UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-04802
Name of Fund: BlackRock Intermediate Municipal Fund of BlackRock Municipal
Series Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, BlackRock Intermediate Municipal Fund of BlackRock Municipal
Series Trust, 800 Scudders Mill Road, Plainsboro, NJ 08536. Mailing
address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 10/31/06
Date of reporting period: 11/01/05 - 10/31/06
Item 1 - Report to Stockholders
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES
FIXED INCOME LIQUIDITY REAL ESTATE
BlackRock Intermediate BLACKROCK
Municipal Fund
Of BlackRock Municipal Series Trust
ANNUAL REPORT | OCTOBER 31, 2006
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
BlackRock Intermediate Municipal Fund
Portfolio Information as of October 31, 2006
Quality Ratings by Percent of
S&P/Moody's Total Investments
- --------------------------------------------------------------------------------
AAA/Aaa ................................................. 66.4%
AA/Aa ................................................... 8.5
A/A ..................................................... 2.7
BBB/Baa ................................................. 5.9
BB/Ba ................................................... 0.6
NR (Not Rated) .......................................... 4.2
Other* .................................................. 11.7
- --------------------------------------------------------------------------------
* Includes portfolio holdings in mutual funds, variable rate demand notes
and short-term investments.
Percent of
Distribution by Market Sector Total Investments
- --------------------------------------------------------------------------------
Other Revenue Bonds ..................................... 59.5%
General Obligation Bonds ................................ 28.8
Mutual Funds ............................................ 4.2
Other* .................................................. 7.5
- --------------------------------------------------------------------------------
* Includes portfolio holdings in variable rate demand notes and short-term
investments.
2 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
A Letter to Shareholders
Dear Shareholder
Ten months into 2006, we are able to say it has been an interesting year for
investors. After a volatile start and far-reaching mid-year correction, the
financial markets regained some positive momentum through late summer and fall.
For the six- and 12-month periods ended October 31, 2006, most major market
indexes managed to post positive returns:
Total Returns as of October 31, 2006 6-month 12-month
==============================================================================================
U.S. equities (Standard & Poor's 500 Index) +6.11% +16.34%
- ----------------------------------------------------------------------------------------------
Small cap U.S. equities (Russell 2000 Index) +0.90 +19.98
- ----------------------------------------------------------------------------------------------
International equities (MSCI Europe, Australasia, Far East Index) +3.77 +27.52
- ----------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) +4.60 + 5.19
- ----------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +4.12 + 5.75
- ----------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse High Yield Index) +4.66 +10.29
- ----------------------------------------------------------------------------------------------
The Federal Reserve Board (the Fed), after raising the target short-term
interest rate 17 times between June 2004 and June 2006, finally opted to pause
on August 8, 2006. This left the federal funds rate at 5.25%, where it remained
through the September and October Fed meetings. In interrupting its two-year
rate-hiking campaign, the Fed acknowledged that economic growth is slowing, led
by softness in the housing market. However, the central bankers continue to take
a cautionary position on inflation, despite a decline in energy prices in recent
months. At the time of this writing, the price of oil had settled into the
$60-per-barrel range after reaching nearly $78 per barrel earlier in the year.
Notwithstanding the mid-year correction, equity markets generally found support
in solid corporate earnings reports in the first three quarters of the year.
Overall corporate health, including strong company balance sheets, helped to
sustain robust dividend-distribution, share-buyback and merger-and-acquisition
activity. Many international equity markets fared equally well or better, thanks
in part to higher economic growth rates and low inflation.
In the U.S. bond market, prices declined for much of the year as investors
focused on decent economic activity and inflation concerns. Bond prices began to
improve in late June as the economy showed signs of weakening and inflation
pressures subsided. Notably, the Treasury curve inverted periodically, a
phenomenon typically associated with periods of economic weakness. At the end of
October, the one-month Treasury bill offered the highest yield on the curve at
5.18%, while the 30-year Treasury bond had a yield of 4.72%.
Amid the uncertainty inherent in the financial markets, we encourage you to
review your goals periodically with your financial professional and to make
portfolio changes, as needed. For additional insight and timely "food for
thought" for investors, we also invite you to visit Shareholder magazine at
www.blackrock.com/shareholdermagazine. We are pleased to make our
investor-friendly magazine available to you online. We thank you for trusting
BlackRock with your investment assets, and we look forward to continuing to
serve your investment needs.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Trustee
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 3
A Discussion With Your Fund's Portfolio Manager
The Fund provided competitive returns relative to the Lipper Intermediate
Debt Funds category average, benefiting from favorable security selection and a
slightly long duration bias.
Describe the recent market environment relative to municipal bonds.
Supported by a positive technical backdrop, municipal bonds managed to
significantly outperform their taxable counterparts for the 12-month period
ended October 31, 2006. Despite considerable volatility, taxable bond yields
were little changed over the past year. Tax-exempt bonds, in the meantime, saw
their yields decline (as prices, which move opposite of yields, rose).
For much of the first half of the fiscal period, longer-maturity U.S. Treasury
bond yields rose (and prices declined) as investors focused on strong U.S.
economic activity and inflationary concerns triggered by rising oil prices. By
mid-May 2006, the yield on 30-year U.S. Treasury bonds had risen more than 70
basis points (.70%) to 5.31%. Bond prices began to improve in late June as
economic activity weakened and inflationary pressures subsided. Bond price
improvement accelerated after the Federal Reserve Board (the Fed) refrained from
raising the target interest rate at its August 8 meeting, a move that came after
17 consecutive interest rate hikes since June 2004. Recent declines in oil
prices, and especially gasoline prices, helped to reverse earlier inflationary
concerns and support higher bond prices. Over the 12-month period, 30-year U.S.
Treasury bond yields fell four basis points to 4.72%, while 10-year Treasury
yields rose four basis points to 4.61%.
Meanwhile, the municipal bond market found support in declining new-issue volume
and increasing investor demand. As reported by Municipal Market Data, yields on
AAA-rated municipal issues maturing in 30 years declined 52 basis points to
4.07% over the past 12 months. Shorter maturities experienced smaller yield
declines, with yields on AAA-rated municipal issues maturing in 10 years falling
28 basis points to 3.64%.
Demand for municipal product by retail and institutional investors has remained
very strong despite the recent decline in bond yields. The strong demand is
reflected in continued flows into long-term, tax-exempt mutual funds. As
reported by the Investment Company Institute, long-term municipal bond funds saw
net new cash inflows of more than $1.3 billion during September 2006, a material
increase from $344 million in July and $283 million in June. During the first
nine months of 2006, long-term tax-exempt bond funds had net new cash flows of
over $9.6 billion, a 43% increase compared to the same period a year earlier.
Recent weekly fund flows, reported by AMG Data, averaged $416 million in October
2006, well above the July average of $247 million and the year-to-date weekly
average of $315 million.
Also supporting municipal bond price improvement has been a decline in new
issuance. In the first 10 months of 2006, more than $295 billion in new
long-term municipal bonds was underwritten, a decline of over 12.5% versus the
same period a year ago. Notably, after declining for much of the year, refunding
activity increased slightly in October as the lower interest rate environment
sparked an increase in refinancing activity. On a year-to-date basis, however,
refunding activity has declined over 50% relative to last year's refunding
issuance.
Looking ahead, the positive technical framework in the municipal marketplace
suggests that the tax-exempt market should continue to perform well. New supply
is expected to remain manageable and tax-exempt bond yield ratios remain in
their recent range of 86% - 89% of comparable long-term U.S. Treasury yields,
well within their recent historic norms. These ratios argue for continued strong
demand from non-traditional, arbitrage-related accounts, which continue to be
attracted to the municipal bond market given its relatively steep yield curve.
Taken together, these factors suggest that the municipal market is poised to
continue to perform well as we approach year-end.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended October 31, 2006, BlackRock Intermediate Municipal
Fund of BlackRock Municipal Series Trust's (formerly Merrill Lynch Municipal
Intermediate Term Fund of Merrill Lynch Municipal Series Trust) Institutional,
Investor A, Investor A1, Investor B and Investor C Shares had total returns of
+4.96%, +4.70%, +4.96%, +4.64% and +4.02%, respectively. (Fund results shown do
not reflect sales charges and would be lower if sales charges were included.
Complete performance information can be found on pages 6 and 7 of this report to
shareholders.) For the same period, the broader municipal market, as measured by
the Lehman Brothers Municipal Bond Index, returned +5.75% and the Lipper
Intermediate Municipal Debt Funds category had an average return of +4.34%.
(Funds in this Lipper category invest primarily in municipal debt issues with
dollar-weighted average maturities in the area of five years - 10 years.)
The Fund's underperformance of the Lehman Brothers Municipal Bond Index is not
surprising given its concentra-
4 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
tion in the intermediate part of the municipal yield curve. Shorter-dated
securities continued to suffer as the yield curve flattened and rising interest
rates exerted downward pressure on prices at the short end. Longer-dated
securities, which are represented in the composition of the Lehman Index,
outperformed substantially during the past year.
The Fund's performance versus its comparable Lipper group was favorable. Our
long duration bias within the intermediate spectrum proved advantageous on a
relative basis, as did good security selection. Specifically, the Fund was able
to realize price outperformance from its holdings of bonds issued by higher-tax
states, which benefited from higher demand and price stability as credit spreads
(compared to low-tax states) narrowed.
What changes were made to the portfolio during the period?
We did not significantly alter our strategy or the Fund's portfolio during the
past 12 months. As new municipal bond issuances declined during the year, we
found few compelling opportunities to restructure the portfolio. Having said
that, we did notice the aforementioned narrowing of credit spreads between
municipal bonds issued by high-tax states and those issued by low-tax states,
and sought to capitalize on this trend. When available, we found it advantageous
to purchase high-quality bonds issued by the high-tax states, as opposed to
bonds issued by low-tax states. Because of the relatively high income taxes
imposed by these states, their securities typically meet with strong retail
demand, which in turn creates a solid technical market, leading to better
liquidity. We participated in these transactions in such high-tax states as
California, New York, New Jersey and Tennessee.
When making sales during the year, we looked to ensure that the Fund had
sufficient capital loss carryforwards to offset any capital gains. Our intention
was to shield investors from the tax consequences associated with the
realization of a capital gain. This is consistent with the Fund's tax-efficient
investment strategies and ultimate goal of delivering a high degree of after-tax
income.
Overall, the Fund maintained a fully invested posture throughout the year with
an average portfolio maturity of eight years, within its required 10-year
average maturity mandate.
How would you characterize the Fund's position at the close of the period?
We ended the period with a fully invested portfolio and a slightly long duration
relative to our peers. Municipal yields and credit spreads are near their
all-time lows and the slope of the yield curve is historically very flat.
However, a favorable supply/demand environment should continue to be supportive
of present valuations in the municipal market.
Against this backdrop, we intend to continue our efforts to enhance yield for
shareholders while also protecting the Fund's underlying value. To that end, we
continue to favor a neutral-to-slightly long portfolio duration, which we
believe offers the benefit of incremental yield. Ultimately, we believe that
above-average yields can provide for competitive Fund returns over time.
William R. Bock
Vice President and Portfolio Manager
November 13, 2006
- --------------------------------------------------------------------------------
Effective December 6, 2006, BlackRock Intermediate Municipal Fund is managed by
a team of investment professionals comprised of Theodore R. Jaeckel Jr., CFA,
Managing Director at BlackRock, and Walter O'Connor, Managing Director at
BlackRock. Each is a member of BlackRock's municipal tax-exempt management
group. Mr. Jaeckel is responsible for setting the Fund's overall investment
strategy and overseeing the management of the Fund. Mr. O'Connor is the Fund's
lead portfolio manager and is responsible for the day-to-day management of the
Fund's portfolio and the selection of its investments. Messrs. Jaeckel and
O'Connor have been members of the Fund's management team since 2006 and Mr.
O'Connor has been the Fund's portfolio manager since 2006.
Mr. Jaeckel joined BlackRock in 2006. Prior to joining BlackRock, he was a
Managing Director (Municipal Tax-Exempt Fund Management) of Merrill Lynch
Investment Managers, L.P. ("MLIM") from 2005 to 2006 and a Director of MLIM from
1997 to 2005. He has been a portfolio manager with BlackRock or MLIM since 1991.
Mr. O'Connor joined BlackRock in 2006. Prior to joining BlackRock, he was a
Managing Director (Municipal Tax-Exempt Fund Management) of MLIM from 2003 to
2006 and was a Director of MLIM from 1997 to 2002. He has been a portfolio
manager with BlackRock or MLIM since 1991.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Effective October 2, 2006, the Fund's Class A, Class B and Class I Shares were
redesignated Investor A1, Investor B and Institutional Shares, respectively.
Class C Shares converted to Class A (now Investor A1) Shares on August 25, 2006.
- --------------------------------------------------------------------------------
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 5
Performance Data
About Fund Performance
Effective October 2, 2006, the Fund's Class A, Class B and Class I Shares were
redesignated Investor A1, Investor B and Institutional Shares, respectively. All
Class C Shares converted to Class A (now Investor A1) Shares on August 25, 2006.
As previously communicated to shareholders, new sales charge schedules came into
effect at the same time for certain of these classes.
The Fund has multiple classes of shares:
o Institutional Shares are not subject to any front-end sales charge.
Institutional Shares bear no ongoing distribution or service fees and are
available only to eligible investors.
o Investor A Shares incur a maximum initial sales charge (front-end load) of
4.25% and a service fee of 0.25% per year (but no distribution fee).
Investor A Shares commenced operations on October 2, 2006. The returns for
Investor A Shares are based upon the performance of the Fund's
Institutional Shares. The returns for Investor A Shares, however, are
adjusted to reflect the distribution and service (12b-1) fees applicable
to Investor A Shares.
o Investor A1 Shares incur a maximum initial sales charge (front-end load)
of 1% and a service fee of 0.10% per year (but no distribution fee).
o Investor B Shares are subject to a maximum contingent deferred sales
charge of 1%, declining to 0% after three years. In addition, Investor B
Shares are subject to a distribution fee of 0.10% per year and a service
fee of 0.20% per year. These shares automatically convert to Investor A1
Shares after approximately ten years. (There is no initial sales charge
for automatic share conversions.)
o Investor C Shares are subject to a distribution fee of 0.75% per year and
a service fee of 0.25% per year. In addition, Investor C Shares are
subject to a 1% contingent deferred sales charge if redeemed within one
year of purchase. Investor C Shares commenced operations on October 2,
2006. The returns for Investor C Shares are based upon the performance of
the Fund's Institutional Shares. The returns for Investor C Shares,
however, are adjusted to reflect the distribution and service (12b-1) fees
applicable to Investor C Shares.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.blackrock.com to obtain performance data current to
the most recent month-end. Performance results do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares. Figures shown in each of the following tables assume reinvestment
of all dividends and capital gain distributions, if any, at net asset value on
the payable date. The Fund's investment adviser reimbursed a portion of the
Fund's expenses. Without such reimbursement, the Fund's performance would have
been lower. Investment return and principal value of shares will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Dividends paid to each class of shares will vary because of the different levels
of service, distribution and transfer agency fees applicable to each class,
which are deducted from the income available to be paid to shareholders.
Recent Performance Results
6-Month 12-Month 10-Year Standardized
As of October 31, 2006 Total Return Total Return Total Return 30-Day Yield
==========================================================================================================
Institutional Shares* +3.65% +4.96% +63.65% 3.40%
- ----------------------------------------------------------------------------------------------------------
Investor A Shares* +3.52 +4.70 +59.63 3.01
- ----------------------------------------------------------------------------------------------------------
Investor A1 Shares* +3.70 +4.96 +62.05 3.27
- ----------------------------------------------------------------------------------------------------------
Investor B Shares* +3.49 +4.64 +58.79 3.09
- ----------------------------------------------------------------------------------------------------------
Investor C Shares* +3.23 +4.02 +48.28 2.40
- ----------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index** +4.12 +5.75 +76.60 --
- ----------------------------------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included. Cumulative total investment
returns are based on changes in net asset values for the periods shown,
and assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable date.
** This unmanaged Index consists of revenue bonds, prerefunded bonds, general
obligation bonds and insured bonds.
6 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Performance Data (concluded)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Institutional,
Investor A, Investor A1, Investor B & Investor C Shares compared to growth of an
investment in the Lehman Brothers Municipal Bond Index. Values are from October
1996 to October 2006:
Lehman Brothers
Institutional Investor A Investor A1 Investor B Investor C Municipal Bond
Shares*+ Shares*+ Shares*+ Shares*+ Shares*+ Index++
10/96 $10,000 $ 9,575 $ 9,900 $10,000 $10,000 $10,000
10/97 $10,756 $10,274 $10,638 $10,733 $10,650 $10,849
10/98 $11,619 $11,070 $11,480 $11,557 $11,390 $11,719
10/99 $11,370 $10,806 $11,211 $11,274 $11,035 $11,512
10/00 $12,256 $11,619 $12,073 $12,103 $11,777 $12,491
10/01 $13,480 $12,747 $13,279 $13,283 $12,825 $13,803
10/02 $14,175 $13,372 $13,950 $13,925 $13,353 $14,613
10/03 $14,849 $13,972 $14,600 $14,542 $13,849 $15,361
10/04 $15,530 $14,577 $15,255 $15,162 $14,340 $16,287
10/05 $15,592 $14,598 $15,285 $15,175 $14,254 $16,700
10/06 $16,365 $15,284 $16,043 $15,879 $14,828 $17,660
* Assuming maximum sales charge, if any, transaction costs and other
operating expenses, including advisory fees.
+ The Fund invests primarily in a diversified portfolio of investment grade
obligations whose interest is exempt from federal income taxes, with a
dollar-weighted average maturity from five to 12 years.
++ This unmanaged Index consists of revenue bonds, prerefunded bonds, general
obligation bonds and insured bonds.
Past performance is not indicative of future results.
Average Annual Total Return
Return
================================================================================
Institutional Shares
================================================================================
One Year Ended 10/31/06 +4.96%
- --------------------------------------------------------------------------------
Five Years Ended 10/31/06 +3.96
- --------------------------------------------------------------------------------
Ten Years Ended 10/31/06 +5.05
- --------------------------------------------------------------------------------
Return Without Return With
Sales Charge Sales Charge***
================================================================================
Investor A Shares**
================================================================================
One Year Ended 10/31/06 +4.70% +0.25%
- --------------------------------------------------------------------------------
Five Years Ended 10/31/06 +3.70 +2.80
- --------------------------------------------------------------------------------
Ten Years Ended 10/31/06 +4.79 +4.33
- --------------------------------------------------------------------------------
Return Without Return With
Sales Charge Sales Charge***
================================================================================
Investor A1 Shares*
================================================================================
One Year Ended 10/31/06 +4.96% +3.91%
- --------------------------------------------------------------------------------
Five Years Ended 10/31/06 +3.85 +3.65
- --------------------------------------------------------------------------------
Ten Years Ended 10/31/06 +4.95 +4.84
- --------------------------------------------------------------------------------
Return Return
Without CDSC With CDSC++
================================================================================
Investor B Shares+
================================================================================
One Year Ended 10/31/06 +4.64% +3.64%
- --------------------------------------------------------------------------------
Five Years Ended 10/31/06 +3.63 +3.63
- --------------------------------------------------------------------------------
Ten Years Ended 10/31/06 +4.73 +4.73
- --------------------------------------------------------------------------------
Return Return
Without CDSC With CDSC++
================================================================================
Investor C Shares+++
================================================================================
One Year Ended 10/31/06 +4.02% +3.03%
- --------------------------------------------------------------------------------
Five Years Ended 10/31/06 +2.94 +2.94
- --------------------------------------------------------------------------------
Ten Years Ended 10/31/06 +4.02 +4.02
- --------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Maximum sales charge is 4.25%.
*** Assuming maximum sales charge.
+ Maximum contingent deferred sales charge is 1% and is reduced to 0% after
three years.
++ Assuming payment of applicable contingent deferred sales charge.
+++ Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 7
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses related
to transactions, including sales charges, redemption fees and exchange fees; and
(b) operating expenses including advisory fees, distribution fees including
12b-1 fees, and other Fund expenses. The following example (which is based on a
hypothetical investment of $1,000 invested on May 1, 2006 and held through
October 31, 2006) is intended to assist shareholders both in calculating
expenses based on an investment in the Fund and in comparing these expenses with
similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during the
period covered by this report, shareholders can divide their account value by
$1,000 and then multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders' ongoing
costs only and do not reflect any transactional expenses, such as sales charges,
redemption fees or exchange fees. Therefore, the second table is useful in
comparing ongoing expenses only, and will not help shareholders determine the
relative total expenses of owning different funds. If these transactional
expenses were included, shareholder expenses would have been higher.
Including Interest Expense and Fees
Expenses Paid
Ending During the
Beginning Account Value Period Ended++
Account Value+ October 31, 2006 October 31, 2006*
==============================================================================================================
Actual
==============================================================================================================
Institutional $ 1,000 $1,036.50 $ 5.65
- --------------------------------------------------------------------------------------------------------------
Investor A $ 1,000 $1,003.60 $ 1.07
- --------------------------------------------------------------------------------------------------------------
Investor A1 $ 1,000 $1,037.00 $ 6.16
- --------------------------------------------------------------------------------------------------------------
Investor B $ 1,000 $1,034.90 $ 7.23
- --------------------------------------------------------------------------------------------------------------
Investor C $ 1,000 $1,004.00 $ 1.66
==============================================================================================================
Hypothetical (5% annual return before expenses)**
==============================================================================================================
Institutional $ 1,000 $1,019.65 $ 5.60
- --------------------------------------------------------------------------------------------------------------
Investor A $ 1,000 $1,002.94 $ 1.07
- --------------------------------------------------------------------------------------------------------------
Investor A1 $ 1,000 $1,019.15 $ 6.11
- --------------------------------------------------------------------------------------------------------------
Investor B $ 1,000 $1,018.09 $ 7.17
- --------------------------------------------------------------------------------------------------------------
Investor C $ 1,000 $1,002.34 $ 1.66
- --------------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (1.10% for Institutional, 1.34% for Investor A, 1.20%
for Investor A1, 1.41% for Investor B and 2.09% for Investor C),
multiplied by the average account value over the period, multiplied by
184/365 for Institutional, Investor A1 and Investor B Shares and 29/365
for Investor A and Investor C Shares (to reflect the one-half year period
for Institutional, Investor A1 and Investor B Shares and the actual days
since inception for Investor A and Investor C Shares.)
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most recent fiscal half-year for Institutional,
Investor A1 and Investor B Shares and the actual days since inception for
Investor A and Investor C Shares divided by 365.
+ May 1, 2006 for Institutional, Investor A1 and Investor B Shares and
October 2, 2006 (commencement of operations) for Investor A and Investor C
Shares.
++ The period represents the six months ended for Institutional, Investor A1
and Investor B Shares and from October 2, 2006 (commencement of
operations) to October 31, 2006 for Investor A and Investor C Shares.
8 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Disclosure of Expenses (concluded)
Excluding Interest Expense and Fees
Expenses Paid
Ending During the
Beginning Account Value Period Ended++
Account Value+ October 31, 2006 October 31, 2006*
==============================================================================================================
Actual
==============================================================================================================
Institutional $ 1,000 $1,036.50 $ 3.70
- --------------------------------------------------------------------------------------------------------------
Investor A $ 1,000 $1,003.60 $ 0.77
- --------------------------------------------------------------------------------------------------------------
Investor A1 $ 1,000 $1,037.00 $ 4.26
- --------------------------------------------------------------------------------------------------------------
Investor B $ 1,000 $1,034.90 $ 5.33
- --------------------------------------------------------------------------------------------------------------
Investor C $ 1,000 $1,032.30 $ 1.40
==============================================================================================================
Hypothetical (5% annual return before expenses)**
==============================================================================================================
Institutional $ 1,000 $1,021.57 $ 3.67
- --------------------------------------------------------------------------------------------------------------
Investor A $ 1,000 $1,003.23 $ 0.77
- --------------------------------------------------------------------------------------------------------------
Investor A1 $ 1,000 $1,021.02 $ 4.23
- --------------------------------------------------------------------------------------------------------------
Investor B $ 1,000 $1,019.96 $ 5.30
- --------------------------------------------------------------------------------------------------------------
Investor C $ 1,000 $1,002.63 $ 1.38
- --------------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (.72% for Institutional, .97% for Investor A, .83% for
Investor A1, 1.04% for Investor B and 1.73% for Investor C), multiplied by
the average account value over the period, multiplied by 184/365 for
Institutional, Investor A1 and Investor B Shares and 29/365 for Investor A
and Investor C Shares (to reflect the one-half year period for
Institutional, Investor A1 and Investor B Shares and the actual days since
inception for Investor A and Investor C Shares.)
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most recent fiscal half-year for Institutional,
Investor A1 and Investor B Shares and the actual days since inception for
Investor A and Investor C Shares divided by 365.
+ May 1, 2006 for Institutional, Investor A1 and Investor B Shares and
October 2, 2006 (commencement of operations) for Investor A and Investor C
Shares.
++ The period represents the six months ended for Institutional, Investor A1
and Investor B Shares and from October 2, 2006 (commencement of
operations) to October 31, 2006 for Investor A and Investor C Shares.
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 9
Schedule of Investments as of October 31, 2006 (in Thousands)
Face
Amount Municipal Bonds Value
===========================================================================================
Alabama--0.3%
$ 500 Tuscaloosa, Alabama, Special Care Facilities Financing
Authority, Residential Care Facility Revenue Bonds
(Capstone Village, Inc. Project) Series A, 5.125%
due 8/01/2015 $ 492
===========================================================================================
Alaska--1.3%
2,250 Alaska Student Loan Corporation, Student Loan Revenue
Bonds, AMT, Series A, 5.65% due 7/01/2012 (a) 2,275
===========================================================================================
Arizona--3.4%
5,000 Arizona State Transportation Board, Highway Revenue
Bonds, Series B, 5% due 7/01/2017 5,481
700 Watson Road Community Facilities District, Arizona,
Special Assessment Revenue Bonds, 5.50%
due 7/01/2016 734
===========================================================================================
California--13.9%
875 Agua Caliente Band of Cahuilla Indians, California,
Casino Revenue Bonds, 5.60% due 7/01/2013 911
5,035 Bay Area Toll Authority, California, Toll Bridge Revenue
Refunding Bonds (San Francisco Bay Area), Series F,
5% due 4/01/2017 5,551
5,225 California County Tobacco Securitization Agency,
California, Tobacco Revenue Bonds (Los Angeles
County Securitization Corporation), 5.25%
due 6/01/2021 (h) 4,512
5,000 California State, GO, Refunding, 5% due 3/01/2018 5,426
5,000 Coast Community College District, California, GO
(Election of 2002), Series B, 5% due 8/01/2018 (d) 5,499
3,000 Los Angeles, California, Harbor Department Revenue
Refunding Bonds, AMT, Series C, 5% due 8/01/2017 (b) 3,265
===========================================================================================
Colorado--3.2%
5,000 Denver, Colorado, City and County Airport Revenue
Bonds, AMT, Series D, 7.75% due 11/15/2013 (a) 5,707
===========================================================================================
Florida--3.9%
4,000 Florida Hurricane Catastrophe Fund Financing
Corporation Revenue Bonds, Series A, 5.25%
due 7/01/2012 4,327
410 Middle Village Community Development District,
Florida, Special Assessment Bonds, Series C, 5.125%
due 5/01/2009 412
1,460 Panther Trace Community Development District II,
Florida, Special Assessment Revenue Bonds, Series A,
5% due 11/01/2010 1,468
250 Pinellas County, Florida, Health Facilities Authority,
Revenue Refunding Bonds (Pooled Hospital
Loan Program), DATES, VRDN, 3.65%
due 12/01/2015 (a)(e) 250
100 Reunion East Community Development District, Florida,
Special Assessment, Series B, 5.90% due 11/01/2007 101
430 Sterling Hill, Florida, Community Development District,
Capital Improvement Revenue Refunding Bonds,
Series B, 5.50% due 11/01/2010 431
===========================================================================================
Georgia--1.0%
700 Burke County, Georgia, Development Authority, PCR,
Refunding (Oglethorpe Power Corporation--Vogtle),
VRDN, 3.64% due 1/01/2022 (a)(e) 700
1,050 Fulton County, Georgia, Residential Care Facilities,
Revenue Refunding Bonds (Canterbury Court Project),
Series A, 5% due 2/15/2014 1,053
===========================================================================================
Idaho--3.0%
5,000 Ada and Canyon Counties, Idaho, Joint School District
Number 2 (Meridian), GO, 5% due 8/15/2017 5,463
===========================================================================================
Illinois--0.9%
1,000 Chicago, Illinois, Tax Allocation Bonds (Kingsbury
Redevelopment Project), Series A, 6.57%
due 2/15/2013 1,040
715 Illinois State Finance Authority Revenue Bonds (Primary
Health Care Centers Program), 5.90% due 7/01/2014 729
===========================================================================================
Massachusetts--5.7%
3,300 Massachusetts State Industrial Finance Agency,
Resource Recovery Revenue Refunding Bonds
(Ogden Haverhill Project), AMT, Series A, 5.30%
due 12/01/2009 3,419
Massachusetts State Port Authority, Special Facilities
Revenue Bonds (Delta Air Lines Inc. Project), AMT,
Series A (a):
2,500 5.50% due 1/01/2014 2,638
4,000 5.50% due 1/01/2015 4,220
===========================================================================================
Michigan--0.9%
1,555 Michigan State Strategic Fund, PCR (General
Motors Corporation Project), VRDN, 7%
due 12/01/2008 (e) 1,555
===========================================================================================
Portfolio Abbreviations
To simplify the listings of BlackRock Intermediate Municipal Fund of BlackRock
Municipal Series Trust's portfolio holdings in the Schedule of Investments, we
have abbreviated the names of many of the securities according to the list at
right.
AMT Alternative Minimum Tax (subject to)
DATES Daily Adjustable Tax-Exempt Securities
GAN Grant Anticipation Notes
GO General Obligation Bonds
HDA Housing Development Authority
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
VRDN Variable Rate Demand Notes
10 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Schedule of Investments (continued) (in Thousands)
Face
Amount Municipal Bonds Value
===========================================================================================
Minnesota--3.0%
$ 5,000 Minnesota State, GO, 5% due 6/01/2018 $ 5,489
===========================================================================================
Missouri--8.3%
4,000 Jackson County, Missouri, Special Obligation Revenue
Bonds (Harry S. Truman Sports Complex Project),
5% due 12/01/2019 (a) 4,357
800 Missouri Development Finance Board, Cultural Facilities
Revenue Bonds (Nelson Gallery Foundation), VRDN,
Series B, 3.61% due 12/01/2031 (b)(e) 800
5,000 Missouri State Highways and Transportation Commission,
First Lien State Road Revenue Bonds, Series A,
5% due 5/01/2017 5,489
4,000 Springfield, Missouri, Public Utility Revenue Bonds,
5% due 8/01/2017 (f) 4,380
===========================================================================================
Montana--2.2%
3,500 Montana State Department of Transportation Revenue
Bonds (Highway 93 Advance Construction Project),
GAN, 5.25% due 6/01/2016 (b) 3,891
===========================================================================================
Nebraska--1.6%
2,715 Nebraska Public Power District, Revenue Refunding
Bonds, Series A, 5% due 1/01/2017 (f) 2,965
===========================================================================================
New York--4.2%
5,000 New York City, New York, GO, Refunding, Series G,
5% due 8/01/2017 (a) 5,457
1,140 New York State Dormitory Authority, Non-State
Supported Debt, Revenue Refunding Bonds
(New York University Hospital Center), Series A,
5% due 7/01/2016 1,186
1,000 Westchester County, New York, IDA, Continuing Care
Retirement Mortgage Revenue Bonds (Kendal on the
Hudson Project), Series A, 5.625% due 1/01/2013 1,040
===========================================================================================
North Carolina--3.1%
5,000 North Carolina State, GO, Refunding, Series B,
5% due 4/01/2017 5,551
===========================================================================================
Ohio--1.2%
2,000 Cincinnati, Ohio, City School District, GO (Classroom
Construction and Improvement), Refunding,
5% due 12/01/2017 (f) 2,212
===========================================================================================
Oregon--3.0%
5,000 Oregon State Department of Transportation, Highway
User Tax Revenue Bonds, Series A, 5%
due 11/15/2017 5,507
===========================================================================================
Tennessee--1.9%
1,500 Blount County, Tennessee, Public Building Authority,
Local Government Public Improvement Revenue
Bonds, VRDN, Series A3A, 3.65% due 6/01/2026 (a)(e) 1,500
300 Sevier County, Tennessee, Public Building Authority,
Local Government Public Improvement Revenue Bonds,
VRDN, Series IV-E-5, 3.61% due 6/01/2020 (a)(e) 300
1,600 Tennessee HDA, Revenue Bonds (Homeownership
Program), AMT, Series 2-C, 5.85% due 7/01/2009 1,614
===========================================================================================
Texas--11.8%
1,100 Bell County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds (Scott & White
Memorial Hospital), VRDN, Series 2001-1, 3.65%
due 8/15/2031 (b)(e) 1,100
2,000 Brazos River Authority, Texas, Revenue Refunding
Bonds (Reliant Energy Inc. Project), Series B,
7.75% due 12/01/2018 2,128
5,000 Dallas-Fort Worth, Texas, International Airport Revenue
Refunding and Improvement Bonds, AMT, Series A,
5.75% due 11/01/2014 (f) 5,414
8,800 Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds (Texas
Children's Hospital), VRDN, Series B-1, 3.62%
due 10/01/2029 (b)(e) 8,800
3,640 University of Texas, Financing System Revenue
Refunding Bonds, Series B, 5% due 8/15/2018 3,977
===========================================================================================
Virginia--3.0%
5,000 Virginia State Public School Authority Revenue Bonds,
Series A, 5% due 8/01/2017 5,497
===========================================================================================
Washington--6.2%
5,400 Energy Northwest, Washington, Electric Revenue
Refunding Bonds (Columbia Generating), Series A,
5.50% due 7/01/2017 (d) 5,861
5,000 Pierce County, Washington, School District Number 3
(Puyallup), GO, 5% due 12/01/2017 (b) 5,430
===========================================================================================
Puerto Rico--0.9%
1,500 Puerto Rico Commonwealth Government Development
Bank, Senior Revenue Bonds, Series B, 5%
due 12/01/2017 1,617
- -------------------------------------------------------------------------------------------
Total Municipal Bonds
(Cost--$154,605)--87.9% 159,221
===========================================================================================
Municipal Bonds Held in Trust (i)
===========================================================================================
California--6.1%
10,000 California State Department of Water Resources,
Power Supply Revenue Bonds, Series A,
5.50% due 5/01/2014 (a) 11,038
- -------------------------------------------------------------------------------------------
Illinois--5.9%
Chicago, Illinois, O'Hare International Airport, General
Airport Revenue Refunding Bonds, Third Lien, AMT,
Series A-2 (d):
5,000 5.25% due 1/01/2013 5,359
5,000 5.25% due 1/01/2014 5,358
- -------------------------------------------------------------------------------------------
New Jersey--5.7%
Port Authority of New Jersey and New York Revenue
Refunding Bonds, AMT, 120th Series (b):
5,000 5.75% due 10/15/2013 5,138
5,000 5.75% due 10/15/2014 5,138
- -------------------------------------------------------------------------------------------
Total Municipal Bonds Held in Trust
(Cost--$32,109)--17.7% 32,031
===========================================================================================
Shares
Held Mutual Funds
===========================================================================================
244 BlackRock Insured Municipal 2008 Term Trust, Inc. (g) 3,789
100 BlackRock Insured Municipal Term Trust, Inc. (g) 972
344 BlackRock Municipal Target Term Trust (g) 3,465
- -------------------------------------------------------------------------------------------
Total Mutual Funds (Cost--$9,086)--4.5% 8,226
===========================================================================================
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 11
Schedule of Investments (concluded) (in Thousands)
Shares
Held Short-Term Securities Value
===========================================================================================
19 Merrill Lynch Institutional Tax-Exempt Fund,
3.38% (c)(g) $ 19
- -------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$19)--0.0% 19
===========================================================================================
Total Investments (Cost--$195,819*)--110.1% 199,497
Liabilities in Excess of Other Assets--(1.8%) (3,296)
Liability for Trust Certificates, Including Interest Expense Payable--(8.3%) (15,069)
--------
Net Assets--100.0% $181,132
========
* The cost and unrealized appreciation (depreciation) of investments as of
October 31, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ................................. $ 181,418
=========
Gross unrealized appreciation .................. $ 4,341
Gross unrealized depreciation .................. (1,262)
---------
Net unrealized appreciation .................... $ 3,079
=========
(a) AMBAC Insured.
(b) MBIA Insured.
(c) Represents the current yield as of October 31, 2006.
(d) FSA Insured.
(e) Security may have a maturity of more than one year at time of issuance,
but has variable rate and demand features that qualify it as a short-term
security. The rate disclosed is that currently in effect. This rate
changes periodically based upon prevailing market rates.
(f) FGIC Insured.
(g) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Institutional Tax-Exempt Fund -- $ -- +
BlackRock Insured Municipal 2008 Term Trust, Inc. -- 194
BlackRock Insured Municipal Term Trust, Inc. (16) 54
BlackRock Municipal Target Term Trust -- 128
--------------------------------------------------------------------------
+ Income was less than $1,000.
(h) Represents a zero coupon bond; the interest rate shown reflects the
effective yield.
(i) Securities represent underlying bonds transferred to a separate
securitization trust established in a tender option bond transaction in
which the Fund acquired the residual interest certificates. These
securities serve as collateral in a financing transaction. See Note 1 (c)
to Financial Statements for details of Municipal Bonds Held in Trust.
o Forward interest rate swaps outstanding as of October 31, 2006 were as
follows:
--------------------------------------------------------------------------
Notional Unrealized
Amount Depreciation
--------------------------------------------------------------------------
Pay a fixed rate of 3.808% and receive a
floating rate based on a 1-week Bond Market
Association rate
Broker, Citibank N.A.
Expires January 2017 $19,700 $ (252)
--------------------------------------------------------------------------
See Notes to Financial Statements.
12 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Statement of Assets and Liabilities
As of October 31, 2006
===================================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$186,713,274) $ 191,251,534
Investments in affiliated securities, at value (identified cost--$9,105,457) ... 8,245,723
Cash ........................................................................... 87,430
Receivables:
Securities sold ............................................................. $ 8,168,580
Interest .................................................................... 2,528,319
Beneficial interest sold .................................................... 690,874
Dividends from affiliates ................................................... 29,908 11,417,681
-------------
Prepaid expenses and other assets .............................................. 37,952
-------------
Total assets ................................................................... 211,040,320
-------------
===================================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Trust certificates ............................................................. 15,000,000
Unrealized depreciation on forward interest rate swaps--net .................... 251,982
Payables:
Securities purchased ........................................................ 13,467,536
Dividends to shareholders ................................................... 659,976
Beneficial interest redeemed ................................................ 320,075
Investment adviser .......................................................... 73,578
Interest expense ............................................................ 68,527
Distributor ................................................................. 8,421
Other affiliates ............................................................ 1,768 14,599,881
-------------
Accrued expenses ............................................................... 55,992
-------------
Total liabilities .............................................................. 29,907,855
-------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets ..................................................................... $ 181,132,465
=============
===================================================================================================================================
Net Assets Consist of
- -----------------------------------------------------------------------------------------------------------------------------------
Institutional Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ............................................................. $ 969,261
Investor A Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ............................................................. 1,560
Investor A1 Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ............................................................. 693,908
Investor B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ............................................................. 94,915
Investor C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized ............................................................. 2,012
Paid-in capital in excess of par ............................................... 177,873,281
Undistributed investment income--net ........................................... $ 36,934
Accumulated realized capital losses--net ....................................... (1,965,950)
Unrealized appreciation--net ................................................... 3,426,544
-------------
Total accumulated earnings--net ................................................ 1,497,528
-------------
Net Assets ..................................................................... $ 181,132,465
=============
===================================================================================================================================
Net Asset Value
- -----------------------------------------------------------------------------------------------------------------------------------
Institutional--Based on net assets of $99,678,431 and 9,692,606 shares of
beneficial interest outstanding ............................................... $ 10.28
=============
Investor A--Based on net assets of $160,240 and 15,597 shares of beneficial
interest outstanding .......................................................... $ 10.27
=============
Investor A1--Based on net assets of $71,327,238 and 6,939,082 shares of
beneficial interest outstanding ............................................... $ 10.28
=============
Investor B--Based on net assets of $9,759,813 and 949,153 shares of beneficial
interest outstanding .......................................................... $ 10.28
=============
Investor C--Based on net assets of $206,743 and 20,120 shares of beneficial
interest outstanding .......................................................... $ 10.28
=============
See Notes to Financial Statements
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 13
Statement of Operations
For the Year Ended October 31, 2006
===================================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------------
Interest ....................................................................... $ 8,267,250
Dividends from affiliates ...................................................... 376,371
-------------
Total income ................................................................... 8,643,621
-------------
===================================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ....................................................... $ 1,008,817
Interest expense and fees ...................................................... 685,456
Accounting services ............................................................ 102,563
Service and distribution fees--Class C ......................................... 58,543
Transfer agent fees--Institutional ............................................. 52,130
Service fees--Investor A1 ...................................................... 51,740
Professional fees .............................................................. 51,588
Registration fees .............................................................. 50,111
Printing and shareholder reports ............................................... 47,450
Service and distribution fees--Investor B ...................................... 36,919
Trustees' fees and expenses .................................................... 26,813
Transfer agent fees--Investor A1 ............................................... 26,808
Custodian fees ................................................................. 13,436
Transfer agent fees--Class C ................................................... 11,740
Pricing fees ................................................................... 11,145
Transfer agent fees--Investor B ................................................ 7,827
Service and distribution fees--Investor C ...................................... 87
Service fees--Investor A ....................................................... 20
Transfer agent fees--Investor C ................................................ 4
Transfer agent fees--Investor A ................................................ 4
Other .......................................................................... 28,776
-------------
Total expenses before waiver and reimbursement ................................. 2,271,977
Waiver and reimbursement of expenses ........................................... (91,751)
-------------
Total expenses after waiver and reimbursement .................................. 2,180,226
-------------
Investment income--net ......................................................... 6,463,395
-------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- -----------------------------------------------------------------------------------------------------------------------------------
Realized loss on:
Investments--net ............................................................ (1,009,002)
Forward interest rate swaps--net ............................................ (679,725) (1,688,727)
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ............................................................ 4,487,022
Forward interest rate swaps--net ............................................ (405,436) 4,081,586
---------------------------------
Total realized and unrealized gain--net ........................................ 2,392,859
-------------
Net Increase in Net Assets Resulting from Operations ........................... $ 8,856,254
=============
See Notes to Financial Statements.
14 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Statements of Changes in Net Assets (As Restated for 2005. See Note 7)
For the Year Ended
October 31,
---------------------------------
Increase (Decrease) in Net Assets: 2006 2005
===================================================================================================================================
Operations
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ......................................................... $ 6,463,395 $ 6,674,384
Realized gain (loss)--net ...................................................... (1,688,727) 3,724,547
Change in unrealized appreciation/depreciation--net ............................ 4,081,586 (10,003,397)
---------------------------------
Net increase in net assets resulting from operations ........................... 8,856,254 395,534
---------------------------------
===================================================================================================================================
Dividends & Distributions to Shareholders
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income--net:
Institutional ............................................................... (3,600,332) (3,366,803)
Investor A .................................................................. (243) --
Investor A1 ................................................................. (1,810,323) (1,826,938)
Investor B .................................................................. (405,591) (584,560)
Investor C .................................................................. (206) --
Class C ..................................................................... (646,700) (896,083)
Realized gain--net:
Institutional ............................................................... (2,007,396) (450,522)
Investor A .................................................................. -- --
Investor A1 ................................................................. (969,703) (292,761)
Investor B .................................................................. (284,047) (103,909)
Investor C .................................................................. -- --
Class C ..................................................................... (491,006) (147,244)
---------------------------------
Net decrease in net assets resulting from dividends and distributions to
shareholders .................................................................. (10,215,547) (7,668,820)
---------------------------------
===================================================================================================================================
Beneficial Interest Transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets derived from beneficial interest
transactions .................................................................. (8,046,361) 13,516,144
---------------------------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ........................................ (9,405,654) 6,242,858
Beginning of year .............................................................. 190,538,119 184,295,261
---------------------------------
End of year* ................................................................... $ 181,132,465 $ 190,538,119
---------------------------------
* Undistributed investment income--net ...................................... $ 36,934 $ 36,934
=================================
See Notes to Financial Statements.
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 15
Financial Highlights (As Restated for 2005, 2004, 2003 and 2002. See Note 7)
Institutional Investor A
--------------------------------------------------------- --------------
For the
Period
For the Year Ended October 31, Oct. 2, 2006++
The following per share data and ratios have been derived --------------------------------------------------------- to Oct. 31,
from information provided in the financial statements. 2006 2005 2004 2003 2002 2006
====================================================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .................. $ 10.36 $ 10.76 $ 10.71 $ 10.69 $ 10.60 $ 10.26
--------------------------------------------------------- -----------
Investment income--net ................................ .37+ .38+ .40+ .40+ .40 .02+
Realized and unrealized gain (loss)--net .............. .13 (.34) .08 .10 .13 .02
--------------------------------------------------------- -----------
Total from investment operations ...................... .50 .04 .48 .50 .53 .04
--------------------------------------------------------- -----------
Less dividends and distributions:
Investment income--net ............................. (.37) (.38) (.40) (.41) (.40) (.03)
Realized gain--net ................................. (.21) (.06) (.03) (.07) (.04) --
--------------------------------------------------------- -----------
Total dividends and distributions ..................... (.58) (.44) (.43) (.48) (.44) (.03)
--------------------------------------------------------- -----------
Net asset value, end of period ........................ $ 10.28 $ 10.36 $ 10.76 $ 10.71 $ 10.69 $ 10.27
========================================================= ===========
====================================================================================================================================
Total Investment Return**
- ------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .................... 4.96% .40% 4.57% 4.77% 5.16%@ .36%@
========================================================= ===========
====================================================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver and reimbursement and excluding
interest expense ..................................... .73% .74% .79% .85% .89% .97%*
========================================================= ===========
Expenses, net of waiver and reimbursement ............. 1.11% 1.00% .91% .94% 1.02% 1.34%*
========================================================= ===========
Expenses .............................................. 1.16% 1.05% .94% .96% 1.02% 1.39%*
========================================================= ===========
Investment income--net ................................ 3.61% 3.63% 3.76% 3.80% 3.84% 3.08%*
========================================================= ===========
====================================================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) .............. $ 99,678 $100,831 $ 78,777 $ 44,372 $ 34,066 $ 160
========================================================= ===========
Portfolio turnover .................................... 102% 162% 176% 179% 181% 102%
========================================================= ===========
* Annualized.
** Total investment returns exclude the effects of sales charges. Effective
December 28, 2005, Institutional Shares are no longer subject to any
front-end sales charge.
+ Based on average shares outstanding.
++ Commencement of operations.
@ Aggregate total investment return.
See Notes to Financial Statements.
16 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Financial Highlights (continued)
(As Restated for 2005, 2004, 2003 and 2002. See Note 7)
Investor A1
The following per share data --------------------------------------------------------------------
and ratios have been derived For the Year Ended October 31,
from information provided in --------------------------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
================================================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year .................... $ 10.35 $ 10.76 $ 10.71 $ 10.69 $ 10.60
--------------------------------------------------------------------
Investment income--net ................................ .35+ .38+ .39+ .40+ .39
Realized and unrealized gain (loss)--net .............. .15 (.36) .08 .09 .13
--------------------------------------------------------------------
Total from investment operations ...................... .50 .02 .47 .49 .52
--------------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............................. (.36) (.37) (.39) (.40) (.39)
Realized gain--net ................................. (.21) (.06) (.03) (.07) (.04)
--------------------------------------------------------------------
Total dividends and distributions ..................... (.57) (.43) (.42) (.47) (.43)
--------------------------------------------------------------------
Net asset value, end of year .......................... $ 10.28 $ 10.35 $ 10.76 $ 10.71 $ 10.69
====================================================================
================================================================================================================================
Total Investment Return*
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .................... 4.96% .20% 4.47% 4.68% 5.05%
====================================================================
================================================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver and reimbursement and excluding
interest expense ..................................... .83% .84% .89% .95% .99%
====================================================================
Expenses, net of waiver and reimbursement ............. 1.20% 1.11% 1.01% 1.04% 1.12%
====================================================================
Expenses .............................................. 1.25% 1.16% 1.04% 1.06% 1.12%
====================================================================
Investment income--net ................................ 3.50% 3.54% 3.66% 3.70% 3.73%
====================================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ................ $ 71,327 $ 48,524 $ 55,128 $ 51,786 $ 45,563
====================================================================
Portfolio turnover .................................... 102% 162% 176% 179% 181%
====================================================================
Investor B
The following per share data --------------------------------------------------------------------
and ratios have been derived For the Year Ended October 31,
from information provided in --------------------------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
================================================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year .................... $ 10.36 $ 10.76 $ 10.71 $ 10.69 $ 10.60
--------------------------------------------------------------------
Investment income--net ................................ .34+ .35+ .37+ .38+ .37
Realized and unrealized gain (loss)--net .............. .15 (.34) .08 .09 .13
--------------------------------------------------------------------
Total from investment operations ...................... .49 .01 .45 .47 .50
--------------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............................. (.36) (.35) (.37) (.38) (.37)
Realized gain--net ................................. (.21) (.06) (.03) (.07) (.04)
--------------------------------------------------------------------
Total dividends and distributions ..................... (.57) (.41) (.40) (.45) (.41)
--------------------------------------------------------------------
Net asset value, end of year .......................... $ 10.28 $ 10.36 $ 10.76 $ 10.71 $ 10.69
====================================================================
================================================================================================================================
Total Investment Return*
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .................... 4.64% .08% 4.24% 4.46% 4.83%
====================================================================
================================================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver and reimbursement and excluding
interest expense ..................................... 1.05% 1.05% 1.10% 1.17% 1.21%
====================================================================
Expenses, net of waiver and reimbursement ............. 1.42% 1.32% 1.22% 1.26% 1.33%
====================================================================
Expenses .............................................. 1.47% 1.37% 1.25% 1.27% 1.34%
====================================================================
Investment income--net ................................ 3.30% 3.34% 3.45% 3.48% 3.53%
====================================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ................ $ 9,760 $ 14,982 $ 21,623 $ 28,678 $ 37,155
====================================================================
Portfolio turnover .................................... 102% 162% 176% 179% 181%
====================================================================
* Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding.
See Notes to Financial Statements.
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 17
Financial Highlights (concluded)
Investor C
--------------
For the
Period
Oct. 2, 2006++
The following per share data and ratios have been derived to Oct. 31,
from information provided in the financial statements. 2006
====================================================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .................................................................. $ 10.26
--------------
Investment income--net* ............................................................................... .01
Realized and unrealized gain--net ..................................................................... .03
--------------
Total from investment operations ...................................................................... .04
--------------
Less dividends from investment income--net ............................................................ (.02)
--------------
Net asset value, end of period ........................................................................ $ 10.28
==============
====================================================================================================================================
Total Investment Return**
- ------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .................................................................... .40%@
==============
====================================================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver and reimbursement and excluding
interest expense ..................................................................................... 1.73%@@
==============
Expenses, net of waiver and reimbursement ............................................................. 2.09%@@
==============
Expenses .............................................................................................. 2.14%@@
==============
Investment income--net ................................................................................ 2.36%@@
==============
====================================================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) .............................................................. $ 207
==============
Portfolio turnover .................................................................................... 102%
==============
* Based on average shares outstanding.
** Total investment returns exclude the effects of sales charges.
++ Commencement of operations.
@ Aggregate total investment return.
@@ Annualized.
See Notes to Financial Statements.
18 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
On September 29, 2006, Merrill Lynch Municipal Intermediate Term Fund of Merrill
Lynch Municipal Series Trust was renamed BlackRock Intermediate Municipal Fund
(the "Fund") of BlackRock Municipal Series Trust (the "Trust"). The Fund is
presently the only series of the Trust. The Fund is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may require
the use of management accruals and estimates. Actual results may differ from
these estimates. The Fund offers multiple classes of shares. On August 25, 2006,
Class C Shares were converted into Class A Shares. Effective October 2, 2006,
Class I, Class A and Class B Shares were redesignated Institutional, Investor A1
and Investor B Shares, respectively. Investor A and Investor C Shares commenced
operations on October 2, 2006. Institutional Shares are sold without a sales
charge and are available only to certain eligible investors. Investor A Shares
are sold with a front-end sales charge. Shares of Investor B and Investor C may
be subject to a contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the same terms and
conditions, except that Investor A, Investor A1, Investor B and Investor C
Shares bear certain expenses related to the account maintenance of such shares,
and Investor B and Investor C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution expenditures
(except that Investor B shareholders may vote on material changes to the
Investor A1 distribution plan). Income, expenses (other than expenses
attributable to a specific class) and realized and unrealized gains and losses
are allocated daily to each class based on its relative net assets. The
following is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter ("OTC") markets and are valued at the last available bid price
in the OTC market or on the basis of values as obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general direction
of the Board of Trustees. Such valuations and procedures are reviewed
periodically by the Board of Trustees of the Fund. Financial futures contracts
and options thereon, which are traded on exchanges, are valued at their closing
prices as of the close of such exchanges. Options written or purchased are
valued at the last sale price in the case of exchange-traded options. Options
traded in the OTC market are valued at the last asked price (options written) or
the last bid price (options purchased). Swap agreements are valued by quoted
fair values received daily by the Fund's pricing service. Short-term investments
with a remaining maturity of 60 days or less are valued at amortized cost, which
approximates market value, under which method the investment is valued at cost
and any premium or discount is amortized on a straight line basis to maturity.
Investments in open-end investment companies are valued at their net asset value
each business day. Securities and other assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Fund.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such financial futures contracts.
Financial futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or yield.
Upon entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
o Forward interest rate swaps -- The Fund may enter into forward interest
rate swaps. In a forward interest rate swap, the Fund and the counterparty
agree to make periodic net payments on a specified notional contract
amount, commencing on a specified future effective date, unless terminated
earlier. When the agreement is closed, the Fund records a realized gain or
loss in an amount equal to the value of the agreement.
o Swaps -- The Fund may enter into swap agreements, which are OTC contracts
in which the Fund and a counter-
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 19
Notes to Financial Statements (continued)
party agree to make periodic net payments on a specified notional amount.
The net payments can be made for a set period of time or may be triggered
by a predetermined credit event. The net periodic payments may be based on
a fixed or variable interest rate; the change in market value of a
specified security, basket of securities or index; or the return generated
by a security. These periodic payments received or made by the Fund are
recorded in the accompanying Statement of Operations as realized gains or
losses, respectively. Gains or losses are also realized upon termination
of the swap agreements. Swaps are marked-to-market daily and changes in
value are recorded as unrealized appreciation (depreciation). Risks
include changes in the returns of the underlying instruments, failure of
the counterparties to perform under the contracts' terms and the possible
lack of liquidity with respect to the swap agreements.
(c) Municipal bonds held in trust -- The Fund invests in leveraged residual
certificates ("TOB Residuals") issued by tender option bond trusts ("TOBs"). A
TOB is established by a third party sponsor forming a special purpose entity,
into which the Fund, or an agent on behalf of the Fund, transfers municipal
securities. A TOB typically issues two classes of beneficial interests:
short-term floating rate certificates, which are sold to third party investors,
and residual certificates, which are generally issued to the Fund which made the
transfer or to affiliates of the Fund. The transfer of the municipal securities
to a TOB does not qualify for sale treatment under Statement of Financial
Accounting Standards No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", therefore the municipal
securities deposited into a TOB are presented in the Fund's schedule of
investments and the proceeds from the transaction are reported as a liability
for trust certificates of the Fund. Similarly, proceeds from residual
certificates issued to affiliates, if any, from the transaction are included in
the liability for trust certificates. Interest income from the underlying
security is recorded by the Fund 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 reported as expenses of the
Fund. The floating rate certificates have interest rates that generally reset
weekly and their holders have the option to tender certificates to the TOB for
redemption at par at each reset date. The residual interests held by the Fund
include the right of the Fund (1) to cause the holders of a proportional share
of the floating rate certificates to tender their certificates at par, and (2)
to transfer a corresponding share of the municipal securities from the TOB to
the Fund. At October 31, 2006, the aggregate value of the underlying municipal
securities transferred to TOBs was $32,031,250, the related liability for trust
certificates was $15,000,000 and the range of interest rates was 3.62% to 3.63%.
Financial transactions executed through TOBs generally will under perform the
market for fixed rate municipal bonds in a rising interest rate environment, but
tend to outperform the market for fixed rate bonds when interest rates decline
or remain relatively stable. Should short-term interest rates rise, the Fund's
investment in TOB Residuals likely will adversely affect the Fund's investment
income-net and distributions to shareholders. Fluctuations in the market value
of municipal securities deposited into the TOB may adversely affect the Fund's
net asset values per share.
While the Fund's investment policies and restrictions expressly permit
investments in inverse floating rate securities such as TOB Residuals, they
generally do not allow the Fund to borrow money for purposes of making
investments. The Fund's management believes that the Fund's restrictions on
borrowings do not apply to the secured borrowings deemed to have occurred for
accounting purposes.
(d) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(f) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
(h) Recent accounting pronouncements -- In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109."
FIN 48 prescribes the minimum recognition threshold a tax position must meet in
connection with accounting for uncertainties in income tax positions taken or
20 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Notes to Financial Statements (continued)
expected to be taken by an entity including mutual funds before being measured
and recognized in the financial statements. Adoption of FIN 48 is required for
fiscal years beginning after December 15, 2006. The impact on the Fund's
financial statements, if any, is currently being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, "Fair Value Measurements" ("FAS 157"), was issued and is effective for
fiscal years beginning after November 15, 2007. FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the implications of
FAS 157. At this time its impact on the Fund's financial statements has not been
determined.
(i) Reclassification -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the current
year, $277,233 has been reclassified between paid-in capital in excess of par
and accumulated net realized capital losses as a result of permanent differences
attributable to distributions in excess of capital gains. This reclassification
has no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
On September 29, 2006, BlackRock, Inc. and Merrill Lynch & Co., Inc. ("Merrill
Lynch") combined Merrill Lynch's investment management business, Merrill Lynch
Investment Managers, L.P. ("MLIM") and its affiliates, with BlackRock, Inc. to
create a new independent company. Merrill Lynch has a 49.8% economic interest
and a 45% voting interest in the combined company and The PNC Financial Services
Group, Inc. ("PNC") has approximately a 34% economic and voting interest. The
new company operates under the BlackRock name and is governed by a board of
directors with a majority of independent members.
On July 31, 2006, shareholders of the Fund approved a new Investment Advisory
Agreement with BlackRock Advisors, Inc. (the "Manager"), an indirect, wholly
owned subsidiary of BlackRock, Inc. BlackRock Advisors, Inc. was recently
reorganized into a limited liability company and renamed BlackRock Advisors,
LLC. The new Investment Advisory Agreement between the Fund and the Manager
became effective on September 29, 2006. Prior to September 29, 2006, MLIM was
the Investment Adviser. The general partner of MLIM is Princeton Services, Inc.
("PSI"), an indirect, wholly owned subsidiary of Merrill Lynch, which is the
limited partner. The Fund has also entered into a separate Distribution
Agreement and Distribution Plan with FAM Distributors, Inc. ("FAMD") and
BlackRock Distributors, Inc. ("BDI") (collectively, the "Distributor"). FAMD is
a wholly owned subsidiary of Merrill Lynch Group, Inc. and BDI is an affiliate
of BlackRock, Inc.
The Manager is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee of .55% of the average daily value of the Fund's net assets.
The Manager and/or MLIM has agreed to waive .05% of its fee resulting in an
annual fee equal to .50% of the average daily net assets of the Fund. For the
period November 1, 2005 to September 29, 2006, MLIM earned fees of $927,878, of
which $84,353 was waived. For the period September 30, 2006 to October 31, 2006,
the Manager earned fees of $80,939, of which $7,358 was waived. In addition, the
Manager has entered into a sub-advisory agreement with BlackRock Investment
Management, LLC, an affiliate of the Manager, under which the Manager pays the
Sub-Adviser for services it provides a fee equal to 59% of the management fee
paid by the Fund to the Manager. In addition, the Manager has agreed to
reimburse its management fee by the amount of management fees the Fund pays to
the Manager indirectly through its investment in Merrill Lynch Institutional
Tax-Exempt Fund. For the period November 1, 2005 to September 29, 2006, MLIM
reimbursed the Fund in the amount of $37. For the period September 30, 2006 to
October 31, 2006, the Manager reimbursed the Fund in the amount of $3.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance fees ("service fees") and distribution fees. The
fees are accrued daily and paid monthly at annual rates based upon the average
daily net assets of the shares as follows:
- --------------------------------------------------------------------------------
Service Distribution
Fee Fee
- --------------------------------------------------------------------------------
Investor A ............................... .25% --
Investor A1 .............................. .10% --
Investor B ............................... .20% .10%
Investor C ............................... .25% .75%
Class C .................................. .20% .10%
- --------------------------------------------------------------------------------
Pursuant to sub-agreements with each Distributor, broker-dealers, including
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a wholly owned
subsidiary of Merrill Lynch, and an affiliate of each of the Distributors, also
provide account maintenance and distribution services to
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 21
Notes to Financial Statements (continued)
the Fund. The ongoing service fee compensates the Distributors and each
broker-dealer (including MLPF&S) for providing account maintenance services to
Investor A, Investor A1, Investor B and Investor C shareholders. The ongoing
distribution fee compensates the Distributors and the broker-dealers for
providing shareholder and distribution-related services to Investor B and
Investor C shareholders.
For the year ended October 31, 2006, FAMD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Institutional and
Investor A1 Shares as follows:
- --------------------------------------------------------------------------------
FAMD MLPF&S
- --------------------------------------------------------------------------------
Institutional ............................ $ 810 $30,899
Investor A1 .............................. $ 702 $ 7,955
- --------------------------------------------------------------------------------
For the year ended October 31, 2006, MLPF&S received contingent deferred sales
charges of $4,711 and $3,794 relating to transactions in Investor B and Class C
Shares, respectively.
In addition, MLPF&S received $314 in commissions on the execution of portfolio
security transactions for the Fund for the year ended October 31, 2006.
Effective September 29, 2006, PFPC, Inc., an indirect, wholly owned subsidiary
of PNC and an affiliate of the Manager, became the Fund's transfer agent. Prior
to September 29, 2006, the Fund's transfer agent was Financial Data Services,
Inc. ("FDS"), a wholly owned subsidiary of Merrill Lynch.
For the year ended October 31, 2006, the Fund reimbursed MLIM and the Manager
$3,916 and $298, respectively, for certain accounting services.
Prior to September 29, 2006, certain officers and/or trustees of the Fund were
officers and/or directors of Merrill Lynch, FAMD, FDS, MLIM, and/or PSI.
Commencing September 29, 2006, certain officers and/or trustees of the Fund are
officers and/or directors of BlackRock, Inc. or its affiliates.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 2006 were $202,354,378 and $222,154,352, respectively.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $(8,046,361) and $13,516,144 for the years ended October 31,
2006 and October 31, 2005, respectively.
Transactions in beneficial interest for each class were as follows:
- -------------------------------------------------------------------------------
Institutional Shares for the Year Dollar
Ended October 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................................. 4,020,988 $ 40,960,524
Shares issued to shareholders
in reinvestment of dividends
and distributions .......................... 99,237 1,011,100
-----------------------------
Total issued ................................. 4,120,225 41,971,624
Shares redeemed .............................. (4,163,299) (42,438,080)
-----------------------------
Net decrease ................................. (43,074) $ (466,456)
=============================
- -------------------------------------------------------------------------------
Institutional Shares for the Year Dollar
Ended October 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................................. 4,508,551 $ 47,812,886
Shares issued to shareholders
in reinvestment of dividends
and distributions .......................... 77,262 818,583
-----------------------------
Total issued ................................. 4,585,813 48,631,469
Shares redeemed .............................. (2,169,763) (22,961,396)
-----------------------------
Net increase ................................. 2,416,050 $ 25,670,073
=============================
- -------------------------------------------------------------------------------
Investor A Shares for the Period Dollar
Oct. 2, 2006+ to Oct. 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................................. 15,604 $ 159,487
Shares redeemed .............................. (7) (67)
-----------------------------
Net increase ................................. 15,597 $ 159,420
=============================
+ Commencement of operations.
- -------------------------------------------------------------------------------
Investor A1 Shares for the Year Dollar
Ended October 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................................. 428,799 $ 4,375,953
Automatic conversion of shares ............... 125,138 1,275,870
Shares issued to shareholders
in reinvestment of dividends
and distributions .......................... 152,300 1,551,857
Shares issued resulting
from conversion of Class C ................. 2,403,412 24,544,146
-----------------------------
Total issued ................................. 3,109,649 31,747,826
Shares redeemed .............................. (858,199) (8,752,391)
-----------------------------
Net increase ................................. 2,251,450 $ 22,995,435
=============================
- -------------------------------------------------------------------------------
Investor A1 Shares for the Year Dollar
Ended October 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................................. 391,581 $ 4,150,465
Automatic conversion of shares ............... 149,930 1,584,520
Shares issued to shareholders
in reinvestment of dividends
and distributions .......................... 121,016 1,281,532
-----------------------------
Total issued ................................. 662,527 7,016,517
Shares redeemed .............................. (1,099,706) (11,665,612)
-----------------------------
Net decrease ................................. (437,179) $ (4,649,095)
=============================
22 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Notes to Financial Statements (continued)
- -------------------------------------------------------------------------------
Investor B Shares for the Year Dollar
Ended October 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................................. 51,287 $ 524,293
Shares issued to shareholders
in reinvestment of dividends
and distributions .......................... 36,382 370,767
-----------------------------
Total issued ................................. 87,669 895,060
-----------------------------
Automatic conversion of shares ............... (125,110) (1,275,870)
Shares redeemed .............................. (460,278) (4,695,757)
-----------------------------
Total redeemed ............................... (585,388) (5,971,627)
-----------------------------
Net decrease ................................. (497,719) $ (5,076,567)
=============================
- -------------------------------------------------------------------------------
Investor B Shares for the Year Dollar
Ended October 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................................. 135,668 $ 1,430,116
Shares issued to shareholders
in reinvestment of dividends
and distributions .......................... 33,249 352,362
-----------------------------
Total issued ................................. 168,917 1,782,478
-----------------------------
Automatic conversion of shares ............... (149,872) (1,584,520)
Shares redeemed .............................. (581,596) (6,172,883)
-----------------------------
Total redeemed ............................... (731,468) (7,757,403)
-----------------------------
Net decrease ................................. (562,551) $ (5,974,925)
=============================
- -------------------------------------------------------------------------------
Investor C Shares for the Period Dollar
Oct. 2, 2006+ to Oct. 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................................. 20,126 $ 205,721
Shares redeemed .............................. (6) (69)
-----------------------------
Net increase ................................. 20,120 $ 205,652
=============================
+ Commencement of operations.
- -------------------------------------------------------------------------------
Class C Shares for the Period Dollar
Nov. 1, 2005 to Aug. 25, 2006+ Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................................. 511,348 $ 5,215,735
Shares issued to shareholders
in reinvestment of dividends
and distributions .......................... 69,597 708,846
-----------------------------
Total issued ................................. 580,945 5,924,581
-----------------------------
Shares redeemed .............................. (708,517) (7,244,280)
Shares redeemed resulting
from conversion to Investor A1 ............. (2,403,368) (24,544,146)
-----------------------------
Total redeemed ............................... (3,111,885) (31,788,426)
-----------------------------
Net decrease ................................. (2,530,940) $(25,863,845)
=============================
+ On August 25, 2006 Class C was converted to Class A (Investor A1).
- -------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended October 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................................. 484,961 $ 5,120,689
Shares issued to shareholders
in reinvestment of dividends
and distributions .......................... 60,792 643,895
-----------------------------
Total issued ................................. 545,753 5,764,584
Shares redeemed .............................. (688,937) (7,294,493)
-----------------------------
Net decrease ................................. (143,184) $ (1,529,909)
=============================
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by the Manager and its
affiliates (or MLIM and its affiliates), is a party to a $500,000,000 credit
agreement with a group of lenders, which expires November 2006, and was
subsequently renewed for one year under substantially the same terms. The Fund
may borrow under the credit agreement to fund shareholder redemptions and for
other lawful purposes other than for leverage. The Fund may borrow up to the
maximum amount allowable under the Fund's current prospectus and statement of
additional information, subject to various other legal, regulatory or
contractual limits. The Fund pays a commitment fee of .07% per annum based on
the Fund's pro rata share of the unused portion of the credit agreement. Amounts
borrowed under the credit agreement bear interest at a rate equal to, at each
Fund's election, the federal funds rate plus .50% or a base rate as defined in
the credit agreement. The Fund did not borrow under the credit agreement during
the year ended October 31, 2006.
6. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended October
31, 2006 and October 31, 2005 was as follows:
- --------------------------------------------------------------------------------
10/31/2006 10/31/2005
- --------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income .................... $ 6,463,395 $ 6,674,384
Ordinary income ...................... 77,571 19,723
Long-term capital gains .............. 3,674,581 974,713
-------------------------------
Total distributions .................... $10,215,547 $ 7,668,820
===============================
As of October 31, 2006, the components of accumulated earnings on a tax basis
were as follows:
- -----------------------------------------------------------------------------
Undistributed tax-exempt income -- net ................... $ 37,245
Undistributed long-term capital gains -- net ............. --
-----------
Total undistributed earnings -- net ...................... 37,245
Capital loss carryforward ................................ (1,745,058)*
Unrealized gains -- net .................................. 3,205,341**
-----------
Total accumulated earnings -- net ........................ $ 1,497,528
===========
* At October 31, 2006, the Fund had a net capital loss carryforward of
$1,745,058, all of which expires in 2014. These amounts will be available
to offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the difference between the book and tax
treatment of residual interests in tender option bond trusts and other
book/tax temporary differences.
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 23
Notes to Financial Statements (concluded)
7. Restatement Information:
During the year ended October 31, 2006, the Fund determined that the criteria
for sale accounting in Statement of Financial Accounting Standards No. 140 had
not been met for certain transfers of municipal bonds and that these transfers
should have been accounted for as secured borrowings rather than as sales.
Accordingly, the Fund has restated its Statement of Changes in Net Assets for
the year ended October 31, 2005 to give effect to offsetting changes in realized
gain -- net and in the change in unrealized appreciation/depreciation -- net on
the transferred municipal securities. Additionally, the Fund, has restated its
financial highlights for the years ended October 31, 2005, 2004, 2003 and 2002
to give effect to recording the transfers of the municipal bonds as secured
borrowings, including recording interest on the bonds as interest income and
interest on the secured borrowings as interest expense.
- -------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Year Ended October 31, 2005
- -------------------------------------------------------------------------------
Previously
Reported Restated
- -------------------------------------------------------------------------------
Realized gain -- net ..................... $ 3,752,147 $ 3,724,547
Change in unrealized
appreciation/depreciation -- net ....... $(10,030,997) $(10,003,397)
- -------------------------------------------------------------------------------
Financial Highlights
For the Years Ended October 31, 2005, 2004, 2003 and 2002
2005 2004 2003 2002
-------------------- --------------------- -------------------- --------------------
Previously Previously Previously Previously
Institutional Reported Restated Reported Restated Reported Restated Reported Restated
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver and reimbursement .. .74% 1.00% .79% .91% .85% .94% .89% 1.02%
Expenses ................................... .79% 1.05% .82% .94% .87% .96% .90% 1.02%
Portfolio turnover ......................... 190.28% 162% 211.00% 176% 214.92% 179% 201.37% 181%
- ------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003 2002
-------------------- --------------------- -------------------- --------------------
Previously Previously Previously Previously
Investor A1 Reported Restated Reported Restated Reported Restated Reported Restated
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver and reimbursement .. .84% 1.11% .89% 1.01% .95% 1.04% .99% 1.12%
Expenses ................................... .89% 1.16% .92% 1.04% .97% 1.06% 1.00% 1.12%
Portfolio turnover ......................... 190.28% 162% 211.00% 176% 214.92% 179% 201.37% 181%
- ------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003 2002
-------------------- --------------------- -------------------- --------------------
Previously Previously Previously Previously
Investor B Reported Restated Reported Restated Reported Restated Reported Restated
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, Net of Waiver and Reimbursement .. 1.05% 1.32% 1.10% 1.22% 1.17% 1.26% 1.21% 1.33%
Expenses ................................... 1.10% 1.37% 1.13% 1.25% 1.18% 1.27% 1.21% 1.34%
Portfolio turnover ......................... 190.28% 162% 211.00% 176% 214.92% 179% 201.37% 181%
- ------------------------------------------------------------------------------------------------------------------------------------
While the Statements of Assets and Liabilities as of October 31, 2005, 2004,
2003 and 2002, not presented herein, have not been reissued to give effect to
the restatement, the principal effects of the restatement would be to increase
investments and liability for trust certificates by corresponding amounts at
each year, with no effect on previously reported net assets.
The Statements of Operations for the years ended October 31, 2005, 2004, 2003
and 2002, not presented herein, have not been reissued to give effect to the
restatement. However, the principal effects of the restatement would be to
increase interest income and interest expense and fees by corresponding amounts
each year, and, where applicable, to revise realized gain (loss) on investments
- -- net, and the change in unrealized appreciation/depreciation on investments --
net, by corresponding and offsetting amounts.
The Statements of Changes in Net Assets for the years ended October 31, 2004,
2003 and 2002, not presented herein, have not been reissued to give effect to
the restatement, but the principal effects of a restatement, where applicable,
would be to revise previously reported realized gain (loss) -- net, and change
in unrealized appreciation/depreciation -- net, by corresponding and offsetting
amounts.
24 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of BlackRock Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of BlackRock Intermediate Municipal Fund of
BlackRock Municipal Series Trust (the "Trust") (formerly Merrill Lynch Municipal
Intermediate Term Fund of Merrill Lynch Municipal Series Trust) as of October
31, 2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Trust's 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 audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Trust
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Trust's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2006, by correspondence with the custodian
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 position of
BlackRock Intermediate Municipal Fund of BlackRock Municipal Series Trust as of
October 31, 2006, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and its financial highlights for each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 7, the statement of changes in net assets for the year
ended October 31, 2005, and the financial highlights for the years ended October
31, 2005, 2004, 2003 and 2002 have been restated.
Deloitte & Touche LLP
Princeton, New Jersey
January 16, 2007
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 25
Disclosure of Investment Advisory Agreement
Disclosure of MLIM Management Agreement
The Board of Trustees of the Trust met in May 2006 to consider approval of the
management agreement between the Trust, on behalf of the Fund, and Merrill Lynch
Investment Managers, L.P. ("MLIM"), the Fund's manager at that time.
Activities and Composition of the Board
All but one member of the Board is an independent trustee, whose only
affiliation with MLIM or other Merrill Lynch affiliates was as a trustee of the
Trust and as a director or trustee of certain other funds advised by MLIM or its
affiliates. The Chairman of the Board is also an independent trustee. New
trustee nominees are chosen by a Nominating Committee comprised of independent
trustees. All independent trustees also are members of the Board's Audit
Committee, and the independent trustees meet in executive session at each
in-person Board meeting. The Board and the Audit Committee meet in person for at
least two days each quarter and conduct other in-person and telephone meetings
throughout the year, some of which are formal Board meetings and some of which
are informational meetings. The independent counsel to the independent trustees
attends all in-person Board and Audit Committee meetings and other meetings at
the independent trustees' request.
MLIM Management Agreement -- Matters Considered by the Board
Every year, the Board considers approval of the Fund's management agreement. The
Board assesses the nature, scope and quality of the services provided to the
Fund by the personnel of the manager and its affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory requirements.
The Board also receives and assesses information regarding the services provided
to the Fund by certain unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
manager and its affiliates. Among the matters considered are: (a) fees (in
addition to management fees) paid to the manager and its affiliates by the Fund,
such as transfer agency fees and fees for marketing and distribution; (b) Fund
operating expenses paid to third parties; (c) the resources devoted to and
compliance reports relating to the Fund's investment objective, policies and
restrictions, and the Fund's compliance with its Code of Ethics and compliance
policies and procedures; and (d) the nature, cost and character of
non-investment management services provided by the manager and its affiliates.
The Board noted its view of MLIM as one of the most experienced global asset
management firms and considered the overall services provided by MLIM to be of
high quality. The Board also noted its view of MLIM as financially sound and
well managed and noted MLIM's affiliation with one of America's largest
financial firms. The Board works closely with the manager in overseeing the
manager's efforts to achieve good performance. As part of this effort, the Board
discusses portfolio manager effectiveness and, when performance is not
satisfactory, discusses with the manager taking steps such as changing
investment personnel.
Annual Consideration of Approval by the Board
In the period prior to the Board meeting to consider renewal of the management
agreement, the Board requests and receives materials specifically relating to
the management agreement. These materials include (a) information compiled by
Lipper Inc. ("Lipper") on the fees and expenses and investment performance of
the Fund as compared to a comparable group of funds as classified by Lipper; (b)
sales and redemption data for the Fund; (c) a discussion by the Fund's portfolio
management team regarding investment strategies used by the Fund during its most
recent fiscal year; (d) information on the profitability to the manager and its
affiliates of the management agreement and other relationships with the Fund;
and (e) information provided by the manager concerning investment advisory fees
charged to other clients under similar investment mandates. The Board also
considers other matters it deems important to the approval process, such as
payments made to the manager or its affiliates relating to the distribution of
Fund shares, services related to the valuation and pricing of Fund portfolio
holdings, allocation of fund brokerage fees, the Fund's portfolio turnover
statistics, and direct and indirect benefits to the manager and its affiliates
from their relationship with the Fund. The Board did not identify any particular
information as controlling, and each member of the Board may have attributed
different weights to the various items considered.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's management agreement
with MLIM (the "MLIM Management Agreement") in May 2006, the independent
trustees' and the Board's review included the following:
26 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Services Provided by the Manager -- The Board reviewed the nature, extent and
quality of services provided by MLIM, including the investment advisory services
and the resulting performance of the Fund. The Board compared Fund performance
- -- both including and excluding the effects of the Fund's fees and expenses --
to the performance of a comparable group of mutual funds as classified by Lipper
and the performance of a relevant index or combination of indexes. While the
Board reviews performance data at least quarterly, the Board attaches more
importance to performance over relatively long periods of time, typically three
to five years. The Board concluded that the comparative data indicated that the
Fund's performance was competitive. Considering all these factors, the Board
concluded that the nature and quality of the services provided supported the
continuation of the MLIM Management Agreement.
MLIM's Personnel and Investment Process -- The Board reviewed the Fund's
investment objectives and strategies. The Board discussed with MLIM's senior
management responsible for investment operations and the senior management of
MLIM's municipal investing group the strategies being used to achieve the stated
objectives. Among other things, the Board considered the size, education and
experience of MLIM's investment staff, its use of technology, and MLIM's
approach to training and retaining portfolio managers and other research,
advisory and management personnel. The Board also reviewed MLIM's compensation
policies and practices with respect to the Fund's portfolio manager. The Board
also considered the experience of the Fund's portfolio manager and noted that
Mr. Bock has more than 15 years of experience in portfolio management. The Board
considered the extensive experience of MLIM and its investment staff in
analyzing and managing the types of investments used by the Fund and concluded
that the Fund benefits from that experience.
Management Fees and Other Expenses -- The Board reviews the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory and
administrative service fees and the effects of any fee waivers -- compared to
the other funds in its Lipper category. It also compares the Fund's total
expenses to those of other comparable funds. The Board noted that MLIM had
advised the Board that it had no other comparable accounts with similar
investment mandates. The Board also noted that MLIM had agreed to continue its
agreement to waive a portion of the Fund's management fee. The Board determined
that the Fund's contractual and actual management fee rates, as well as total
expenses, were competitive with those of comparable funds. The Board concluded
that the Fund's management fee rate (including the fee waiver) and overall
expense ratio were reasonable compared to those of other comparable funds.
Profitability -- The Board considers the cost of the services provided to the
Fund by the manager and the manager's and its affiliates' profits relating to
the management and distribution of the Fund and the funds advised by the
investment manager and its affiliates. As part of its analysis, the Board
reviewed MLIM's methodology in allocating its costs to the management of the
Fund and concluded that there was a reasonable basis for the allocation. The
Board also considered federal court decisions discussing an investment adviser's
profitability and profitability levels considered to be reasonable in those
decisions. The Board concluded that the profits of MLIM and its affiliates were
acceptable in relation to the nature and quality of services provided and given
the level of fees and expenses overall.
Economies of Scale -- The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable the
Fund to participate in these economies of scale. The Board considered that MLIM
was waiving a portion of its fee. The Board determined that no changes were
currently necessary.
Conclusion
After the independent trustees deliberated in executive session, the entire
Board, including all of the independent trustees, approved the renewal of the
existing MLIM Management Agreement, concluding that the management fee rate
(including the fee waiver) was reasonable in relation to the services provided
and that a contract renewal was in the best interests of the shareholders.
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 27
Disclosure of New Investment Advisory Agreement
New BlackRock Management Agreement -- Matters Considered by the Board
In connection with the combination of Merrill Lynch's investment advisory
business, including Merrill Lynch Investment Managers, L.P. (the "Previous
Manager"), with that of BlackRock, Inc. ("BlackRock") to create a new
independent company ("New BlackRock") (the "Transaction"), the Fund's Board of
Trustees considered and approved a new management agreement (the "BlackRock
Management Agreement") between the Fund and BlackRock Advisors, LLC ("BlackRock
Advisors"). The Fund's shareholders subsequently approved the BlackRock
Management Agreement and it became effective on September 29, 2006, replacing
the management agreement with the Previous Manager (the "Previous Management
Agreement").
The Board discussed the BlackRock Management Agreement at telephonic and
in-person meetings held during April and May 2006. The Board, including the
independent trustees, approved the BlackRock Management Agreement at an
in-person meeting held on May 12, 2006. The Board also approved the issuance of
new classes of shares and new distribution arrangements with respect to these
new share classes, including higher distribution fees, to take effect after the
closing of the Transaction.
To assist the Board in its consideration of the BlackRock Management Agreement,
BlackRock provided materials and information about BlackRock, including its
financial condition and asset management capabilities and organization, and
Merrill Lynch provided materials and information about the Transaction. The
independent trustees, through their independent legal counsel, also requested
and received additional information from Merrill Lynch and BlackRock in
connection with their consideration of the BlackRock Management Agreement. The
additional information was provided in advance of the May 12, 2006 meeting. In
addition, the independent trustees consulted with their counsel and Fund counsel
on numerous occasions, discussing, among other things, the legal standards and
certain other considerations relevant to the trustees' deliberations.
At the Board meetings, the trustees discussed with Merrill Lynch management and
certain BlackRock representatives the Transaction, its strategic rationale and
BlackRock's general plans and intentions regarding the Fund. At these Board
meetings, representatives of Merrill Lynch and BlackRock made presentations to
and responded to questions from the Board. The trustees also inquired about the
plans for and anticipated roles and responsibilities of certain employees and
officers of the Previous Manager, and of its affiliates, to be transferred to
BlackRock in connection with the Transaction. The independent trustees of the
Board also conferred separately and with their counsel about the Transaction and
other matters related to the Transaction on a number of occasions, including in
connection with the April and May 2006 meetings. After the presentations and
after reviewing the written materials provided, the independent trustees met in
executive sessions with their counsel to consider the BlackRock Management
Agreement.
In connection with the Board's review of the BlackRock Management Agreement,
Merrill Lynch and/or BlackRock advised the trustees about a variety of matters.
The advice included the following, among other matters:
o that there was not expected to be any diminution in the nature, quality
and extent of services provided to the Fund and its shareholders by
BlackRock Advisors, including compliance services;
o that operation of New BlackRock as an independent investment management
firm would enhance its ability to attract and retain talented
professionals;
o that the Fund was expected to benefit from having access to BlackRock's
state of the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions(R) brand name;
o that BlackRock had no present intention to alter any applicable expense
waivers or reimbursements that were currently in effect and, while it
reserved the right to do so in the future, it would seek the approval of
the Board before making any changes;
o that BlackRock and Merrill Lynch would enter into an agreement, for an
initial three-year period and automatically renewable from year to year
thereafter, in connection with the Transaction under which Merrill
Lynch-affiliated broker-dealers would continue to offer the Fund as an
investment product;
o that BlackRock Advisors would have substantially the same access to the
Merrill Lynch sales force when distributing shares of the Fund as was
currently being provided to the Previous Manager and that other
arrangements between the Previous Manager and Merrill Lynch sales channels
would be preserved;
28 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
o that the Fund would have access to BlackRock's network of third party
brokers, retirement plan platforms and registered managers;
o that in connection with the Transaction, Merrill Lynch and BlackRock had
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Previous Manager (or affiliates), respectively; and
o that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they had a financial interest in the
matters being considered that was different from that of Fund
shareholders.
The trustees considered the information provided by Merrill Lynch and BlackRock
above, and, among other factors, the following:
o the potential benefits to Fund shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies
of scale and access to investment opportunities;
o the potential for expanding distribution of Fund shares through improved
access to third party distribution;
o the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
o the compliance policies and procedures of BlackRock Advisors;
o the terms and conditions of the BlackRock Management Agreement, including
the fact that the schedule of the Fund's total advisory fees would not
increase under the BlackRock Management Agreement, but would remain the
same;
o that in May 2005, the Board had performed a full annual review of the
Previous Management Agreement, as required by the 1940 Act, and had
determined that the Previous Manager had the capabilities, resources and
personnel necessary to provide the advisory and administrative services
that were then being provided to the Fund; and that the advisory and/or
management fees paid by the Fund, taking into account any applicable
agreed-upon fee waivers and breakpoints, had represented reasonable
compensation to the Previous Manager in light of the services provided,
the costs to the Previous Manager of providing those services, economies
of scale, the fees and other expenses paid by similar funds (including
information provided by Lipper Inc. ["Lipper"]), and such other matters as
the trustees had considered relevant in the exercise of their reasonable
judgment; and
o that Merrill Lynch had agreed to pay all expenses of the Fund in
connection with the Board's consideration of the BlackRock Management
Agreement and related agreements and all costs of shareholder approval of
the BlackRock Management Agreement and as a result the Fund would bear no
costs in obtaining shareholder approval of the BlackRock Management
Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the BlackRock Management Agreement, the Board assessed the
nature, quality and scope of the services to be provided to the Fund by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting, marketing services
and assistance in meeting legal and regulatory requirements. In its review of
the BlackRock Management Agreement, the Board also considered a range of
information in connection with its oversight of the services to be provided by
BlackRock Advisors and its affiliates. Among the matters considered were: (a)
fees (in addition to management fees) to be paid to BlackRock Advisors and its
affiliates by the Fund; (b) Fund operating expenses paid to third parties; (c)
the resources devoted to and compliance reports relating to the Fund's
investment objective, policies and restrictions, and its compliance with its
Code of Ethics and BlackRock Advisors' compliance policies and procedures; and
(d) the nature, cost and character of non-investment management services to be
provided by BlackRock Advisors and its affiliates.
In the period prior to the Board meetings to consider renewal of the Previous
Management Agreement, the Board had requested and received materials
specifically relating to the Previous Management Agreement. These materials
included (a) information compiled by Lipper on the fees and expenses and the
investment performance of the Fund as compared to a comparable group of funds as
classified by Lipper; (b) a discussion by the Fund's portfolio management team
on
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 29
Disclosure of New Investment Advisory Agreement (continued)
investment strategies used by the Fund during its most recent fiscal year; (c)
information on the profitability to the Previous Manager of the Previous
Management Agreement and other payments received by the Previous Manager and its
affiliates from the Fund; and (d) information provided by the Previous Manager
concerning services related to the valuation and pricing of the Fund's portfolio
holdings, allocation of Fund brokerage fees, the Fund's portfolio turnover
statistics, and direct and indirect benefits to the Previous Manager and its
affiliates from their relationship with the Fund.
In their deliberations, the trustees considered information received in
connection with their most recent approval of the continuance of the Previous
Management Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the BlackRock Management Agreement. The trustees did not identify
any particular information that was all-important or controlling, and each
trustee attributed different weights to the various factors. The trustees,
including a majority of the independent trustees, concluded that the terms of
the BlackRock Management Agreement are appropriate, that the fees to be paid are
reasonable in light of the services to be provided to the Fund, and that the
BlackRock Management Agreement should be approved and recommended to Fund
shareholders.
Nature, Quality and Extent of Services Provided -- The Board reviewed the
nature, quality and extent of services provided by the Previous Manager,
including the investment advisory services and the resulting performance of the
Fund, as well as the nature, quality and extent of services expected to be
provided by BlackRock Advisors. The Board focused primarily on the Previous
Manager's investment advisory services and the Fund's investment performance,
but also considered certain areas in which both the Previous Manager and the
Fund received services as part of the Merrill Lynch complex. The Board compared
the Fund's performance -- both including and excluding the effects of fees and
expenses -- to the performance of a comparable group of mutual funds, and the
performance of a relevant index or combination of indexes. While the Board
reviews performance data at least quarterly, consistent with the Previous
Manager's investment goals, the Board attaches more importance to performance
over relatively long periods of time, typically three to five years.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the BlackRock Management Agreement, the trustees
considered, among other things, the expected impact of the Transaction on the
operations, facilities, organization and personnel of New BlackRock and how it
would affect the Fund; the ability of BlackRock Advisors to perform its duties
after the Transaction; and any anticipated changes to the investment and other
practices of the Fund.
The trustees were given information with respect to the potential benefits to
the Fund and its shareholders from having access to BlackRock's state of the art
technology and risk management analytic tools, including the investment tools
provided under the BlackRock Solutions brand name.
The trustees were advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Fund would continue to be subject to
restrictions concerning certain transactions involving Merrill Lynch affiliates
(for example, transactions with a Merrill Lynch broker-dealer acting as
principal) absent revised or new regulatory relief. The trustees were advised
that a revision of existing regulatory relief with respect to these restrictions
was being sought from the Securities and Exchange Commission and were advised of
the possibility of receipt of such revised regulatory relief.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the trustees
determined that the nature and quality of services to be provided to the Fund
under the BlackRock Management Agreement were expected to be as good as or
better than that provided under the Previous Management Agreement. The trustees
were advised that BlackRock Advisors did not plan to change the Fund's portfolio
management team upon the closing of the Transaction. It was noted, however, that
other changes in personnel were expected to follow the Transaction and the
combination of the operations of the Previous Manager and its affiliates with
those of BlackRock. The trustees noted that if portfolio managers or other
personnel were to cease to be available prior to the closing of the Transaction,
the Board would consider all available options, including seeking the investment
advisory or other services of BlackRock affiliates. Accordingly, the trustees
concluded that, overall, they were satisfied at the present time with assurances
from BlackRock and BlackRock Advisors as to the expected nature, quality and
extent of the services to be provided to the Fund under the BlackRock Management
Agreement.
30 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Costs of Services Provided and Profitability -- It was noted that, in
conjunction with the recent review of the Previous Management Agreement, the
trustees had received, among other things, a report from Lipper comparing the
Fund's fees and expenses to those of a peer group selected by Lipper, and
information as to the fees charged by the Previous Manager or its affiliates to
other registered investment company clients for investment management services.
The Board reviewed the Fund's contractual management fee rate and actual
management fee rate as a percentage of total assets at common asset levels --
the actual rate includes advisory fees and the effects of any fee waivers --
compared to the other funds in its Lipper category. They also compared the
Fund's total expenses to those of other comparable funds. The information showed
that the Fund had fees and expenses within the range of fees and expenses of
comparable funds. The Board considered the services to be provided by and the
fees to be charged by BlackRock Advisors to other funds with similar investment
mandates and noted that the fees charged by BlackRock Advisors in those cases,
including fee waivers and expense reimbursements, were generally comparable to
those being charged to the Fund. The Board concluded that the Fund's management
fee rate and overall expense ratio were reasonable compared to those of other
comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the BlackRock Management Agreement, the trustees considered, among other
things, whether advisory fees or other expenses would change as a result of the
Transaction. Based on their review of the materials provided and the fact that
the BlackRock Management Agreement is substantially similar to the Previous
Management Agreement in all material respects, including the rate of
compensation, the trustees determined that the Transaction should not increase
the total fees payable, including any fee waivers and expense reimbursements,
for advisory and administrative services. The trustees noted that it was not
possible to predict how the Transaction would affect BlackRock Advisors'
profitability from its relationship with the Fund.
The trustees discussed with BlackRock Advisors its general methodology to be
used in determining New BlackRock's profitability with respect to its
relationship with the Fund. The trustees noted that they expect to receive
profitability information from New BlackRock on at least an annual basis and
thus be in a position to evaluate whether any adjustments in the Fund's fees
and/or fee breakpoints would be appropriate.
Fees and Economies of Scale -- The Board considered the extent to which
economies of scale might be realized as the assets of the Fund increase and
whether there should be changes in the management fee rate or structure in order
to enable the Fund to participate in these economies of scale. The Board
determined that changes were not currently necessary.
In reviewing the Transaction, the trustees considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the BlackRock Management Agreement is
substantially similar to the Previous Management Agreement in all material
respects, including the rate of compensation, the trustees determined that as a
result of the Transaction, the Fund's total advisory fees would be no higher
than the fees under the Previous Management Agreement. The trustees noted that,
in conjunction with their most recent deliberations concerning the Previous
Management Agreement, the trustees had determined that the total fees for
advisory and administrative services for the Fund were reasonable in light of
the services provided. It was noted that in conjunction with the recent review
of the Previous Management Agreement, the trustees had received, among other
things, a report from Lipper comparing the Fund's fees, expenses and performance
to those of a peer group selected by Lipper, and information as to the fees
charged by the Previous Manager to other registered investment company clients
for investment management services. The trustees concluded that because the
rates for advisory fees for the Fund would be no higher than the fee rates in
effect at the time, the proposed management fee structure, including any fee
waivers, was reasonable in relation to the services provided and that no changes
were currently necessary.
Fall-Out Benefits -- In evaluating the fall-out benefits to be received by
BlackRock Advisors under the BlackRock Management Agreement, the trustees
considered whether BlackRock Advisors would experience such benefits to the same
extent that the Previous Manager was experiencing such benefits under the
Previous Management Agreement. Based on their review of the materials provided,
including materials received in connection with their most recent approval of
the continuance of the Previous Management Agreement, and their discussions with
management of the Previous Manager and BlackRock, the trustees determined that
BlackRock Advisors' fall-out benefits could include increased ability for
BlackRock to distribute shares of its
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 31
Disclosure of New Investment Advisory Agreement (concluded)
funds and other investment products. The trustees noted that fall-out benefits
were difficult to quantify with certainty at this time, and indicated that they
would continue to evaluate them going forward.
Investment Performance -- The trustees considered investment performance for the
Fund. The trustees compared the Fund's performance -- both including and
excluding the effects of fees and expenses -- to the performance of a comparable
group of mutual funds, and the performance of a relevant index or combination of
indexes. The comparative information received from Lipper showed Fund
performance at various levels within the range of performance of comparable
funds over different time periods. While the Board reviews performance data at
least quarterly, consistent with the Previous Manager's investment goals, the
Board attaches more importance over relatively long periods of time, typically
three to five years. The trustees believed the Fund's performance was
satisfactory. Also, the trustees took into account the investment performance of
funds advised by BlackRock Advisors. The Board considered comparative
information from Lipper which showed that the performance of the funds advised
by BlackRock Advisors was within the range of performance of comparable funds
over different time periods. The Board noted BlackRock's considerable investment
management experience and capabilities, but was unable to predict what effect,
if any, consummation of the Transaction would have on the future performance of
the Fund.
Conclusion -- After the independent trustees of the Trust deliberated in
executive session, the entire Board, including the independent trustees,
approved the BlackRock Management Agreement, concluding that the management fee
rate was reasonable in relation to the services provided and that the BlackRock
Management Agreement was in the best interests of the shareholders. In approving
the BlackRock Management Agreement, the Board noted that it anticipated
reviewing the continuance of the agreement in advance of the expiration of the
initial two-year period.
New BlackRock Sub-Advisory Agreement -- Matters Considered by the Board
At an in-person meeting held on August 14-16, 2006, the Board of Trustees,
including the independent trustees, discussed and approved the sub-advisory
agreement (the "BlackRock Sub-Advisory Agreement") between BlackRock Advisors
and BlackRock Investment Management, LLC, an affiliate (the "Sub-Adviser"). The
BlackRock Sub-Advisory Agreement became effective on September 29, 2006, at the
same time the BlackRock Management Agreement became effective.
Pursuant to the BlackRock Sub-Advisory Agreement, the Sub-Adviser receives a
monthly fee from BlackRock Advisors equal to 59% of the advisory fee received by
BlackRock Advisors from the Fund. BlackRock Advisors pays the Sub-Adviser out of
its own resources, and there is no increase in Fund expenses as a result of the
BlackRock Sub-Advisory Agreement.
In approving the BlackRock Sub-Advisory Agreement at the August in-person
meeting, the Board reviewed its considerations in connection with its approval
of the BlackRock Management Agreement in May 2006. The Board relied on the same
information and considered the same factors as those discussed above in
connection with the approval of the BlackRock Management Agreement and came to
the same conclusion. In reviewing the sub-advisory fee rate provided in the
BlackRock Sub-Advisory Agreement, the Board noted the fact that both BlackRock
Advisors and the Sub-Adviser have significant responsibilities under their
respective advisory agreements. BlackRock Advisors remains responsible for
oversight of the Fund's operations and administration, and the Sub-Adviser
provides advisory services to the Fund and is responsible for the day-to-day
management of the Fund's portfolio under the BlackRock Sub-Advisory Agreement.
The Board also took into account the fact that there is no increase in total
advisory fees paid by the Fund as a result of the BlackRock Sub-Advisory
Agreement. Under all of the circumstances, the Board concluded that it was a
reasonable allocation of fees for the Sub-Adviser to receive 59% of the advisory
fee paid by the Fund to BlackRock Advisors.
After the independent trustees deliberated in executive session, the entire
Board, including the independent trustees, approved the BlackRock Sub-Advisory
Agreement, concluding that the sub-advisory fee was reasonable in relation to
the services provided and that the BlackRock Sub-Advisory Agreement was in the
best interests of shareholders.
32 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Proxy Results
During the six-month period ended October 31, 2006, BlackRock Intermediate
Municipal Fund of BlackRock Municipal Series Trust's shareholders voted on the
following proposals, which were approved at a special shareholders' meeting on
July 31, 2006. A description of the proposals and number of shares voted were as
follows:
- ------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- ------------------------------------------------------------------------------------------------------------
To approve a new investment advisory agreement
with BlackRock Advisors, Inc. 11,798,923 147,012 111,721
- ------------------------------------------------------------------------------------------------------------
To approve a contingent subadvisory agreement
with BlackRock Advisors, Inc. 11,781,352 164,840 111,464
- ------------------------------------------------------------------------------------------------------------
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 33
Important Tax Information
All of the net investment income distributions paid by BlackRock Intermediate
Municipal Fund of BlackRock Municipal Series Trust during the taxable year ended
October 31, 2006 qualify as tax-exempt interest dividends for federal income tax
purposes.
Additionally, the following table summarizes the taxable per share distribution
paid by the Fund during the year:
================================================================================
Payable Long-Term
Record Date Date Capital Gains
================================================================================
12/19/2005 12/23/2005 $ .207829
- --------------------------------------------------------------------------------
34 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
Officers and Trustees
Number of
Funds and
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to Vice Chairman and Director of BlackRock, Inc., 122 Funds None
Doll, Jr.* Princeton, NJ and present Global Chief Investment Officer for Equities, 168 Portfolios
08543-9011 Trustee Chairman of the BlackRock Retail Operating
Age: 52 Committee, and of the BlackRock Executive Committee
since 2006; President of the Funds advised by
Merrill Lynch Investment Managers, L.P. ("MLIM")
and its affiliates ("MLIM/FAM-advised funds") from
2005 to 2006 and Chief Investment Officer thereof
from 2001 to 2006; President of MLIM and Fund Asset
Management, L.P. ("FAM") from 2001 to 2006; Co-Head
(Americas Region) thereof from 2000 to 2001 and
Senior Vice President from 1999 to 2001; President
and Director of Princeton Services, Inc.
("Princeton Services") since 2001; President of
Princeton Administrators, L.P. ("Princeton
Administrators") from 2001 to 2006; Chief
Investment Officer of OppenheimerFunds, Inc. in
1999 and Executive Vice President thereof from 1991
to 1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which
BlackRock acts as investment adviser. Mr. Doll is an "interested person," as described in the Investment Company
Act, of the Fund based on his current and former positions with BlackRock, Inc. and its affiliates. Trustees serve
until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund
President, Mr. Doll serves at the pleasure of the Board of Trustees.
====================================================================================================================================
Independent Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
Ronald W. P.O. Box 9095 Trustee 1986 to Professor Emeritus of Finance, School of Business, 47 Funds None
Forbes** Princeton, NJ present State University of New York at Albany since 2000 49 Portfolios
08543-9095 and Professor thereof from 1989 to 2000;
Age: 66 International Consultant, Urban Institute,
Washington, D.C. from 1995 to 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
Cynthia A. P.O. Box 9095 Trustee 1994 to Professor, Harvard Business School since 1989; 47 Funds Newell
Montgomery Princeton, NJ present Associate Professor, J.L. Kellogg Graduate School of 49 Portfolios Rubbermaid,
08543-9095 Management, Northwestern University from 1985 Inc.
Age: 54 to 1989; Associate Professor, Graduate School of (manufac-
Business Administration, University of Michigan turing)
from 1979 to 1985; Director, Harvard Business
School Publishing since 2005; Director, McLean
Hospital since 2005.
- ------------------------------------------------------------------------------------------------------------------------------------
Jean Margo P.O. Box 9095 Trustee 2004 to Self-employed consultant since 2001; Counsel of 47 Funds None
Reid Princeton, NJ present Alliance Capital Management (investment adviser) 49 Portfolios
08543-9095 in 2000; General Counsel, Director and Secretary
Age: 61 of Sanford C. Bernstein & Co., Inc. (investment
adviser/broker-dealer) from 1997 to 2000;
Secretary, Sanford C. Bernstein Fund, Inc. from
1994 to 2000; Director and Secretary of SCB, Inc.
since 1998; Director and Secretary of SCB Partners,
Inc. since 2000; and Director of Covenant House
from 2001 to 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
Roscoe S. P.O. Box 9095 Trustee 2000 to President, Middle East Institute, from 1995 to 2001; 47 Funds None
Suddarth Princeton, NJ present Foreign Service Officer, United States Foreign 49 Portfolios
08543-9095 Service, from 1961 to 1995 and Career Minister from
Age: 71 1989 to 1995; Deputy Inspector General, U.S.
Department of State, from 1991 to 1994; U.S.
Ambassador to the Hashemite Kingdom of Jordan from
1987 to 1990.
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 36
Officers and Trustees (concluded)
Number of
Funds and
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Trustees (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
Richard R. P.O. Box 9095 Trustee 1986 to Professor of Finance from 1984 to 1995, Dean from 47 Funds Bowne & Co.,
West Princeton, NJ present 1984 to 1993 and since 1995 Dean Emeritus of 49 Portfolios Inc.
08543-9095 New York University's Leonard N. Stern School of (financial
Age: 68 Business Administration. printers);
Vornado
Realty Trust
(real estate
company);
Alexander's,
Inc. (real
estate
company)
- ------------------------------------------------------------------------------------------------------------------------------------
Edward D. P.O. Box 9095 Trustee 2000 to Self-employed financial consultant since 1994; 47 Funds None
Zinbarg*** Princeton, NJ present Executive Vice President of the Prudential Insurance 49 Portfolios
08543-9095 Company of America from 1988 to 1994; Former
Age: 72 Director of Prudential Reinsurance Company and
former Trustee of the Prudential Foundation.
------------------------------------------------------------------------------------------------------------------------
* Trustees serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Chairman of the Board of Trustees and the Audit Committee.
*** Mr. Zinbarg is expected to retire from the Board of Trustees effective January 1, 2007.
- ------------------------------------------------------------------------------------------------------------------------------------
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1993 to Managing Director of BlackRock since 2006; Managing Director of MLIM and FAM in
Burke Princeton, NJ President present 2006; First Vice President of MLIM and FAM from 1997 to 2005 and Treasurer thereof
08543-9011 and and from 1999 to 2006; Vice President of MLIM and FAM from 1990 to 1997.
Age: 46 Treasurer 1999
to
present
- ------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 Senior Vice 2002 to Managing Director of BlackRock, Inc. since 2006; Managing Director of MLIM from
Loffredo Princeton, NJ President present 2000 to 2006; Director (Tax-Exempt Fund Management) of MLIM from 1997 to 2000.
08543-9011
Age: 42
- ------------------------------------------------------------------------------------------------------------------------------------
William R. P.O. Box 9011 Vice 1995 to Director of BlackRock, Inc. since 2006; Director of MLIM from 2005 to 2006; Vice
Bock Princeton, NJ President present President of MLIM from 1989 to 2005.
08543-9011
Age: 70
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Fund Chief 2004 to Managing Director of BlackRock and Fund Chief Compliance Officer since 2006; Chief
Hiller Princeton, NJ Compliance present Compliance Officer of the MLIM/FAM-advised funds and First Vice President and Chief
08543-9011 Officer Compliance Officer of MLIM (Americas Region) from 2004 to 2006; Chief Compliance
Age: 55 Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
Investment Management from 2002 to 2004; Managing Director and Global Director of
Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance
Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential
Financial from 1995 to 2000; Senior Counsel in the Securities and Exchange
Commission's Division of Enforcement in Washington, D.C. from 1990 to 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director of BlackRock since 2006; Director (Legal Advisory) of MLIM from 2002 to
Pellegrino Princeton, NJ present 2006; Vice President of MLIM from 1999 to 2002; Attorney associated with MLIM from
08543-9011 1997 to 2006; Secretary of MLIM, FAM, FAM Distributors, Inc. and Princeton Services
Age: 46 from 2004 to 2006.
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Trustees.
- ------------------------------------------------------------------------------------------------------------------------------------
Further information about the Fund's Officers and Trustees is available in the Fund's Statement of Additional
Information, which can be obtained without charge by calling 1-800-441-7762.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
PFPC Inc.
Wilmington, DE 19809
36 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
BlackRock Funds
BlackRock Privacy Principles
BlackRock is committed to maintaining the privacy of its current and former fund
investors and individual clients (collectively, "Clients") and to safeguarding
their nonpublic personal information. The following information is provided to
help you understand what personal information BlackRock collects, how we protect
that information and why in certain cases we share such information with select
parties.
If you are located in a jurisdiction where specific laws, rules or regulations
require BlackRock to provide you with additional or different privacy-related
rights beyond what is set forth below, then BlackRock will comply with those
specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from and about you
from different sources, including the following: (i) information we receive from
you or, if applicable, your financial intermediary, on applications, forms or
other documents; (ii) information about your transactions with us, our
affiliates, or others; (iii) information we receive from a consumer reporting
agency; and (iv) from visits to our Web sites.
BlackRock does not sell or disclose to nonaffiliated third parties any nonpublic
personal information about its Clients, except as permitted by law or as is
necessary to service Client accounts. These nonaffiliated third parties are
required to protect the confidentiality and security of this information and to
use it only for its intended purpose.
We may share information with our affiliates to service your account or to
provide you with information about other BlackRock products or services that may
be of interest to you. In addition, BlackRock restricts access to nonpublic
personal information about its Clients to those BlackRock employees with a
legitimate business need for the information. BlackRock maintains physical,
electronic and procedural safeguards that are designed to protect the nonpublic
personal information of its Clients, including procedures relating to the proper
storage and disposal of such information.
Availability of Additional Information
Electronic copies of most financial reports and prospectuses are available on
the Fund's Web site or shareholders can sign up for e-mail notifications of
quarterly statements, annual and semi-annual reports and prospectuses by
enrolling in the Fund's electronic delivery program.
To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:
Please contact your financial adviser. Please note that not all investment
advisers, banks or brokerages may offer this service.
Shareholders Who Hold Accounts Directly with BlackRock:
1) Access the BlackRock Web site at http://www.blackrock.com/edelivery
2) Select eDelivery under the More Information section
3) Log into your account
The Fund will mail only one copy of shareholder documents, including
prospectuses, annual and semi-annual reports and proxy statements, to
shareholders with multiple accounts at the same address. This practice is
commonly called "householding" and it is intended to reduce expenses and
eliminate duplicate mailings of shareholder documents. Mailings of your
shareholder documents may be householded indefinitely unless you instruct us
otherwise. If you do not want the mailing of these documents to be combined with
those for other members of your household, please contact the Fund at (800)
441-7762.
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 37
BlackRock Funds (concluded)
Availability of Additional Information (concluded)
Availability of Proxy Voting Policies and Procedures
The Fund has delegated proxy voting responsibilities to BlackRock and its
affiliates, subject to the general oversight of the Fund's Board of Trustees. A
description of the policies and procedures that BlackRock and its affiliates use
to determine how to vote proxies relating to portfolio securities is available
without charge, upon request, on our Web site at www.blackrock.com, by calling
(800) 441-7762, or on the Web site of the Securities and Exchange Commission
(the"Commission") at http://www.sec.gov.
Availability of Proxy Voting Record
Information on how proxies relating to the Fund's voting securities were voted
(if any) by BlackRock during the most recent 12-month period ended June 30 is
available, upon request and without charge, on our Web site at
www.blackrock.com, by calling (800) 441-7762 or on the Web site of the
Commission at http://www.sec.gov.
Availability of Quarterly Portfolio Schedule
The Fund files its complete schedule of portfolio holdings for the first and
third quarters of its fiscal year with the Commission on Form N-Q. The Fund's
Form N-Q is available on the Commission's Web site at http://www.sec.gov and may
be reviewed and copied at the Commission's Public Reference Room in Washington,
D.C. Information regarding the operation of the Public Reference Room may be
obtained by calling (800) SEC-0330. The Fund's Forms N-Q may also be obtained
upon request, without charge, by calling (800) 441-7762.
Shareholder Privileges
Account Information
Call us at (800) 441-7762 8:00 AM - 6:00 PM EST to get information about your
account balances, recent transactions and share prices. You can also reach us on
the web at www.blackrock.com.
Automatic Investment Plans
Investor Class shareholders who want to invest regularly can arrange to have $50
or more automatically deducted from their checking or savings account and
invested in any of the BlackRock portfolios.
Systematic Withdrawal Plans
Investor Class shareholders can establish a systematic withdrawal plan and
receive periodic payments of $50 or more from their BlackRock portfolios, as
long as their account is at least $10,000.
Retirement Plans
Shareholders may make investments in conjunction with Traditional, Rollover,
Roth, Coverdell, Simple IRAs, SEP IRAs and 403(b) Plans.
38 BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006
A World-Class Mutual Fund Family
BlackRock now offers an expanded lineup of open-end mutual funds. Our range
includes more than 85 funds crossing all investment styles and managed by
experts in equity, fixed income and tax-exempt investing.
Equity Portfolios
BlackRock All-Cap Global Resources Portfolio
BlackRock Aurora Portfolio
BlackRock Asset Allocation Portfolio+
BlackRock Balanced Capital Fund+
BlackRock Basic Value Fund
BlackRock Developing Capital Markets Fund
BlackRock Equity Dividend Fund
BlackRock EuroFund
BlackRock Focus Twenty Fund
BlackRock Focus Value Fund
BlackRock Fundamental Growth Fund
BlackRock Global Allocation Fund+
BlackRock Global Dynamic Equity Fund
BlackRock Global Financial Services Fund
BlackRock Global Growth Fund
BlackRock Global Opportunities Portfolio
BlackRock Global Resources Portfolio*
BlackRock Global Science & Technology Opportunities Portfolio
BlackRock Global SmallCap Fund
BlackRock Global Technology Fund
BlackRock Global Value Fund
BlackRock Healthcare Fund
BlackRock Health Sciences Opportunities Portfolio
BlackRock Index Equity Portfolio*
BlackRock International Fund
BlackRock International Index Fund
BlackRock International Opportunities Portfolio*
BlackRock International Value Fund
BlackRock Investment Trust
BlackRock Large Cap Core Fund
BlackRock Large Cap Growth Fund
BlackRock Large Cap Value Fund
BlackRock Latin America Fund
BlackRock Legacy Portfolio
BlackRock Mid-Cap Growth Equity Portfolio
BlackRock Mid-Cap Value Equity Portfolio
BlackRock Mid Cap Value Opportunities Fund
BlackRock Natural Resources Trust
BlackRock Pacific Fund
BlackRock Small Cap Core Equity Portfolio
BlackRock Small Cap Growth Equity Portfolio
BlackRock Small Cap Growth Fund II
BlackRock Small Cap Index Fund
BlackRock Small Cap Value Equity Portfolio*
BlackRock Small/Mid-Cap Growth Portfolio
BlackRock S&P 500 Index Fund
BlackRock U.S. Opportunities Portfolio
BlackRock Utilities and Telecommunications Fund
BlackRock Value Opportunities Fund
Fixed Income Portfolios
BlackRock Bond Fund
BlackRock Enhanced Income Portfolio
BlackRock GNMA Portfolio
BlackRock Government Income Portfolio
BlackRock High Income Fund
BlackRock High Yield Bond Portfolio
BlackRock Inflation Protected Bond Portfolio
BlackRock Intermediate Bond Portfolio
BlackRock Intermediate Bond Portfolio II
BlackRock Intermediate Government Bond Portfolio
BlackRock International Bond Portfolio
BlackRock Low Duration Bond Portfolio
BlackRock Managed Income Portfolio
BlackRock Real Investment Fund
BlackRock Short-Term Bond Fund
BlackRock Total Return Portfolio
BlackRock Total Return Portfolio II
BlackRock World Income Fund
Municipal Bond Portfolios
BlackRock AMT-Free Municipal Bond Portfolio
BlackRock California Insured Municipal Bond Fund
BlackRock Delaware Municipal Bond Portfolio
BlackRock Florida Municipal Bond Fund
BlackRock High Yield Municipal Fund
BlackRock Intermediate Municipal Fund
BlackRock Kentucky Municipal Bond Portfolio
BlackRock Municipal Insured Fund
BlackRock National Municipal Fund
BlackRock New Jersey Municipal Bond Fund
BlackRock New York Municipal Bond Fund
BlackRock Ohio Municipal Bond Portfolio
BlackRock Pennsylvania Municipal Bond Fund
BlackRock Short-Term Municipal Fund
Money Market Portfolios
BlackRock Money Market Portfolio
BlackRock Municipal Money Market Portfolio@
BlackRock NC Municipal MM Portfolio@
BlackRock NJ Municipal MM Portfolio@
BlackRock OH Municipal MM Portfolio@
BlackRock PA Municipal MM Portfolio@
BlackRock Summit Cash Reserves Fund*
BlackRock U.S. Treasury MM Portfolio
BlackRock VA Municipal MM Portfolio@
* See the prospectus for information on specific limitations on investments
in the fund.
+ Mixed asset fund.
@ Tax-exempt fund.
BlackRock mutual funds are distributed by BlackRock Distributors, Inc. You
should consider the investment objectives, risks, charges and expenses of the
funds under consideration carefully before investing. Each fund's prospectus
contains this and other information and is available at www.blackrock.com or by
calling 800-882-0052 or from your financial advisor. The prospectus should be
read carefully before investing.
BLACKROCK INTERMEDIATE MUNICIPAL FUND OCTOBER 31, 2006 39
This report is transmitted to shareholders only. It is not authorized for use as
an offer of sale or a solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past performance
results shown in this report should not be considered a representation of future
performance. Investment return and principal value of shares will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject to change.
BlackRock Intermediate Municipal Fund
Of BlackRock Municipal Series Trust
P.O. Box 9011
Princeton, NJ 08543-9011
BLACKROCK
#10437-10/06
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge at
www.blackrock.com.
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Ronald W.
Forbes, (2) Richard R. West, and (3) Edward D. Zinbarg (retired as of
December 31, 2006).
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending October 31, 2006 - $26,500
Fiscal Year Ending October 31, 2005 - $26,000
(b) Audit-Related Fees - Fiscal Year Ending October 31, 2006 - $0
Fiscal Year Ending October 31, 2005 - $0
(c) Tax Fees - Fiscal Year Ending October 31, 2006 - $6,000
Fiscal Year Ending October 31, 2005 - $5,700
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending October 31, 2006 - $0
Fiscal Year Ending October 31, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending October 31, 2006 - $3,204,783
Fiscal Year Ending October 31, 2005 - $6,277,749
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,739,500 , 0%
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The Registrant's principal executive and principal financial officers
have evaluated the Registrant's disclosure controls and procedures,
including internal control over financial reporting, within 90 days of
this filing. Such principal officers have concluded that the
Registrant's disclosure controls and procedures were effective in design
and operation to reasonably ensure that information required to be
disclosed by the Registrant in this Form N-CSR was recorded, processed,
summarized, and reported within the required time periods, and were
sufficient to form the basis of the certifications required by Rule
30a-(2) of the Investment Company Act of 1940, as amended. Prior to
reaching that conclusion, such principal officers had become aware of
matters relating to the Registrant's participation in certain inverse
floater structures that necessitated adjustments to financial
information included in Item 1 of this filing. As a result, management
of the Registrant has reevaluated certain disclosure controls and
procedures determined not to be effective, as discussed more fully
below.
Management of the Registrant is responsible for establishing and
maintaining effective internal control over financial reporting. In
fulfilling this responsibility, estimates and judgments by management
are required to assess the expected benefits and related costs of
controls. The Registrant's internal control over financial reporting is
a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally
accepted accounting principles. Such internal control includes policies
and procedures that provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of a
registrant's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
A control deficiency exists when the design or operation of a control
does not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect misstatements
on a timely basis. A significant deficiency is a control deficiency, or
combination of control deficiencies, that adversely affects the
Registrant's ability to initiate, authorize, record, process or report
financial data reliably in accordance with generally accepted accounting
principles such that there is more than a remote likelihood that a
misstatement of the Registrant's annual or interim financial statements
that is more than inconsequential will not be prevented or detected. A
material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood
that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
Prior to the filing of this Form N-CSR, the Registrant identified the
following control deficiency, that was determined to be a material
weakness, as defined above, in the Registrant's internal control over
financial reporting. The Registrant's controls related to the review and
analysis of relevant terms and conditions of transfers of certain assets
pertaining to inverse floater structures were not operating effectively
to appropriately determine whether the transfers of assets qualified for
sale accounting under the provisions of Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 140").
Accordingly, the Registrant's financial statements as of and for the
period ended October 31, 2006, including prior periods where applicable,
were adjusted prior to being issued to appropriately reflect transfers
of such securities as secured borrowings and to report the related
income and expense. These adjustments had no impact on net assets, net
asset value per share or total return.
Management of the Registrant believes that subsequent to the
adjustments, the Registrant's accounting treatment of such transfers is
appropriate under SFAS 140. Additionally, management of the Registrant
is taking such further actions as are necessary to enhance its internal
control over financial reporting, and in doing so, increase the
effectiveness of such controls, so that such transfers of assets are
reviewed and evaluated appropriately under the provisions of SFAS 140.
11(b) - There have been no changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Investment
Company Act of 1940, as amended) that occurred during the second half of
the Registrant's fiscal year that have materially affected, or are
reasonably likely to materially affect, the Registrant's internal
control over financial reporting. However, as discussed above,
subsequent to October 31, 2006, the Registrant is further enhancing
controls related to the application of SFAS 140.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BlackRock Intermediate Municipal Fund of BlackRock Municipal Series Trust
By: /s/ Robert C. Doll, Jr.
------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock Municipal Intermediate Term Fund of BlackRock Municipal Series
Trust
Date: January 18, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock Intermediate Municipal Fund of BlackRock Municipal Series Trust
Date: January 18, 2007
By: /s/ Donald C. Burke
------------------------------
Donald C. Burke,
Chief Financial Officer of
BlackRock Intermediate Municipal Fund of BlackRock Municipal Series Trust
Date: January 18, 2007