory Agreement the necessity of ensuring that the Fund operate
with effective management services until the closing of the Transaction. In
reviewing the subadvisory fee rate provided in the Contingent Subadvisory
Agreement, the Board took note of the fact that both the Investment Adviser and
the BlackRock Subadviser would have significant responsibilities under their
respective advisory agreements. The Investment Adviser would remain responsible
for oversight of the Fund's operations and administration and the BlackRock
Subadviser would provide advisory services to the Fund under the Contingent
Subadvisory Agreement. The Board also took into account the expected short
duration of the term of any Contingent Subadvisory Agreement and the fact that
total advisory fees paid by the Fund would not increase as a result of the
Contingent Subadvisory Agreement. Under all of the circumstances, the Board
concluded that it was a reasonable allocation of fees for the BlackRock
Subadviser to receive 50% of the advisory fee paid by the Fund to the Investment
Adviser.
After the independent directors deliberated in executive session, the entire
Board, including the independent directors, approved the Contingent Subadvisory
Agreement, concluding that the advisory fee was reasonable in relation to the
services provided and that the Contingent Subadvisory Agreement was in the best
interests of shareholders.
22 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
Officers and Directors
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to President of the MLIM/FAM-advised funds since 2005; 131 Funds None
Doll, Jr.* Princeton, NJ and present President and Chief Investment Officer of MLIM and 178 Portfolios
08543-9011 Director and FAM since 2001; Co-Head (Americas Region)
Age: 51 thereof from 2000 to 2001 and Senior Vice President
from 1999 to 2001; President and Director of
Princeton Services, Inc. ("Princeton Services")
since 2001; President of Princeton Administrators,
L.P. ("Princeton Administrators") since 2001; Chief
Investment Officer of OppenheimerFunds, Inc. in
1999 and Executive Vice President thereof from 1991
to 1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which
MLIM or FAM acts as investment adviser. Mr. Doll is an "interested person," as defined in the Investment Company
Act, of the Fund based on his positions with MLIM, FAM, Princeton Services and Princeton Administrators. Directors
serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund
President, Mr. Doll serves at the pleasure of the Board of Directors.
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 23
Officers and Directors (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Independent Directors*
------------------------------------------------------------------------------------------------------------------------------------
James H. P.O. Box 9095 Director 2002 to Director, The China Business Group, Inc. since 1996 39 Funds None
Bodurtha** Princeton, NJ present and Executive Vice President thereof from 1996 to 59 Portfolios
08543-9095 2003; Chairman of the Board, Berkshire Holding
Age: 62 Corporation since 1980; Partner, Squire, Sanders &
Dempsey from 1980 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9095 Director 2005 to Professor, Harvard University since 1992; 39 Funds None
Froot Princeton, NJ present Professor, Massachusetts Institute of Technology 59 Portfolios
08543-9095 from 1986 to 1992.
Age: 48
------------------------------------------------------------------------------------------------------------------------------------
Joe P.O. Box 9095 Director 1994 to Member of the Committee of Investment of Employee 39 Funds Kimco
Grills** Princeton, NJ present Benefit Assets of the Association of Financial 59 Portfolios Realty
08543-9095 Professionals ("CIEBA") since 1986; Member of Corporation
Age: 71 CIEBA's Executive Committee since 1988 and its
Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Corporation ("IBM")
and Chief Investment Officer of IBM Retirement
Funds from 1986 to 1993; Member of the Investment
Advisory Committee of the State of New York Common
Retirement Fund since 1989; Member of the
Investment Advisory Committee of the Howard Hughes
Medical Institute from 1997 to 2000; Director, Duke
University Management Company from 1992 to 2004,
Vice Chairman thereof from 1998 to 2004, and
Director Emeritus thereof since 2004; Director,
LaSalle Street Fund from 1995 to 2001; Director,
Kimco Realty Corporation since 1997; Member of the
Investment Advisory Committee of the Virginia
Retirement System since 1998, Vice Chairman thereof
from 2002 to 2005, and Chairman thereof since 2005;
Director, Montpelier Foundation since 1998 and its
Vice Chairman since 2000; Member of the Investment
Committee of the Woodberry Forest School since
2000; Member of the Investment Committee of the
National Trust for Historic Preservation since
2000.
24 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
Officers and Directors (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Independent Directors* (concluded)
------------------------------------------------------------------------------------------------------------------------------------
Herbert I. P.O. Box 9095 Director 2002 to Chairman of the Board of Directors of Vigilant 39 Funds None
London Princeton, NJ present Research, Inc. since 2006; Director of Reflex 59 Portfolios
08543-9095 Security since 2006; Director of Cerego, LLC since
Age: 67 2006; Director of InnoCentive, Inc. since 2006;
Professor Emeritus, New York University since 2005;
John M. Olin Professor of Humanities, New York
University from 1993 to 2005; and Professor thereof
from 1980 to 2005; President, Hudson Institute
since 1997 and Trustee thereof since 1980; Dean,
Gallatin Division of New York University from 1976
to 1993; Distinguished Fellow, Herman Kahn Chair,
Hudson Institute from 1984 to 1985; Director, Damon
Corp. from 1991 to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9095 Director 2002 to Shareholder, Modrall, Sperling, Roehl, Harris & 39 Funds None
Cooper Princeton, NJ present Sisk, P.A. since 1993; President, American Bar 59 Portfolios
Ramo 08543-9095 Association from 1995 to 1996 and Member of the
Age: 63 Board of Governors thereof from 1994 to 1997;
Shareholder, Poole, Kelly & Ramo, Attorneys at Law,
P.C. from 1977 to 1993; Director of ECMC Group
(service provider to students, schools and lenders)
since 2001; Director, United New Mexico Bank (now
Wells Fargo) from 1983 to 1988; Director, First
National Bank of New Mexico (now Wells Fargo) from
1975 to 1976; Vice President, American Law
Institute since 2004.
------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Director 1996 to Principal of STI Management (investment adviser) 39 Funds None
Salomon, Princeton, NJ present from 1994 to 2005; Chairman and CEO of Salomon 59 Portfolios
Jr. 08543-9095 Brothers Asset Management Inc. from 1992 to 1995;
Age: 69 Chairman of Salomon Brothers Equity Mutual Funds
from 1992 to 1995; regular columnist with Forbes
Magazine from 1992 to 2002; Director of Stock
Research and U.S. Equity Strategist at Salomon
Brothers Inc. from 1975 to 1991; Trustee,
Commonfund from 1980 to 2001.
------------------------------------------------------------------------------------------------------------------------------------
* Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Co-Chairman of the Board of Directors and the Audit Committee.
APEX MUNICIPAL FUND, INC. JUNE 30, 2006 25
Officers and Directors (concluded)
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1993 to Managing Director of MLIM and FAM since 2006 and Treasurer thereof since 1999;
Burke Princeton, NJ President present First Vice President of MLIM and FAM from 1997 to 2005; Senior Vice President and
08543-9011 and and Treasurer of Princeton Services since 1999 and Director since 2004; Vice President
Age: 46 Treasurer 1999 to of FAM Distributors, Inc. ("FAMD") since 1999 and Director since 2004; Vice
present President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM
from 1990 to 2001; Vice President, Treasurer and Secretary of the IQ Funds since
2004.
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9011 Senior 2003 to Managing Director (Tax-Exempt Fund Management) of MLIM since 2000; Director of
Jacob Princeton, NJ Vice present MLIM from 1997 to 2000.
08543-9011 President
Age: 55
------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 Senior 2003 to Managing Director (Tax-Exempt Fund Management) of MLIM since 2000; Director of
Loffredo Princeton, NJ Vice present MLIM from 1997 to 2000.
08543-9011 President
Age: 42
------------------------------------------------------------------------------------------------------------------------------------
Theodore P.O. Box 9011 Vice 1997 to Managing Director (Tax-Exempt Fund Management) of MLIM since 2005; Director of
R. Jaeckel Princeton, NJ President present MLIM from 1997 to 2005; Vice President of MLIM from 1991 to 1997.
Jr. 08543-9011
Age: 46
------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President
Hiller Princeton, NJ Compliance present and Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief
08543-9011 Officer Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at
Age: 54 Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance
Officer at Prudential Financial from 1995 to 2000; Senior Counsel in the
Securities and Exchange Commission's Division of Enforcement in Washington, D.C.
from 1990 to 1995.
------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
Pellegrino Princeton, NJ present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD and
08543-9011 Princeton Services since 2004.
Age: 46
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
The Bank of New York
101 Barclay Street -- 11 East
New York, NY 10286
NYSE Symbol
APX
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.
26 APEX MUNICIPAL FUND, INC. JUNE 30, 2006
Proxy Results
During the six-month period ended June 30, 2006, Apex Municipal Fund, Inc.'s
shareholders voted on the following proposal. The proposal was approved at a
shareholders' meeting on April 27, 2006. A description of the proposal and
number of shares voted are as follows:
-------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
-------------------------------------------------------------------------------------------------
1. To elect the Fund's Directors: Joe Grills 18,292,913 456,923
Roberta Cooper Ramo 18,291,124 458,712
-------------------------------------------------------------------------------------------------
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.
About Inverse Floaters
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of reduced or
eliminated interest payments and losses of invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed rate, tax-exempt securities. To the extent the Fund invests in
inverse securities, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities. As of June 30, 2006, none of the Fund's total net
assets were invested in these securities.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site 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. JUNE 30, 2006 27
[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 -- 6/06
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Joe Grills,
(2) Robert S. Salomon, Jr., and (3) Stephen B. Swensrud (retired as of
December 31, 2005).
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending June 30, 2006 - $28,000
Fiscal Year Ending June 30, 2005 - $27,500
(b) Audit-Related Fees - Fiscal Year Ending June 30, 2006 - $0
Fiscal Year Ending June 30, 2005 - $0
(c) Tax Fees - Fiscal Year Ending June 30, 2006 - $6,000
Fiscal Year Ending June 30, 2005 - $5,700
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending June 30, 2006 - $0
Fiscal Year Ending June 30, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending June 30, 2006 - $2,909,800
Fiscal Year Ending June 30, 2005 - $8,181,305
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,227,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
James H. Bodurtha
Kenneth A. Froot
Joe Grills
Herbert I. London
Roberta Cooper Ramo
Robert S. Salomon, Jr.
Stephen B. Swensrud (retired as of December 31, 2005)
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill Lynch
Investment Managers, L.P. and/or Fund Asset Management, L.P. (the
"Investment Adviser") authority to vote all proxies relating to the
Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to the
voting of proxies related to the portfolio securities held in the
account of one or more of its clients, including a Fund. Pursuant to
these Proxy Voting Procedures, the Investment Adviser's primary
objective when voting proxies is to make proxy voting decisions solely
in the best interests of each Fund and its shareholders, and to act in
a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser considers
the interests of its clients, including the Funds, and not the
interests of the Investment Adviser, when voting proxies and that real
(or perceived) material conflicts that may arise between the Investment
Adviser's interest and those of the Investment Adviser's clients are
properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment professionals
appointed by the CIO, portfolio managers and investment analysts
appointed by the CIO and any other personnel the CIO deems appropriate.
The Committee will also include two non-voting representatives from the
Investment Adviser's Legal department appointed by the Investment
Adviser's General Counsel. The Committee's membership shall be limited
to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser's affiliates may serve as a
member of the Committee or participate in its decision making (except
to the extent such person is asked by the Committee to present
information to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser might
be asked to do so). The Committee determines how to vote the proxies of
all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes
are consistent with the best interests of those clients and are free
from unwarranted and inappropriate influences. The Committee
establishes general proxy voting policies for the Investment Adviser
and is responsible for determining how those policies are applied to
specific proxy votes, in light of each issuer's unique structure,
management, strategic options and, in certain circumstances, probable
economic and other anticipated consequences of alternate actions. In so
doing, the Committee may determine to vote a particular proxy in a
manner contrary to its generally stated policies. In addition, the
Committee will be responsible for ensuring that all reporting and
recordkeeping requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not
to adopt a specific voting policy applicable to that issue. The
Investment Adviser believes that certain proxy voting issues require
investment analysis - such as approval of mergers and other significant
corporate transactions - akin to investment decisions, and are,
therefore, not suitable for general guidelines. The Committee may elect
to adopt a common position for the Investment Adviser on certain proxy
votes that are akin to investment decisions, or determine to permit the
portfolio manager to make individual decisions on how best to maximize
economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that
the Investment Adviser will generally seek to vote proxies over which
the Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in conjunction
with a Fund's portfolio manager, may determine that the Fund's specific
circumstances require that its proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Investment Adviser
generally will not seek to vote proxies related to portfolio securities
that are on loan, although it may do so under certain circumstances. In
addition, the Investment Adviser will vote proxies related to
securities of foreign issuers only on a best efforts basis and may
elect not to vote at all in certain countries where the Committee
determines that the costs associated with voting generally outweigh the
benefits. The Committee may at any time override these general policies
if it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent
fiduciary, the powers of the Committee shall pass to a subcommittee,
appointed by the CIO (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by the CIO. The CIO
shall appoint to the subcommittee, where appropriate, only persons
whose job responsibilities do not include contact with the Client and
whose job evaluations would not be affected by the Investment Adviser's
relationship with the Client (or failure to retain such relationship).
The subcommittee shall determine whether and how to vote all proxies on
behalf of the Investment Adviser's clients or, if the proxy matter is,
in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting guidelines
or, on matters where the Investment Adviser's policy is case-by-case,
does not follow the voting recommendation of any proxy voting service
or other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies relating
to the Client may be voted unless the Secretary, or in the Secretary's
absence, the Assistant Secretary of the Committee concurs that the
subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring
proxy issues that are not expected to involve unusual circumstances.
These policies are guidelines only, and the Investment Adviser may
elect to vote differently from the recommendation set forth in a voting
guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at any
time upon the request of a Committee member and may be amended or
deleted upon the vote of a majority of Committee members present at a
Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors of issuers
other than investment companies. As a general matter, the Committee
believes that a company's Board of Directors (rather than shareholders) is
most likely to have access to important, nonpublic information regarding a
company's business and prospects, and is therefore best-positioned to set
corporate policy and oversee management. The Committee, therefore,
believes that the foundation of good corporate governance is the election
of qualified, independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of the
corporation in a manner that will seek to maximize shareholder value over
time. In individual cases, the Committee may look at a nominee's history
of representing shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent auditors. As
a general matter, the Committee believes that corporate auditors have a
responsibility to represent the interests of shareholders and provide an
independent view on the propriety of financial reporting decisions of
corporate management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the Committee may
look at an auditors' history of representing shareholder interests as
auditor of other companies, to the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits. As a
general matter, the Committee favors disclosure of an issuer's
compensation and benefit policies and opposes excessive compensation, but
believes that compensation matters are normally best determined by an
issuer's board of directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set arbitrary
restrictions on compensation or benefits will, therefore, generally not be
supported.
o Proposals related to requests, principally from management, for approval
of amendments that would alter an issuer's capital structure. As a general
matter, the Committee will support requests that enhance the rights of
common shareholders and oppose requests that appear to be unreasonably
dilutive.
o Proposals related to requests for approval of amendments to an issuer's
charter or by-laws. As a general matter, the Committee opposes poison pill
provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the Committee
believes that a fund's Board of Directors (rather than its shareholders)
is best-positioned to set fund policy and oversee management. However, the
Committee opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective, that the
Investment Company Act envisions will be approved directly by
shareholders.
o Proposals related to limiting corporate conduct in some manner that
relates to the shareholder's environmental or social concerns. The
Committee generally believes that annual shareholder meetings are
inappropriate forums for discussion of larger social issues, and opposes
shareholder resolutions "micromanaging" corporate conduct or requesting
release of information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the Committee
is generally supportive of proposals to require corporate disclosure of
matters that seem relevant and material to the economic interests of
shareholders, the Committee is generally not supportive of proposals to
require disclosure of corporate matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of June 30, 2006.
(a)(1) Mr. Theodore R. Jaeckel, Jr. is primarily responsible for the
day-to-day management of the registrant's portfolio ("Portfolio
Manager"). Mr. Jaeckel has been a Managing Director of MLIM
since 2005. He was a Director of MLIM from 1997 to 2005. Mr.
Jaeckel has been a portfolio manager with the Investment Adviser
and MLIM since 1991 and has been a Vice President and portfolio
manager of the Fund since 1997.
(a)(2) As of June 30, 2006:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
---------- ----------
Theodore R.
Jaeckel, Jr. 7 1 0 0 1 0
$ 2,487,934,866 $ 22,295,074 $ 0 $ 0 $ 22,295,074 $ 0
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for other
clients advised by the Investment. Adviser and its affiliates, including other
client accounts managed by the Fund's portfolio management team. Investment
decisions for the Fund and other clients are made with a view to achieving their
respective investment objectives and after consideration of such factors as
their current holdings, availability of cash for investment and the size of
their investments generally. Frequently, a particular security may be bought or
sold for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, because clients of the Investment
Adviser and its affiliates may have differing investment strategies, a
particular security may be bought for one or more clients when one or more other
clients are selling the security. The investment results for the Fund may differ
from the results achieved by other clients of the Investment Adviser and its
affiliates and results among clients may differ. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Investment Adviser and its affiliates to be equitable to each.
The Investment Adviser will not determine allocations based on whether it
receives a performance based fee from the client. In some cases, the allocation
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for the Fund may be
combined with those of other clients of the Investment Adviser and its
affiliates in the interest of achieving the most favorable net results to the
Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a portfolio
manager will need to divide his time and attention among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise
where (i) the Investment Adviser may have an incentive, such as a performance
based fee, in managing one account and not with respect to other accounts it
manages or (ii) where a member of the Fund's portfolio management team owns an
interest in one fund or account he or she manages and not another.
(a)(3) As of June 30, 2006:
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of MLIM and its affiliates,
including the Investment Adviser, is critical to MLIM's ability to attract and
retain the most talented asset management professionals. This program ensures
that compensation is aligned with maximizing investment returns and it provides
a competitive pay opportunity for competitive performance.
Compensation Program
The elements of total compensation for MLIM and its affiliates portfolio
managers are a fixed base salary, annual performance-based cash and stock
compensation (cash and stock bonus) and other benefits. MLIM has balanced these
components of pay to provide portfolio managers with a powerful incentive to
achieve consistently superior investment performance. By design, portfolio
manager compensation levels fluctuate -- both up and down -- with the relative
investment performance of the portfolios that they manage.
Base Salary
Under the MLIM approach, like that of many asset management firms, base
salaries represent a relatively small portion of a portfolio manager's total
compensation. This approach serves to enhance the motivational value of the
performance-based (and therefore variable) compensation elements of the
compensation program.
Performance-Based Compensation
MLIM believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent. To
that end, MLIM and its affiliates portfolio manager incentive compensation is
based on a formulaic compensation program. MLIM's formulaic portfolio manager
compensation program includes: investment performance relative to a subset of
closed-end, high yield municipal debt funds over 1-, 3- and 5-year performance
periods and a measure of operational efficiency. Portfolio managers are
compensated based on the pre-tax performance of the products they manage. If a
portfolio manager's tenure is less than 5 years, performance periods will
reflect time in position. Portfolio managers are compensated based on products
they manage. A discretionary element of portfolio manager compensation may
include consideration of: financial results, expense control, profit margins,
strategic planning and implementation, quality of client service, market share,
corporate reputation, capital allocation, compliance and risk control,
leadership, workforce diversity, supervision, technology and innovation. MLIM
and its affiliates also consider the extent to which individuals exemplify and
foster ML & Co.'s principles of client focus, respect for the individual,
teamwork, responsible citizenship and integrity. All factors are considered
collectively by MLIM management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers in a
combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based bonus
is paid in restricted shares of ML & Co. stock. Paying a portion of annual
bonuses in stock puts compensation earned by a portfolio manager for a given
year "at risk" based on the company's ability to sustain and improve its
performance over future periods. The ultimate value of stock bonuses is
dependent on future ML & Co. stock price performance. As such, the stock bonus
aligns each portfolio manager's financial interests with those of the ML & Co.
shareholders and encourages a balance between short-term goals and long-term
strategic objectives. Management strongly believes that providing a significant
portion of competitive performance-based compensation in stock is in the best
interests of investors and shareholders. This approach ensures that portfolio
managers participate as shareholders in both the "downside risk" and "upside
opportunity" of the company's performance. Portfolio managers therefore have a
direct incentive to protect ML & Co.'s reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and financial
management objectives during a performance year are eligible to participate in a
deferred cash program. Awards under this program are in the form of deferred
cash that may be benchmarked to a menu of MLIM mutual funds (including their own
fund) during a five-year vesting period. The deferred cash program aligns the
interests of participating portfolio managers with the investment results of
MLIM products and promotes continuity of successful portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-based plans
offered generally to employees of ML & Co. and its affiliates, including
broad-based retirement, 401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of June 30, 2006, Mr.
Jaeckel does not beneficially own any stock issued by the Fund.
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Apex Municipal Fund, Inc.
By: /s/ Robert C. Doll, Jr.
--------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Apex Municipal Fund, Inc.
Date: August 23, 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: August 23, 2006
By: /s/ Donald C. Burke
--------------------------
Donald C. Burke,
Chief Financial Officer of
Apex Municipal Fund, Inc.
Date: August 23, 2006