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Notes to Financial Statements
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1. Organization:
BlackRock MuniHoldings Quality Fund II, Inc. (MUE), BlackRock
MuniYield California Quality Fund, Inc. (MCA), BlackRock MuniYield Michigan Quality Fund II, Inc. (MYM), BlackRock MuniYield New York Quality Fund, Inc. (MYN) and BlackRock MuniYield Quality Fund III, Inc.
(MYI), (collectively, the Funds or individually a Fund), are registered under the 1940 Act, as non-diversified, closed-end management investment companies. The Funds are organized as Maryland corporations. The
Boards of Directors of the Funds are collectively referred to throughout this report as the Board of Directors or the Board, and the directors thereof are collectively referred to throughout this report as
Directors. The Funds determine, and make available for publication the NAVs of their Common Shares on a daily basis.
2.
Significant Accounting Policies:
The Funds financial statements are prepared in conformity with accounting principles generally
accepted in the United States of America (US GAAP), which may require management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of
increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Funds:
Valuation: US GAAP defines fair value as the price the Funds would receive to sell an asset or pay to transfer a liability in an orderly transaction
between market participants at the measurement date. The Funds determine the fair value of their financial instruments at market value using independent dealers or pricing services under policies approved by the Board. The BlackRock Global Valuation
Methodologies Committee (the Global Valuation Committee) is the committee formed by management to develop global pricing policies and procedures and to provide oversight of the pricing function for the Funds for all financial
instruments.
Municipal investments (including commitments to purchase such investments on a when-issued basis) are valued on the
basis of prices provided by dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrixes,
market transactions in comparable investments and information with respect to various relationships between investments. Financial futures contracts traded on exchanges are valued at their last sale price. Short-term securities with remaining
maturities of 60 days or less may be valued at amortized cost, which approximates fair value.
Exchange-traded options are valued at the mean
between the last bid and ask prices at the close of the options market in which the options trade. An exchange-traded option for which there is no mean price is valued at the last bid (long positions) or ask (short positions) price. If no bid or ask
price is available, the prior days price will be used, unless it is determined that the prior days price no longer reflects the fair value of the option. Over-the-counter (OTC) options are valued by an independent pricing
service using a mathematical model, which incorporates a number of market data factors, such as the trades and prices of the underlying instruments.
In the event that application of these methods of valuation results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not
available, the investment will be valued by the Global Valuation Committee, or its delegate, in accordance with a policy approved by the Board as reflecting fair value (Fair Value Assets). When determining the price for Fair Value
Assets, the Global Valuation Committee, or its delegate, seeks to determine the price that each Fund might reasonably expect to receive from the current sale of that asset in an arms-length transaction. Fair value determinations shall be based
upon all available factors that the Global Valuation Committee, or its delegate, deem relevant consistent with the principles of fair value measurement which include the market approach, income approach and/or in the case of recent investments, the
cost approach, as appropriate. The market approach generally consists of using comparable market transactions. The income approach generally is used to discount future cash flows to present value and is adjusted for liquidity as appropriate. These
factors include but are not limited to: (i) attributes specific to the investment or asset; (ii) the principal market for the investment or asset; (iii) the customary participants in the principal market for the investment or asset;
(iv) data assumptions by market participants for the investment or asset, if reasonably available; (v) quoted prices for similar investments or assets in active markets; and (vi) other factors, such as future cash flows, interest
rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, recovery rates, liquidation amounts and/or default rates. Due to the inherent uncertainty of valuations of such investments, the fair values may differ from the
values that would have been used had an active market existed. The Global Valuation Committee, or its delegate, employs various methods for calibrating valuation approaches for investments where an active market does not exist, including regular due
diligence of each Funds pricing vendors, a regular review of key inputs and assumptions, transactional back-testing or disposition analysis to compare unrealized gains and losses to realized gains and losses, reviews of missing or stale prices
and large movements in market values and reviews of any market related activity. The pricing of all Fair Value Assets is subsequently reported to the Board or a committee thereof on a quarterly basis.
Segregation and Collateralization: In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (SEC)
require that the Funds either deliver collateral or segregate assets in connection with certain investments (e.g., TOBs and financial futures contracts), the Funds will, consistent with SEC rules and/or certain interpretive letters issued by the
SEC, segregate collateral or designate on their books and records cash or liquid securities having a market value at least equal to the amount that would otherwise be required to be physically segregated. Furthermore, based on requirements and
agreements with certain exchanges and third party broker-dealers, a Fund engaging in such transactions may have requirements to deliver/deposit securities to/with an exchange or broker-dealer as collateral for certain investments.
Investment Transactions and Investment Income: For financial reporting purposes, investment transactions are recorded on the dates the transactions are
entered into (the trade dates). Realized gains and losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Interest income,
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52
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ANNUAL REPORT
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JULY 31, 2013
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Notes to Financial Statements (continued)
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including amortization and accretion of premiums and discounts on debt securities, is recognized on the accrual basis.
Dividends and Distributions: Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. The character and timing of dividends
and distributions are determined in accordance with federal income tax regulations, which may differ from US GAAP. Dividends and distributions to Preferred Shareholders are accrued and determined as described in Note 9.
Income Taxes: It is the Funds policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of their taxable income to their shareholders. Therefore, no federal income tax provision is required.
Each Fund files US federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on the Funds US federal tax returns remains open
for each of the four years ended July 31, 2013. The statutes of limitations on each Funds state and local tax returns may remain open for an additional year depending upon the jurisdiction. Management does not believe there are any
uncertain tax positions that require recognition of a tax liability.
Recent Accounting Standards: In December 2011, the Financial Accounting
Standards Board (the FASB) issued guidance that will expand current disclosure requirements on the offsetting of certain assets and liabilities. The new disclosures will be required for investments and derivative financial instruments
subject to master netting or similar agreements, which are eligible for offset in the Statements of Assets and Liabilities and will require an entity to disclose both gross and net information about such investments and transactions in the financial
statements. In January 2013, the FASB issued guidance that clarifies which investments and transactions are subject to the offsetting disclosure requirements. The scope of the disclosure requirements for offsetting will be limited to derivative
instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions. The guidance is effective for financial statements with fiscal years beginning on or after January 1, 2013, and
interim periods within those fiscal years. Management is evaluating the impact, if any, of this guidance on the Funds financial statement disclosures.
Deferred Compensation Plan: Under the Deferred Compensation Plan (the Plan) approved by each Funds Board, the independent Directors (Independent Directors) may defer a portion
of their annual complex-wide compensation. Deferred amounts earn an approximate return as though equivalent dollar amounts had been invested in common shares of certain other BlackRock Closed-End Funds selected by the Independent Directors. This has
the same economic effect for the Independent Directors as if the Independent Directors had invested the deferred amounts directly in certain other BlackRock Closed-End Funds.
The Plan is not funded and obligations thereunder represent general unsecured claims against the general assets of each Fund. Deferred compensation liabilities are included in officers and
directors fees payable in the Statements of Assets and Liabilities and will remain as a liability of the Funds until such amounts are distributed in accordance with the Plan.
Other: Expenses directly related to a Fund are charged to that Fund. Other operating expenses shared by several funds are pro rated among those funds on the basis of relative net assets or other appropriate
methods.
The Funds have an arrangement with the custodian whereby fees may be reduced by credits earned on uninvested cash balances, which, if
applicable, are shown as fees paid indirectly in the Statements of Operations. The custodian imposes fees on overdrawn cash balances, which can be offset by accumulated credits earned or may result in additional custody charges.
3. Securities and Other Investments:
Zero-Coupon Bonds: The Funds may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for
periodic interest payments. Zero-coupon bonds may experience greater volatility in market value than similar maturity debt obligations which provide for regular interest payments.
Forward Commitments and When-Issued Delayed Delivery Securities: The Funds may purchase securities on a when-issued basis and may purchase or sell securities on a forward commitment basis. Settlement of such
transactions normally occurs within a month or more after the purchase or sale commitment is made. The Funds may purchase securities under such conditions with the intention of actually acquiring them, but may enter into a separate agreement to sell
the securities before the settlement date. Since the value of securities purchased may fluctuate prior to settlement, the Funds may be required to pay more at settlement than the security is worth. In addition, the Funds are not entitled to any of
the interest earned prior to settlement. When purchasing a security on a delayed delivery basis, the Funds assume the rights and risks of ownership of the security, including the risk of price and yield fluctuations. In the event of default by the
counterparty, the Funds maximum amount of loss is the unrealized appreciation of unsettled when-issued transactions, which is shown in the Schedules of Investments.
Municipal Bonds Transferred to TOBs: The Funds leverage their assets through the use of TOBs. A TOB is a special purpose entity established by a third party sponsor, into which a fund, or an agent on behalf
of a fund, transfers municipal bonds into a trust (TOB Trust). Other funds managed by the investment advisor may also contribute municipal bonds to a TOB into which a Fund has contributed bonds. A TOB typically issues two classes of
beneficial interests: short-term floating rate certificates (TOB Trust Certificates), which are sold to third party investors, and residual certificates (TOB Residuals), which are generally issued to the participating funds
that contributed the municipal bonds to the TOB Trust. If multiple funds participate in the same TOB, the rights and obligations under the TOB Residual will be shared among the funds ratably in proportion to their participation.
The TOB Residuals held by a Fund include the right of a Fund (1) to cause the holders of a proportional share of the TOB Trust Certificates to tender
their certificates at par plus accrued interest upon the occurrence of certain mandatory tender events defined in the TOB agreements, and (2) to
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ANNUAL REPORT
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JULY 31, 2013
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53
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Notes to Financial Statements (continued)
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transfer, subject to a specified number of days prior notice, a corresponding share of the municipal bonds from the TOB to a Fund. The TOB may also be collapsed without the consent of a
Fund, as the TOB Residual holder, upon the occurrence of certain termination events as defined in the TOB agreements. Such termination events may include the bankruptcy or default of the municipal bond, a substantial downgrade in credit quality of
the municipal bond, the inability of the TOB to obtain renewal of the liquidity support agreement, a substantial decline in market value of the municipal bond and a judgment or ruling that interest on the municipal bond is subject to federal income
taxation. Upon the occurrence of a Termination Event, the TOB would generally be liquidated in full with the proceeds typically applied first to any accrued fees owed to the trustee, remarketing agent and liquidity provider, and then to the holders
of the TOB Trust Certificates up to par plus accrued interest owed on the TOB Trust Certificates, with the balance paid out to the TOB Residual holder. During the year ended July 31, 2013, no TOBs in which the Funds participated were terminated
without the consent of the Trusts. The cash received by the TOB from the sale of the TOB Trust Certificates, less transaction expenses, is paid to a Fund. The Fund typically invests the cash received in additional municipal bonds. Each Funds
transfer of the municipal bonds to a TOB Trust is accounted for as a secured borrowing; therefore, the municipal bonds deposited into a TOB are presented in the Funds Schedules of Investments and the TOB Trust Certificates are shown in other
liabilities in the Statements of Assets and Liabilities. The carrying amount of the Funds payable to the holder of the TOB Trust Certificates, as reported in Statements of Assets and Liabilities as TOB Trust Certificates, approximates its fair
value.
The Funds may invest in TOBs on either a non-recourse or recourse basis. TOB Trusts are typically supported by a liquidity facility
provided by a bank or other financial institution (the Liquidity Provider) that allows the holders of the TOB Trust Certificates to tender their certificates in exchange for payment from the Liquidity Provider of par plus accrued
interest on any business day prior to the occurrence of the termination events described above. When a Fund invests in TOBS on a non-recourse basis, and the Liquidity Provider is required to make a payment under the liquidity facility due to a
termination event, the Liquidity Provider will typically liquidate all or a portion of the municipal securities held in the TOB Trust and then fund, on a net basis, the balance, if any,) of the amount owed under the liquidity facility over the
liquidation proceeds (the Liquidation Shortfall). If a Fund invests in a TOB on a recourse basis, the Fund will typically enter into a reimbursement agreement with the Liquidity Provider where the Fund is required to repay the Liquidity
Provider the amount of any Liquidation Shortfall. As a result, a Fund investing in a recourse TOB will bear the risk of loss with respect to any Liquidation Shortfall. If multiple funds participate in any such TOB, these losses will be shared
ratably in proportion to their participation. The recourse TOB Trusts, if any, are identified in the Schedules of Investments.
Interest income,
including amortization and accretion of premiums and discounts, from the underlying municipal bonds is recorded by the Funds on an accrual basis. Interest expense incurred on the secured borrowing and other expenses related to remarketing,
administration and trustee services to a TOB are shown as interest expense, fees and amortization of offering costs in the Statements of Operations. The TOB Trust Certificates have interest rates that generally reset weekly and their holders have
the option to tender such certificates to the TOB for redemption at par at each reset date. At July 31, 2013, the aggregate value of the underlying municipal bonds transferred to TOBs, the related liability for TOB Trust Certificates and the
range of interest rates on the liability for TOB Trust Certificates were as follows:
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Underlying
Municipal Bonds
Transferred to TOBs
|
|
|
Liability
for TOB Trust
Certificates
|
|
|
Range of
Interest Rates
|
|
MUE
|
|
$
|
146,170,655
|
|
|
$
|
81,123,028
|
|
|
|
0.06% - 0.51%
|
|
MCA
|
|
$
|
382,690,580
|
|
|
$
|
188,184,586
|
|
|
|
0.06% - 0.14%
|
|
MYM
|
|
$
|
34,155,110
|
|
|
$
|
19,344,205
|
|
|
|
0.00% - 0.19%
|
|
MYN
|
|
$
|
203,103,234
|
|
|
$
|
108,614,961
|
|
|
|
0.06% - 0.36%
|
|
MYI
|
|
$
|
526,642,057
|
|
|
$
|
287,425,797
|
|
|
|
0.06% - 0.34%
|
|
For the year ended July 31, 2013, the Funds average TOB Trust Certificates outstanding and the daily weighted
average interest rate, including fees, were as follows:
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|
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|
Average TOB Trust
Certificates
Outstanding
|
|
|
Daily Weighted
Average
Interest Rate
|
|
MUE
|
|
$
|
87,215,191
|
|
|
|
0.69
|
%
|
MCA
|
|
$
|
201,272,535
|
|
|
|
0.66
|
%
|
MYM
|
|
$
|
17,000,288
|
|
|
|
0.64
|
%
|
MYN
|
|
$
|
113,197,395
|
|
|
|
0.80
|
%
|
MYI
|
|
$
|
262,503,992
|
|
|
|
0.65
|
%
|
Should short-term interest rates rise, the Funds investments in TOBs may adversely affect the Funds net
investment income and dividends to Common Shareholders. Also, fluctuations in the market value of municipal bonds deposited into the TOB Trust may adversely affect the Funds NAVs per share.
4. Derivative Financial Instruments:
The Funds
engage in various portfolio investment strategies using derivative contracts both to increase the returns of the Funds and/or to economically hedge their exposure to certain risks such as interest rate risk. These contracts may be transacted on an
exchange or OTC.
Financial Futures Contracts: The Funds purchase and/or sell financial futures contracts and options on financial futures
contracts to gain exposure to, or economically hedge against, changes in interest rates (interest rate risk), Financial futures contracts are agreements between the Funds and a counterparty to buy or sell a specific quantity of an underlying
instrument at a specified price and at a specified date. Depending on the terms of the particular contract, financial futures contracts are settled either through physical delivery of the underlying instrument on the settlement date or by payment of
a cash settlement amount on the settlement date. Upon entering into a financial futures contract, the Funds are required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on a
contracts size and risk profile. The initial margin deposit must then be maintained at an established level over the life of the contract. Securities deposited as initial margin are designated on the Schedules of Investments and cash deposited
is recorded on the Statements of Assets and Liabilities as cash pledged for financial futures contracts. Pursuant to the contract, the
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54
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ANNUAL REPORT
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JULY 31, 2013
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Notes to Financial Statements (continued)
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Funds agree 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 Funds as unrealized appreciation or depreciation. When the contract is closed, the Funds record 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. The use of financial futures contracts involves the risk of an imperfect correlation in the movements in the price of financial futures contracts, interest rates and the underlying assets.
Options: Certain Funds purchase and write call and put options to increase or decrease their exposure to underlying instruments (including interest rate risk
and/or, in the case of options written, to generate gains from options premiums. A call option gives the purchaser (holder) of the option the right (but not the obligation) to buy, and obligates the seller (writer) to sell (when the option is
exercised) the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. A put option gives the holder the right to sell and obligates the writer to buy the underlying instrument at the
exercise or strike price at any time or at a specified time during the option period. When the Funds purchase (write) an option, an amount equal to the premium paid (received) by the Funds is reflected as an asset (liability). The amount of the
asset (liability) is subsequently marked-to-market to reflect the current market value of the option purchased (written). When an instrument 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 instrument acquired or deducted from (or added to) the proceeds of the instrument sold. When an option expires (or the Funds enter into a closing transaction), the Funds realize 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 premiums received or paid). When the Funds write a call option, such option is covered, meaning that the Funds hold
the underlying instrument subject to being called by the option counterparty. When the Funds write a put option, such option is covered by cash in an amount sufficient to cover the obligation.
In purchasing and writing options, the Funds bear the risk of an unfavorable change in the value of the underlying instrument or the risk that the Funds may not be able to enter into a closing transaction
due to an illiquid market. Exercise of a written option could result in the Funds purchasing or selling a security at a price different from the current market value.
The following is a summary of the Funds derivative financial instruments categorized by risk exposure:
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|
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|
|
|
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|
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|
The Effect of Derivative
Financial Instruments in the Statements of Operations
Year Ended July 31, 2013
|
|
|
|
Net Realized Gain (Loss) From
|
|
|
|
MUE
|
|
|
MCA
|
|
|
MYM
|
|
|
MYN
|
|
|
MYI
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial futures contracts
|
|
$
|
1,182,538
|
|
|
$
|
906,969
|
|
|
$
|
100,309
|
|
|
$
|
376,545
|
|
|
$
|
670,353
|
|
Options
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193,373
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,182,538
|
|
|
$
|
906,969
|
|
|
$
|
100,309
|
|
|
$
|
183,172
|
|
|
$
|
670,353
|
|
|
|
|
|
|
1
Options purchased are
included in the net realized gain (loss) from investments.
For the year ended
July 31, 2013, the average quarterly balances of outstanding derivative financial instruments were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MUE
|
|
|
MCA
|
|
|
MYM
|
|
|
MYN
|
|
|
MYI
|
|
Financial future contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of contracts sold
|
|
|
80
|
|
|
|
128
|
|
|
|
14
|
|
|
|
64
|
|
|
|
109
|
|
Average notional value of contracts sold
|
|
$
|
10,702,090
|
|
|
$
|
16,915,000
|
|
|
$
|
1,833,691
|
|
|
$
|
9,138,707
|
|
|
$
|
14,502,832
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of option contracts purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,223
|
2
|
|
|
|
|
Average notional value of option contracts purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
191,094
|
2
|
|
|
|
|
|
2
|
|
Actual contract amount shown due to limited activity.
|
Counterparty Credit Risk: A derivative contract may suffer
a mark to market loss if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument. Losses can also occur if the counterparty does not perform under the contract.
With exchange traded purchased options and futures, there is less counterparty credit risk to the Funds since the exchange or clearinghouse, as counterparty
to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract;
therefore,
the credit risk is limited to failure of the clearinghouse. Additionally, credit risk exists in exchange traded futures with respect to initial and variation margin that is held in a brokers customer accounts. While brokers are required to
segregate customer margin from their own assets, in the event that a broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the broker for all its clients, typically the
shortfall would be allocated on a pro rata basis across all the brokers customers, potentially resulting in losses to the Funds.
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ANNUAL REPORT
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JULY 31, 2013
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55
|
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|
|
|
Notes to Financial Statements (continued)
|
|
|
5. Investment Advisory Agreement and Other Transactions with Affiliates:
The PNC Financial
Services Group, Inc. is the largest stockholder and an affiliate, for 1940 Act purposes, of BlackRock, Inc. (BlackRock).
Each Fund
entered into an Investment Advisory Agreement with BlackRock Advisors, LLC (the Manager), the Funds investment advisor, an indirect, wholly owned subsidiary of BlackRock, to provide investment advisory and administration services.
The Manager is responsible for the management of each Funds portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of each Fund. For such services, each Fund pays the
Manager a monthly fee at an annual rate of each Funds average daily net assets at the following annual rates:
|
|
|
|
|
MUE
|
|
|
0.55
|
%
|
MCA
|
|
|
0.50
|
%
|
MYM
|
|
|
0.50
|
%
|
MYN
|
|
|
0.50
|
%
|
MYI
|
|
|
0.50
|
%
|
Average daily net assets are the average daily value of each Funds total assets minus the sum of its accrued
liabilities.
The Manager voluntarily agreed to waive its investment advisory fees by the amount of investment advisory fees each Fund pays to the
Manager indirectly through its investment in affiliated money market funds. However, the Manager does not waive its investment advisory fees by the amount of investment advisory fees paid in connection with each Funds investment in other
affiliated investment companies, if any. These amounts are included in fees waived by Manager in the Statements of Operations. For the year ended July 31, 2013, the amounts waived were as follows:
|
|
|
|
|
MUE
|
|
$
|
3,302
|
|
MCA
|
|
$
|
9,840
|
|
MYM
|
|
$
|
997
|
|
MYN
|
|
$
|
9,190
|
|
MYI
|
|
$
|
6,693
|
|
The Manager voluntarily agreed to
waive MUEs investment advisory fee on the proceeds of Preferred Shares and TOBs that exceed 35% of total assets minus the sum of its accrued liabilities. This amount is included in fees waived by Manager in the Statements of Operations. For
the year ended July 31, 2013 the waiver was $197,593.
The Manager entered into a sub-advisory agreement with BlackRock Investment
Management, LLC (BIM), an affiliate of the Manager. The Manager pays BIM, for services it provides, a monthly fee that is a percentage of the investment advisory fees paid by each Fund to the Manager.
Certain officers and/Directors of the Funds are officers and/or directors of BlackRock or its affiliates. The Funds reimburse the Manager for a portion of
the compensation paid to the Funds Chief Compliance Officer, which is included in officer and directors in the Statements of Operations.
The Funds may purchase securities from, or sell securities to, an affiliated fund provided the affiliation is due solely to having a common investment
adviser, common officers, or common trustees. For the year ended July 31, 2013, the purchase and sale transactions from an affiliated fund in compliance with Rule 17a-7 under the 1940 Act were as follows:
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
Sales
|
|
MCA
|
|
|
|
|
|
$
|
8,036,875
|
|
6. Purchases and Sales:
Purchases and sales of investments excluding short-term securities for the year ended July 31, 2013, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
Sales
|
|
MUE
|
|
$
|
221,376,570
|
|
|
$
|
231,583,867
|
|
MCA
|
|
$
|
228,448,794
|
|
|
$
|
243,826,716
|
|
MYM
|
|
$
|
44,595,828
|
|
|
$
|
39,934,739
|
|
MYN
|
|
$
|
97,376,087
|
|
|
$
|
115,649,874
|
|
MYI
|
|
$
|
199,424,044
|
|
|
$
|
143,978,831
|
|
7. Income Tax Information:
US GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These
reclassifications have no effect on net assets or net asset values per share. The following permanent differences as of July 31, 2013 attributable to amortization methods on fixed income securities, non-deductible expenses, distributions
received from a regulated investment company, the reclassification of distributions and the sale of bonds received from tender option bond trusts were reclassified to the following accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MUE
|
|
|
MCA
|
|
|
MYM
|
|
|
MYN
|
|
|
MYI
|
|
Paid-in capital
|
|
$
|
(79,347
|
)
|
|
$
|
(11,322
|
)
|
|
$
|
(7,947
|
)
|
|
$
|
(15,051
|
)
|
|
$
|
(492,041
|
)
|
Undistributed net investment income
|
|
$
|
34,837
|
|
|
$
|
(188,395
|
)
|
|
$
|
2,030
|
|
|
$
|
(233,199
|
)
|
|
$
|
(567,721
|
)
|
Accumulated net realized loss
|
|
$
|
44,510
|
|
|
$
|
199,717
|
|
|
$
|
5,917
|
|
|
$
|
248,250
|
|
|
$
|
1,059,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
ANNUAL REPORT
|
|
JULY 31, 2013
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
The tax character of distributions paid during the fiscal years ended July 31, 2013 and July 31, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MUE
|
|
|
MCA
|
|
|
MYM
|
|
|
MYN
|
|
|
MYI
|
|
Tax-exempt income
1
|
|
|
7/31/13
|
|
|
$
|
19,163,782
|
|
|
$
|
33,161,559
|
|
|
$
|
10,957,626
|
|
|
$
|
36,363,648
|
|
|
$
|
62,440,835
|
|
|
|
|
7/31/12
|
|
|
|
20,882,325
|
|
|
|
31,356,352
|
|
|
|
10,640,020
|
|
|
|
34,539,953
|
|
|
|
59,767,679
|
|
Ordinary income
2
|
|
|
7/31/13
|
|
|
|
17,315
|
|
|
|
2,539
|
|
|
|
4,228
|
|
|
|
4,934
|
|
|
|
203,729
|
|
|
|
|
7/31/12
|
|
|
|
|
|
|
|
|
|
|
|
220,123
|
|
|
|
|
|
|
|
118,460
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7/31/13
|
|
|
$
|
19,181,097
|
|
|
$
|
33,164,098
|
|
|
$
|
10,961,854
|
|
|
$
|
36,368,582
|
|
|
$
|
62,644,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/31/12
|
|
|
$
|
20,882,325
|
|
|
$
|
31,356,352
|
|
|
$
|
10,860,143
|
|
|
$
|
34,539,953
|
|
|
$
|
59,886,139
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
The Funds designate these amounts paid during the fiscal year ended July 31, 2013, as exempt-interest dividends
|
|
2
|
|
Ordinary income consists primarily of taxable income recognized from market discount and net short-term capital gains. Additionally, all ordinary income
distributions are comprised of interest related dividends and qualified short-term capital dividends for non-US residents and are eligible for exemption from US withholding tax for nonresident aliens and foreign corporations.
|
As of July 31, 2013, the tax components of accumulated net earnings (losses) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MUE
|
|
|
MCA
|
|
|
MYM
|
|
|
MYN
|
|
|
MYI
|
|
Undistributed tax-exempt income
|
|
$
|
3,796,328
|
|
|
$
|
7,225,192
|
|
|
$
|
1,557,716
|
|
|
$
|
6,931,188
|
|
|
$
|
13,915,692
|
|
Undistributed ordinary income
|
|
|
227
|
|
|
|
|
|
|
|
7,765
|
|
|
|
85,858
|
|
|
|
3,993
|
|
Capital loss carryforwards
|
|
|
(9,398,712
|
)
|
|
|
(4,809,571
|
)
|
|
|
(968,448
|
)
|
|
|
(17,917,406
|
)
|
|
|
(80,078,998
|
)
|
Net unrealized gains (losses)
3
|
|
|
7,127,949
|
|
|
|
14,669,876
|
|
|
|
(2,540,549
|
)
|
|
|
(3,040,646
|
)
|
|
|
37,678,220
|
|
Qualified late-year losses
4
|
|
|
(2,973,765
|
)
|
|
|
|
|
|
|
(14,160
|
)
|
|
|
(440,281
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,447,973
|
)
|
|
$
|
17,085,497
|
|
|
$
|
(1,957,676
|
)
|
|
$
|
(14,381,287
|
)
|
|
$
|
(28,481,093
|
)
|
|
|
|
|
|
|
3
|
|
The difference between book-basis and tax-basis net unrealized gains (losses) was attributable primarily to the tax deferral of losses on wash sales and
straddles, amortization and accretion methods of premiums and discounts on fixed income securities, the deferral of compensation to Directors and the treatment of residual interests in tender option bond trusts.
|
|
4
|
|
The Funds have elected to defer certain qualified late-year losses and recognize such losses in the year ending July 31, 2014.
|
As of July 31, 2013, the Funds had capital loss carryforwards available to offset future realized capital gains through the
indicated expiration dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expires July 31,
|
|
MUE
|
|
|
MCA
|
|
|
MYM
|
|
|
MYN
|
|
|
MYI
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,107,506
|
|
|
$
|
1,213,491
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,979,955
|
|
2016
|
|
|
|
|
|
|
|
|
|
$
|
714,516
|
|
|
|
2,330,288
|
|
|
|
25,066,903
|
|
2017
|
|
$
|
3,385,582
|
|
|
|
|
|
|
|
253,932
|
|
|
|
2,295,738
|
|
|
|
21,251,301
|
|
2018
|
|
|
6,013,130
|
|
|
$
|
4,809,571
|
|
|
|
|
|
|
|
3,370,191
|
|
|
|
26,460,028
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,287,746
|
|
|
|
|
|
No expiration date
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,525,937
|
|
|
|
107,320
|
|
|
|
|
|
|
Total
|
|
$
|
9,398,712
|
|
|
$
|
4,809,571
|
|
|
$
|
968,448
|
|
|
$
|
17,917,406
|
|
|
$
|
80,078,998
|
|
|
|
|
|
|
|
5
|
|
Must be utilized prior to losses subject to expiration.
|
During the year ended July 31, 2013, the Funds listed
below utilized the following amounts of their respective capital loss carryforward:
|
|
|
|
|
MUE
|
|
$
|
4,657,548
|
|
MCA
|
|
$
|
5,250,908
|
|
MYM
|
|
$
|
108,551
|
|
MYI
|
|
$
|
6,117,692
|
|
As of July 31, 2013, gross unrealized appreciation and gross unrealized depreciation based on cost for federal income
tax purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MUE
|
|
|
MCA
|
|
|
MYM
|
|
|
MYN
|
|
|
MYI
|
|
Tax cost
|
|
$
|
429,589,544
|
|
|
$
|
652,594,618
|
|
|
$
|
247,430,093
|
|
|
$
|
766,480,871
|
|
|
$
|
1,237,405,648
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
17,846,714
|
|
|
$
|
25,770,335
|
|
|
$
|
8,128,207
|
|
|
$
|
20,530,535
|
|
|
$
|
61,416,978
|
|
Gross unrealized depreciation
|
|
|
(10,714,678
|
)
|
|
|
(10,928,093
|
)
|
|
|
(10,550,268
|
)
|
|
|
(23,286,292
|
)
|
|
|
(23,445,774
|
)
|
|
|
|
|
|
Net unrealized appreciation (depreciation)
|
|
$
|
7,132,036
|
|
|
$
|
14,842,242
|
|
|
$
|
(2,422,061
|
)
|
|
$
|
(2,755,757
|
)
|
|
$
|
37,971,204
|
|
|
|
|
|
|
8. Concentration, Market and Credit Risk:
MCA, MYM and MYN invest a substantial amount of their assets in issuers located in a single state or limited number of states. Please see the
Schedules of Investments for concentrations in specific states.
Many municipalities insure repayment of their bonds, which may reduce the
potential for loss due to credit risk. The market value of these bonds may fluctuate for other reasons, including market perception of the value of such insurance, and there is no guarantee that the insurer will meet its obligation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANNUAL REPORT
|
|
JULY 31, 2013
|
|
57
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
In the normal course of business, the Funds invest in securities and enter into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet
all its obligations (issuer credit risk). The value of securities held by the Funds may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Funds; conditions affecting the general
economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Funds may be exposed to counterparty credit risk, or the
risk that an entity with which the Funds have unsettled or open transactions may fail to or be unable to perform on its commitments. The Funds manage counterparty credit risk by entering into transactions only with counterparties that they believe
have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Funds to market, issuer and counterparty credit risks, consist principally of
financial instruments and receivables due from counterparties The extent of the Funds exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally approximated by their value recorded in the
Statements of Assets and Liabilities, less any collateral held by the Funds.
The Funds may hold a significant amount of bonds subject to calls by
the issuers at defined dates and prices. When bonds are called by issuers and the Funds reinvest the proceeds received, such investments may be in securities with lower yields than the bonds originally held, and correspondingly, could adversely
impact the yield and total return performance of a fund.
As of July 31, 2013, MUE invested a significant portion of their assets in
securities in the county/city/special district/school district, transportation and utilities sectors. MYN invested a significant portion of their assets in securities in the county/city/special district/school district and transportation sectors.
MCA invested a significant portion of its assets in securities in the county/city/special district/school district and utilities sectors. MYM invested a significant portion of its assets in securities in the county/city/special district/school
district sector. MYI invested a significant portion of its assets in securities in the transportation sector. Changes in economic conditions affecting the county/city/special district/ school district, transportation and utilities sectors would have
a greater impact on the Funds and could affect the value, income and/or liquidity of positions in such securities.
9. Capital Share
Transactions:
Each Fund is authorized to issue 200 million shares, all of which were initially classified as Common Shares. The par
value for each Funds Common Shares is $0.10. The par value for each Funds Preferred Shares outstanding, including AMPS, is $0.10. The Board is authorized, however, to reclassify any unissued Common Shares to Preferred Shares, including
AMPS, without approval of Common Shareholders.
Common Shares
For the years shown, shares issued and outstanding increased by the following amounts as a result of dividend reinvestment:
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
July 31, 2013
|
|
|
Year Ended
July 31, 2012
|
|
MUE
|
|
|
48,061
|
|
|
|
30,480
|
|
MCA
|
|
|
35,451
|
|
|
|
|
|
MYM
|
|
|
5,323
|
|
|
|
23,376
|
|
MYN
|
|
|
126,457
|
|
|
|
6,634
|
|
MYI
|
|
|
221,596
|
|
|
|
109,295
|
|
Preferred Shares
Each
Funds Preferred Shares rank prior to the Funds Common Shares as to the payment of dividends by the Fund and distribution of assets upon dissolution or liquidation of the Fund. The 1940 Act prohibits the declaration of any dividend on the
Funds Common Shares or the repurchase of the Funds Common Shares if the Funds fail to maintain the asset coverage of at least 200% of the liquidation preference of the outstanding Preferred Shares. In addition, pursuant to the Preferred
Shares governing instrument, the Funds are restricted from declaring and paying dividends on classes of shares ranking junior to or on parity with the Preferred Shares or repurchasing such shares if the Funds fail to declare and pay dividends
on the Preferred Shares, redeem any Preferred Shares required to be redeemed under the Preferred Shares governing instrument or comply with the basic maintenance amount requirement of the rating agencies then rating the Preferred Shares.
The holders of Preferred Shares have voting rights equal to the holders of Common Shares (one vote per share) and will vote together with holders of Common
Shares (one vote per share) as a single class. However, the holders of Preferred Shares, voting as a separate class, are also entitled to elect two Directors for each Fund. In addition, the 1940 Act requires that along with approval by shareholders
that might otherwise be required, the approval of the holders of a majority of any outstanding Preferred Shares, voting separately as a class would be required to (a) adopt any plan of reorganization that would adversely affect the Preferred
Shares, (b) change a Funds sub-classification as a closed-end investment company or change its fundamental investment restrictions or (c) change its business so as to cease to be an investment company.
VRDP Shares
MCA, MYM, MYN and MYI (collectively, the
VRDP Funds), have issued Series W-7 VRDP Shares, $100,000 liquidation value per share, in a privately negotiated offering. The VRDP Shares were offered to qualified institutional buyers as defined pursuant to Rule 144A under the
Securities Act of 1933, as amended, (the Securities Act) and include a liquidity feature, pursuant to a liquidity agreement, that allows the holders of VRDP Shares to have their shares purchased by the liquidity provider in the event of
a failed remarketing. The VRDP Funds are required to redeem the VRDP Shares owned by the liquidity provider after six months of continuous, unsuccessful remarketing. Upon the occurrence of the first unsuccessful remarketing, the VRDP Funds are
required to segregate liquid assets to fund the redemption. The VRDP Shares are subject to certain restrictions on transfer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
ANNUAL REPORT
|
|
JULY 31, 2013
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
The VRDP Shares outstanding as of July 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue
Date
|
|
|
Shares
Issued
|
|
|
Aggregate
Principal
|
|
|
Maturity
Date
|
|
MCA
|
|
|
4/21/11
|
|
|
|
1,665
|
|
|
$
|
166,500,000
|
|
|
|
5/01/41
|
|
MYM
|
|
|
5/19/11
|
|
|
|
873
|
|
|
$
|
87,300,000
|
|
|
|
6/01/41
|
|
MYN
|
|
|
4/21/11
|
|
|
|
2,477
|
|
|
$
|
247,700,000
|
|
|
|
5/01/41
|
|
MYI
|
|
|
5/19/11
|
|
|
|
3,564
|
|
|
$
|
356,400,000
|
|
|
|
6/01/41
|
|
Each VRDP Fund entered into a fee agreement with the liquidity provider that required a per annum liquidity fee payable to
the liquidity provider. These fees, if applicable, are shown as liquidity fees in the Statements of Operations.
The fee agreement between each
VRDP Fund and the liquidity provider is scheduled to expire on July 9, 2015 unless renewed or terminated in advance.
In the event the fee
agreement is not renewed or is terminated in advance, and the VRDP Funds do not enter into a fee agreement with an alternate liquidity provider, the VRDP Shares will be subject to mandatory purchase by the liquidity provider prior to the termination
of the fee agreement. The VRDP Funds are required to redeem any VRDP Shares purchased by the liquidity provider six months after the purchase date. Immediately after the purchase of any VRDP Shares by the liquidity provider, the VRDP Funds are
required to begin to segregate liquid assets with the VRDP Funds custodians to fund the redemption. There is no assurance the VRDP Funds will replace such redeemed VRDP Shares with any other preferred shares or other form of leverage.
The VRDP Funds are required to redeem their VRDP Shares on the maturity date, unless earlier redeemed or repurchased. Six months prior to the
maturity date, the VRDP Funds are required to begin to segregate liquid assets with the Funds custodians to fund the redemption. In addition, VRDP Funds are required to redeem certain of their outstanding VRDP Shares if they fail to maintain
certain asset coverage, basic maintenance amount or leverage requirements.
Subject to certain conditions, VRDP Shares may be redeemed, in whole
or in part, at any time at the option of VRDP Funds. The redemption price per VRDP Share is equal to the liquidation value per share plus any outstanding unpaid dividends.
Dividends on the VRDP Shares are payable monthly at a variable rate set weekly by the remarketing agent. Such dividend rates are generally based upon a spread over a base rate and cannot exceed a maximum
rate. In the event of a failed remarketing, the dividend rate of the VRDP Shares will be reset to a maximum rate. The maximum rate is determined based on, among other things, the long-term preferred share rating assigned to the VRDP Shares and the
length of time that the VRDP Shares fail to be remarketed. At the date of issuance, the VRDP Shares were assigned a long-term rating of Aaa from Moodys and AAA from Fitch. In May 2012, Moodys completed a review of its methodology for
rating securities issued by registered closed-end funds. As of July 31, 2013, the VRDP Shares were assigned a long-term rating of Aa2 for MCA, MYM and MYN and Aa1 for MYI from Moodys under its new ratings methodology. The VRDP Shares
continue to be assigned a long-term rating of AAA from Fitch.
The short-term ratings on the VRDP Shares are directly related to the short-term
ratings of the liquidity provider for such VRDP Shares. Changes in the credit quality of the liquidity provider could cause a change in the short-term credit ratings of the VRDP Shares as rated by Moodys, Fitch and/or S&P. A change in the
short-term credit rating of the liquidity provider or the VRDP Shares may adversely affect the dividend rate paid on such shares, although the dividend rate paid on the VRDP Shares is not directly related based upon either short-term rating. The
liquidity provider may be terminated prior to the scheduled termination date if the liquidity provider fails to maintain short-term debt ratings in one of the two highest rating categories. The short-term ratings on the VRDP Shares were withdrawn by
Moodys, Fitch and/or S&P at the commencement of the special rate period, as described below.
For financial reporting purposes, VRDP
Shares are considered debt of the issuer; therefore, the liquidation value, which approximates fair value, of VRDP Shares is recorded as a liability in the Statements of Assets and Liabilities. Unpaid dividends are included in interest expense and
fees payable in the Statements of Assets and Liabilities, and the dividends accrued and paid on the VRDP Shares are included as a component of interest expense, fees and amortization of offering costs in the Statements of Operations. VRDP Shares are
treated as equity for tax purposes. Dividends paid to holders of VRDP Shares are generally classified as tax-exempt income for tax-reporting purposes.
The VRDP Funds may incur remarketing fees of 0.10% on the aggregate principal amount of all VRDP Shares, which, if any, are included in remarketing fees on Preferred Shares in the Statements of Operations.
All of the VRDP Shares successfully remarketed prior to the beginning of the special rate period.
The annualized dividend rates for the VRDP
Shares for the year ended July 31, 2013 were as follows:
|
|
|
|
|
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|
Rate
|
|
MCA
|
|
|
1.08
|
%
|
MYM
|
|
|
1.08
|
%
|
MYN
|
|
|
1.08
|
%
|
MYI
|
|
|
1.08
|
%
|
VRDP Shares issued and outstanding remained constant for the year ended July 31, 2013.
On June 21, 2012, the VRDP Funds announced a special rate period for a three-year term ending June 24, 2015 with respect to their VRDP Shares. The
liquidity and fee agreements remain in effect for the duration of the special rate period and the VRDP shares are still subject to mandatory redemption by the VRDP Funds on maturity date. The VRDP Shares will not be remarketed or subject to optional
or mandatory tender events during such time. During the special rate period, the VRDP Funds are required to maintain the same asset coverage, basic maintenance amount and leverage requirements for the VRDP Shares. The VRDP Funds will not pay any
liquidity and remarketing fees during the special rate period and instead will pay dividends monthly based on the sum of the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index and a percentage per annum based on the
long-term ratings assigned to the VRDP Shares. The short-term ratings were withdrawn by
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ANNUAL REPORT
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JULY 31, 2013
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59
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Notes to Financial Statements (continued)
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Moodys, Fitch and/or S&P. Short-term ratings may be re-assigned upon the termination of the special rate period when the VRDP Shares revert back to remarketable securities.
If the VRDP Funds redeem the VRDP Shares on a date that is one year or more before the end of the special rate period and the VRDP Shares are rated above
A1/A by Moodys and Fitch respectively, then such redemption is subject to a redemption premium (up to 3% of the liquidation preference) payable to the holder of the VRDP Shares based on the time remaining in the special rate period, subject to
certain exceptions for redemptions that are required to maintain minimum asset coverage requirements. After June 24, 2015, the holder of the VRDP Shares and the VRDP Funds may mutually agree to extend the special rate period. If the special
rate period is not extended, the VRDP Shares will revert back to remarketable securities and will be remarketed and available for purchase by qualified institutional investors.
VMTP Shares
MUE has issued Series W-7 VMTP Shares, $100,000 liquidation value per share, in a privately
negotiated offering and sale of VMTP Shares exempt from registration under the Securities Act.
The VMTP Shares outstanding as of July 31,
2013 were as follows:
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Issue
Date
|
|
|
Shares
Issued
|
|
|
Aggregate
Principal
|
|
|
Term
Date
|
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MUE
|
|
|
12/16/11
|
|
|
|
1,310
|
|
|
$
|
131,000,000
|
|
|
|
1/02/15
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|
MUE is required to redeem its VMTP Shares on the term date, unless earlier redeemed or repurchased or unless extended. There
is no assurance that the term of the Funds VMTP Shares will be extended or that the Funds VMTP Shares will be replaced with any other preferred shares or other form of leverage upon the redemption or repurchase of the VMTP Shares. Six
months prior to term date, the VMTP Fund is required to begin to segregate liquid assets with the Funds custodian to fund the redemption. In addition, the VMTP Fund is required to redeem certain of its outstanding VMTP Shares if it fails to
maintain certain asset coverage, basic maintenance amount or leverage requirements.
Subject to certain conditions, the Funds VMTP Shares
may be redeemed, in whole or in part, at any time at the option of the Fund. The redemption price per VMTP Share is equal to the liquidation value per share plus any outstanding unpaid dividends and applicable redemption premium. If the Fund redeems
the VMTP Shares on a date that is one year or more prior to the term date and the VMTP Shares are rated above A1/A+ by Moodys and Fitch, respectively, then such redemption is subject to a prescribed redemption premium (up to 3% of the
liquidation preference) payable to the holder of the VMTP Shares based on the time remaining to the term date, subject to certain exceptions for redemptions that are required to maintain minimum asset coverage requirements. The VMTP Shares are
subject to certain restrictions on transfer, and the Fund may also be required to register the VMTP Shares for sale under the Securities Act under certain circumstances. In addition, amendments to the VMTP governing document generally require the
consent of the holders of VMTP Shares.
Dividends on the VMTP Shares are declared daily and payable monthly at a variable rate set weekly at a
fixed rate spread to the SIFMA Municipal Swap Index. The fixed spread is determined based on the long-term preferred share rating assigned to the VMTP Shares by Moodys and Fitch. At the date of issuance, the VMTP Shares were assigned long-term
ratings of Aaa from Moodys and AAA from Fitch. In May 2012, Moodys completed a review of its methodology for rating securities issued by registered closed-end funds. As of July 31, 2013, the VMTP Shares were assigned a long-term
rating of Aa1 from Moodys under its new rating methodology. The VMTP Shares continue to be assigned a long-term rating of AAA from Fitch. The dividend rate on the VMTP Shares is subject to a step-up spread if the Fund fails to comply with
certain provisions, including, among other things, the timely payment of dividends, redemptions or gross-up payments, and maintaining certain asset coverage and leverage requirements.
The average annualized dividend rate of the VMTP Shares for the year ended July 31, 2013 for MUE was 1.13%.
For financial reporting purposes, VMTP Shares are considered debt of the issuer; therefore the liquidation value, which approximates fair value, of VMTP Shares is recorded as a liability in the Statements of
Assets and Liabilities. Unpaid dividends are included in interest expense and fees payable in the Statements of Assets and Liabilities, and the dividends paid on the VMTP Shares are included as a component of interest expense, fees and amortization
of offering costs in the Statements of Operations. VMTP Shares are treated as equity for tax purposes. Dividends paid to holders of VMTP Shares are generally classified as tax-exempt income for tax-reporting purposes.
VMTP Shares issued and outstanding remained constant for the year ended July 31, 2013.
Offering Costs: The Funds incurred costs in connection with the issuance of VRDP Shares and/or VMTP Shares. For VRDP Shares, these costs were recorded as a deferred charge and will be amortized over the
30-year life of the VRDP Shares with the exception of upfront fees paid to the liquidity provider, which were amortized over the life of the liquidity agreement. For VMTP Shares, these costs were recorded as a deferred charge and will be amortized
over the 3-year life of the VMTP Shares. Amortization of these costs is included in interest expense, fees and amortization of offering costs in the Statements of Operations.
AMPS
The AMPS were redeemable at the option of MUE, in whole or in part, on any dividend payment date
at their liquidation preference per share plus any accumulated and unpaid dividends whether or not declared. The AMPS were also subject to mandatory redemption at their liquidation preference plus any accumulated and unpaid dividends, whether or not
declared, if certain requirements relating to the composition of the assets and liabilities of MUE, as set forth in MUEs Articles of Supplementary were not satisfied.
From February 13, 2008 to the redemption date listed below, the AMPS of the Funds failed to clear any of their auctions. A failed auction was not an event of default for the Funds, but it had negative
impact on the
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60
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ANNUAL REPORT
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JULY 31, 2013
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Notes to Financial Statements (concluded)
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liquidity of AMPS. A failed auction occurs when there are more sellers of a funds AMPS than buyers.
As of July 31, 2013, the Funds did not have any AMPS outstanding.
During the year ended
July 31, 2012, MUE announced the following redemptions of AMPS at a price of $25,000 per share plus any accrued and unpaid dividends through the redemption date:
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Series
|
|
|
Redemption
Date
|
|
|
Shares
Redeemed
|
|
|
Aggregate
Principal
|
|
MUE
|
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|
A
|
|
|
|
1/06/12
|
|
|
|
1,345
|
|
|
$
|
33,625,000
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|
|
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B
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|
|
|
1/05/12
|
|
|
|
1,345
|
|
|
$
|
33,625,000
|
|
|
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|
C
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|
|
|
1/11/12
|
|
|
|
2,550
|
|
|
$
|
63,750,000
|
|
MUE financed the AMPS redemptions with the proceeds received from the issuance of VMTP shares of $131,000,000.
10. Subsequent Events:
Managements
evaluation of the impact of all subsequent events on the Funds financial statements was completed through the date the financial statements were issued and the following items were noted:
Each Fund paid a net investment income dividend on September 3, 2013 to Common Shareholders of record on August 15, 2013:
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|
|
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|
Common
Dividend
Per Share
|
|
MUE
|
|
$
|
0.0705
|
|
MCA
|
|
$
|
0.0760
|
|
MYM
|
|
$
|
0.0690
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MYN
|
|
$
|
0.0710
|
|
MYI
|
|
$
|
0.0720
|
|
Additionally, the Funds declared a net investment income dividend on September 3, 2013 payable to Common Shareholders of
record on September 16, 2013 for the same amounts noted above.
The dividends declared on VMTP or VRDP Shares for the period August 1,
2013 to August 31, 2013 were as follows:
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|
|
|
|
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|
|
Series
|
|
|
Dividends
Declared
|
|
MUE VMTP Shares
|
|
|
W-7
|
|
|
$
|
117,433
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|
MCA VRDP Shares
|
|
|
W-7
|
|
|
$
|
151,401
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|
MYM VRDP Shares
|
|
|
W-7
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|
|
$
|
79,383
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|
MYN VRDP Shares
|
|
|
W-7
|
|
|
$
|
225,237
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|
MYI VRDP Shares
|
|
|
W-7
|
|
|
$
|
324,080
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ANNUAL REPORT
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JULY 31, 2013
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61
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Report of Independent Registered Public Accounting Firm
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|
|
To the Shareholders and Board of Directors of
BlackRock MuniHoldings Quality Fund II, Inc.,
BlackRock MuniYield California Quality Fund, Inc.,
BlackRock MuniYield Michigan Quality Fund II, Inc.,
BlackRock MuniYield New York Quality
Fund, Inc.,
and BlackRock MuniYield Quality Fund III, Inc.:
We have audited the accompanying statements of assets and liabilities of BlackRock MuniHoldings Quality Fund II, Inc., BlackRock MuniYield California Quality Fund, Inc., BlackRock MuniYield Michigan Quality
Fund II, Inc., BlackRock MuniYield New York Quality Fund, Inc., and BlackRock MuniYield Quality Fund III, Inc. (collectively, the Funds), including the schedules of investments, as of July 31, 2013, and the related statements of
operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Funds management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Funds are not required to have, nor were we engaged to perform, an audit of their
internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Funds internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of July 31, 2013, by
correspondence with the custodians and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial positions of
BlackRock MuniHoldings Quality Fund II, Inc., BlackRock MuniYield California Quality Fund, Inc., BlackRock MuniYield Michigan Quality Fund II, Inc., BlackRock MuniYield New York Quality Fund, Inc., and BlackRock MuniYield Quality Fund III, Inc. as
of July 31, 2013, the results of their operations and their cash flows for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period
then ended, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
September 25, 2013
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62
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ANNUAL REPORT
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JULY 31, 2013
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|
Disclosure of Investment Advisory Agreements
and Sub-Advisory Agreements
|
The Board of Directors
(each, a Board, collectively, the Boards, and the members of which are referred to as Board Members) of BlackRock MuniHoldings Quality Fund II, Inc. (MUE), BlackRock MuniYield California Quality Fund,
Inc. (MCA), BlackRock MuniYield Michigan Quality Fund II, Inc. (MYM), BlackRock MuniYield New York Quality Fund, Inc. (MYN) and BlackRock MuniYield Quality Fund III, Inc. (MYI and together with MUE,
MCA, MYM and MYN, each a Fund, and, collectively, the Funds) met in person on April 18, 2013 (the April Meeting) and June 4-5, 2013 (the June Meeting) to consider the approval of each
Funds investment advisory agreement (each, an Advisory Agreement) with BlackRock Advisors, LLC (the Manager), each Funds investment advisor. The Board of each Fund also considered the approval of the sub-advisory
agreement (each, a Sub-Advisory Agreement) among the Manager, BlackRock Investment Management, LLC (the Sub-Advisor), and its Fund. The Manager and the Sub-Advisor are referred to herein as BlackRock. The Advisory
Agreements and the Sub-Advisory Agreements are referred to herein as the Agreements.
Activities and Composition of the Board
Each Board consists of eleven individuals, nine of whom are not interested persons of such Fund as defined in the Investment
Company Act of 1940 (the 1940 Act) (the Independent Board Members). The Board Members are responsible for the oversight of the operations of the Funds and perform the various duties imposed on the directors of investment
companies by the 1940 Act. The Independent Board Members have retained independent legal counsel to assist them in connection with their duties. The Chairman of each Board is an Independent Board Member. Each Board has established six standing
committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee, a Performance Oversight Committee, an Executive Committee, and a Leverage Committee, each of which is chaired by an Independent Board Member and composed
of Independent Board Members (except for the Executive Committee and the Leverage Committee, each of which also has one interested Board Member).
The Agreements
Pursuant to the 1940 Act, the
Boards are required to consider the continuation of the Agreements on an annual basis. The Boards have four quarterly meetings per year, each extending over two days, and a fifth one-day meeting to consider specific information surrounding the
consideration of renewing the Agreements. In connection with this process, the Boards assessed, among other things, the nature, scope and quality of the services provided to the Funds by BlackRock, its personnel and its affiliates, including
investment management, administrative and shareholder services, oversight of fund accounting and custody, marketing services, risk oversight, compliance and assistance in meeting applicable legal and regulatory requirements.
The Boards, acting directly and through their respective committees, considered at each of their meetings, and from time to time as appropriate, factors that
are relevant to their annual consideration of the renewal of the Agreements, including the services and support provided by BlackRock to the Funds and their shareholders. Among the matters the Boards considered were: (a) investment performance
for one-year, three-year, five-year and/or since inception periods, as applicable, against peer funds, and applicable benchmarks, if any, as well as senior managements and portfolio managers analysis of the reasons for any
over-performance or underperformance against their peers and/or benchmark, as applicable; (b) fees, including advisory, administration, if applicable, and other amounts paid to BlackRock and its affiliates by the Funds for services such as call
center and fund accounting; (c) Fund operating expenses and how BlackRock allocates expenses to the Funds; (d) the resources devoted to, risk oversight of, and compliance reports relating to, implementation of the Funds investment
objectives, policies and restrictions; (e) the Funds compliance with their Code of Ethics and other compliance policies and procedures; (f) the nature, cost and character of non-investment management services provided by BlackRock
and its affiliates; (g) BlackRocks and other service providers internal controls and risk and compliance oversight mechanisms; (h) BlackRocks implementation of the proxy voting policies approved by the Boards;
(i) execution quality of portfolio transactions; (j) BlackRocks implementation of the Funds valuation and liquidity procedures; (k) an analysis of management fees for products with similar investment objectives across the
open-end fund, closed-end fund and institutional account product channels, as applicable; (l) BlackRocks compensation methodology for its investment professionals and the incentives it creates; and (m) periodic updates on
BlackRocks business.
The Boards have engaged in an ongoing strategic review with BlackRock of opportunities to consolidate funds and of
BlackRocks commitment to investment performance. In addition, the Boards requested and BlackRock provided an analysis of fair valuation and stale pricing policies. BlackRock also furnished information to the Boards in response to specific
questions. These questions covered issues such as BlackRocks profitability, investment performance and management fee levels. The Boards further considered the importance of: (i) organizational and structural variables to investment
performance; (ii) rates of portfolio turnover; (iii) BlackRocks performance accountability for portfolio managers; (iv) marketing support for the funds; (v) services provided to the Funds by BlackRock affiliates; and
(vi) BlackRocks oversight of relationships with third party service providers.
The Board of each Trust considered BlackRocks
efforts during the past year with regard to refinancing outstanding AMPS, as well as ongoing time and resources devoted to other forms of preferred shares and alternative leverage. As of the date of this report, the Funds have redeemed 100% of their
outstanding AMPS.
Board Considerations in Approving the Agreements
The Approval Process: Prior to the April Meeting, the Boards requested and received materials specifically relating to the
Agreements. The Boards are engaged in a process with its independent legal counsel and BlackRock to review the nature and scope of the information provided to better assist their deliberations. The materials provided in connection with the April
Meeting included (a) information independently compiled and prepared by Lipper, Inc. (Lipper) on Fund fees and expenses as compared with a peer group of funds as determined by Lipper (Expense Peers) and the investment
performance of the Funds as compared with a peer group of funds as determined by Lipper
1
and a customized peer
1
|
|
Lipper ranks funds in quartiles, ranging from first to fourth, where first is the most desirable quartile position and fourth is the least desirable.
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ANNUAL REPORT
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JULY 31, 2013
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63
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Disclosure of Investment Advisory Agreements and Sub-Advisory Agreements (continued)
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group selected by BlackRock; (b) information on the profits realized by BlackRock and its affiliates pursuant to the Agreements and a discussion of fall-out benefits to BlackRock and its
affiliates; (c) a general analysis provided by BlackRock concerning investment management fees charged to other clients, such as institutional clients and open-end funds, under similar investment mandates, as applicable; (d) review of
non-management fees; (e) the existence, impact and sharing of potential economies of scale; (f) a summary of aggregate amounts paid by each Fund to BlackRock and (g) if applicable, a comparison of management fees to similar BlackRock
closed-end funds, as classified by Lipper.
At the April Meeting, the Boards reviewed materials relating to their consideration of the Agreements.
As a result of the discussions that occurred during the April Meeting, and as a culmination of the Boards year-long deliberative process, the Boards presented BlackRock with questions and requests for additional information. BlackRock
responded to these requests with additional written information in advance of the June Meeting.
At the June Meeting, each Board, including the
Independent Board Members, unanimously approved the continuation of the Advisory Agreement between the Manager and its Fund, and the Sub-Advisory Agreement among the Manager, the Sub-Advisor, and its Fund, each for a one-year term ending
June 30, 2014. In approving the continuation of the Agreements, the Boards considered: (a) the nature, extent and quality of the services provided by BlackRock; (b) the investment performance of the Funds and BlackRock; (c) the
advisory fee and the cost of the services and profits to be realized by BlackRock and its affiliates from their relationship with the Funds; (d) the Funds costs to investors compared to the costs of Expense Peers and performance compared
to the relevant performance comparison as previously discussed; (e) economies of scale; (f) fall-out benefits to BlackRock as a result of its relationship with the Funds; and (g) other factors deemed relevant by the Board Members.
The Boards also considered other matters they deemed important to the approval process, such as payments made to BlackRock or its affiliates
relating to securities lending, services related to the valuation and pricing of Fund portfolio holdings, direct and indirect benefits to BlackRock and its affiliates from their relationship with the Funds and advice from independent legal counsel
with respect to the review process and materials submitted for the Boards review. The Boards noted the willingness of BlackRock personnel to engage in open, candid discussions with the Boards. The Boards did not identify any particular
information as determinative, and each Board Member may have attributed different weights to the various items considered.
A. Nature, Extent and
Quality of the Services Provided by BlackRock: The Boards, including the Independent Board Members, reviewed the nature, extent and quality of services provided by BlackRock, including the investment advisory services and the resulting performance
of the Funds. Throughout the year, the Boards compared Fund performance to the performance of a comparable group of closed-end funds and/or the performance of a relevant benchmark, if any. The Boards met with BlackRocks senior management
personnel responsible for investment operations, including the senior investment officers. Each Board also reviewed the materials provided by its Funds portfolio management team discussing the Funds performance and the Funds
investment objective, strategies and outlook.
The Boards considered, among other factors, with respect to BlackRock: the number, education and
experience of investment personnel generally and their Funds portfolio management teams; investments by portfolio managers in the funds they manage; portfolio trading capabilities; use of technology; commitment to compliance; credit analysis
capabilities; risk analysis and oversight capabilities; and the approach to training and retaining portfolio managers and other research, advisory and management personnel. The Boards engaged in a review of BlackRocks compensation structure
with respect to their Funds portfolio management teams and BlackRocks ability to attract and retain high-quality talent and create performance incentives.
In addition to advisory services, the Boards considered the quality of the administrative and other non-investment advisory services provided to the Funds. BlackRock and its affiliates provide the Funds with
certain services (in addition to any such services provided to the Funds by third parties) and officers and other personnel as are necessary for the operations of the Funds. In particular, BlackRock and its affiliates provide the Funds with the
following administrative services including, among others: (i) preparing disclosure documents, such as the prospectus, the summary prospectus (as applicable) and the statement of additional information in connection with the initial public
offering and periodic shareholder reports; (ii) preparing communications with analysts to support secondary market trading of the Funds; (iii) assisting with daily accounting and pricing; (iv) preparing periodic filings with
regulators and stock exchanges; (v) overseeing and coordinating the activities of other service providers; (vi) organizing Board meetings and preparing the materials for such Board meetings; (vii) providing legal and compliance
support; (viii) furnishing analytical and other support to assist the Boards in their consideration of strategic issues such as the merger or consolidation of certain closed-end funds; and (ix) performing other administrative functions
necessary for the operation of the Funds, such as tax reporting, fulfilling regulatory filing requirements and call center services. The Boards reviewed the structure and duties of BlackRocks fund administration, shareholder services, legal
and compliance departments and considered BlackRocks policies and procedures for assuring compliance with applicable laws and regulations.
B. The Investment Performance of the Funds and BlackRock: Each Board, including the Independent Board Members, also reviewed and considered the performance
history of its Funds. In preparation for the April Meeting, the Boards worked with its independent legal counsel, BlackRock and Lipper to develop a template for, and was provided with reports independently prepared by Lipper, which included a
comprehensive analysis of each Funds performance. The Boards also reviewed a narrative and statistical analysis of the Lipper data that was prepared by BlackRock, which analyzed various factors that affect Lippers rankings. In connection
with their review, each Board received and reviewed information regarding the investment performance, based on net asset value (NAV), of its Fund as compared to other funds in its applicable Lipper category and the customized peer group selected by
BlackRock. The Boards were provided with a description of the methodology used by Lipper to select peer funds and periodically meets with Lipper representatives to review their methodology. Each Board and its
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64
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ANNUAL REPORT
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JULY 31, 2013
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Disclosure of Investment Advisory Agreements and Sub-Advisory Agreements (continued)
|
Performance Oversight Committee regularly review, and meet with Fund management to discuss, the performance of its Fund throughout the year.
The Board of MUE noted that MUE ranked in the second, first and first quartiles against its Customized Lipper Peer Group Composite for the
one-, three-
and five-year periods reported, respectively. BlackRock believes that the Customized Lipper Peer Group Composite is an appropriate performance metric for MUE in that it measures a blend of total
return and yield.
The Board of MCA noted that MCA ranked in the second, fourth and second quartiles against its Customized Lipper Peer Group
Composite for the one-, three- and five-year periods reported, respectively. BlackRock believes that the Customized Lipper Peer Group Composite is an appropriate performance metric for MCA in that it measures a blend of total return and yield.
MCAs Board and BlackRock reviewed and discussed the reasons for MCAs underperformance during the three-year period and will continue to monitor MCAs performance.
The Board of each of MYM and MYN noted that its respective Fund ranked in the first quartile against its Customized Lipper Peer Group Composite for each of the one-, three- and five-year periods reported.
BlackRock believes that the Customized Lipper Peer Group Composite is an appropriate performance metric for MYM and MYN in that it measures a blend of total return and yield.
The Board of MYI noted that MYI ranked in the third, second and second quartiles against its Customized Lipper Peer Group Composite for the
one-, three-
and
five-year periods reported, respectively. BlackRock believes that the Customized Lipper Peer Group Composite is an appropriate performance metric for MYI in that it measures a blend of total return and yield. MYIs Board and BlackRock reviewed
and discussed the reasons for MYIs underperformance during the one-year period and will monitor MYIs performance in the coming year.
The Boards noted that BlackRock has recently made, and continues to make, changes to the organization of BlackRocks overall portfolio management
structure designed to result in strengthened leadership teams.
C. Consideration of the Advisory/Management Fees and the Cost of the Services and
Profits to be Realized by BlackRock and its Affiliates from their Relationship with the Funds: Each Board, including the Independent Board Members, reviewed its Funds contractual management fee rate compared with the other funds in its Lipper
category. The contractual management fee rate represents a combination of the advisory fee and any administrative fees, before taking into account any reimbursements or fee waivers. Each Board also compared its Funds total net operating
expense ratio, as well as actual management fee rate, to those of other funds in its Lipper category. The total net operating expense ratio and actual management fee rate both give effect to any expense reimbursements or fee waivers that benefit the
funds. The Boards considered the services provided and the fees charged by BlackRock to other types of clients with similar investment mandates, including institutional accounts.
The Boards received and reviewed statements relating to BlackRocks financial condition. The Boards were also provided with a profitability analysis that detailed the revenues earned and the expenses
incurred by BlackRock for services provided to the Funds. The Boards reviewed BlackRocks profitability with respect to the Funds and other funds the Boards currently oversee for the year ended December 31, 2012 compared to available
aggregate profitability data provided for the prior two years. The Boards reviewed BlackRocks profitability with respect to certain other fund complexes managed by the Manager and/or its affiliates. The Boards reviewed BlackRocks
assumptions and methodology of allocating expenses in the profitability analysis, noting the inherent limitations in allocating costs among various advisory products. The Boards recognized that profitability may be affected by numerous factors
including, among other things, fee waivers and expense reimbursements by the Manager, the types of funds managed, precision of expense allocations and business mix. As a result, comparing profitability is difficult.
The Boards noted that, in general, individual fund or product line profitability of other advisors is not publicly available. The Boards reviewed
BlackRocks overall operating margin, in general, compared to that of certain other publicly-traded asset management firms. The Boards considered the differences between BlackRock and these other firms, including the contribution of technology
at BlackRock, BlackRocks expense management, and the relative product mix.
In addition, the Boards considered the cost of the services
provided to the Funds by BlackRock, and BlackRocks and its affiliates profits relating to the management of the Funds and the other funds advised by BlackRock and its affiliates. As part of its analysis, the Boards reviewed
BlackRocks methodology in allocating its costs to the management of the Funds. The Boards also considered whether BlackRock has the financial resources necessary to attract and retain high quality investment management personnel to perform its
obligations under the Agreements and to continue to provide the high quality of services that is expected by the Boards.
The Board of each of
MUE, MCA, MYM, MYN and MYI noted that its respective Funds contractual management fee rate ranked in the first quartile relative to the Funds Expense Peers.
D. Economies of Scale: Each Board, including the Independent Board Members, considered the extent to which economies of scale might be realized as the assets of its Fund increase. Each Board also considered
the extent to which its Fund benefits from such economies and whether there should be changes in the advisory fee rate or breakpoint structure in order to enable the Fund to participate in these economies of scale, for example through the use of
breakpoints in the advisory fee based upon the asset level of the Fund.
Based on the Boards review and consideration of the issue, the
Boards concluded that most closed-end funds do not have fund level breakpoints because closed-end funds generally do not experience substantial growth after the initial public offering. They are typically priced at scale at a funds inception.
The Boards noted that only one closed-end fund in the Fund Complex has breakpoints in its advisory fee structure.
E. Other Factors Deemed
Relevant by the Board Members: The Boards, including the Independent Board Members, also took into account other ancillary or fall-out benefits that BlackRock or its affiliates may derive
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Disclosure of Investment Advisory Agreements and Sub-Advisory Agreements
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from their respective relationships with the Funds, both tangible and intangible, such as BlackRocks ability to leverage its investment professionals who manage other portfolios and risk
management personnel, an increase in BlackRocks profile in the investment advisory community, and the engagement of BlackRocks affiliates as service providers to the Funds, including securities lending and cash management services. The
Boards also considered BlackRocks overall operations and its efforts to expand the scale of, and improve the quality of, its operations. The Boards also noted that BlackRock may use and benefit from third party research obtained by soft
dollars generated by certain registered fund transactions to assist in managing all or a number of its other client accounts. The Boards further noted that they had considered the investment by BlackRocks funds in exchange traded funds (i.e.,
ETFs) without any offset against the management fees payable by the funds to BlackRock.
In connection with its consideration of the Agreements,
the Boards also received information regarding BlackRocks brokerage and soft dollar practices. The Boards received reports from BlackRock which included information on brokerage commissions and trade execution practices throughout the year.
The Boards noted the competitive nature of the closed-end fund marketplace, and that shareholders are able to sell their Fund shares in the
secondary market if they believe that the Funds fees and expenses are too high or if they are dissatisfied with the performance of the Fund.
The Boards also considered the various notable initiatives and projects BlackRock performed in connection with its closed-end fund product line. These
initiatives included completion of the refinancing of auction rate preferred securities; efforts to eliminate product overlap with fund mergers; ongoing services to manage leverage that has become increasingly complex; share repurchases and other
support initiatives for certain BlackRock funds; and continued communications efforts with shareholders, fund analysts and financial advisers. With respect to the latter, the Independent Board Members noted BlackRocks continued commitment to
supporting the secondary market for the common shares of its closed-end funds through a comprehensive secondary market communication program designed to raise investor and analyst awareness and understanding of closed-end funds. BlackRocks
support services included, among other things: continuing communications concerning the refinancing efforts related to auction rate preferred securities; sponsoring and participating in conferences; communicating with closed-end fund analysts
covering the BlackRock funds throughout the year; providing marketing and product updates for the closed-end funds; and maintaining and enhancing its closed-end fund website.
Conclusion
Each Board, including the Independent Board Members, unanimously approved the
continuation of the Advisory Agreement between the Manager and its Fund for a one-year term ending June 30, 2014, and the Sub-Advisory Agreement among the Manager, the Sub-Advisor, and its Fund for a one-year term ending June 30, 2014.
Based upon its evaluation of all of the aforementioned factors in their totality, the Boards, including the Independent Board Members, were satisfied that the terms of the Agreements were fair and reasonable and in the best interest of the Funds and
their shareholders. In arriving at their decision to approve the Agreements, the Boards did not identify any single factor or group of factors as all-important or controlling, but considered all factors together, and different Board Members may have
attributed different weights to the various factors considered. The Independent Board Members were also assisted by the advice of independent legal counsel in making these determinations. The contractual fee arrangements for the Funds reflect the
results of several years of review by the Board Members and predecessor Board Members, and discussions between such Board Members (and predecessor Board Members) and BlackRock. As a result, the Board Members conclusions may be based in part on
their consideration of these arrangements in prior years.
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Automatic Dividend Reinvestment Plans
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Pursuant to each Funds Dividend Reinvestment Plan (the Reinvestment Plan), Common Shareholders are automatically enrolled to have all distributions of dividends and capital gains reinvested
by Computershare Trust Company, N.A. (the Reinvestment Plan Agent) in the respective Funds shares pursuant to the Reinvestment Plan. Shareholders who do not participate in the Reinvestment Plan will receive all distributions in
cash paid by check and mailed directly to the shareholders of record (or if the shares are held in street name or other nominee name, then to the nominee) by the Reinvestment Plan Agent, which serves as agent for the shareholders in administering
the Reinvestment Plan.
After the Funds declare a dividend or determine to make a capital gain distribution, the Reinvestment Plan Agent will
acquire shares for the participants accounts, depending upon the following circumstances, either (i) through receipt of unissued but authorized shares from the Funds (newly issued shares) or (ii) by purchase of outstanding shares
on the open market or on the Funds primary exchange (open-market purchases). If, on the dividend payment date, the net asset value per share (NAV) is equal to or less than the market price per share plus estimated
brokerage commissions (such condition often referred to as a market premium), the Reinvestment Plan Agent will invest the dividend amount in newly issued shares acquired on behalf of the participants. The number of newly issued shares to
be credited to each participants account will be determined by dividing the dollar amount of the dividend by the NAV on the date the shares are issued. However, if the NAV is less than 95% of the market price on the dividend payment date, the
dollar amount of the dividend will be divided by 95% of the market price on the dividend payment date. If, on the dividend payment date, the NAV is greater than the market price per share plus estimated brokerage commissions (such condition often
referred to as a market discount), the Reinvestment Plan Agent will invest the dividend amount in shares acquired on behalf of the participants in open-market purchases. If the Reinvestment Plan Agent is unable to invest the full
dividend amount in open-market purchases, or if the market discount shifts to a market premium during the purchase period, the Reinvestment Plan Agent will invest any un-invested portion in newly issued shares. Investments in newly issued shares
made in this manner would be made pursuant to the same process described above and the date of issue for such newly issued shares will substitute for the dividend payment date.
Participation in the Reinvestment Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed by the Reinvestment Plan Agent prior to the
dividend record date. Additionally, the Reinvestment Plan Agent seeks to process notices received after the record date but prior to the payable date and such notices often will become effective by the payable date. Where late notices are not
processed by the applicable payable date, such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution.
The Reinvestment Plan Agents fees for the handling of the reinvestment of dividends and distributions will be paid by each Fund. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Reinvestment Plan Agents open market purchases in connection with the reinvestment of dividends and distributions. The automatic reinvestment of dividends and distributions will not relieve participants
of any federal income tax that may be payable on such dividends or distributions.
Each Fund reserves the right to amend or terminate the
Reinvestment Plan. There is no direct service charge to participants in the Reinvestment Plan. However, each Fund reserves the right to amend the Reinvestment Plan to include a service charge payable by the participants. Participants in MUE, MCA and
MYI that request a sale of shares are subject to a $2.50 sales fee and a $0.15 per share fee. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay. Participants in MYM and MYN that request a sale
of shares are subject to a $0.02 per share sold brokerage commission. All correspondence concerning the Reinvestment Plan should be directed to Computershare Trust Company, N.A. through the internet at http://www.computershare.com/blackrock, or
in writing to Computershare, P.O. Box 43078, Providence, Rl 02940-3078, Telephone: (800) 699-1236. Overnight correspondence should be directed to the Reinvestment Plan Agent at 250 Royall Street, Canton, MA 02021.
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