APEX MUNICIPAL
FUND, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
June 30, 1998
<PAGE>
APEX MUNICIPAL FUND, INC.
Managed Dividend Policy
The Fund's dividend policy is to distribute substantially all of its net
investment income to its shareholders on a monthly basis. However, in order to
provide shareholders with a more consistent yield to the current trading price
of shares of Common Stock of the Fund, the Fund may at times pay out less than
the entire amount of net investment income earned in any particular month and
may at times in any particular month pay out such accumulated but undistributed
income in addition to net investment income earned in that month. As a result,
the dividends paid by the Fund for any particular month may be more or less than
the amount of net investment income earned by the Fund during such month. The
Fund's current accumulated but undistributed net investment income, if any, is
disclosed in the Statement of Assets, Liabilities and Capital, which comprises
part of the financial information included in this report.
Quality Profile
The quality ratings of securities in the Fund as of June 30, 1998 were as
follows:
- ---------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- ---------------------------------------
AAA/Aaa ........................ 2.1%
A/A ............................ 0.4
BBB/Baa ........................ 11.4
BB/Ba .......................... 15.8
B/B ............................ 8.7
NR(Not Rated) .................. 63.1
Other+ ......................... 0.7
- ---------------------------------------
+ Temporary investments in short-term municipal securities.
<PAGE>
Apex Municipal Fund, Inc., June 30, 1998
DEAR SHAREHOLDERS
For the year ended June 30, 1998, Apex Municipal Fund, Inc. earned $0.642 per
share income dividends, which included earned and unpaid dividends of $0.053.
This represents a net annualized yield of 6.06%, based on a month-end per share
net asset value of $10.60. Over the same period, the Fund's total investment
return was +10.03%, based on a change in per share net asset value from $10.25
to $10.60, and assuming reinvestment of $0.643 per share income dividends.
For the six months ended June 30, 1998, the Fund's total investment return was
+2.66%, based on a change in per share net asset value from $10.65 to $10.60,
and assuming reinvestment of $0.323 per share income dividends.
The Municipal Market Environment
During the six-month period ended June 30, 1998, long-term tax-exempt revenue
bond yields were little changed. Throughout the period, the near absence of
inflationary pressures continued to support low interest rates. However,
consistently strong domestic economic growth has caused some investors to fear
that the Federal Reserve Board will be forced eventually to raise short-term
interest rates. Such action would be taken to ensure that the US economy's
present rate of growth would decelerate before any inflationary pressures could
develop. These concerns pushed bond yields modestly higher by late April.
However, the weakening financial conditions in many Asian countries subsequently
calmed investor fears of Federal Reserve Board intervention, and fixed-income
prices again moved higher. Long-term uninsured municipal bond yields, as
measured by the Bond Buyer Revenue Bond Index, fell approximately 5 basis points
(0.05%) to end the June quarter at 5.34%. As in late 1997 and early 1998, US
Treasury bond yields benefited from a "flight to quality" as foreign investors
were drawn to the relative safe haven of US Government securities. Long-term US
Treasury bond yields declined approximately 30 basis points to end the June
quarter at 5.62%.
Thus far in 1998, the municipal bond market has experienced unexpectedly strong
supply pressures. These supply pressures have prevented tax-exempt bond yields
from declining as much as US Treasury bond yields. During the first six months
of 1998, more than $145 billion in new tax-exempt bonds were underwritten, an
increase of over 50% compared to the same period a year ago. During the quarter
ended June 30, 1998, municipalities issued over $75 billion in new securities,
an increase of more than 35% compared to the same three-month period in 1997.
Additionally, corporate issuers have also viewed current interest rate levels as
an opportunity to issue significant amounts of taxable securities. Thus far in
1998, over $500 billion in investment-grade corporate bonds have been
underwritten, an increase of more than 70% compared to the same period a year
ago. This sizeable corporate bond issuance has tended to both support generally
higher fixed-income yields and reduce the demand for tax-exempt bonds.
However, the recent pace of new municipal bond issuance is unlikely to be
maintained. Continued increases in bond issuance will require lower and lower
tax-exempt bond yields to generate the economic savings necessary for additional
municipal bond refinancings. Preliminary estimates for 1998 total municipal bond
issuance are presently in the $200 billion-$225 billion range. These estimates
suggest that recent supply pressures are likely to abate later in the year.
Earlier this year, municipal bond investors received approximately $30 billion
in coupon payments, bond maturities and proceeds from early redemptions. The
demand generated by these assets has helped to offset the increase in supply
seen thus far in 1998. Historically, the month of July tends to be a period of
strong investor demand as seasonal factors generate strong income flows.
It is also possible that at least some of the recent economic strength seen in
the United States will be reversed in the coming months. A particularly mild
winter has been partially responsible for a strong housing sector, as well as
other construction industries. This past winter's economic strength may have
borrowed from future quarters' growth. This recent strong trend may not be
sustained and may lead to weaker construction growth later this year.
Additionally, strong economic growth in 1997 and the increased use of electronic
tax filings have resulted in larger and earlier Federal and state income tax
refunds to many individuals. These refunds appear to have supported strong
consumer spending in recent months, but may be borrowing against weaker spending
later this year.
The continued impact of the Asian financial crisis on the US domestic economy's
future growth remains unclear. Current Asian economic conditions continue to
reflect ongoing weakness. Recent trade data indicated that reduced US exports to
these countries may have lowered US economic growth by as much as 2% in the
first quarter of 1998. Since further trade deterioration is possible in the
coming months, we do not believe that the Federal Reserve Board will be willing
to raise interest rates, barring a dramatic and unexpected resurgence of
domestic inflation.
These factors suggest that over the near term, interest rates in general are
unlikely to rise by any appreciable amount. Recent supply pressures have caused
municipal bond yield ratios to rise relative to US Treasury bond yields. At June
30, 1998, long-term tax-exempt bond yields were at attractive yield ratios
relative to US Treasury securities of comparable maturities (over 90%), well in
excess of their expected range of 85%-88%. Tax-exempt bond yield ratios rarely
exceeded 90% in the 1980s and 1990s. Previous instances have usually been
associated with potential changes in Federal tax codes that would have adversely
affected the tax-favored status of municipal bonds. The present situation has
developed largely because of a temporary supply imbalance. These imbalances
should soon be corrected as tax-exempt bond issuance slows from its current
rapid pace later this year. Any further pressure on the municipal market may
well represent a very attractive investment opportunity.
Portfolio Strategy
As a result of our investment approach, which places emphasis on solid credit
and attentive yield spread analysis rather than interest rate calls, Apex
Municipal Fund, Inc. has consistently generated a competitive total return for
its shareholders. During the fiscal year ended June 30, 1998, we chose to keep
the Fund fully invested in an effort to enhance the potential income stream.
This approach proved beneficial in light of the stable bond market environment
experienced thus far in 1998. Contributing to the year's positive results has
been the advance refunding of approximately 3.3% of the Fund's investments and
the initial assignment of ratings or actual upgrades for another 13.5% of its
holdings.
In the past, we have witnessed increasingly narrow credit spreads and the
resulting lack of value in the high-yield municipal market. Our investment
approach has clearly been impacted by these developments, as evidenced by the
recent retrenchment from our emphasis on the healthcare sector. Yield spread
contraction was most pronounced in this industry, and given the illiquidity
typical of many small healthcare issuers, we chose to reduce our exposure. As a
result, few true opportunities exist in the current marketplace for healthcare
issues and, as a consequence, a high degree of caution is mandated by the low
risk/reward ratio. While much of our focus will shift to the more liquid and
widely held issues, we still expect to continue to search the marketplace for
the increasingly rare opportunities that offer both incremental yield and upside
potential.
During the fiscal year ended June 30, 1998, we purchased approximately $40
million in tax-exempt high-yield securities. Partial funding for these purchases
was obtained through the sale of various holdings, some of which had been
advance refunded. In almost every instance, those securities that were sold had
been issued some time ago in a higher interest rate environment. Although it
will be difficult to replace the coupon income generated by these holdings,
early redemption by the respective issuers at some point in the near future is
all but certain. Given this likelihood, we have chosen to address the issue
rather than passively wait for the bonds to be called. In this manner, we are
able to achieve the flexibility to gradually restructure the portfolio at a pace
of our own choosing, thereby limiting the erosion of income brought on by lower
interest rates. Moreover, the Fund's new investments typically possess not only
far better call protection, but also the potential to appreciate within the
context of improving credit fundamentals as well as a further decline in
long-term interest rates.
2 & 3
<PAGE>
Apex Municipal Fund, Inc., June 30, 1998
Clearly, this approach entails additional risk both in terms of credit and
interest-rate sensitivity. However, much of our success to date is directly
attributable to a deliberate and value-oriented style of credit analysis. In
addition, a strong argument can be made for a constructive outlook in the bond
market. Persistent low inflation, coupled with the expected fallout from the
economic and political turmoil encompassing many of the emerging market nations,
suggests there is limited risk of a sustained rise in domestic long-term
interest rates. Therefore, we view the foregoing strategy as the logical means
by which to strive to generate both a sustainable dividend as well as a
competitive total return.
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/ Arthur Zeikel
Arthur Zeikel
President
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Theodore R. Jaeckel Jr.
Theodore R. Jaeckel Jr.
Vice President and Portfolio Manager
/s/ John M. Loffredo
John M. Loffredo
Vice President and Portfolio Manager
August 4, 1998
- --------------------------------------------------------------------------------
We are pleased to announce that John M. Loffredo became Vice President and
Portfolio Manager of Apex Municipal Fund, Inc. Mr. Loffredo has been First Vice
President of Merrill Lynch Asset Management, L.P. (an affiliate of the
Investment Adviser)since 1997 and Vice President since 1991.
- --------------------------------------------------------------------------------
4
<PAGE>
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
Alabama--1.9% B+ NR* $ 1,000 Brewton, Alabama, Industrial Development Board,
PCR, Refunding (Container Corporation America
Project), 8% due 4/01/2009 $ 1,134
CCC Baa3 5,500 Mobile, Alabama, IDB, Solid Waste Disposal,
Revenue Refunding Bonds (Mobile Energy
Services Co. Project), 6.95% due 1/01/2020 2,750
==================================================================================================================================
Arizona--3.7% NR* B1 4,000 Phoenix, Arizona, IDA, Airport Facilities Revenue
Refunding Bonds (America West Airlines, Inc.),
AMT, 6.30% due 4/01/2023 4,177
B B2 3,500 Pima County, Arizona, IDA, IDR (Tucson Electric
Power Co. Project), Series B, 6% due 9/01/2029 3,572
==================================================================================================================================
Arkansas--1.8% NR* NR* 390 Alma, Arkansas, Health Facilities Board Revenue
Bonds, 10.50% due 12/01/2019 422
NR* NR* 390 Conway, Arkansas, Public Facilities Board, Health
Care Revenue Bonds (Creative Living Project),
10.50% due 12/01/2019 420
NR* NR* 390 Hope, Arkansas, Health Facilities Board Revenue
Bonds (Omega Home), 10.50% due 12/01/2019 421
NR* NR* 780 Little Rock, Arkansas, Health Facilities Board
Revenue Bonds (Community Life Services),
10.50% due 12/01/2019 842
NR* NR* 780 Pine Bluff, Arkansas, Health Facilities Board
Revenue Bonds (Jenkins Housing), 10.50%
due 12/01/2019 841
NR* NR* 390 Texarkana, Arkansas, Public Facilities Board,
Health Care Revenue Bonds (Housing Opportunities
Addition Project), 10.50% due 12/01/2019 420
NR* NR* 390 West Helena, Arkansas, Health Facilities Board
Revenue Bonds (Delta House), 10.50% due 12/01/2019 419
==================================================================================================================================
California--1.1% AAA Aaa 5,000 Foothill/Eastern Transportation Corridor Agency,
California, Toll Road Revenue Bonds
(Senior Lien), Series A, 5.775%** due 1/01/2028 (c) 1,075
NR* NR* 2,000 Long Beach, California, Redevelopment Agency,
M/F Housing Revenue Bonds (Pacific Court
Apartments), AMT, Issue B, 6.95% due 9/01/2023 (b) 1,100
==================================================================================================================================
Colorado--2.6% NR* NR* 1,700 Colorado Postsecondary Educational Facilities
Authority Revenue Bonds (Colorado Ocean
Journey Inc. Project), 8.30% due 12/01/2017 1,992
NR* NR* 3,000 Denver, Colorado, Urban Renewal Authority,
Tax Increment Revenue Bonds (Downtown Denver),
AMT, Series A, 7.75% due 9/01/2016 3,339
==================================================================================================================================
Florida--10.1% Arbor Greene, Florida, Community Development
District, Special Assessment Revenue Bonds:
NR* NR* 1,000 7.60% due 5/01/2018 1,081
NR* NR* 400 6.30% due 5/01/2019 402
==================================================================================================================================
</TABLE>
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)
COP Certificates of Participation
EDA Economic Development Authority
HFA Housing Finance Agency
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
UT Unlimited Tax
VRDN Variable Rate Demand Notes
5
<PAGE>
Apex Municipal Fund, Inc., June 30, 1998
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
Florida A1 NR* $ 200 Escambia, County, Florida, PCR, Refunding (Gulf
(concluded) Power Company Project), VRDN, 4.05% (concluded)
due 7/01/2022 (a) $ 200
NR* NR* 9,448 Florida HFA, M/F Housing Revenue Bonds (Palm
Aire Retirement Facilities Project), AMT, Series
S, 10% due 1/01/2020 (b) 7,464
NR* NR* 3,000 Lee County, Florida, IDA, Healthcare Facilities
Revenue Bonds (Cypress Cove Health Park), Series
A, 6.375% due 10/01/2025 3,160
NR* NR* 4,385 Miami Beach, Florida, Redevelopment Agency, Tax
Increment Revenue Bonds, AMT, 9.125% due
12/01/2004 4,766
NR* NR* 3,575 Tampa Palms, Florida, Open Space and
Transportation Community Development District
Revenue Bonds (Capital Improvement--Richmond
Place Project), 7.50% due 5/01/2018 3,797
==================================================================================================================================
Georgia--4.3% NR* NR* 3,920 Atlanta, Georgia, Urban Residential Finance
Authority, M/F Housing Mortgage Revenue Bonds
(Northside Plaza Apartments Project), 9.75% due
11/01/2020 4,207
NR* NR* 2,275 Hancock County, Georgia, COP, 8.50% due 4/01/2015 2,562
NR* NR* 1,915 Rockdale County, Georgia, Development Authority,
Solid Waste Disposal Revenue Bonds (Visy Paper Inc.
Project), AMT, 7.40% due 1/01/2016 2,078
==================================================================================================================================
Illinois--4.1% BB+ Baa2 4,490 Chicago, Illinois, O'Hare International Airport,
Special Facilities Revenue Bonds (United Airlines,
Inc.), Series 1984-B, 8.85% due 5/01/2018 5,020
NR* NR* 3,190 Illinois Development Finance Authority, Prime
Health Care Centers Facilities, Acquisition
Program Revenue Bonds, 7.75% due 12/01/2016 3,569
==================================================================================================================================
Indiana--1.1% NR* NR* 2,000 Wabash, Indiana, Solid Waste Disposal Revenue
Bonds (Jefferson Smurfit Corporation Project),
AMT, 7.50% due 6/01/2026 2,235
==================================================================================================================================
Iowa--6.5% NR* NR* 10,000 Iowa Finance Authority, Health Care Facilities,
Revenue Refunding Bonds (Care Initiatives
Project), 9.25% due 7/01/2025 13,474
==================================================================================================================================
Louisiana--2.2% NR* A2 650 Louisiana Public Facilities Authority, Student
Loan Revenue Refunding Bonds, AMT, Sub-Series
A-3, 7% due 9/01/2006 692
BB NR* 3,500 Port New Orleans, Louisiana, IDR, Refunding
(Continental Grain Company Project), 7.50% due
7/01/2013 3,944
==================================================================================================================================
Maryland--2.7% NR* NR* 5,000 Maryland State Energy Financing Administration,
Limited Obligation Revenue Bonds (Cogeneration-AES
Warrior Run), AMT, 7.40% due 9/01/2019 5,544
==================================================================================================================================
Massachusetts--4.0% NR* NR* 1,555 Boston, Massachusetts, Industrial Development
Financing Authority, Solid Waste Disposal
Facilities Revenue Bonds (Jet-A-Way Project),
AMT, 10.50% due 1/01/2011 1,740
NR* NR* 1,920 Massachusetts State Industrial Finance Agency,
Educational Institution Revenue Bonds (Center
for Human Development), 9.375% due 7/01/2015 2,095
NR* NR* 2,100 Massachusetts State Industrial Finance Agency,
Sewage Facility Revenue Bonds (Resource Control
Composting, Inc. Project), AMT, 9.25% due 6/01/2010 2,196
NR* NR* 2,000 Massachusetts State Port Authority, Special
Project Revenue Bonds (Harborside Hyatt), AMT,
10% due 3/01/2026 2,235
==================================================================================================================================
Michigan--1.7% NR* NR* 2,050 Wayne Charter County, Michigan, Special Airport
Facilities, Revenue Refunding Bonds (Northwest
Airlines, Inc.), 6.75% due 12/01/2015 2,276
BBB- Baa 1,200 Wayne County, Michigan, Downriver Sewer Disposal
System, Series A, 7% due 11/01/2013 1,306
==================================================================================================================================
Minnesota--1.7% NR* NR* 3,310 Anoka, Minnesota, M/F Housing Revenue Bonds
(Rainbow Plaza Apartments Project), AMT, 9.375%
due 12/01/2024 3,494
==================================================================================================================================
Mississippi--0.8% NR* P1 200 Jackson County, Mississippi, Port Facility
Revenue Refunding Bonds (Chevron USA, Inc.
Project), VRDN, 4% due 6/01/2023 (a) 200
NR* NR* 1,400 Mississippi Development Bank, Special Obligation
Refunding Bonds (Diamond Lakes Utilities),
Series A, 6.25% due 12/01/2017 1,438
==================================================================================================================================
New Jersey--5.3% Camden County, New Jersey, Improvement Authority,
Lease Revenue Bonds (Holt Hauling & Warehousing),
Series A:
BB- NR* 2,000 9.625% due 1/01/2011 2,512
BB- NR* 4,500 9.875% due 1/01/2021 5,721
NR* NR* 1,500 New Jersey, EDA, IDR, Refunding (Newark Airport
Marriott Hotel), 7% due 10/01/2014 1,657
AAA Aaa 1,000 New Jersey Health Care Facilities Financing
Authority Revenue Bonds (Saint Elizabeth Hospital),
Series B, 8.25% due 7/01/2000 (d) 1,093
==================================================================================================================================
New Mexico--4.5% Farmington, New Mexico, PCR:
BB+ Ba1 3,000 Refunding (Public Service Company--San Juan
Project), Series B, 6.30% due 12/01/2016 3,231
B B2 5,000 (Tucson Electric Power Co.--San Juan Project),
Series A, 6.95% due 10/01/2020 5,654
A1+ P1 500 Hurley, New Mexico, PCR (Kennecott Santa Fe),
VRDN, 4.10% due 12/01/2015 (a) 500
==================================================================================================================================
New York--7.2% NR* NR* 7,010 New York City, New York, IDA, Civic Facilities
Revenue Bonds (Amboy Properties Corporation
Project), 9.625% due 6/01/2015 7,660
NR* NR* 3,500 Port Authority of New York and New Jersey,
Special Obligation Revenue Bonds (Special
Project--KIAC), AMT, Series 4, 5th Installment,
6.75% due 10/01/2019 3,857
Utica, New York, Public Improvement Bonds, UT:
CCC B2 700 9.25% due 8/15/2004 815
CCC B2 700 9.25% due 8/15/2005 829
CCC B2 635 9.25% due 8/15/2006 764
CCC B2 475 8.50% due 8/15/2013 553
CCC B2 475 8.50% due 8/15/2014 553
==================================================================================================================================
Ohio--3.8% BB- Ba2 5,000 Cleveland, Ohio, Airport Special Revenue
Refunding Bonds (Continental Airlines, Inc.), AMT,
5.70% due 12/01/2019 (h) 4,931
NR* NR* 3,000 Ohio State Water Development Authority, Solid
Waste Disposal Revenue Bonds (Bay Shore Power
Project), AMT, Series A, 5.875% due 9/01/2020 3,038
==================================================================================================================================
Oregon--1.5% NR* Baa2 2,000 Oregon State, Economic Development Revenue
Refunding Bonds (Georgia-Pacific Corporation
Project), Series 183, 5.70% due 12/01/2025 2,067
NR* NR* 1,000 Western Generation Agency, Oregon, Cogeneration
Project Revenue Bonds (Wauna Cogeneration
Project), AMT, Series B, 7.40% due 1/01/2016 1,101
==================================================================================================================================
Pennsylvania--12.5% NR* NR* 5,000 Lehigh County, Pennsylvania, General Purpose
Authority Revenue Bonds (Wiley House--
Kid's Peace), 8.75% due 11/01/2014 5,217
BBB- Baa2 3,000 Pennsylvania Economic Development Financing
Authority, Exempt Facilities Revenue Bonds
(MacMillan Limited Partnership Project), AMT,
7.60% due 12/01/2020 3,350
NR* NR* 4,000 Pennsylvania Economic Development Financing
Authority, Recycling Revenue Bonds (Ponderosa
Fibres Project), AMT, Series A, 6.045% due
1/01/2022 (b) 2,880
BBB Baa3 1,000 Pennsylvania Economic Development Financing
Authority, Wastewater Treatment Revenue Bonds
(Sun Company Inc.--R & M Project), AMT, Series A,
7.60% due 12/01/2024 1,170
AAA Aaa 2,000 Pennsylvania State Higher Education Assistance
Agency, Student Loan Revenue Bonds, RIB, AMT,
Series B, 8.28% due 3/01/2022 (e)(f) 2,255
</TABLE>
6 & 7
<PAGE>
Apex Municipal Fund, Inc., June 30, 1998
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
Pennsylvania NR* NR* $ 4,000 Pennsylvania State Higher Educational Facilities
(concluded) Authority, College and University Revenue Bonds
(Eastern College), Series B, 8% due 10/15/2025 $ 4,718
NR* NR* 5,500 Philadelphia, Pennsylvania, Authority for IDR,
Refunding (Commercial Development--Philadelphia
Airport), AMT, 7.75% due 12/01/2017 6,207
==================================================================================================================================
Texas--9.0% NR* NR* 1,460 Angelina County, Texas, Jail Facilities Financing
Corporation, Criminal Detention Center,
Mortgage Revenue Bonds, 9.75% due 8/01/2009 (b) --
Bell County, Texas, Health Facilities Development
Corporation Revenue Bonds (Heartway Corporation
Project):
NR* NR* 4,750 Senior Series A, 9.50% due 3/01/2019 5,232
NR* NR* 805 Sub-Series B, 10%** due 3/01/2019 (g) 542
A1+ NR* 450 Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds (Methodist
Hospital), VRDN, 4% due 12/01/2025 (a) 450
BB Ba2 3,100 Houston, Texas, Airport System, Special Facilities
Revenue Bonds (Continental Airlines Terminal
Improvement), AMT, Series B, 6.125% due 7/15/2027 3,245
BB- Ba1 6,500 Lower Colorado River Authority, Texas, PCR
(Samsung Austin Semiconductor), AMT, 6.375% due
4/01/2027 6,790
NR* Ba1 945 Nolan County, Texas, Industrial Development
Corporation, IDR (US Gypsum Company Project),
7.25% due 12/01/2014 1,071
BBB Baa3 1,000 Odessa, Texas, Junior College District, Revenue
Refunding Bonds, Series A, 8.125% due 6/01/2005 (d) 1,226
NR* NR* 3,530 Pecos County, Texas, Jail Facilities Financing
Corporation, Criminal Detention Center Mortgage
Revenue Bonds, 9.75% due 8/01/2009 (b) --
==================================================================================================================================
Virginia--5.1% NR* NR* 2,500 Dulles Town Center Community Development Authority,
Virginia, Special Assessment Tax Bonds (Dulles
Town Center Project), 6.25% due 3/01/2026 2,532
Pocahontas Parkway Association, Virginia,
Connector Toll Road Revenue Bonds (Route 895):
NR* Ba1 6,200 1st Tier, Sub-Series C, 6.25%** due 8/15/2033 711
NR* Ba1 6,200 1st Tier, Sub-Series C, 6.25%** due 8/15/2034 669
BBB- Baa3 32,600 Senior Series B, 5.887%** due 8/15/2025 6,760
==================================================================================================================================
West Virginia--3.0% NR* NR* 5,850 Fayette County, West Virginia, Commercial
Development Commission, Revenue Refunding Bonds
(MPC Incorporated Project), 9.75% due 2/01/2011 6,298
==================================================================================================================================
Total Investments (Cost--$201,931)--102.2% 211,958
Liabilities in Excess of Other Assets--(2.2%) (4,498)
--------
Net Assets--100.0% $207,460
========
==================================================================================================================================
</TABLE>
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at June 30,
1998.
(b) Non-income producing security.
(c) FSA Insured.
(d) Prerefunded.
(e) The interest rate is subject to change periodically and inversely based upon
prevailing market rates. The interest rate shown is the rate in effect at
June 30, 1998.
(f) AMBAC Insured.
(g) This issue will begin to accrue interest on September 1, 1999.
(h) This issue will begin to accrue interest on September 2, 1999.
* Not Rated.
** Represents a zero coupon bond; the interest rate shown is the effective
yield at the time of purchase by the Fund.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
8
<PAGE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of June 30, 1998
=====================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $201,930,717) (Note 1a) $ 211,957,859
Cash ............................................................ 30,394
Receivables:
Securities sold .............................................. $ 5,208,313
Interest ..................................................... 3,698,679 8,906,992
-------------
Prepaid expenses and other assets ............................... 26,936
-------------
Total assets .................................................... 220,922,181
-------------
=====================================================================================================================
Liabilities: Payables:
Securities purchased ......................................... 13,115,060
Dividends to shareholders (Note 1e) .......................... 153,048
Investment adviser (Note 2) .................................. 111,136 13,379,244
-------------
Accrued expenses and other liabilities .......................... 83,003
-------------
Total liabilities ............................................... 13,462,247
-------------
=====================================================================================================================
Net Assets: Net assets ...................................................... $ 207,459,934
=============
=====================================================================================================================
Capital: Common Stock, $.10 par value, 150,000,000 shares authorized;
19,569,551 shares issued and outstanding (Note 4) ............... $ 1,956,955
Paid-in capital in excess of par ................................ 215,220,133
Undistributed investment income--net ............................ 1,178,772
Accumulated realized capital losses on investments--net (Note 5) (20,923,068)
Unrealized appreciation on investments--net ..................... 10,027,142
-------------
Total capital--Equivalent to $10.60 net asset value per share
of Common Stock (market price--$10.50) .......................... $ 207,459,934
=============
=====================================================================================================================
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Apex Municipal Fund, Inc., June 30, 1998
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended June 30, 1998
==============================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $ 14,341,094
Income (Note 1d):
==============================================================================================================
Expenses: Investment advisory fees (Note 2) ...................... $ 1,343,366
Professional fees ...................................... 177,716
Accounting services (Note 2) ........................... 62,768
Transfer agent fees .................................... 51,567
Directors' fees and expenses ........................... 40,251
Printing and shareholder reports ....................... 34,000
Listing fees ........................................... 24,260
Custodian fees ......................................... 18,332
Pricing fees ........................................... 10,129
Other .................................................. 17,699
------------
Total expenses ......................................... 1,780,088
------------
Investment income--net ................................. 12,561,006
------------
==============================================================================================================
Realized & Realized loss on investments--net ...................... (220,913)
Unrealized Change in unrealized appreciation on investments--net .. 7,061,457
Gain (Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations ... $ 19,401,550
(Notes 1b, 1d & 3): ============
==============================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year
Ended June 30,
------------------------------
Increase (Decrease) in Net Assets: 1998 1997
============================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ............................................ $ 12,561,006 $ 12,625,286
Realized loss on investments--net ................................. (220,913) (1,036,737)
Change in unrealized appreciation/depreciation on investments--net 7,061,457 6,145,613
------------- -------------
Net increase in net assets resulting from operations .............. 19,401,550 17,734,162
------------- -------------
============================================================================================================================
Dividends to Investment income--net ............................................ (12,579,736) (12,927,160)
Shareholders ------------- -------------
(Note 1e): Net decrease in net assets resulting from dividends to shareholders (12,579,736) (12,927,160)
------------- -------------
============================================================================================================================
Common Stock Net increase in net assets derived from capital stock issued to
Transactions shareholders in reinvestment of dividends ......................... 265,795 --
(Note 4): ------------- -------------
============================================================================================================================
Net Assets: Total increase in net assets ...................................... 7,087,609 4,807,002
Beginning of year ................................................. 200,372,325 195,565,323
------------- -------------
End of year* ...................................................... $ 207,459,934 $ 200,372,325
============= =============
============================================================================================================================
* Undistributed investment income--net ...... $ 1,178,772 $ 1,197,502
============= =============
============================================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
For the Year Ended June 30,
----------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year .................. $ 10.25 $ 10.01 $ 10.06 $ 10.10 $ 10.40
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .............................. .64 .64 .67 .71 .75
Realized and unrealized gain (loss) on
investments--net .................................... .35 .26 (.06) (.04) (.30)
-------- -------- -------- -------- --------
Total from investment operations .................... .99 .90 .61 .67 .45
-------- -------- -------- -------- --------
Less dividends from investment income--net .......... (.64) (.66) (.66) (.71) (.75)
-------- -------- -------- -------- --------
Net asset value, end of year ........................ $ 10.60 $ 10.25 $ 10.01 $ 10.06 $ 10.10
======== ======== ======== ======== ========
Market price per share, end of year ................. $ 10.50 $ 9.9375 $ 9.125 $ 9.375 $ 9.875
======== ======== ======== ======== ========
==================================================================================================================================
Total Investment Based on market price per share ..................... 12.42% 16.66% 4.54% 2.57% (2.26%)
Return:* ======== ======== ======== ======== ========
Based on net asset value per share .................. 10.03% 9.69% 6.87% 7.61% 4.53%
======== ======== ======== ======== ========
==================================================================================================================================
Ratios to Average Expenses ............................................ .86% .79% .90% .91% .88%
Net Assets: ======== ======== ======== ======== ========
Investment income--net .............................. 6.08% 6.34% 6.66% 7.14% 7.24%
======== ======== ======== ======== ========
==================================================================================================================================
Supplemental Net assets, end of year (in thousands) .............. $207,460 $200,372 $195,565 $196,647 $197,466
Data: ======== ======== ======== ======== ========
Portfolio turnover .................................. 34% 79% 56% 20% 12%
======== ======== ======== ======== ========
==================================================================================================================================
</TABLE>
* 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 loads.
See Notes to Financial Statements.
10 & 11
<PAGE>
Apex Municipal Fund, Inc., June 30, 1998
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 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, which are traded on exchanges, are valued at
their last sale price as of the close of such exchanges or, lacking any sales,
at the last available bid price. 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
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counter party 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).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost 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 a 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 0.65% of the Fund's average weekly net assets.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc., and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 1998 were $76,663,295 and $68,600,275, respectively.
Net realized losses for the year ended June 30, 1998 and net unrealized gains as
of June 30, 1998 were as follows:
- ------------------------------------------------------
Realized Unrealized
Losses Gains
- ------------------------------------------------------
Long-term investments ....... $(220,913) $10,027,142
--------- -----------
Total ....................... $(220,913) $10,027,142
========= ===========
- ------------------------------------------------------
As of June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $10,027,142, of which $17,303,613 related to appreciated securities
and $7,276,471 related to depreciated securities. The aggregate cost of
investments at June 30, 1998 for Federal income tax purposes was $201,930,717.
4. Common Stock Transactions:
At June 30, 1998, 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 year ended June 30, 1998 increased by 24,907 as a result
of dividend reinvestment and during the year ended June 30, 1997 remained
constant.
5. Capital Loss Carryforward:
At June 30, 1998, the Fund had a net capital loss carryforward of approximately
$20,239,000, of which $1,527,000 expires in 1999, $4,876,000 expires in 2001,
$2,775,000 expires in 2002, $1,754,000 expires in 2003, $7,057,000 expires in
2004, $1,312,000 expires in 2005 and $938,000 expires in 2006. This amount will
be available to offset like amounts of any future taxable gains. Expired capital
loss carryforward in the amount of $273,559 has been reclassified to paid-in
capital in excess of par.
6. Subsequent Event:
On July 9, 1998, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.052835 per share,
payable on July 30, 1998 to shareholders of record as of July 23, 1998.
12 & 13
<PAGE>
Apex Municipal Fund, Inc., June 30, 1998
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders,
Apex Municipal Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of Apex Municipal Fund, Inc., as of June
30, 1998, the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year period then
ended. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1998 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and the financial highlights present
fairly, in all material respects, the financial position of Apex Municipal Fund,
Inc. as of June 30, 1998, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche llp
Princeton, New Jersey
August 6, 1998
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions declared monthly by Apex
Municipal Fund, Inc. during its taxable year ended June 30, 1998 qualify as
tax-exempt interest dividends for Federal income tax purposes.
Additionally, there were no capital gains distributions declared by the Fund
during its taxable year ended June 30, 1998.
Please retain this information for your records.
14
<PAGE>
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, interest rates 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 such securities.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Theodore R. Jaeckel Jr., Vice President
John M. Loffredo, Vice President
Gerald M. Richard, Treasurer
Patrick D. Sweeney, Secretary
Custodian & Transfer Agent
The Bank of New York
90 Washington Street
New York, NY 10286
NYSE Symbol
APX
15
<PAGE>
This report, including the financial information herein, is transmitted to the
shareholders of Apex Municipal Fund, Inc. for their information. It is not a
prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in the report. 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 #10955--6/98
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