[LOGO] Merrill Lynch Investment Managers
Semi-Annual Report
December 31, 2001
Apex
Municipal Fund,
Inc.
www.mlim.ml.com
APEX MUNICIPAL FUND, INC.
Managed Dividend Policy
The Fund's dividend policy is to distribute all or a portion of its net
investment income to its shareholders on a monthly basis. In order to provide
shareholders with a more consistent yield to the current trading price of shares
of Common Stock of the Fund, the Fund may at times pay out less than the entire
amount of net investment income earned in any particular month and may at times
in any particular month pay out such accumulated but undistributed income in
addition to net investment income earned in that month. As a result, the
dividends paid by the Fund for any particular month may be more or less than the
amount of net investment income earned by the Fund during such month. The Fund's
current accumulated but undistributed net invest ment income, if any, is
disclosed in the Statement of Assets, Liabilities and Capital, which comprises
part of the financial information included in this report.
Quality Profile
The quality ratings of securities in the Fund as of December 31, 2001 were as
follows:
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Percent of
S&P Rating/Moody's Rating Net Assets
------------------------------------------------------------------------------
AAA/Aaa ........................................................... 7.4%
BBB/Baa ........................................................... 12.6
BB/Ba ............................................................. 15.9
B/B ............................................................... 4.6
CCC/Caa ........................................................... 1.0
NR (Not Rated) .................................................... 57.0
Other+ ............................................................ 0.4
------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
Proxy Results
During the six-month period ended December 31, 2001, Apex Municipal Fund, Inc.'s
shareholders voted on the following proposal. The proposal was approved at the
shareholders' meeting on December 12, 2001. The description of the proposal and
number of shares voted are as follows:
Shares Voted Shares Withheld
For From Voting
--------------------------------------------------------------------------------
1. To elect Robert S. Salomon Jr. as Director. 17,751,905 354,027
--------------------------------------------------------------------------------
Apex Municipal Fund, Inc., December 31, 2001
DEAR SHAREHOLDER
For the six months ended December 31, 2001, Apex Municipal Fund, Inc. earned
$0.285 per share income dividends, which included earned and unpaid dividends of
$0.047. This represents a net annualized yield of 6.19%, based on a month-end
net asset value of $9.13 per share. Over the same period, the Fund's total
investment return was -0.24%, based on a change in per share net asset value
from $9.45 to $9.13, and assuming reinvestment of $0.288 per share income
dividends.
The Municipal Market Environment
Throughout most of the six-month period ended December 31, 2001, long-term fixed
income interest rates exhibited considerable volatility. Additionally, during
the period, long-term US Treasury bond yields registered moderate declines,
while long-term municipal bond yields rose slightly. From early summer through
early September 2001, fixed-income yields generally declined. Weak economic
growth, exemplified by declines in industrial production and large losses in
employment, easily outweighed modest strength in consumer confidence and
spending. The consensus was that a meaningful US economic recovery was unlikely
before early 2002. Consequently, US equity markets remained under pressure and
fixed-income instruments benefited. By the end of August 2001, the Federal
Reserve Board had lowered its target for short-term interest rates to 3.50%,
cutting interest rates by 300 basis points (3.00%) during the first eight months
of 2001.
By early September there were some, albeit few, indications pointing toward the
beginning of a US economic recovery. However, immediately following the tragedy
of the World Trade Center and Pentagon attacks all such indications effectively
vanished. After anemic economic growth of just 0.3% during the second quarter of
2001, US gross domestic product growth was recently reported to have declined
1.3% during the third quarter of 2001. The Federal Reserve Board quickly lowered
short-term interest rates an additional 50 basis points immediately following
the attacks, just prior to the reopening of the stock exchanges. This marked the
eighth time this year the Federal Reserve Board had eased monetary conditions.
Despite the events of September 11, the Federal Reserve Board noted that the
nation's long-term economic prospects remained favorable.
Initially, long-term interest rates rose during the days following the September
11 attacks. The quick response by both Federal and state governments to
stabilize, aid and revive US business activities quickly restored fixed-income
investors' confidence. Investor attention again focused on weak US economic
fundamentals and on a financial environment further impaired by the economic
losses resulting from the attacks. In addition to the immediate loss of four
days of equity trading and air transportation, including air cargo transfers, US
consumer confidence was expected to be severely shaken, resulting in weaker
consumer spending and, eventually, diminished business manufacturing. By
September 30, 2001, US Treasury bond yields declined to 5.42%, their approximate
level before the September attacks.
In early October, the Federal Reserve Board lowered short-term interest rates an
additional 50 basis points to a target of 2.50%, the lowest rate in nearly 40
years. US economic reports continued to be very weak, pushing US equity prices
lower in early October and bond prices higher. US military reprisals in
Afghanistan also helped to support higher bond prices as investors sought the
safe haven of US Treasury obligations. At October 31, 2001, the US Treasury
announced that it would no longer issue 30-year maturity bonds triggering an
explosive fixed-income rally as investors scrambled to purchase
soon-to-be-unavailable issues. By the end of October, long-term US Treasury bond
yields had declined to 4.87%, declining more than 50 basis points during the
month. Despite an additional decrease in its short-term interest rate target to
1.75% by the Federal Reserve Board, long-term fixed-income markets were unable
to hold their October gains. Rapid, significant US military success in
Afghanistan, stronger-than-expected retail sales and recovering US equity
markets combined to suggest to many investors that a US economic recovery was
far more imminent than was expected earlier in the fall of 2001. Bond yields
rose during November and December, as investors sold securities both to realize
recent profits and in anticipation of an early reversal of Federal Reserve Board
policy. By December 31, 2001, long-term US Treasury bond yields rose to
approximately 5.45%. Over the last six months, however, the generally positive
financial environment allowed US Treasury bond yields to decline approximately
30 basis points.
The municipal bond market displayed a very similar pattern during the November
period. Long-term tax-exempt bond yields had generally declined through early
September as strong investor demand easily outweighed sizable increases in new
bond issuance. The disruption in the financial markets following the September
11 attacks also served to push tax-exempt bond yields higher. The municipal bond
market was able to reorganize operations quickly and tax-exempt bond yields were
able to decline in conjunction with US Treasury bond yields for the remainder of
the period. While municipal bond yields were unable to match the dramatic
declines witnessed in the US Treasury market, tax-exempt bond prices rose
strongly during late October. At October 31, 2001, as measured by the Bond Buyer
Revenue Bond Index, long-term municipal bond yields stood at 5.23%, a decline of
approximately 20 basis points during October. Similar to its taxable
counterpart, the long-term municipal bond market was also unable to maintain the
improvements made in September and October. In addition to a slightly stronger
financial environment, increased tax-exempt bond issuance during November and
December also put upward pressure on municipal bond yields. By the end of
December 2001, long-term tax-exempt revenue bond yields rose to approximately
5.60% while during the last six months, tax-exempt bond yields rose
approximately 10 basis points.
Investor demand was solid throughout much of 2001. Reports stated that through
November 2001, long-term municipal bond funds had net cash inflows of $12.4
billion compared to net outflows of more than $14.3 billion during the same
period in 2000. Also, a number of mutual fund families raised over $2.5 billion
in new closed-end tax-exempt bond funds during the summer of 2001. Perhaps most
importantly, short-term municipal rates continued to move lower in response to
Federal Reserve Board actions. Seasonal tax pressures this past March and April
kept short-term municipal rates artificially high, although not as high as in
recent years. As these pressures abated, short-term municipal rates declined to
almost 1%. As interest rates declined, investors extended maturities to take
advantage of the steep municipal bond yield curve. All of these factors
contributed to a positive technical environment for municipal bonds in recent
months.
Recent investor demand has not been strong enough to outweigh the continued
dramatic increase in new tax-exempt bond issuance. Historically low municipal
bond yields have continued to allow municipalities to refund outstanding,
high-couponed debt. Over the past six months, more than $150 billion in
long-term tax-exempt bonds was issued, an increase of over 40% compared to the
same period a year ago. During the December 2001 quarter, the pace of tax-exempt
bond issuance further strengthened with more than $90 billion in long-term
municipal bonds underwritten, an increase of nearly 60% compared to the December
2000 quarter. During December 2001, municipalities issued nearly $30 billion in
tax-exempt bonds, an increase of more than 80% compared to December 2000
issuance. Recent increases in municipal bond issuance have put considerable
pressure on the tax-exempt market, especially in the 10-year - 15-year maturity
sector. A large number of bond financings in recent months have been heavily
weighted in this maturity sector. Investor demand for these maturities, both
institutional and retail, has been limited, in part, by seasonal, year-end
factors. Also, demand for municipals, in general, has declined as recovering US
equity markets have siphoned away interest in tax-exempt products.
Interest rates are likely to remain near current levels in early 2002, as US
economic conditions are expected to remain weak. Going forward, however,
business activity is likely to accelerate, perhaps significantly. Immediately
after the September 11 attacks, the Federal Government announced a $45 billion
aid package for New York City, Washington, DC and the airline industry, with
additional fiscal aid packages also expected. The military response to these
attacks will continue to require sizable increases in Defense Department
spending. Eventually, this governmental spending will result in increased US
economic activity, particularly in the construction and defense industries. This
governmental stimulus, in conjunction with the actions already taken by the
Federal Reserve Board, can be expected to generate significant increases in US
gross domestic product growth some time in mid-2002.
As inflationary pressures are expected to remain well-contained going forward,
increased economic activity may not result in significant increases in long-term
bond yields. Also, throughout much of 2001, the municipal bond market exhibited
far less volatility than its taxable counterparts. Since the strong technical
position that supported the tax-exempt bond market's performance for much of
this year can be expected to continue going forward, any potential increases in
municipal bond yields also can be expected to be minimal.
Portfolio Strategy
The six-month period ended December 31, 2001 was characterized by a continuation
in the recovery of the tax-exempt high-yield market as investor demand for the
relative stability of fixed-income investments accelerated in response to
deteriorating conditions in the equity markets. Furthermore, as yields available
on municipal bonds at the upper end of the credit spectrum sank to levels that
historically proved unsustainable, investors were willing to assume greater
credit risk in pursuit of higher potential returns. The resulting contraction in
credit spreads proved beneficial for shareholders of the Fund.
Specifically, concentrations in health care-related issues, tax-supported debt
and utilities experienced some of the most significant rises in value so far in
2001. The health care sector bore the brunt of last year's liquidity collapse
and
2 & 3
Apex Municipal Fund, Inc., December 31, 2001
stood to benefit the most as attractive yields and a stabilizing credit outlook
lured investors. Supported by low interest rates, the housing industry remains
one of the more resilient sectors in the economy. Infrastructure-related
tax-backed financing for residential development continues to provide attractive
investment opportunities given the security provisions inherent in the
transaction structure as well as the potential returns associated with project
completion. Several of the portfolio's more recent purchases were within this
sector and were primarily residential in scope. While selected issues for
commercial projects were also added to the portfolio, the more cyclical nature
of these ventures warrants a heightened degree of caution with respect to the
investment process. Lastly, the utility sector remains a major component of the
portfolio as investments in senior unsecured obligations of Tucson Electric
Power Company and a variety of independent co-generation facilities have
performed well in the current environment. Perhaps most notable are positions
not held by the Fund such as debt of the troubled California investor-owned
utilities and, more recently, that of Enron Corporation. The portfolio was
negatively affected by its exposure to airline debt in the wake of the events of
September 11, 2001. While the airline industry faces significant challenges in
the coming months, the demonstrated resolve on the part of the Government to
provide financial assistance, coupled with the recent decline in fuel costs,
should provide enough relief to weather these difficult times. Nevertheless, a
shakeout of some sort appears inevitable as the weaker airlines either fail to
survive or are acquired by those that remain more financially sound.
Our portfolio strategy remained largely unchanged as we sought to maintain a
fully invested position in an effort to enhance the Fund's income distribution.
Opportunities have begun to emerge recently as the recovery in bond prices has
been decidedly uneven. By selectively engaging in swaps, it was possible to
reallocate small portions of the portfolio in an effort to generate both
additional income and price appreciation. Typically, the sale of existing
holdings reflects our belief that the individual security in question has
fulfilled its expected potential in terms of either credit improvement or
relative valuation. In this manner, new investments offer the potential to
enhance total return within the context of the Fund's stated objective of
investing primarily in a portfolio of medium- to lower-grade or unrated
municipal obligations.
In Conclusion
We appreciate your ongoing interest in Apex Municipal Fund, Inc., and we look
forward to serving your investment needs in the months and years to come.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Kenneth A. Jacob
Kenneth A. Jacob
Senior Vice President
/s/ John M. Loffredo
John M. Loffredo
Senior Vice President
/s/ Theodore R. Jaeckel Jr.
Theodore R. Jaeckel Jr.
Vice President and Portfolio Manager
February 6, 2002
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
==================================================================================================================================
Alabama--0.7% B NR* $ 1,000 Brewton, Alabama, IDB, PCR, Refunding (Container Corporation of
America--Jefferson Smurfit Corp. Project), 8% due 4/01/2009 $ 1,015
CCC NR* 5,285 Mobile, Alabama, IDB, Solid Waste Disposal Revenue Refunding Bonds
(Mobile Energy Services Co. Project), 6.95% due 1/01/2020 (d) 322
==================================================================================================================================
Alaska--1.1% NR* NR* 2,000 Alaska Industrial Development and Expert Authority Revenue Bonds
(Williams Lynxs Alaska Cargoport), AMT, 8% due 5/01/2023 1,938
==================================================================================================================================
Arizona--2.8% NR* NR* 1,505 Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds (Sun King
Apartments Project), Sub-Series C, 9.50% due 11/01/2031 1,535
NR* Caa2 4,000 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds
(America West Airlines Inc. Project), AMT, 6.30% due 4/01/2023 1,520
B+ Ba3 2,000 Pima County, Arizona, IDA, Industrial Revenue Refunding Bonds (Tucson
Electric Power Company Project), Series C, 6% due 9/01/2029 1,887
==================================================================================================================================
California--3.6% AAA NR* 5,500 Los Angeles, California, Department of Water and Power, Electric Plant
Revenue Bonds, RIB, Series 144, 9.11% due 6/15/2029 (b)(e) 6,380
==================================================================================================================================
Colorado--5.2% NR* NR* 3,000 Denver, Colorado, Urban Renewal Authority, Tax Increment Revenue Bonds
(Pavilions), AMT, 7.75% due 9/01/2016 3,209
NR* NR* 2,800 Elk Valley, Colorado, Public Improvement Revenue Bonds (Public
Improvement Fee), Series A, 7.30% due 9/01/2022 2,713
NR* NR* 1,640 Lincoln Park, Colorado, Metropolitan District, GO, Refunding, 7.75%
due 12/01/2026 1,644
NR* NR* 1,235 North Range, Colorado, Metropolitan District Number 1, GO, 7.25% due
12/15/2031 1,197
BB+ Ba1 595 Northwest Parkway, Colorado, Public Highway Authority Revenue Bonds,
First Tier, Sub-Series D, 7.125% due 6/15/2041 601
==================================================================================================================================
Connecticut--1.6% BBB- NR* 1,530 Mohegan Tribe Indians, Connecticut, Gaming Authority, Public Improvement
Revenue Refunding Bonds (Priority Distribution), 6.25% due 1/01/2031 1,492
NR* B1 1,350 New Haven, Connecticut, Facility Revenue Bonds (Hill Health
Corporation Project), 9.25% due 5/01/2017 1,382
==================================================================================================================================
Portfolio Abbreviations
To simplify the listings of Apex Municipal Fund, Inc.'s portfolio holdings in
the Schedule of Investments, we have abbreviated the names of many of the
securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
EDA Economic Development Authority
GO General Obligation Bonds
IDA Industrial Development Authority
IDB Industrial Development Board
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
VRDN Variable Rate Demand Notes
4 & 5
Apex Municipal Fund, Inc., December 31, 2001
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
==================================================================================================================================
Florida--9.5% NR* NR* $ 935 Arbor Greene Community Development District, Florida, Special Assessment
Revenue Bonds, 7.60% due 5/01/2018 $ 991
NR* NR* 2,500 Hillsborough County, Florida, IDA, Exempt Facilities Revenue Bonds
(National Gypsum), AMT, Series A, 7.125% due 4/01/2030 2,029
NR* NR* 935 Lakewood Ranch, Florida, Community Development District Number 5, Special
Assessment Revenue Refunding Bonds, Series A, 6.70% due 11/01/2031 914
NR* NR* 3,000 Lee County, Florida, IDA, Health Care Facilities Revenue Bonds
(Cypress Cove Healthpark), Series A, 6.375% due 10/01/2025 2,733
NR* NR* 2,000 Orlando, Florida, Special Assessment Bonds (Conroy Road Interchange
Project), Series A, 5.80% due 5/01/2026 1,919
NR* NR* 1,650 Orlando, Florida, Urban Community Development District, Capital
Improvement Special Assessment Bonds, Series A, 6.95% due 5/01/2033 1,607
NR* NR* 3,600 Parkway Center, Florida, Community Development District, Special
Assessment Refunding Bonds, Series B, 8% due 5/01/2010 3,332
NR* NR* 3,285 Tampa Palms, Florida, Open Space and Transportation Community Development
District Revenue Bonds, Capital Improvement (Richmond Place Project),
7.50% due 5/01/2018 3,458
==================================================================================================================================
Georgia--3.2% NR* NR* 2,000 Atlanta, Georgia, Tax Allocation Revenue Bonds (Atlantic Station Project),
7.90% due 12/01/2024 1,946
NR* NR* 3,680 Atlanta, Georgia, Urban Residential Finance Authority, M/F Mortgage
Revenue Bonds (Northside Plaza Apartments Project), AMT, 9.75%
due 11/01/2020 3,770
==================================================================================================================================
Idaho--0.8% NR* NR* 1,470 Idaho Health Facilities Authority, Revenue Refunding Bonds (Valley Vista
Care Corporation), Series A, 7.75% due 11/15/2016 1,492
==================================================================================================================================
Illinois--1.9% NR* NR* 3,190 Illinois Development Finance Authority, Primary Health Care Centers
Facilities, Acquisition Program Revenue Bonds, 7.75% due 12/01/2016 3,434
==================================================================================================================================
Indiana--2.6% NR* NR* 2,600 Indiana State Educational Facilities Authority, Revenue Refunding Bonds
(Saint Joseph's College Project), 7% due 10/01/2029 2,685
NR* NR* 1,925 Indianapolis, Indiana, M/F Revenue Bonds (Lake Nora Fox Club Project),
Series B, 7.50% due 10/01/2029 1,880
==================================================================================================================================
Iowa--6.6% NR* NR* 10,000 Iowa Finance Authority, Health Care Facilities Revenue Refunding
Bonds (Care Initiatives Project), 9.25% due 7/01/2025 11,865
==================================================================================================================================
Louisiana--3.1% BB- NR* 5,500 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain
Company Project), 7.50% due 7/01/2013 5,610
==================================================================================================================================
Maryland--2.9% NR* NR* 1,875 Anne Arundel County, Maryland, Special Obligation Revenue Bonds
(Arundel Mills Project), 7.10% due 7/01/2029 1,987
NR* NR* 3,000 Maryland State Energy Financing Administration, Limited Obligation
Revenue Bonds (Cogeneration-AES Warrior Run), AMT, 7.40% due 9/01/2019 3,124
==================================================================================================================================
Massachusetts-- NR* Ba2 3,000 Massachusetts State Health and Educational Facilities Authority, Revenue
2.4% Refunding Bonds (Bay Cove Human Services Issue), Series A, 5.90%
due 4/01/2028 2,512
NR* NR* 1,800 Massachusetts State Industrial Finance Agency Revenue Bonds, Sewer
Facility (Resource Control Composting), AMT, 9.25% due 6/01/2010 1,815
==================================================================================================================================
Michigan--0.5% BBB- Baa3 1,000 Michigan State Hospital Finance Authority, Revenue Refunding Bonds
(Detroit Medical Center Obligation Group), Series A, 6.50% due 8/15/2018 952
==================================================================================================================================
Minnesota--1.8% NR* NR* 3,200 Anoka, Minnesota, M/F Housing Revenue Bonds (Rainbow Plaza Apartments
Project), 9.375% due 12/01/2024 3,222
==================================================================================================================================
Missouri--0.7% NR* NR* 1,200 Fenton, Missouri, Tax Increment Revenue Refunding and Improvement Bonds
(Gravois Bluffs), 7% due 10/01/2021 1,248
==================================================================================================================================
Nevada--1.2% BBB Baa2 2,500 Henderson, Nevada, Health Care Facility Revenue Bonds (Catholic Healthcare
West--Saint Rose Dominican Hospital), 5.375% due 7/01/2026 2,202
==================================================================================================================================
New Jersey--14.1% Camden County, New Jersey, Improvement Authority, Lease Revenue Bonds
(Holt Hauling & Warehousing), AMT, Series A (d):
NR* NR* 2,000 9.625% due 1/01/2011 1,855
NR* NR* 4,500 9.875% due 1/01/2021 4,174
CCC B2 6,000 Camden County, New Jersey, Pollution Control Financing Authority, Solid
Waste Resource Recovery Revenue Refunding Bonds, AMT, Series A, 7.50%
due 12/01/2010 5,762
NR* NR* 1,000 New Jersey EDA, Economic Development Revenue Bonds (Glimcher Properties LP
Project), AMT, 6% due 11/01/2028 948
BBB- NR* 1,500 New Jersey EDA, First Mortgage Revenue Bonds (Fellowship Village),
Series C, 5.50% due 1/01/2028 1,355
NR* Ba3 1,500 New Jersey EDA, IDR, Refunding (Newark Airport Marriott Hotel), 7%
due 10/01/2014 1,501
New Jersey EDA, Retirement Community Revenue Bonds, Series A:
NR* NR* 1,000 (Cedar Crest Village Inc. Facility), 7.25% due 11/15/2031 954
NR* NR* 3,700 (Seabrook Village Inc.), 8.125% due 11/15/2023 3,869
BB- B3 3,050 New Jersey EDA, Special Facility Revenue Bonds (Continental Airlines Inc.
Project), AMT, 6.625% due 9/15/2012 2,658
BBB- Baa3 2,000 New Jersey Health Care Facilities Financing Authority, Revenue Refunding
Bonds (Trinitas Hospital Obligation Group), 7.375% due 7/01/2015 2,157
==================================================================================================================================
New Mexico--2.8% B+ Ba3 5,000 Farmington, New Mexico, PCR, Refunding (Tucson Electric Power Co.--San
Juan Project), Series A, 6.95% due 10/01/2020 5,068
==================================================================================================================================
New York--1.9% Utica, New York, GO, Public Improvement:
BB Ba1 700 9.25% due 8/15/2004 759
BB Ba1 700 9.25% due 8/15/2005 778
BB Ba1 475 8.50% due 8/15/2006 (c) 584
BB Ba1 475 8.50% due 8/15/2006 (c) 584
BB Ba1 635 9.25% due 8/15/2006 721
==================================================================================================================================
North Carolina-- . NR* NR* 1,600 North Carolina Medical Care Commission, Health Care Facilities, First
0.9% Mortgage Revenue Refunding Bonds (Presbyterian Homes Project), 7%
due 10/01/2031 1,664
==================================================================================================================================
Ohio--1.6% BB- B3 4,135 Cleveland, Ohio, Airport Special Revenue Refunding Bonds (Continental
Airlines Inc. Project), AMT, 5.70% due 12/01/2019 2,937
==================================================================================================================================
Oregon--1.8% NR* NR* 2,160 Klamath Falls, Oregon, Electric Revenue Refunding Bonds (Klamath
Cogeneration Project), Senior Lien, 6% due 1/01/2025 2,102
NR* NR* 1,000 Western Generation Agency, Oregon, Cogeneration Project Revenue Bonds
(Wauna Cogeneration Project), AMT, Series B, 7.40% due 1/01/2016 1,020
==================================================================================================================================
6 & 7
Apex Municipal Fund, Inc., December 31, 2001
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
==================================================================================================================================
Pennsylvania--9.1% NR* Ba2 $ 2,000 Lehigh County, Pennsylvania, General Purpose Authority, Revenue
Refunding Bonds (Kidspeace Obligation Group), 6% due 11/01/2023 $ 1,732
Montgomery County, Pennsylvania, Higher Education and Health
Authority, Revenue Refunding Bonds (Faulkeways at Gwynedd Project):
BBB+ NR* 900 6.75% due 11/15/2024 927
BBB+ NR* 925 6.75% due 11/15/2030 945
AAA Aaa 2,000 Pennsylvania State Higher Education Assistance Agency, Student
Loan Revenue Bonds, RIB, AMT, 10.647% due 3/01/2022 (a)(e) 2,090
AAA NR* 4,000 Pennsylvania State Higher Educational Facilities Authority, College and
University Revenue Bonds (Eastern College), Series B, 8%
due 10/15/2006 (c) 4,826
NR* NR* 5,500 Philadelphia, Pennsylvania, Authority for IDR, Commercial Development,
AMT, 7.75% due 12/01/2017 5,678
==================================================================================================================================
South Carolina-- BBB- NR* 1,000 South Carolina Jobs, EDA, Revenue Bonds (Myrtle Beach Convention Center),
0.6% Series A, 6.625% due 4/01/2036 991
==================================================================================================================================
Texas--4.6% BBB- Baa3 1,000 Austin, Texas, Convention Center Revenue Bonds (Convention Enterprises
Inc.), First Tier, Series A, 6.70% due 1/01/2028 1,007
A1+ NR* 800 Harris County, Texas, Health Facilities Development Corporation, Hospital
Revenue Refunding Bonds (Methodist Hospital), VRDN, 1.80%
due 12/01/2025 (f) 800
BBB+ Baa2 6,500 Lower Colorado River Authority, Texas, PCR (Samsung Austin Semiconductor),
AMT, 6.375% due 4/01/2027 6,463
==================================================================================================================================
Utah--1.3% NR* NR* 2,240 Carbon County, Utah, Solid Waste Disposal Revenue Refunding Bonds (Laidlaw
Environmental), AMT, Series A, 7.45% due 7/01/2017 2,273
==================================================================================================================================
Virginia--6.8% NR* NR* 2,500 Dulles Town Center, Virginia, Community Development Authority, Special
Assessment Tax (Dulles Town Center Project), 6.25% due 3/01/2026 2,421
NR* NR* 4,215 Peninsula Ports Authority, Virginia, Revenue Refunding Bonds (Port
Facility--Zeigler Coal), 6.90% due 5/02/2022 (d) 2,350
NR* NR* 3,000 Pittsylvania County, Virginia, IDA, Revenue Refunding Bonds,
Exempt-Facility, AMT, Series A, 7.50% due 1/01/2014 2,934
Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds:
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2033 244
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2034 220
BBB- Baa3 32,600 Senior Series B, 5.875%** due 8/15/2025 4,075
==================================================================================================================================
Washington--1.2% NR* NR* 2,600 Port Seattle, Washington, Special Facilities Revenue Bonds
(Northwest Airlines Project), AMT, 7.25% due 4/01/2030 2,051
==================================================================================================================================
Total Investments (Cost--$188,343)--98.9% 177,039
Other Assets Less Liabilities--1.1% 1,968
--------
Net Assets--100.0% $179,007
========
==================================================================================================================================
(a) AMBAC Insured.
(b) FSA Insured.
(c) Prerefunded.
(d) Non-income producing security.
(e) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at December 31, 2001.
(f) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at December
31, 2001.
* Not Rated.
** Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase by the Fund.
See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of December 31, 2001
============================================================================================================================
Assets: Investments, at value (identified cost--$188,342,506) ............................... $ 177,038,936
Cash ................................................................................ 43,254
Interest receivable ................................................................. 3,093,776
Prepaid expenses and other assets ................................................... 16,195
-------------
Total assets ........................................................................ 180,192,161
-------------
============================================================================================================================
Liabilities: Payables:
Securities purchased ........................................................... $966,626
Investment adviser ............................................................. 96,253
Dividends to shareholders ...................................................... 93,760 1,156,639
--------
Accrued expenses .................................................................... 28,491
-------------
Total liabilities ................................................................... 1,185,130
-------------
============================================================================================================================
Net Assets: Net assets .......................................................................... $ 179,007,031
=============
============================================================================================================================
Capital: Common Stock, $.10 par value, 150,000,000 shares authorized; 19,596,732 shares issued
and outstanding ..................................................................... $ 1,959,673
Paid-in capital in excess of par .................................................... 211,626,481
Undistributed investment income--net ................................................ 946,379
Accumulated realized capital losses on investments--net ............................. (24,221,932)
Unrealized depreciation on investments--net ......................................... (11,303,570)
-------------
Total capital--Equivalent to $9.13 net asset value per share of Common Stock
(market price--$8.32) ............................................................... $ 179,007,031
=============
============================================================================================================================
See Notes to Financial Statements.
8 & 9
Apex Municipal Fund, Inc., December 31, 2001
STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 2001
=====================================================================================================
Investment Interest ............................................ $ 6,406,726
Income:
=====================================================================================================
Expenses: Investment advisory fees ............................ $605,226
Accounting services ................................. 37,058
Professional fees ................................... 32,575
Transfer agent fees ................................. 24,349
Directors' fees and expenses ........................ 19,486
Printing and shareholder reports .................... 18,315
Listing fees ........................................ 17,209
Custodian fees ...................................... 7,937
Pricing fees ........................................ 5,241
Other ............................................... 9,856
--------
Total expenses ...................................... 777,252
-----------
Investment income--net .............................. 5,629,474
-----------
======================================================================================================
Realized & Realized loss on investments--net ................... (931,395)
Unrealized Loss on Change in unrealized depreciation on investments--net (5,300,771)
Investments--Net: -----------
Net Decrease in Net Assets Resulting from Operations $ (602,692)
===========
=====================================================================================================
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 2001 2001
===================================================================================================================
Operations: Investment income--net ............................................ $ 5,629,474 $ 11,596,874
Realized loss on investments--net ................................. (931,395) (1,269,704)
Change in unrealized appreciation/depreciation on investments--net. (5,300,771) 3,734,670
------------- -------------
Net increase (decrease) in net assets resulting from operations ... (602,692) 14,061,840
------------- -------------
===================================================================================================================
Dividends to Investment income--net ............................................ (5,636,588) (11,694,527)
Shareholders: ------------- -------------
Net decrease in net assets resulting from dividends to shareholders (5,636,588) (11,694,527)
------------- -------------
===================================================================================================================
Net Assets: Total increase (decrease) in net assets ........................... (6,239,280) 2,367,313
Beginning of period ............................................... 185,246,311 182,878,998
------------- -------------
End of period* .................................................... $ 179,007,031 $ 185,246,311
============= =============
===================================================================================================================
*Undistributed investment income--net .............................. $ 946,379 $ 953,493
============= =============
===================================================================================================================
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been
derived from information provided in the financial For the Six
statements. Months Ended For the Year Ended June 30,
December 31, -----------------------------------------
Increase (Decrease) in Net Asset Value: 2001 2001 2000 1999 1998
===================================================================================================================================
Per Share Net asset value, beginning of period ................... $ 9.45 $ 9.33 $ 10.37 $ 10.60 $ 10.25
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ................................ .29 .59 .66 .63 .64
Realized and unrealized gain (loss) on investments--net (.32) .13 (1.03) (.23) .35
-------- -------- -------- -------- --------
Total from investment operations ....................... (.03) .72 (.37) .40 .99
-------- -------- -------- -------- --------
Less dividends from investment income--net ............ (.29) (.60) (.67) (.63) (.64)
-------- -------- -------- -------- --------
Net asset value, end of period ......................... $ 9.13 $ 9.45 $ 9.33 $ 10.37 $ 10.60
======== ======== ======== ======== ========
Market price per share, end of period .................. $ 8.32 $ 9.10 $ 8.9375 $ 10.25 $ 10.50
======== ======== ======== ======== ========
===================================================================================================================================
Total Investment Based on market price per share ........................ (5.60%)+ 9.05% (6.22%) 3.68% 12.42%
Return:** ======== ======== ======== ======== ========
Based on net asset value per share ..................... (.24%)+ 8.48% (3.23%) 3.90% 10.03%
======== ======== ======== ======== ========
===================================================================================================================================
Ratios to Expenses ............................................... .83%* .82% .81% .81% .86%
Average ======== ======== ======== ======== ========
Net Assets: Investment income--net ................................ 6.04%* 6.35% 6.71% 5.93% 6.08%
======== ======== ======== ======== ========
===================================================================================================================================
Supplemental Net assets, end of period (in thousands) ............... $179,007 $185,246 $182,879 $203,198 $207,460
Data: ======== ======== ======== ======== ========
Portfolio turnover ..................................... 10% 17% 20% 40% 34%
======== ======== ======== ======== ========
===================================================================================================================================
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
+ Aggregate total investment return.
See Notes to Financial Statements.
10 & 11
Apex Municipal Fund, Inc., December 31, 2001
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Apex Municipal Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company. The Fund's financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The Fund
determines and makes available for publication the net asset value of its Common
Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock
Exchange under the symbol APX. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
o Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
o Options--The Fund is authorized to write covered call options and purchase
put options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked to market to reflect the current
market value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis.
(e) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .65% of the Fund's average weekly net assets.
For the six months ended December 31, 2001, the Fund reimbursed FAM $3,299 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended December 31, 2001 were $19,825,567 and $18,750,091, respectively.
Net realized losses for the six months ended December 31, 2001 and net
unrealized losses as of December 31, 2001 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
--------------------------------------------------------------------------------
Long-term investments ................. $(931,395) $(11,303,570)
--------- ------------
Total ................................. $(931,395) $(11,303,570)
========= ============
--------------------------------------------------------------------------------
As of December 31, 2001, net unrealized depreciation for Federal income tax
purposes aggregated $11,303,570, of which $6,583,290 related to appreciated
securities and $17,886,860 related to depreciated securities. The aggregate cost
of investments at December 31, 2001 for Federal income tax purposes was
$188,342,506.
4. Common Stock Transactions:
At December 31, 2001, the Fund had one class of shares of Common Stock, par
value $.10 per share, of which 150,000,000 shares were authorized. Shares issued
and outstanding during the six months ended December 31, 2001 and the year ended
June 30, 2001 remained constant.
5. Capital Loss Carryforward:
At June 30, 2001, the Fund had a net capital loss carryforward of approximately
$22,153,000, of which $2,775,000 expires in 2002, $1,754,000 expires in 2003,
$7,057,000 expires in 2004, $1,312,000 expires in 2005, $938,000 expires in
2006, $2,975,000 expires in 2008 and $5,342,000 expires in 2009. This amount
will be available to offset like amounts of any future taxable gains. Expired
capital loss carryforward in the amount of $3,879,734 has been reclassified to
paid-in capital in excess of par.
6. Subsequent Event:
On January 3, 2002, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.046778 per share,
payable on January 30, 2002 to shareholders of record as of January 15, 2002.
12 & 13
Apex Municipal Fund, Inc., December 31, 2001
ABOUT INVERSE FLOATERS
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of reduced or
eliminated interest payments and losses of invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed rate, tax-exempt securities. To the extent the Fund invests in
inverse securities, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Joe Grills, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Kenneth A. Jacob, Senior Vice President
John M. Loffredo, Senior Vice President
Theodore R. Jaeckel Jr., Vice President
Donald C. Burke, Vice President and Treasurer
Bradley J. Lucido, Secretary
--------------------------------------------------------------------------------
Walter Mintz, Director and Vincent R. Giordano, Senior Vice President of Apex
Municipal Fund, Inc., have recently retired. The Fund's Board of Directors
wishes Messrs. Mintz and Giordano well in their retirements.
--------------------------------------------------------------------------------
Custodian & Transfer Agent
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
APX
14 & 15
[LOGO] Merrill Lynch Investment Managers
[GRAPHIC OMITTED]
Apex Municipal Fund, Inc. seeks to provide shareholders with high current income
exempt from Federal income taxes by investing primarily in a portfolio of
medium-to-lower grade or unrated municipal obligations, the interest on which is
exempt from Federal income taxes in the opinion of bond counsel to the issuer.
This report, including the financial information herein, is transmitted to
shareholders of Apex Municipal Fund, Inc. for their information. It is not a
prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
Apex Municipal Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
[RECYCLE LOGO] Printed on post-consumer recycled paper #10955--12/01