<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1998
SECURITIES ACT FILE NO. 333-68451
INVESTMENT COMPANY ACT FILE NO. 811-09133
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
POST-EFFECTIVE AMENDMENT NO.
[_] AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 1
(CHECK APPROPRIATE BOX OR BOXES)
--------------
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
--------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
--------------
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------
ARTHUR ZEIKEL
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
--------------
COPIES TO:
MICHAEL J. HENNEWINKEL, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557
--------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
--------------
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES BEING BEING OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE(3)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest
($.10 par value)....... 4,634,500 shares $15.00 $69,517,500 $19,326
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 604,500 shares subject to the Underwriter's over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
$278 was previously paid; $19,048 was transmitted earlier in connection
with this filing.
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- ------------------------------------------------------------------------------
<PAGE>
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
- --------------------- ---------------------
<S> <C>
PART A
1.Outside Front Cover Page............ Outside Front Cover Page
2.Inside Front and Outside Back Cover
Pages............................. Inside Front and Outside Back Cover
Pages; Underwriting
3.Fee Table and Synopsis.............. Prospectus Summary; Fee Table
4.Financial Highlights................ Not Applicable
5.Plan of Distribution................ Prospectus Summary; Net Asset Value;
Underwriting
6.Selling Shareholders................ Not Applicable
7.Use of Proceeds..................... Use of Proceeds; Investment Objective
and Policies
8.General Description of the
Registrant........................ Prospectus Summary; The Fund;
Investment Objective and Policies;
Risks and Special Considerations of
Leverage; Investment Restrictions;
Dividends and Distributions; Automatic
Dividend Reinvestment Plan; Mutual Fund
Investment Option
9.Management.......................... Trustees and Officers; Investment
Advisory and Management Arrangements;
Custodian; Transfer Agent, Dividend
Disbursing Agent and Registrar
10.Capital Stock, Long-Term Debt, and
Other Securities.................. Description of Shares
11.Defaults and Arrears on Senior
Securities........................ Not Applicable
12.Legal Proceedings................... Not Applicable
13.Table of Contents of the Statement
of Additional Information......... Not Applicable
PART B
14.Cover Page.......................... Not Applicable
15.Table of Contents................... Not Applicable
16.General Information and History..... Not Applicable
17.Investment Objective and Policies... Prospectus Summary; Investment
Objective and Policies; Investment
Restrictions
18.Management.......................... Trustees and Officers; Investment
Advisory and Management Arrangements
19.Control Persons and Principal
Holders of Securities............. Investment Advisory and Management
Arrangements
20.Investment Advisory and Other
Services.......................... Investment Advisory and Management
Arrangements; Custodian; Underwriting;
Transfer Agent, Dividend Disbursing
Agent and Registrar; Legal Opinions;
Experts
21.Brokerage Allocation and Other
Practices......................... Portfolio Transactions
22.Tax Status.......................... Taxes; Automatic Dividend Reinvestment
Plan
23.Financial Statements................ Report of Independent Auditors;
Statement of Assets, Liabilities and
Capital
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE +
+CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT +
+FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS +
+PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING +
+AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT +
+PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 15, 1998
PROSPECTUS
4,030,000 SHARES
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
COMMON SHARES
--------------
MuniHoldings Pennsylvania Insured Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment company that seeks to provide
shareholders with current income exempt from Federal and Pennsylvania income
taxes. The Fund seeks to achieve its objective by investing primarily in a
portfolio of long-term, investment grade municipal obligations the interest on
which, in the opinion of bond counsel to the issuer, is exempt from Federal and
Pennsylvania income taxes. The Fund intends to invest in municipal obligations
that are rated investment grade, or if unrated, are considered by the Fund's
investment adviser to be of comparable quality. Under normal circumstances, at
least 80% of the Fund's assets will be invested in municipal obligations with
remaining maturities of one year or more that are covered by insurance
guaranteeing the timely payment of principal at maturity and interest.
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for investors
expecting to sell their shares in a relatively short period after completion of
the public offering. The Fund plans to apply to list its shares on the New York
Stock Exchange under the symbol "MPI." Trading of the Fund's common shares on
the exchange is expected to begin within two weeks of the date of this
prospectus. Before it begins trading, the underwriter does not intend to make a
market in the Fund's shares. Thus, investors may not be able to buy and sell
shares of the Fund during that time.
Within approximately three months after completion of this offering of common
shares, the Fund intends to offer preferred shares representing approximately
40% of the Fund's capital immediately after the issuance of such preferred
shares. There can be no assurance, however, that preferred shares representing
such percentage of the Fund's capital will actually be issued. The use of
preferred shares to leverage the common shares can create special risks.
--------------
This prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference.
--------------
INVESTING IN THE COMMON SHARES INVOLVES CERTAIN RISKS, WHICH ARE DESCRIBED IN
THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 7 OF
THIS PROSPECTUS.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public Offering Price...................... $15.00 $60,450,000
Sales Load................................. None None
Proceeds, before expenses, to Fund......... $15.00 $60,450,000
</TABLE>
The Fund's investment adviser or an affiliate will pay the underwriter a
commission in the amount of % of the public offering price per share in
connection with the sale of the common shares.
The underwriter may also purchase up to an additional 604,500 shares at the
public offering price within 45 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
We expect that the common shares will be ready for delivery in New York, New
York on or about January , 1999.
--------------
MERRILL LYNCH & CO.
--------------
The date of this prospectus is January , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY......................................................... 3
RISK FACTORS AND SPECIAL CONSIDERATIONS.................................... 7
FEE TABLE.................................................................. 9
THE FUND................................................................... 10
USE OF PROCEEDS............................................................ 10
INVESTMENT OBJECTIVE AND POLICIES.......................................... 10
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE............................... 21
INVESTMENT RESTRICTIONS.................................................... 24
TRUSTEES AND OFFICERS...................................................... 25
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS............................ 28
PORTFOLIO TRANSACTIONS..................................................... 29
DIVIDENDS AND DISTRIBUTIONS................................................ 30
TAXES...................................................................... 31
AUTOMATIC DIVIDEND REINVESTMENT PLAN....................................... 35
MUTUAL FUND INVESTMENT OPTION.............................................. 37
NET ASSET VALUE............................................................ 38
DESCRIPTION OF CAPITAL SHARES.............................................. 38
CUSTODIAN.................................................................. 42
UNDERWRITING............................................................... 42
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR.................... 43
LEGAL OPINIONS............................................................. 43
EXPERTS.................................................................... 43
ADDITIONAL INFORMATION..................................................... 44
REPORT OF INDEPENDENT AUDITORS............................................. 45
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL............................... 46
APPENDIX III--ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA............ 47
APPENDIX III--RATINGS OF MUNICIPAL BONDS................................... 58
APPENDIX III--PORTFOLIO INSURANCE.......................................... 65
APPENDIX IV--TAXABLE EQUIVALENT YIELDS FOR 1999............................ 67
</TABLE>
----------------
INFORMATION ABOUT THE FUND CAN BE REVIEWED AND COPIED AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. CALL 1-800-SEC-0330 FOR INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM. THIS INFORMATION IS ALSO AVAILABLE ON
THE SEC'S INTERNET SITE AT HTTP://WWW.SEC.GOV AND COPIES MAY BE OBTAINED UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE SECTION OF THE
SEC, WASHINGTON, D.C. 20549-6009.
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition,
results of operations and prospects may have changed since that date.
2
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus.
THE FUND MuniHoldings Pennsylvania Insured Fund (the "Fund") is a newly
organized, non-diversified, closed-end management investment
company.
THE
OFFERING The Fund is offering 4,030,000 common shares at an initial offering
price of $15.00 per share. The common shares are being offered by
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as underwriter.
The underwriter may also purchase up to an additional 604,500
common shares within 45 days of the date of this prospectus to
cover over-allotments.
INVESTMENT The investment objective of the Fund is to provide shareholders
OBJECTIVE with current income exempt from Federal and Pennsylvania income
AND taxes. The Fund seeks to achieve its objective by investing
POLICIES primarily in a portfolio of long-term, investment grade municipal
obligations the interest on which, in the opinion of bond counsel
to the issuer, is exempt from Federal and Pennsylvania income
taxes.
Investment Grade Municipal Bonds. The Fund intends to invest in
municipal bonds that are rated investment grade by one or more
nationally recognized statistical rating agencies or, if unrated,
are considered by the investment adviser to be of comparable
quality.
Pennsylvania Municipal Bonds. The Fund will generally invest
substantially all (at least 80%) of its assets in Pennsylvania
municipal bonds. However, when the Fund's investment adviser
believes that investment grade Pennsylvania municipal bonds are not
available in sufficient amounts at an appropriate price, the Fund
may invest a lesser amount of its assets in these securities. At
all times, except during periods when the Fund is in the process of
investing its proceeds from a public offering or during temporary
defensive periods, the Fund intends to invest at least 65% of its
assets in Pennsylvania municipal bonds and at least 80% of its
assets in Pennsylvania municipal bonds and other long-term
municipal bonds. These other long-term municipal bonds that the
Fund may buy will be exempt from Federal income tax but not
Pennsylvania income taxes.
The Fund will normally invest at least 80% of its assets in insured
municipal obligations with remaining maturities of one year or
more. Insured municipal obligations are covered by insurance that
guarantees timely interest payments and the repayment of principal
on maturity.
In general, the Fund does not intend its investments to earn a
large amount of income that is not exempt from Federal and
Pennsylvania income taxes.
Indexed and Inverse Floating Rate Securities. The Fund may invest
in securities whose potential returns are directly related to
changes in an underlying index or interest rate, known as indexed
securities. The return on indexed securities will rise when the
underlying index or interest rate rises and fall when the index or
interest rate falls. The Fund may also invest in
3
<PAGE>
securities whose return is inversely related to changes in an
interest rate (inverse floaters). In general, income on inverse
floaters will decrease when short term interest rates increase and
increase when short term interest rates decrease. Investments in
inverse floaters may subject the Fund to the risks of reduced or
eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or
decrease in value at a greater rate than the underlying interest
rate, which effectively leverages the Fund's investment. As a
result, the market value of such securities will generally be more
volatile than that of fixed rate, tax exempt securities. Both
indexed securities and inverse floaters are derivative securities
and can be considered speculative.
Options and Futures Transactions. The Fund may seek to hedge its
portfolio against changes in interest rates using options and
financial futures contracts. The Fund's hedging transactions are
designed to reduce volatility, but come at some cost. For example,
the Fund may try to limit its risk of loss from a decline in price
of a portfolio security by purchasing a put option. However, the
Fund must pay for the option, and the price of the security may not
in fact drop. In large part, the success of the Fund's hedging
activities depends on its ability to forecast movements in
securities prices and interest rates. The Fund does not, however,
intend to enter into options and futures transactions for
speculative purposes. The Fund is not required to hedge its
portfolio and may not do so.
LEVERAGE Issuance of Preferred Shares. The Fund intends to offer preferred
shares within three months after completion of this offering. The
preferred shares will represent approximately 40% of the Fund's
capital, including the capital raised by issuing the preferred
shares. There can be no assurance, however, that preferred shares
will actually be issued. Issuing preferred shares will result in
the leveraging of the common shares. Although the Board of Trustees
has not yet determined the terms of the preferred shares offering,
the Fund expects that the preferred shares will pay dividends that
will be adjusted over either relatively short-term periods
(generally seven to 28 days) or medium-term periods (up to five
years). The preferred shares dividend rate will be based upon
prevailing interest rates for debt obligations of comparable
maturity. The money raised by the preferred shares offering will be
invested in longer-term obligations in accordance with the Fund's
investment objective. The expenses of the preferred shares, which
will be borne by the Fund, will reduce the net asset value of the
common shares. In addition, at times when the Fund is required to
allocate taxable income to preferred shareholders, the terms of the
preferred shares may require the Fund to make an additional
distribution to them. The amount of this additional distribution
approximately equals the tax liability resulting from the
allocation and the additional distribution (an "Additional
Distribution"). During periods when the Fund has preferred shares
outstanding, the Fund will pay fees to the investment adviser for
its services that are higher than if the Fund did not issue
preferred shares because the fees will be calculated on the basis
of the Fund's average weekly net assets, including proceeds from
the sale of preferred shares.
4
<PAGE>
Potential Benefits of Leverage. Under normal market conditions,
longer term obligations produce higher yields than short and medium
term obligations. The Fund's investment adviser believes that the
interest income the Fund receives from its long term investments
will exceed the amount of interest the Fund must pay to the
preferred shareholders. Thus, the Fund's use of preferred shares
should provide common shareholders with a higher yield than they
would receive if the Fund were not leveraged.
Risks. The use of leverage creates certain risks for common
shareholders, including higher volatility of both the net asset
value and the market value of the common shares. Since any decline
in the value of the Fund's investments will affect only the common
shareholders, in a declining market the use of leverage will cause
the Fund's net asset value to decrease more than it would if the
Fund were not leveraged. This decrease in net asset value will
likely also cause a decline in the market price for common shares.
In addition, fluctuations in the dividend rates paid on, and the
amount of taxable income allocable to, the preferred shares will
affect the yield to common shareholders. There can be no assurance
that the Fund will earn a higher net return on its investments than
the then current dividend rate (and any Additional Distribution) it
pays on the preferred shares. Under certain conditions, the
benefits of leverage to common shareholders will be reduced, and
the Fund's leveraged capital structure could result in a lower rate
of return to common shareholders than if the Fund were not
leveraged.
Distributions. When the Fund issues preferred shares, common
shareholders will receive all of the Fund's net income that remains
after it pays dividends (and any Additional Distribution) on the
preferred shares and generally will be entitled to a pro rata share
of net realized capital gains. If the Fund is liquidated, preferred
shareholders will be entitled to receive liquidating distributions
before any distribution is made to common shareholders. These
liquidating distributions are expected to equal the original
purchase price per share of the preferred shares plus any
accumulated and unpaid dividends and Additional Distributions.
Redemption of Preferred Shares. The Fund may redeem the preferred
shares for any reason. For example, the Fund may redeem all or part
of the preferred shares if it believes that the Fund's leveraged
capital structure will cause common shareholders to obtain a lower
return than they would if the common shares were unleveraged for
any significant amount of time.
Voting Rights. Preferred shareholders, voting as a separate class,
will be entitled to elect two of the Fund's Trustees. Common and
preferred shareholders, voting together as a single class, will be
entitled to elect the remaining Trustees. If the Fund fails to pay
dividends to the preferred shareholders for two full years, the
holders of all outstanding shares of preferred shares, voting as a
separate class, would then be entitled to elect a majority of the
Fund's Trustees. The preferred shareholders also will vote
separately on certain other matters as required under the Fund's
Declaration of Trust, the Investment Company Act of 1940, as
amended, and Massachusetts law. Otherwise, common and preferred
shareholders will have equal voting rights (one vote per share) and
will vote together as a single class.
5
<PAGE>
Ratings. Before it offers the preferred shares, the Fund intends to
apply to one or more nationally recognized statistical ratings
organizations for ratings on the preferred shares. The Fund
believes that a rating for the preferred shares will make it easier
to market the shares, which should reduce the dividend rate.
LISTING Currently, there is no public market for the Fund's common shares.
However, the Fund plans to apply to list the Fund's common shares
on the New York Stock Exchange. Trading of the Fund's common shares
is expected to begin within two weeks of the date of this
prospectus. Before it begins trading, the underwriter does not
intend to make a market in the Fund's common shares. Thus,
investors may not be able to buy and sell shares of the Fund during
that period.
INVESTMENT
ADVISER Fund Asset Management, L.P. is the Fund's investment adviser and
provides investment advisory and management services to the Fund.
For its services, the Fund pays the investment adviser a fee at the
annual rate of 0.55% of the Fund's average weekly net assets,
including assets acquired from the sale of preferred shares.
DIVIDENDS
AND
DISTRIBUTIONS
The Fund intends to distribute dividends equal to substantially all
of its net investment income to common shareholders each month.
Once the Fund issues preferred shares, the monthly distributions to
common shareholders will consist of substantially all net
investment income that remains after the Fund pays dividends (and
any Additional Distribution) on the preferred shares. The Fund
expects to begin paying dividends to common shareholders within
approximately 90 days from the date of this prospectus. The Fund
will distribute net capital gains, if any, at least annually to
common shareholders and, after it issues the preferred shares, on a
pro rata basis to common and preferred shareholders. When the Fund
allocates capital gains or other taxable income to preferred
shareholders, under certain circumstances, the terms of the
preferred shares may require the Fund to make an Additional
Distribution. The Fund may not declare any cash dividend or other
distribution on its common shares unless the preferred shares have
asset coverage of at least 200%. If the Fund issues preferred
shares representing 40% of its total capital, the preferred share's
asset coverage will be approximately 250%. If the Fund's ability to
make distributions on its common shares is limited, the Fund may
not be able to qualify for taxation as a regulated investment
company. This would have adverse tax consequences for common
shareholders.
AUTOMATIC Dividend and capital gains distributions generally are used to
DIVIDEND purchase additional common shares. However, an investor can choose
REINVESTMENTto receive distributions in cash. Since not all investors can
PLAN participate in the automatic dividend reinvestment plan, you should
call your broker or nominee to confirm that you are eligible to
participate in the plan.
MUTUAL Investors who purchase shares in this offering through the
FUND underwriter and later sell their shares have the option, subject to
INVESTMENT certain conditions, to purchase Class D shares of certain Merrill
OPTION Lynch funds with the proceeds from the sale.
6
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Liquidity and Market Price of Shares. The Fund is newly organized and has no
operating history or history of public trading. Before the Fund's common shares
are listed on the New York Stock Exchange, an investment in the Fund may be
illiquid.
Shares of closed-end funds that trade in a secondary market frequently trade
at a market price that is below their net asset value. This is commonly
referred to as "trading at a discount." Investors who sell their shares within
a relatively short period after completion of the public offering are more
likely to be exposed to this risk. The Fund is designed primarily for long-term
investors and should not be considered a vehicle for trading purposes.
Pennsylvania Municipal Bonds. The Fund intends to invest the majority of its
portfolio in Pennsylvania municipal bonds. As a result, the Fund is more
exposed to risks affecting issuers of Pennsylvania municipal bonds than is a
municipal bond fund that invests more widely.
Non-diversification. The Fund is registered as a "non-diversified" investment
company. This means that the Fund may invest a greater percentage of its assets
in a single issuer than a diversified investment company. Even as a non-
diversified fund, the Fund must still meet the diversification requirements of
applicable Federal income tax laws. Since the Fund may invest a relatively high
percentage of its assets in a limited number of issuers, the Fund may be more
exposed to any single economic, political or regulatory occurrence than a more
widely-diversified fund.
Rating Categories. The Fund intends to invest in municipal bonds that are
rated investment grade by Standard & Poor's, Moody's Investors Service, Inc.
and Fitch IBCA, Inc. It may also invest in unrated municipal bonds that the
Fund's investment adviser believes are of comparable quality. Obligations rated
in the lowest investment grade category may have certain speculative
characteristics.
Private Activity Bonds. The Fund may invest in certain tax-exempt securities
classified as "private activity bonds." These bonds may subject certain
investors in the Fund to the alternative minimum tax. See "Taxes--General."
Portfolio Insurance and Rating Agencies. The Fund will be subject to certain
investment restrictions imposed by guidelines of the insurance companies that
issue portfolio insurance and to guidelines of one or more nationally
recognized statistical ratings organizations that may issue ratings for the
preferred shares. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed by the
Investment Company Act of 1940, as amended. The Fund does not expect these
requirements or guidelines to prevent the investment adviser from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies.
Leverage. The Fund plans to offer preferred shares. The preferred shares will
represent approximately 40% of the Fund's capital, including capital raised by
issuing the preferred shares. Leverage creates certain risks for common
shareholders, including higher volatility of both the net asset value and the
market value of the common shares. Leverage also creates the risk that the
investment return on the Fund's common shares will be
7
<PAGE>
reduced to the extent the dividends paid on preferred shares and other expenses
of the preferred shares exceed the income earned by the Fund on its
investments. If the Fund is liquidated, preferred shareholders will be entitled
to receive liquidating distributions before any distribution is made to common
shareholders.
Inverse Floating Obligations. The Fund's investments in "inverse floating
obligations" or "residual interest bonds" provide investment leverage because
their market value increases or decreases in response to market changes at a
greater rate than fixed rate, long term tax exempt securities. The market
values of such securities are more volatile than the market values of fixed
rate, tax exempt securities.
Options and Futures Transactions. The Fund may engage in certain options and
futures transactions to reduce its exposure to interest rate movements. If the
Fund incorrectly forecasts market values, interest rates or other factors, the
Fund's performance could suffer. The Fund also may suffer a loss if the other
party to the transaction fails to meet its obligations. The Fund is not
required to use hedging and may not do so.
Antitakeover Provisions. The Fund's Declaration of Trust includes provisions
that could limit the ability of other entities or persons to acquire control of
the Fund or to change the composition of its Board of Trustees. Such provisions
could limit the ability of shareholders to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund.
8
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
NET ASSETS NET ASSETS
WITH WITHOUT
LEVERAGE(A) LEVERAGE
----------- ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of offering
price).............................................. None None
Dividend Reinvestment Plan Fees...................... None None
ANNUAL EXPENSES (as a percentage of net assets
attributable to Common Stock):
Investment Advisory Fees(a)(b)....................... 0.75% 0.55%
Interest Payments on Borrowed Funds.................. None None
Other Expenses(a)(b)................................. 0.52% 0.28%
---- ----
Total Annual Expenses(a)(b)........................ 1.27% 0.83%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
EXAMPLE ---- ----- ----- -----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) total annual expenses
of 1.27% (assuming leverage of 40% of the Fund's total
assets) and 0.83% (assuming no leverage) and (2) a 5%
annual return throughout the periods:
Assuming Leverage..................................... $13 $40 $70 $153
Assuming No Leverage.................................. $8 $26 $46 $103
</TABLE>
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(a) The Fund intends to use leverage only if the Investment Adviser believes
that it would result in higher income to shareholders over time. See
"Risks and Special Considerations of Leverage." Assumes leverage by
issuing preferred shares in an amount of approximately 40% of the Fund's
capital at a dividend rate of 3.375%.
(b) See "Investment Advisory and Management Arrangements"--page 28.
The Fee Table is intended to assist investors in understanding the costs and
expenses that a shareholder in the Fund will bear directly or indirectly. The
expenses set forth under "Other Expenses" are based on estimated amounts
through the end of the Fund's first fiscal year on an annualized basis. The
Example set forth above assumes reinvestment of all dividends and
distributions and uses a 5% annual rate of return as mandated by the
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND
ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE.
9
<PAGE>
THE FUND
MuniHoldings Pennsylvania Insured Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund was
organized under the laws of The Commonwealth of Massachusetts on December 3,
1998, and has registered under the 1940 Act. The Fund's principal office is
located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its
telephone number is (609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as "mutual funds") in that closed-end investment companies do not
generally make a continuous offering of their shares or redeem their
securities at the option of the shareholder, whereas open-end companies issue
securities redeemable at net asset value at any time at the option of the
shareholder and typically engage in a continuous offering of their shares.
Accordingly, open-end investment companies are subject to continuous asset in-
flows and out-flows that can complicate portfolio management. Shares of
closed-end investment companies, however, frequently trade at a discount from
their net asset value. This risk may be greater for investors expecting to
sell their shares in a relatively short period after completion of the public
offering.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ (or
approximately $ assuming the Underwriter exercises the over-allotment
option in full) after payment of organizational and offering expenses
estimated to be approximately $ .
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months
after completion of the offering of common shares, depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-
term, tax-exempt securities. See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with current
income exempt from Federal and Pennsylvania income taxes. The Fund will seek
to achieve its objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations issued by or on behalf of the
Commonwealth of Pennsylvania, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest that, in
the opinion of bond counsel to the issuer, is exempt from Federal and
Pennsylvania income taxes ("Pennsylvania Municipal Bonds"). The Fund intends
to invest substantially all (at least 80%) of its assets in Pennsylvania
Municipal Bonds, except at times when the Fund's investment adviser, Fund
Asset Management, L.P. (the "Investment Adviser"), considers that Pennsylvania
Municipal Bonds of sufficient quality and quantity are unavailable for
investment at suitable prices by the Fund. To the extent the Investment
Adviser considers that suitable Pennsylvania Municipal Bonds are not available
for investment, the Fund may purchase other long-term municipal obligations
the interest on which is exempt from Federal income taxes but not from
Pennsylvania income taxes ("Municipal Bonds"). The Fund will maintain at least
65% of its assets in Pennsylvania Municipal Bonds and at least 80% of its
assets in Pennsylvania Municipal Bonds and Municipal Bonds, except during
interim periods pending investment of the net proceeds of public offerings of
the Fund's securities and during temporary defensive periods. Under normal
circumstances, at least 80% of the Fund's assets will be invested in
10
<PAGE>
municipal obligations with remaining maturities of one year or more that are
covered by insurance guaranteeing the timely payment of principal at maturity
and interest. The Fund's investment objective is a fundamental policy that may
not be changed without a vote of a majority of the Fund's outstanding voting
securities, as defined below under "Investment Restrictions." There can be no
assurance that the investment objective of the Fund will be realized. At times
the Fund may seek to hedge its portfolio through the use of futures
transactions and options to reduce volatility in the net asset value of its
common shares.
The Fund ordinarily does not intend to realize significant investment income
that is subject to Federal or Pennsylvania income taxes. The Fund may invest
all or a portion of its assets in certain tax-exempt securities classified as
"private activity bonds" (in general, bonds that benefit non-governmental
entities) that may subject certain investors in the Fund to an alternative
minimum tax.
The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Pennsylvania Municipal Bonds and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act of 1940, as amended (the "1940 Act"). Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term Pennsylvania Municipal Bonds or Municipal
Bonds. Certain Non-Municipal Tax-Exempt Securities may be characterized as
derivative instruments. Non-Municipal Tax-Exempt Securities are considered
"Pennsylvania Municipal Bonds" or "Municipal Bonds" for purposes of the Fund's
investment objective and policies.
Investment in common shares of the Fund offers several potential benefits.
The Fund offers investors the opportunity to receive income exempt from
Federal and Pennsylvania income taxes by investing in a professionally managed
portfolio comprised primarily of investment grade insured Pennsylvania
Municipal Bonds. Investment in the Fund also relieves the investor of the
burdensome administrative details involved in managing a portfolio of
Pennsylvania Municipal Bonds. Additionally, the Investment Adviser will seek
to enhance the yield on the common shares by leveraging the Fund's capital
structure through the issuance of preferred shares. The benefits are at least
partially offset by the expenses involved in operating an investment company.
Such expenses primarily consist of the advisory fee and operational costs.
Additionally, the use of leverage involves certain expenses and special risk
considerations. See "Risks and Special Considerations of Leverage."
The investment grade Pennsylvania Municipal Bonds and Municipal Bonds in
which the Fund will primarily invest are those Pennsylvania Municipal Bonds
and Municipal Bonds rated at the date of purchase in the four highest rating
categories of Standard & Poor's ("S&P"), Moody's Investors Services, Inc.
("Moody's") or Fitch IBCA, Inc. ("Fitch"), or, if unrated, are considered to
be of comparable quality by the Investment Adviser. In the case of long-term
debt, the investment grade rating categories are AAA through BBB for S&P, Aaa
through Baa for Moody's and AAA through BBB for Fitch. In the case of short-
term notes, the investment grade rating categories are SP-1+ through SP-3 for
S&P, MIG-1 through MIG-3 for Moody's and F-1+ through F-3 for Fitch. In the
case of tax-exempt commercial paper, the investment grade rating categories
are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moody's and F-1+
through F-3 for Fitch. Obligations ranked in the lowest investment grade
rating category (BBB, SP-3 and A-3 for S&P; Baa, MIG-3 and Prime-3 for
Moody's; and BBB and F-3 for Fitch), while considered "investment grade," may
have certain speculative characteristics. There may be sub-categories or
gradations indicating relative standing within the rating categories set forth
11
<PAGE>
above. See Appendix II to this Prospectus for a description of S&P's, Moody's
and Fitch's ratings of Municipal Bonds. In assessing the quality of
Pennsylvania Municipal Bonds and Municipal Bonds with respect to the foregoing
requirements, the Investment Adviser will take into account the portfolio
insurance as well as the nature of any letters of credit or similar credit
enhancements to which particular Pennsylvania Municipal Bonds and Municipal
Bonds are entitled and the creditworthiness of the insurance company or
financial institution that provided such insurance or credit enhancement.
Consequently, if Pennsylvania Municipal Bonds or Municipal Bonds are covered
by insurance policies issued by insurers whose claims-paying ability is rated
AAA by S&P or Fitch or Aaa by Moody's, the Investment Adviser may consider
such municipal obligations to be equivalent to AAA- or Aaa- rated securities,
as the case may be, even though such Pennsylvania Municipal Bonds or Municipal
Bonds would generally be assigned a lower rating if the rating were based
primarily upon the credit characteristics of the issuers without regard to the
insurance feature. The insured Pennsylvania Municipal Bonds and Municipal
Bonds must also comply with the standards applied by the insurance carriers in
determining eligibility for portfolio insurance.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution, typically a commercial bank. The VRDOs in which the Fund will
invest are tax-exempt obligations, in the opinion of counsel to the issuer,
that contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short
notice period not to exceed seven days. Participating VRDOs provide the Fund
with a specified undivided interest (up to 100%) in the underlying obligation
and the right to demand payment of the unpaid principal balance plus accrued
interest on the Participating VRDOs from the financial institution on a
specified number of days' notice, not to exceed seven days. There is, however,
the possibility that because of default or insolvency, the demand feature of
VRDOs or Participating VRDOs may not be honored. The Fund has been advised by
its counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the common shares of a closed-end investment company, such as
the Fund, which invests primarily in fixed-income securities, changes as the
general levels of interest rates fluctuate. When interest rates decline, the
value of a fixed-income portfolio can be expected to rise. Conversely, when
interest rates rise, the value of a fixed-income portfolio can be expected to
decline. Prices of longer-term securities generally fluctuate more in response
to interest rate changes than do short-term or medium-term securities. These
changes in net asset value are likely to be greater in the case of a fund
having a leveraged capital structure, as proposed for the Fund. See "Risks and
Special Considerations of Leverage."
The Fund intends to invest primarily in long-term Pennsylvania Municipal
Bonds and Municipal Bonds with a maturity of more than ten years. Also, the
Fund may invest in intermediate-term Pennsylvania Municipal Bonds and
Municipal Bonds with a maturity of between three years and ten years. The Fund
may invest in short-term, tax-exempt securities, short-term U.S. Government
securities, repurchase agreements or cash. Such short-term securities or cash
will not exceed 20% of its total assets except during interim periods pending
investment of the net proceeds of public offerings of the Fund's securities or
in anticipation of the repurchase or redemption of the Fund's securities and
temporary periods when, in the opinion of the Investment Adviser, prevailing
market or economic conditions warrant. The Fund does not ordinarily intend to
realize significant interest income that is subject to Federal or Pennsylvania
income taxes.
12
<PAGE>
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in securities of a single issuer.
However, the Fund's investments will be limited so as to qualify the Fund for
special tax treatment afforded regulated investment companies under the
Federal tax laws. See "Taxes." To qualify, among other requirements, the Fund
will limit its investments so that, at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the Fund's total
assets will be invested in the securities (other than U.S. Government
securities) of a single issuer, and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets will be invested in the securities (other than U.S. Government
securities) of a single issuer. A fund that elects to be classified as
"diversified" under the 1940 Act must satisfy the foregoing 5% requirement
with respect to 75% of its total assets. To the extent that the Fund assumes
large positions in the securities of a small number of issuers, the Fund's
yield may fluctuate to a greater extent than that of a diversified company as
a result of changes in the financial condition or in the market's assessment
of the issuers.
PORTFOLIO INSURANCE
Under normal circumstances, at least 80% of the Fund's assets will be
invested in Pennsylvania Municipal Bonds and Municipal Bonds either (i)
insured under an insurance policy purchased by the Fund or (ii) insured under
an insurance policy obtained by the issuer thereof or any other party. The
Fund will seek to limit its investments to municipal bonds insured under
insurance policies issued by insurance carriers that have total admitted
assets (unaudited) of at least $75,000,000 and capital and surplus (unaudited)
of at least $50,000,000 and insurance claims-paying ability ratings of AAA
from S&P or Fitch or Aaa from Moody's. There can be no assurance that
insurance from insurance carriers meeting these criteria will be at all times
available. See Appendix III to this Prospectus for a brief description of
S&P's, Fitch's and Moody's insurance claims-paying ability ratings. Currently,
it is anticipated that a majority of the insured Pennsylvania Municipal Bonds
and Municipal Bonds in the Fund's portfolio will be insured by the following
insurance companies that satisfy the foregoing criteria: AMBAC Indemnity
Corporation, Financial Guaranty Insurance Company, Financial Security
Assurance and Municipal Bond Investors Assurance Corporation. The Fund also
may purchase Pennsylvania Municipal Bonds and Municipal Bonds covered by
insurance issued by any other insurance company that satisfies the foregoing
criteria. It is anticipated that initially a majority of insured Pennsylvania
Municipal Bonds and Municipal Bonds held by the Fund will be insured under
policies obtained by parties other than the Fund.
The Fund may purchase, but has no obligation to purchase, separate insurance
policies (the "Policies") from insurance companies meeting the criteria set
forth above that guarantee the payment of principal and interest on specified
eligible Pennsylvania Municipal Bonds and Municipal Bonds purchased by the
Fund. A Pennsylvania Municipal Bond and a Municipal Bond will be eligible for
coverage if it meets certain requirements of the insurance company set forth
in a Policy. In the event interest or principal on an insured Pennsylvania
Municipal Bond and Municipal Bond is not paid when due, the insurer will be
obligated under its Policy to make such payment not later than 30 days after
it has been notified by, and provided with documentation from, the Fund that
such nonpayment has occurred.
The Policies will be effective only as to insured Pennsylvania Municipal
Bonds and Municipal Bonds beneficially owned by the Fund. In the event of a
sale of any Pennsylvania Municipal Bonds and Municipal Bonds held by the Fund,
the issuer of the relevant Policy will be liable only for those payments of
interest and principal that are then due and owing. The Policies will not
guarantee the market value of the insured Pennsylvania Municipal Bonds and
Municipal Bonds or the value of the shares of the Fund.
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<PAGE>
The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities
remain in the Fund's portfolio. In addition, the insurer may not cancel its
Policies for any reason except failure to pay premiums when due. The Board of
Trustees of the Fund will reserve the right to terminate any of the Policies
if it determines that the benefits to the Fund of having its portfolio insured
under such policy are not justified by the expense involved.
The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently ranges from
approximately .02 of 1% to .15 of 1% of the principal amount of the
Pennsylvania Municipal Bonds and Municipal Bonds covered by such Policies. The
estimate is based on the expected composition of the Fund's portfolio of
Pennsylvania Municipal Bonds and Municipal Bonds. Additional information
regarding the Policies is set forth in Appendix III to this Prospectus. In
instances in which the Fund purchases Pennsylvania Municipal Bonds and
Municipal Bonds insured under policies obtained by parties other than the
Fund, the Fund does not pay the premiums for such policies; rather, the cost
of such policies may be reflected in the purchase price of the Pennsylvania
Municipal Bonds and Municipal Bonds.
It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place
a value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities that are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternate value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser's ability to manage
the portfolio may be limited to the extent the Fund holds defaulted
securities, which may limit its ability in certain circumstances to purchase
other Pennsylvania Municipal Bonds and Municipal Bonds. See "Net Asset Value"
below for a more complete description of the Fund's method of valuing
defaulted securities and securities that have a significant risk of default.
There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Trustees determines that such
insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may modify the criteria for insurance carriers
or the terms of the insurance, or discontinue its policy of maintaining
insurance for all or any of the Pennsylvania Municipal Bonds and Municipal
Bonds held in the Fund's portfolio. Although the Investment Adviser
periodically reviews the financial condition of each insurer, there can be no
assurance that the insurers will be able to honor their obligations under all
circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Pennsylvania Municipal Bonds or
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured Pennsylvania Municipal Bonds or Municipal
Bonds are subject to market risk (i.e., fluctuations in market value as a
result of changes in prevailing interest rates).
DESCRIPTION OF PENNSYLVANIA MUNICIPAL BONDS AND MUNICIPAL BONDS
Pennsylvania Municipal Bonds and Municipal Bonds include debt obligations
issued to obtain funds for various public purposes, including construction of
a wide range of public facilities, refunding of outstanding obligations and
obtaining funds for general operating expenses and loans to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to finance
various privately operated facilities, including certain local facilities for
water supply, gas,
14
<PAGE>
electricity, sewage or solid waste disposal. For purposes of this prospectus,
such obligations are Municipal Bonds if the interest paid thereon is exempt
from Federal income tax and are Pennsylvania Municipal Bonds if the interest
thereon is exempt from Federal and Pennsylvania income taxes, even though such
bonds may be industrial development bonds ("IDBs") or "private activity bonds"
as discussed below. Also, for purposes of this prospectus, Non-Municipal Tax-
Exempt securities as discussed above will be considered Pennsylvania Municipal
Bonds or Municipal Bonds.
The two principal classifications of Pennsylvania Municipal Bonds and
Municipal Bonds are "general obligation" bonds and "revenue" bonds, which
latter category includes IDBs and, for bonds issued after August 15, 1986,
private activity bonds. General obligation bonds are secured by the issuer's
pledge of faith, credit and taxing power for the repayment of principal and
the payment of interest. Revenue or special obligation bonds are payable only
from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source such as from the user of the facility being financed. IDBs are
in most cases revenue bonds and do not generally constitute the pledge of the
credit or taxing power of the issuer of such bonds. The repayment of principal
and the payment of interest on such industrial development bonds depends
solely on the ability of the user of the facility financed by the bonds to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment. Pennsylvania Municipal
Bonds and Municipal Bonds may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such
bonds becomes a moral commitment but not a legal obligation of the state or
municipality in question.
The Fund may purchase Pennsylvania Municipal Bonds and Municipal Bonds
classified as "private activity bonds" (in general, bonds that benefit non-
governmental entities). Interest received on certain tax-exempt securities
that are classified as "private activity bonds" may subject certain investors
in the Fund to an alternative minimum tax. There is no limitation on the
percentage of the Fund's assets that may be invested in Pennsylvania Municipal
Bonds and Municipal Bonds that may subject certain investors to an alternative
minimum tax. See "Taxes--General." Also included within the general category
of Pennsylvania Municipal Bonds and Municipal Bonds are participation
certificates issued by government authorities or entities to finance the
acquisition or construction of equipment, land and/or facilities. The
certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively referred to
as "lease obligations") relating to such equipment, land or facilities.
Although lease obligations do not constitute general obligations of the issuer
for which the issuer's unlimited taxing power is pledged, a lease obligation
frequently is backed by the issuer's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses, which provide that the issuer
has no obligation to make lease or installment purchase payments in future
years unless money is appropriated for such purpose on a yearly basis.
Although "non-appropriation" lease obligations are secured by the lease
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing that
has not yet developed the depth of marketability associated with more
conventional securities.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of Pennsylvania Municipal Bonds and Municipal Bonds for
investment by the Fund.
15
<PAGE>
SPECIAL CONSIDERATIONS RELATING TO PENNSYLVANIA MUNICIPAL BONDS
The Fund ordinarily will invest substantially all of its assets in
Pennsylvania Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of Pennsylvania Municipal Bonds than is a
municipal bond mutual fund that is not concentrated in issuers of Pennsylvania
Municipal Bonds to this degree. Many different social, environmental and
economic factors may affect the financial condition of Pennsylvania and its
political subdivisions. From time to time Pennsylvania and certain of its
political subdivisions have encountered financial difficulties which adversely
affected their respective credit standings. Other factors which may negatively
affect economic conditions in Pennsylvania include adverse changes in
employment rates, Federal revenue sharing or laws with respect to tax-exempt
financing. The Investment Adviser does not believe that the current economic
conditions in Pennsylvania or other factors described above will have a
significant adverse effect on the Fund's ability to invest in high quality
Pennsylvania Municipal Bonds. As of August 1, 1998, Pennsylvania general
obligation bonds were rated AA- by S&P, AA by Fitch and Aa3 by Moody's. See
Appendix I, "Economic and Financial Conditions in Pennsylvania."
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own common shares pursuant to tender offers or
otherwise to redeem or repurchase preferred shares or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known,
as with the issuance of preferred shares, as "leveraging") create an
opportunity for greater total return since the Fund will not be required to
sell portfolio securities to repurchase or redeem shares but, at the same
time, increase exposure to capital risk. In addition, borrowed funds are
subject to interest costs that may offset or exceed the return earned on the
borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell Pennsylvania Municipal Bonds and Municipal Bonds on a delayed
delivery basis or on a when-issued basis at fixed purchase or sale terms.
These transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future. The purchase will be
recorded on the date the Fund enters into the commitment, and the value of the
obligation will thereafter be reflected in the calculation of the Fund's net
asset value. The value of the obligation on the delivery day may be more or
less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or liquid
securities having a market value at all times at least equal to the amount of
the commitment.
Indexed and Inverse Floating Obligations. The Fund may invest in
Pennsylvania Municipal Bonds and Municipal Bonds yielding a return based on a
particular index of value or interest rates. For example, the Fund may invest
in Pennsylvania Municipal Bonds and Municipal Bonds that pay interest based on
an index of Municipal Bond interest rates. The principal amount payable upon
maturity of certain Pennsylvania Municipal Bonds and Municipal Bonds also may
be based on the value of an index. To the extent the Fund invests in these
types of Municipal Bonds, the Fund's return on such Pennsylvania Municipal
Bonds and Municipal Bonds will be subject to risk with respect to the value of
the particular index. Also, the Fund may invest in so-called "inverse floating
obligations" or "residual interest bonds" on which the interest rates
typically vary inversely with a short-term floating rate (which may be reset
periodically by a dutch auction, a remarketing agent, or by
16
<PAGE>
reference to a short-term tax-exempt interest rate index). The Fund may
purchase synthetically-created inverse floating rate bonds evidenced by
custodial or trust receipts. Generally, income on inverse floating rate bonds
will decrease when short-term interest rates increase, and will increase when
short-term interest rates decrease. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes in market interest rates at a rate that is a
multiple (typically two) of the rate at which fixed-rate, long-term, tax-
exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities generally will be more volatile
than the market values of fixed-rate tax-exempt securities. To seek to limit
the volatility of these securities, the Fund may purchase inverse floating
obligations with shorter-term maturities or limitations on the extent to which
the interest rate may vary. The Investment Adviser believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund that allows the Investment Adviser to vary the degree
of investment leverage relatively efficiently under different market
conditions.
Call Rights. The Fund may purchase a Pennsylvania Municipal Bond or
Municipal Bond issuer's right to call all or a portion of such Pennsylvania
Municipal Bond or Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Pennsylvania Municipal Bonds or
Municipal Bonds, subject to certain conditions. A Call Right that is not
exercised prior to the maturity of the related Pennsylvania Municipal Bond or
Municipal Bond will expire without value. The economic effect of holding both
the Call Right and the related Pennsylvania Municipal Bond or Municipal Bond
is identical to holding a Pennsylvania Municipal Bond or Municipal Bond as a
non-callable security.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at
a mutually agreed-upon time and price, thereby determining the yield during
the term of the agreement. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the underlying securities.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts ("financial futures contracts") and options
thereon. While the Fund's use of hedging strategies is intended to reduce the
volatility of the net asset value of the common shares, the net asset value of
the common shares will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. In addition, because of the
anticipated leveraged nature of the common shares, hedging transactions will
result in a larger impact on the net asset value of the common shares
17
<PAGE>
than would be the case if the common shares were not leveraged. Furthermore,
the Fund may only engage in hedging activities from time to time and may not
necessarily be engaging in hedging activities when movements in interest rates
occur. The Fund has no obligation to enter into hedging transactions and may
not do so.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or,
in certain circumstances, as long-term capital gains to shareholders. See
"Taxes--Tax Treatment of Options and Futures Transactions." In addition, in
order to obtain ratings of the preferred shares from one or more nationally
recognized statistical ratings organizations ("NRSROs"), the Fund may be
required to limit its use of hedging techniques in accordance with the
specified guidelines of such organizations.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The investment policies with
respect to the hedging transactions of the Fund are not fundamental policies
and may be modified by the Board of Trustees of the Fund without the approval
of the Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to Pennsylvania Municipal Bonds and Municipal Bonds it
owns, thereby giving the holder of the option the right to buy the underlying
security covered by the option from the Fund at the stated exercise price
until the option expires. The Fund writes only covered call options, which
means that so long as the Fund is obligated as the writer of a call option, it
will own the underlying securities subject to the option. The Fund may not
write covered call options on underlying securities in an amount exceeding 15%
of the market value of its total assets.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options may serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction; profit or loss from the sale
will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities that it intends to purchase. The Fund will not
purchase options on securities if, as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
Financial Futures Contracts and Options. The Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for
the purpose of hedging its investments in Pennsylvania Municipal
18
<PAGE>
Bonds and Municipal Bonds against declines in value and to hedge against
increases in the cost of securities it intends to purchase. A financial
futures contract obligates the seller of a contract to deliver and the
purchaser of a contract to take delivery of the type of financial instrument
covered by the contract or, in the case of index-based futures contracts, to
make and accept a cash settlement, at a specific future time for a specified
price. A sale of financial futures contracts may provide a hedge against a
decline in the value of portfolio securities because such depreciation may be
offset, in whole or in part, by an increase in the value of the position in
the financial futures contracts. A purchase of financial futures contracts may
provide a hedge against an increase in the cost of securities intended to be
purchased because such appreciation may be offset, in whole or in part, by an
increase in the value of the position in the futures contracts.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker equal to approximately
5% of the contract amount must be deposited with the broker. This amount is
known as initial margin. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the financial
futures contract fluctuates making the long and short positions in the
financial futures contract more or less valuable.
The Fund may purchase and sell financial futures contracts based on The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging Pennsylvania Municipal
Bonds and Municipal Bonds that the Fund holds or anticipates purchasing
against adverse changes in interest rates. The Fund also may purchase and sell
financial futures contracts on U.S. Government securities and purchase and
sell put and call options on such financial futures contracts for such hedging
purposes. With respect to U.S. Government securities, currently there are
financial futures contracts based on long-term U.S. Treasury bonds, U.S.
Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Board of Trustees, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available,
if the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the
Pennsylvania Municipal Bonds and Municipal Bonds in which the Fund invests to
make such hedging appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates.
OTC options transactions are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below
for information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Fund may be considered to be illiquid. The illiquidity of such options
or assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.
19
<PAGE>
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
security that is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, the Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and Pennsylvania
Municipal Bonds and Municipal Bonds may be adversely affected by economic,
political, legislative or other developments that have a disparate impact on
the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations, provided that
the Fund adheres to certain restrictions. In particular, the Fund may purchase
and sell financial futures contracts and options thereon (i) for bona fide
hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes if,
immediately thereafter, the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums entered into for
non-hedging purposes does not exceed 5% of the market value of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any such transactions. Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian so that
the amount so segregated plus the amount of initial and variation margin held
in the account of its broker equals the market value of the financial futures
contract, thereby ensuring that the use of such financial futures contract is
unleveraged.
Certain risks are involved in options and futures transactions. The
Investment Adviser believes, however, that, because the Fund will engage in
options and futures transactions only for hedging purposes, the Fund's options
and futures portfolio strategies will not subject the Fund to those risks
associated with speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to Pennsylvania
Municipal Bond or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.
20
<PAGE>
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past moved beyond the daily limit on a number of consecutive
trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may
be disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaged in hedging transactions
when movements in interest rates occur.
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
EFFECTS OF LEVERAGE
Within approximately three months after the completion of this offering, the
Fund intends to offer preferred shares representing approximately 40% of the
Fund's capital immediately after the issuance of such preferred shares. There
can be no assurance, however, that preferred shares representing such
percentage of the Fund's capital will actually be issued. Issuing the
preferred shares will result in the leveraging of the common shares. Although
the Fund's Board of Trustees has not yet determined the terms of the preferred
shares offering, the Fund anticipates that the preferred shares will pay
dividends that will be adjusted over either relatively short-term periods
(generally seven to 28 days) or medium-term periods (up to five years). The
dividend rate will be based upon prevailing interest rates for debt
obligations of comparable maturity. The proceeds of the preferred shares
offering will be invested in longer-term obligations in accordance with the
Fund's investment objective. The expenses of the preferred shares, which will
be borne by the Fund, will reduce the net asset value of the common shares.
Additionally, under certain circumstances, when the Fund is required to
allocate taxable income to holders of preferred shares, the Fund anticipates
that the terms of the preferred shares will require the Fund to make an
additional distribution to such holders in an amount approximately equal to
the tax liability resulting from such allocation and such additional
distribution (an "Additional Distribution"). Because under normal market
conditions, obligations with longer maturities produce higher yields than
short-term and medium-term obligations, the Investment Adviser believes that
the spread inherent in the difference between the short-term and medium-term
rates (and any Additional Distribution) paid by the Fund as dividends on the
preferred shares and the longer-term rates received by the Fund may provide
holders of common shares with a potentially higher yield.
The use of leverage, however, involves certain risks to the holders of
common shares. For example, issuance of the preferred shares may result in
higher volatility of the net asset value of the common shares and potentially
21
<PAGE>
more volatility in the market value of the common shares. In addition, changes
in the short-term and medium-term dividend rates on, and the amount of taxable
income allocable to, the preferred shares will affect the yield to holders of
common shares. Leverage will allow holders of common shares to realize a
higher current rate of return than if the Fund were not leveraged as long as
the Fund, while accounting for its costs and operating expenses, is able to
realize a higher net return on its investment portfolio than the then current
dividend rate (and any Additional Distribution) of the preferred shares.
Similarly, since a pro rata portion of the Fund's net realized capital gains
are generally payable to holders of common shares, the effect of leverage will
be to increase the amount of such gains distributed to holders of common
shares. However, short-term, medium-term and long-term interest rates change
from time to time as do their relationships to each other (i.e., the slope of
the yield curve) depending upon such factors as supply and demand forces,
monetary and tax policies and investor expectations. Changes in any or all of
such factors could cause the relationship between short-term, medium-term and
long-term rates to change (i.e., to flatten or to invert the slope of the
yield curve) so that short-term and medium-term rates may substantially
increase relative to the long-term obligations in which the Fund may be
invested. To the extent that the current dividend rate (and any Additional
Distribution) on the preferred shares approaches the net return on the Fund's
investment portfolio, the benefit of leverage to holders of common shares will
be decreased. If the current dividend rate (and any Additional Distribution)
on the preferred shares were to exceed the net return on the Fund's portfolio,
holders of common shares would receive a lower rate of return than if the Fund
were not leveraged. Similarly, since both the cost of issuing the preferred
shares and any decline in the value of the Fund's investments (including
investments purchased with the proceeds from any preferred share offering)
will be borne entirely by holders of common shares, the effect of leverage in
a declining market would result in a greater decrease in net asset value to
holders of common shares than if the Fund were not leveraged. If the Fund is
liquidated, holders of preferred shares will be entitled to receive
liquidating distributions before any distribution is made to holders of common
shares.
In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the common shares. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under Federal tax laws. See "Taxes." However, the Fund
intends to take all measures necessary to make common shares dividend
payments. If the Fund's current investment income is ever insufficient to meet
dividend payments on either the common shares or the preferred shares, the
Fund may have to liquidate certain of its investments. In addition, the Fund
will have the authority to redeem the preferred shares for any reason and may
redeem all or part of the preferred shares under the following circumstances:
. if the Fund anticipates that the leveraged capital structure will result
in a lower rate of return for any significant amount of time to holders
of the common shares than that obtainable if the common shares were not
leveraged,
. if the asset coverage for the preferred shares declines below 200% either
as a result of a decline in the value of the Fund's portfolio investments
or as a result of the repurchase of common shares in tender offers, or
. in order to maintain the asset coverage guidelines established by the
NRSROs that have rated the preferred shares.
Redemption of the preferred shares or insufficient investment income to make
dividend payments, may reduce the net asset value of the common shares and
require the Fund to liquidate a portion of its investments at a time when it
may be disadvantageous, in the absence of such extraordinary circumstances, to
do so.
As discussed under "Investment Advisory and Management Arrangements," during
periods when the Fund has preferred shares outstanding, the fees paid the
Investment Adviser for investment advisory and management
22
<PAGE>
services will be higher than if the Fund did not issue preferred shares
because the fees paid will be calculated on the basis of the Fund's average
weekly net assets, including proceeds from the sale of preferred shares.
Assuming the use of leverage by issuing preferred shares (paying dividends
at a rate that generally will be adjusted every 28 days) in an amount
representing approximately 40% of the Fund's capital at an annual dividend
rate of 3.375% payable on such preferred shares based on market rates as of
the date of this prospectus, the annual return that the Fund's portfolio must
experience (net of expenses) in order to cover such dividend payments would be
1.35%.
The following table is designed to illustrate the effect on the return to a
holder of the Fund's common shares of the leverage obtained by the issuance of
preferred shares representing approximately 40% of the Fund's capital,
assuming hypothetical annual returns on the Fund's portfolio of minus 10% to
plus 10%. As the table shows, leverage generally increases the return to
shareholders when portfolio return is positive and decreases the return when
portfolio return is negative. The figures appearing in the table are
hypothetical and actual returns may be greater or less than those appearing in
the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return
(net of expenses).................................. (10)% (5)% 0% 5% 10%
Corresponding Common Shares Return.................. (19)% (11)% (2)% 6% 14%
</TABLE>
Leveraging the common shares cannot be fully achieved until preferred shares
are issued and the proceeds of such offering have been invested in long-term
Pennsylvania Municipal Bonds and Municipal Bonds.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS
If short-term or medium-term rates increase or other changes in market
conditions occur to the point where the Fund's leverage could adversely affect
holders of common shares as noted above (or in anticipation of such changes),
the Fund may attempt to shorten the average maturity of its investment
portfolio in order to offset the negative impact of leverage. The Fund also
may attempt to reduce the degree to which it is leveraged by redeeming
preferred shares pursuant to the Fund's Certificate of Designation, which
establishes the rights and preferences of the preferred shares, or otherwise
by purchasing preferred shares. Purchases and redemptions of preferred shares,
whether on the open market or in negotiated transactions, are subject to
limitations under the 1940 Act. In determining whether or not it is in the
best interest of the Fund and its shareholders to redeem or repurchase
outstanding preferred shares, the Trustees will take into account a variety of
factors, including the following:
. market conditions,
. the ratio of preferred shares to common shares, and
. the expenses associated with such redemption or repurchase.
If market conditions subsequently change, the Fund may sell previously
unissued preferred shares or preferred shares that the Fund had issued but
later repurchased or redeemed.
The Fund intends to apply for ratings of the preferred shares from one or
more NRSROs. In order to obtain these ratings, the Fund may be required to
maintain portfolio holdings that meet the specified guidelines of such
organizations. These guidelines may impose asset coverage requirements that
are more stringent than those imposed by the 1940 Act. The Fund does not
anticipate that these guidelines will impede the Investment Adviser
23
<PAGE>
from managing the Fund's portfolio in accordance with the Fund's investment
objective and policies. Ratings on the preferred shares issued by the Fund
should not be confused with ratings on the obligations held by the Fund.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless, immediately after such issuance, the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding
preferred shares (expected to equal the original purchase price of the
outstanding preferred shares plus any accumulated and unpaid dividends thereon
and any accumulated and unpaid Additional Distribution). In addition, the Fund
is not permitted to declare any cash dividend or other distribution on its
common shares unless, at the time of such declaration, the net asset value of
the Fund's portfolio (determined after deducting the amount of such dividend
or distribution) is at least 200% of such liquidation value. Under the Fund's
proposed capital structure, assuming the sale of preferred shares representing
approximately 40% of the Fund's capital, the net asset value of the Fund's
portfolio is expected to be approximately 250% of the liquidation value of the
Fund's preferred shares. To the extent possible, the Fund intends to purchase
or redeem preferred shares from time to time to maintain coverage of preferred
shares of at least 200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and, prior
to issuance of the preferred shares, may not be changed without the approval
of the holders of a majority of the Fund's outstanding common shares (which
for this purpose and under the 1940 Act means the lesser of (i) 67% of the
common shares represented at a meeting at which more than 50% of the
outstanding common shares are represented or (ii) more than 50% of the
outstanding shares). Subsequent to the issuance of the preferred shares, the
following investment restrictions may not be changed without the approval of a
majority of the outstanding common shares and of the outstanding preferred
shares, voting together as a class, and the approval of a majority of the
outstanding preferred shares, voting separately as a class. The Fund may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase
Pennsylvania Municipal Bonds, Municipal Bonds and other debt securities and
enter into repurchase agreements in accordance with its investment
objective, policies and limitations.
6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Trustees without shareholder approval, provide that the Fund
may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of
24
<PAGE>
other investment companies except if immediately thereafter not more than
(i) 3% of the total outstanding voting shares of such company is owned by
the Fund, (ii) 5% of the Fund's total assets, taken at market value, would
be invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding shares of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(3) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on Pennsylvania Municipal Bonds,
Municipal Bonds, U.S. Government obligations and related indices or
otherwise in connection with bona fide hedging activities and may purchase
and sell Call Rights to require mandatory tender for the purchase of
related Pennsylvania Municipal Bonds and Municipal Bonds.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentages resulting from changing values will not be
considered a violation.
The Investment Adviser of the Fund and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") are owned and controlled by Merrill Lynch & Co.
("ML & Co."). Because of the affiliation of Merrill Lynch with the Investment
Adviser, the Fund is prohibited from engaging in certain transactions
involving Merrill Lynch except pursuant to an exemptive order or otherwise in
compliance with the provisions of the 1940 Act and the rules and regulations
thereunder. Included among such restricted transactions will be purchases from
or sales to Merrill Lynch of securities in transactions in which it acts as
principal. An exemptive order has been obtained that permits the Fund to
effect principal transactions with Merrill Lynch in high quality, short-term,
tax-exempt securities subject to conditions set forth in such order. The Fund
may consider in the future requesting an order permitting other principal
transactions with Merrill Lynch, but there can be no assurance that such
application will be made and, if made, that such order would be granted.
TRUSTEES AND OFFICERS
Information about the Trustees, executive officers and portfolio managers of
the Fund, including their ages and their principal occupations during the last
five years is set forth below. Unless otherwise noted, the address of each
Trustee, executive officer and portfolio manager is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
Arthur Zeikel (66)--President and Director (1)(2)--Chairman of the
Investment Adviser and MLAM (which terms, as used herein, include their
corporate predecessors) since 1997; President of the Investment Adviser and
MLAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997, and Director thereof since 1993; President of Princeton
Services from 1993 to 1997; Executive Vice President of ML & Co. since 1990.
25
<PAGE>
James H. Bodurtha (54)--Director (2)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation
since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
Herbert I. London (59)--Director (2)--113-115 University Place, New York,
New York 10003. John M. Olin Professor of Humanities, New York University
since 1993 and Professor thereof since 1980; President, Hudson Institute since
1997 and Trustee since 1980; Dean, Gallatin Division of New York University
from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Director, Damon Corporation from 1991 to 1995; Overseer,
Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech LP in
1996.
Robert R. Martin (71)--Director (2)--513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from
1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989;
Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof
in 1979; Director, Securities Industry Association from 1981 to 1982 and
Public Securities Association from 1979 to 1980; Chairman of the Board, WTC
Industries, Inc. in 1994; Trustee, Northland College since 1992.
Joseph L. May (69)--Director (2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold (46)--Director (2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund since 1989;
Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.
Terry K. Glenn (58)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of
Princeton Funds Distributor, Inc. ("PFD") since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since 1988.
Vincent R. Giordano (54)--Senior Vice President (1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993.
Donald C. Burke (38)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Kenneth A. Jacob (47)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Investment Adviser since 1984.
Robert A. DiMella, CFA (32)--Vice President (1)(2)--Vice President of MLAM
since 1997; Assistant Portfolio Manager of MLAM from 1993 to 1995; Assistant
Portfolio Manager with Prudential Investment Advisers from 1991 to 1993.
26
<PAGE>
William R. Bock (62)--Vice President and Portfolio Manager (1)(2)--Vice
President of MLAM since 1989.
Gerald M. Richard (49)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of PFD since
1981 and Treasurer thereof since 1984.
Alice A. Pellegrino (38)--Secretary (1)(2)--Attorney with MLAM since 1997;
Associate with Kirkpatrick & Lockhart LLP from 1992 to 1997.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Trustee or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
In the event that the Fund issues preferred shares, in connection with the
election of the Fund's Trustees, holders of shares of preferred shares, voting
as a separate class, will be entitled to elect two of the Fund's Trustees, and
the remaining Trustees will be elected by all holders of capital shares,
voting as a single class. See "Description of Capital Shares."
COMPENSATION OF TRUSTEES
Pursuant to an Investment Advisory Agreement with the Fund, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Trustees who are affiliated persons of ML & Co. or its
subsidiaries.
The Fund pays each Trustee not affiliated with the Investment Adviser (each,
a "non-affiliated Trustee") a fee of $2,500 per year plus $250 per meeting
attended, and pays all Trustee's out-of-pocket expenses relating to attendance
at meetings. The Fund also compensates members of the Board's audit and
nominating committee (the "Committee"), which consists of all of the non-
affiliated Trustees, an annual fee of $500 per year plus $125 per Committee
meeting attended.
The following table sets forth compensation to be paid by the Fund to the
non-affiliated Trustees projected through the end of the Fund's first full
fiscal year, and for the calendar year ended December 31, 1997 the aggregate
compensation paid by all investment companies advised by the Investment
Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-
affiliated Trustees.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF TRUSTEE FROM FUND FUND EXPENSE TRUSTEES
- --------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
James H. Bodurtha (/1/)..... $4,500 None $148,500
Herbert I. London (/1/)..... $4,500 None $148,500
Robert R. Martin (/1/)...... $4,500 None $148,500
Joseph L. May (/1/)......... $4,500 None $148,500
Andre F. Perold (/1/)....... $4,500 None $148,500
</TABLE>
- --------
(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Bodurtha (25 registered investment companies consisting of 43 portfolios);
Mr. London (25 registered investment companies consisting of 43
portfolios); Mr. Martin (25 registered investment companies consisting of
43 portfolios); Mr. May (25 registered investment companies consisting of
43 portfolios); and Mr. Perold (25 registered investment companies
consisting of 43 portfolios).
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<PAGE>
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, provides
the Fund with investment advisory and management services. The Merrill Lynch
Asset Management Group (which includes the Investment Adviser) acts as the
investment adviser to more than 100 registered investment companies and offers
investment advisory services to individuals and institutional accounts. As of
October 1998, the Asset Management Group had a total of approximately $483
billion in investment company and other portfolio assets under management
(approximately $38 billion of which was invested in municipal securities).
This amount includes assets managed for certain affiliates of the Investment
Adviser. The Investment Adviser is a limited partnership, the partners of
which are ML & Co. and Princeton Services, Inc. The principal business address
of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
The Investment Advisory Agreement provides that, subject to the direction of
the Board of Trustees of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Trustees.
The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. William R. Bock is the
portfolio manager of the Fund and is primarily responsible for the Fund's day-
to-day management.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.55
of 1% of the Fund's average weekly net assets (i.e., the average weekly value
of the total assets of the Fund, including proceeds from the issuance of
preferred shares, minus the sum of accrued liabilities of the Fund and
accumulated dividends on the preferred shares). For purposes of this
calculation, average weekly net assets are determined at the end of each month
on the basis of the average net assets of the Fund for each week during the
month. The assets for each weekly period are determined by averaging the net
assets at the last business day of a week with the net assets at the last
business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Trustees of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
printing proxies, listing fees, if any, share certificates and shareholder
reports, charges of the custodian and the transfer and dividend disbursing
agent and registrar, fees and expenses with respect to the issuance of
preferred shares, Securities and Exchange Commission fees, fees and expenses
of non-affiliated Trustees, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. Accounting services
are provided to the Fund by the Investment Adviser, and the Fund reimburses
the Investment Adviser for its costs in connection with such services.
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<PAGE>
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Trustees of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Trustees who are
not parties to such contract or interested persons (as defined in the 1940
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for an
advisory client when other clients are selling the same security. If purchases
or sales of securities by the Investment Adviser for the Fund or other funds
for which it acts as investment adviser or for advisory clients arise for
consideration at or about the same time, transactions in such securities will
be made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. Transactions effected by the Investment Adviser (or
its affiliates) on behalf of more than one of its clients during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, causing an adverse effect on price.
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S.
Government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" that prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available.
29
<PAGE>
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to providing the
best price and execution, securities firms that provide supplemental
investment research to the Investment Adviser, including Merrill Lynch, may
receive orders for transactions by the Fund. Research information provided to
the Investment Adviser by securities firms is supplemental. It does not
replace or reduce the level of services performed by the Investment Adviser
and the expenses of the Investment Adviser will not be reduced because it
receives supplemental research information.
The Fund invests in securities traded in the over-the-counter markets, and
the Fund intends to deal directly with dealers who make markets in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere. Under the 1940 Act, except as permitted by
exemptive order, persons affiliated with the Fund, including Merrill Lynch,
are prohibited from dealing with the Fund as principal in the purchase and
sale of securities. Since transactions in the over-the-counter market usually
involve transactions with dealers acting as principals for their own accounts,
the Fund does not deal with Merrill Lynch and its affiliates in connection
with such transactions except that, pursuant to exemptive orders obtained by
the Investment Adviser, the Fund may engage in principal transactions with
Merrill Lynch in high quality, short-term, tax-exempt securities. See
"Investment Restrictions." However, affiliated persons of the Fund, including
Merrill Lynch, serve as its brokers in certain over-the-counter transactions
conducted on an agency basis.
The Fund also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
PORTFOLIO TURNOVER
The Fund may dispose of securities without regard to the time they have been
held when such action, for defensive or other reasons, if it appears advisable
to the Investment Adviser. While it is not possible to predict turnover rates
with any certainty, presently it is anticipated that the Fund's annual
portfolio turnover rate, under normal circumstances, should be less than 100%.
(The portfolio turnover rate is calculated by dividing the lesser of purchases
or sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are
excluded.) A high portfolio turnover rate has certain tax consequences and
results in greater transaction costs, which are borne directly by the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared and paid monthly to holders of
common shares. It is expected that the Fund will commence paying dividends to
holders of common shares within approximately 90 days of the date of this
prospectus. From and after issuance of the preferred shares, monthly
distributions to holders of common shares normally will consist of
substantially all net investment income remaining after the payment of
dividends (and any Additional Distribution) on the preferred shares. All net
realized capital gains, if any, will be distributed pro rata at least annually
to holders of common shares and any preferred shares. While any preferred
shares are outstanding, the Fund may not declare any cash dividend or other
distribution on its common shares, unless at the time of such declaration, (i)
all accumulated preferred share dividends, including any Additional
Distribution, have been paid,
30
<PAGE>
and (ii) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200%
of the liquidation value of the outstanding preferred shares (expected to
equal the original purchase price of the outstanding preferred shares plus any
accumulated and unpaid dividends thereon and any accumulated but unpaid
Additional Distribution). If the Fund's ability to make distributions on its
common shares is limited, such limitation could under certain circumstances
impair the ability of the Fund to maintain its qualification for taxation as a
regulated investment company, which would have adverse tax consequences for
holders of common shares. See "Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of common shares may be
automatically reinvested in common shares of the Fund. Dividends and
distributions may be taxable to shareholders under certain circumstances as
discussed below, whether they are reinvested in shares of the Fund or received
in cash.
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income
and 90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Fund
intends to distribute substantially all of such income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its shareholders. Exempt-
interest dividends are dividends or any part thereof paid by the Fund that are
attributable to interest on tax-exempt obligations and designated by the Fund
as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of its taxable year. To the extent
that the dividends distributed to the Fund's shareholders are derived from
interest income exempt from tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal income tax purposes. Exempt-interest
dividends are included, however, in determining the portion, if any, of a
person's social security and railroad retirement benefits subject to Federal
income taxes. Each shareholder is advised to consult a tax adviser with
respect to whether exempt-interest dividends retain the exclusion under Code
Section 103(a) if such shareholder
31
<PAGE>
would be treated as a "substantial user" or "related person" under Code
Section 147(a) with respect to property financed with the proceeds of an issue
of "industrial development bonds" or "private activity bonds," if any, held by
the Fund.
The portion of dividends paid from interest received by the Fund from
Pennsylvania Municipal Bonds also will be exempt from Pennsylvania personal
income tax. However, distributions attributable to capital gains derived by
the Fund as well as distributions derived from income from investments other
than Pennsylvania Municipal Bonds will be taxable for purposes of the
Pennsylvania personal income tax. In the case of residents of the City of
Philadelphia, distributions which are derived from interest received by the
Fund from Pennsylvania Municipal Bonds or which are designated as capital gain
dividends for Federal income tax purposes will be exempt from the Philadelphia
School District investment income tax. Interest on indebtedness incurred or
continued to purchase or carry shares of a RIC paying exempt interest
dividends, such as the Fund, will not be deductible by the investor for
Federal or Pennsylvania income tax purposes to the extent attributable to
exempt interest dividends.
Shareholders subject to income taxation by states other than Pennsylvania
will realize a lower after tax rate of return than Pennsylvania shareholders
since the dividends distributed by the Fund generally will not be exempt, to
any significant degree, from income taxation by such other states. The Fund
will inform shareholders annually regarding the portion of the Fund's
distributions which constitutes exempt-interest dividends and the portion
which is exempt from Pennsylvania personal income taxes.
As a result of a pronouncement by the Pennsylvania Department of Revenue, an
investment in the Fund by a corporate shareholder will apparently qualify as
an exempt asset for purposes of the single asset apportionment fraction
available in computing the Pennsylvania capital stock/foreign franchise tax to
the extent that the portfolio securities of the Fund comprise investments in
Pennsylvania and/or United States Government Securities that would be exempt
assets if owned directly by the corporation. To the extent exempt-interest
dividends are excluded from taxable income for Federal corporate income tax
purposes (determined before net operating loss carryovers and special
deductions), they will not be subject to the Pennsylvania corporate net income
tax. An investment in or distributions from investment income and capital
gains of the Fund, including exempt-interest dividends, may be subject to
state taxes in states other than Pennsylvania (and, possibly, in Pennsylvania)
and to local taxes imposed by municipalities in states other than Pennsylvania
(and, possibly, municipalities in Pennsylvania). Accordingly, investors in the
Fund should consult their tax advisors with respect to the application of such
taxes to an investment in the Fund, to the receipt of Fund dividends and to
their Pennsylvania tax situation in general.
Shares of the Fund will be exempt from Pennsylvania county personal property
taxes to the extent the Fund's portfolio securities consist of Pennsylvania
Municipal Bonds on the annual assessment date.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions
will be considered taxable ordinary income for Federal income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Certain categories of
capital gains are taxable at different rates. Generally not later than 60 days
after the close of its taxable year, the Fund will provide its shareholders
with a written notice designating the amounts of any exempt-interest
dividends, ordinary income dividends or capital gain dividends, as well as any
amount of capital gain dividends in the different categories of capital gain
referred to above. Distributions by the Fund, whether from
32
<PAGE>
exempt-income, ordinary income or capital gains, are not eligible for the
dividends received deduction allowed to corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of tax-
exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
If the Fund pays a dividend in January that was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
The Internal Revenue Service (the "Service") has taken the position in a
revenue ruling that if a RIC has more than one class of shares, it may
designate distributions made to each class in any year as consisting of no
more than such class's proportionate share of particular types of income,
including exempt-interest income and net long-term capital gains. A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the RIC during such year that was
paid to such class. Consequently, when common shares and one or more series of
preferred shares are outstanding, the Fund intends to designate distributions
made to the classes as consisting of particular types of income in accordance
with the classes' proportionate shares of such income. Thus, the Fund will
designate dividends paid as exempt-interest dividends in a manner that
allocates such dividends among the holders of common shares and series of
preferred shares in proportion to the total dividends paid to each class
during the taxable year, or otherwise as required by applicable law. Capital
gain dividends will similarly be allocated among the classes in proportion to
the total dividends paid to each class during the taxable year, or otherwise
as required by applicable law. When capital gain or other taxable income is
allocated to holders of preferred shares pursuant to the allocation rules
described above, the terms of the preferred shares may require the Fund to
make an additional distribution to or otherwise compensate such holders for
the tax liability resulting from such allocation.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on certain "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds that, although tax-exempt,
are used for purposes other than those generally performed by governmental
units and that benefit non-governmental entities (e.g., bonds used for
industrial development or housing purposes). Income received on such bonds is
classified as an item of "tax preference" that could subject certain investors
in such bonds, including shareholders of the Fund, to an increased alternative
minimum tax. The Fund intends to purchase such "private activity bonds" and
will report to shareholders within 60 days after calendar year-end the portion
of its dividends declared during the year that constitutes an item of tax
preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay an alternative minimum tax on
exempt-interest dividends paid by the Fund.
33
<PAGE>
The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special
tax rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such nontraditional
instruments could be recharacterized as taxable ordinary income.
If at any time when preferred shares are outstanding the Fund does not meet
the asset coverage requirements of the 1940 Act, the Fund will be required to
suspend distributions to holders of common shares until the asset coverage is
restored. See "Dividends and Distributions." This may prevent the Fund from
distributing at least 90% of its net investment income and may, therefore,
jeopardize the Fund's qualification for taxation as a RIC. Upon any failure to
meet the asset coverage requirements of the 1940 Act, the Fund, in its sole
discretion, may redeem preferred shares in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences to the Fund and
its shareholders of failing to qualify as a RIC. There can be no assurance,
however, that any such action would achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Some types of preferred shares that the Fund currently contemplates
issuing may raise an issue as to whether distributions on such preferred
shares are "preferential" under the Code and, therefore, not eligible for the
dividends paid deduction. The Fund intends to issue preferred shares that
counsel advises will not result in the payment of a preferential dividend and
may seek a private letter ruling from the Service to that effect. If the Fund
ultimately relies solely on a legal opinion when it issues such preferred
shares, there is no assurance that the Service would agree that dividends on
the preferred shares are not preferential. If the Service successfully
disallowed the dividends paid deduction for dividends on the preferred shares,
the Fund could be disqualified as a RIC. In this case, dividends on the common
shares would not be exempt from Federal income taxes. Additionally, the Fund
would be subject to the alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan that have a greater fair market
value than the amount of cash reinvested, it is possible that all or a portion
of such discount (which may not exceed 5% of the fair market value of the
Fund's shares) could be viewed as a taxable distribution. If the discount is
viewed as a taxable distribution, it is also possible that the taxable
character of this discount would be allocable to all of the shareholders,
including shareholders who do not participate in the dividend reinvestment
plan. Thus, shareholders who do not participate in the dividend reinvestment
plan, as well as dividend reinvestment plan participants, might be required to
report as ordinary income a portion of their distributions equal to their
allocable share of the discount.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Under certain Code provisions, some taxpayers may be subject to 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
34
<PAGE>
shareholders subject to backup withholding are those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to
the Fund or an exception applies, such options and financial futures contracts
that are "Section 1256 contracts" will be "marked to market" for Federal
income tax purposes at the end of each taxable year, i.e., each such option or
financial futures contract will be treated as sold for its fair market value
on the last day of the taxable year, and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain
or loss. Application of these rules to Section 1256 contracts held by the Fund
may alter the timing and character of distributions to shareholders. The mark-
to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in financial
futures contracts or the related options.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and Pennsylvania tax laws
presently in effect. For the complete provisions, reference should be made to
the pertinent Code sections, the Treasury Regulations promulgated thereunder
and Pennsylvania tax laws. The Code and the Treasury Regulations, as well as
the Pennsylvania tax laws, are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a holder of common shares otherwise elects, all dividend and capital
gains distributions will be automatically reinvested by The Bank of New York,
as agent for shareholders in administering the Plan (the "Plan Agent"), in
additional common shares of the Fund. Holders of common shares who elect not
to participate in the Plan will receive all distributions in cash paid by
check mailed directly to the shareholder of record (or, if the shares are held
in street or other nominee name, then to such nominee) by The Bank of New
York, as dividend paying agent. Such participants may elect not to participate
in the Plan and to receive all distributions of dividends and capital gains
35
<PAGE>
in cash by sending written instructions to The Bank of New York, as dividend
paying agent, at the address set forth below. Participation in the Plan is
completely voluntary and may be terminated or resumed at any time without
penalty by written notice if received by the Plan Agent not less than ten days
prior to any dividend record date; otherwise, such termination or resumption
will be effective with respect to any subsequently declared dividend or
distribution.
Whenever the Fund declares an income dividend or a capital gains
distribution (collectively, referred to as "dividends") payable either in
shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in common shares. The
shares will be acquired by the Plan Agent for the participant's account,
depending upon the circumstances described below, either (i) through receipt
of additional unissued but authorized common shares from the Fund ("newly
issued shares") or (ii) by purchase of outstanding common shares on the open
market ("open-market purchases") on the New York Stock Exchange (the "NYSE")
or elsewhere. If on the payment date for the dividend, the net asset value per
share of the common shares is equal to or less than the market price per
common shares plus estimated brokerage commissions (such condition being
referred to herein as "market premium"), the Plan Agent will invest the
dividend amount in newly issued shares on behalf of the participant. The
number of newly issued shares of common shares to be credited to the
participant's account will be determined by dividing the dollar amount of the
dividend by the net asset value per share on the date the shares are issued,
provided that the maximum discount from the then current market price per
share on the date of issuance may not exceed 5%. If on the dividend payment
date the net asset value per share is greater than the market value (such
condition being referred to herein as "market discount"), the Plan Agent will
invest the dividend amount in shares acquired on behalf of the participant in
open-market purchases. Prior to the time the common shares commence trading on
the NYSE, participants in the Plan will receive any dividends in newly issued
shares.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that
the Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a common share exceeds the net
asset value per share, the average per share purchase prices paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during
the purchase period, the Plan Agent will cease making open-market purchases
and will invest the uninvested portion of the dividend amount in newly issued
shares at the close of business on the last purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form
in the name of the participant and each shareholder's proxy will include those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
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<PAGE>
In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record shareholders as representing the total amount registered
in the record shareholder's name and held for the account of beneficial owners
who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open-
market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at 101 Barclay Street, New York, New York 10286.
MUTUAL FUND INVESTMENT OPTION
Purchasers of common shares of the Fund through Merrill Lynch in this
offering will have an investment option consisting of the right to reinvest
the net proceeds from a sale of such shares (the "Original Shares") in Class D
initial sales charge shares of certain Merrill Lynch-sponsored open-end mutual
funds ("Eligible Class D Shares") at their net asset value, without the
imposition of the initial sales charge, if the conditions set forth below are
satisfied. First, the sale of the Original Shares must be made through Merrill
Lynch, and the net proceeds therefrom must be immediately reinvested in
Eligible Class D Shares. Second, the Original Shares must have been either
acquired in this offering or be shares representing reinvested dividends from
common shares acquired in this offering. Third, the Original Shares must have
been continuously maintained in a Merrill Lynch securities account. Fourth,
there must be a minimum purchase of $250 to be eligible for the investment
option. Class D shares of the mutual funds are subject to an account
maintenance fee at an annual rate of up to 0.25% of the average daily net
asset value of such mutual fund. The Eligible Class D Shares may be redeemed
at any time at the next determined net asset value, subject in certain cases
to a redemption fee. Prior to the time the common shares commence trading on
the NYSE, the distributor for the mutual funds will advise Merrill Lynch
Financial Consultants as to those mutual funds that offer the investment
option described above.
37
<PAGE>
NET ASSET VALUE
Net asset value per common share is determined as of 15 minutes after the
close of business on the NYSE (generally, the NYSE closes at 4:00 p.m.,
Eastern time) on the last business day in each week. For purposes of
determining the net asset value of a common share, the value of the securities
held by the Fund plus any cash or other assets (including interest accrued but
not yet received) minus all liabilities (including accrued expenses) and the
aggregate liquidation value of the outstanding preferred shares is divided by
the total number of common shares outstanding at such time. Expenses,
including the fees payable to the Investment Adviser, are accrued daily.
The Pennsylvania Municipal Bonds and Municipal Bonds in which the Fund
invests are traded primarily in the over-the-counter markets. In determining
net asset value, the Fund utilizes the valuations of portfolio securities
furnished by a pricing service approved by the Board of Trustees. The pricing
service typically values portfolio securities at the bid price or the yield
equivalent when quotations are readily available. Pennsylvania Municipal Bonds
and Municipal Bonds for which quotations are not readily available are valued
at fair market value on a consistent basis as determined by the pricing
service using a matrix system to determine valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Fund
under the general supervision of the Board of Trustees. The Board of Trustees
has determined in good faith that the use of a pricing service is a fair
method of determining the valuation of portfolio securities. Positions in
futures contracts are valued at closing prices for such contracts established
by the exchange on which they are traded, or if market quotations are not
readily available, are valued at fair value on a consistent basis using
methods determined in good faith by the Board of Trustees.
The Fund determines and makes available for publication the net asset value
of its common shares weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
DESCRIPTION OF CAPITAL SHARES
The Fund is authorized to issue an unlimited number of shares of beneficial
interest, par value $.10 per share. The Board of Trustees may authorize
separate classes of shares together with such designations and powers,
preferences and rights, qualifications, limitations and restrictions as may be
determined from time to time by the Trustees. Pursuant to such authority, the
Trustees have authorized the issuance of an unlimited number of common shares
together with 1,000,000 preferred shares. Within approximately three months
after completion of the offering of the common shares described herein, the
Fund intends to offer preferred shares representing approximately 40% of the
Fund's capital immediately after the issuance of such preferred shares. There
is no assurance that such preferred shares will be issued.
The Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust of the Fund contains an express
disclaimer of shareholder liability for acts or obligations of the Fund and
provides for indemnification and reimbursement of expenses out of the Fund's
property for any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to
38
<PAGE>
circumstances in which the Fund itself would be unable to meet its
obligations. Given the nature of the Fund's assets and operations, the
possibility of the Fund being unable to meet its obligations is remote and, in
the opinion of Massachusetts counsel to the Fund, the risk to Fund
shareholders is remote.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to any shareholder, nor is any
Trustee, officer, employee of agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his or
her own bad faith, willful misfeasance, gross negligence, or reckless
disregard of their duties. It also provides that all third persons shall look
solely to the Fund property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
COMMON SHARES
Common shares, when issued and outstanding, will be fully paid and non-
assessable. Shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
So long as any shares of the Fund's preferred shares are outstanding,
holders of common shares will not be entitled to receive any net income of or
other distributions from the Fund unless all accumulated dividends on
preferred shares have been paid and unless asset coverage (as defined in the
1940 Act) with respect to preferred shares would be at least 200% after giving
effect to such distributions. See "Preferred Shares" below.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 6,667 common shares of the Fund for $100,005. As of the date of
this prospectus, the Investment Adviser owned 100% of the outstanding common
shares of the Fund. The Investment Adviser may be deemed to control the Fund
until such time as it owns less than 25% of the outstanding shares of the
Fund.
PREFERRED SHARES
It is anticipated that the Fund's preferred shares will be issued in one or
more series, with rights as determined by the Board of Trustees, by action of
the Board of Trustees without the approval of the holders of common shares.
Under the 1940 Act, the Fund is permitted to have outstanding more than one
series of preferred stock so long as no single series has a priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Holders of common shares have no preemptive right to purchase any
preferred shares that might be issued. It is anticipated that the net asset
value per the preferred shares will equal its original purchase price per
share plus accumulated dividends per share.
The Fund's Board of Trustees has declared its intention to authorize an
offering of preferred shares (representing approximately 40% of the Fund's
capital immediately after the issuance of such preferred shares) within
approximately three months after completion of the offering of common shares,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred
shares is likely to achieve the benefits to the holders of common shares
described in the
39
<PAGE>
prospectus. Although the terms of the preferred shares, including its dividend
rate, voting rights, liquidation preference and redemption provisions will be
determined by the Board of Trustees (subject to applicable law and the Fund's
Declaration of Trust), the initial series of preferred shares will be
structured to carry either a relatively short-term dividend rate, in which
case periodic redetermination of the dividend rate will be made at relatively
short intervals (generally seven or 28 days), or a medium-term dividend rate,
in which case periodic redetermination of the dividend rate will be made at
intervals of up to five years. In either case, such redetermination of the
dividend rate will be made through an auction or remarketing procedure.
Additionally, under certain circumstances, when the Fund is required to
allocate taxable income to holders of the preferred shares, it is anticipated
that the terms of the preferred shares will require the Fund to make an
Additional Distribution (as defined in "Risks and Special Considerations of
Leverage--Effects of Leverage") to such holders. The Board also has indicated
that it is likely that the liquidation preference, voting rights and
redemption provisions of the preferred shares will be as stated below. The
Fund's Declaration of Trust, as amended, together with any Certificate of
Designation, is referred to below as the "Charter."
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of preferred
shares will be entitled to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus an amount equal
to accumulated and unpaid dividends whether or not earned or declared and any
accumulated and unpaid Additional Distribution) before any distribution of
assets is made to holders of common shares. After payment of the full amount
of the liquidating distribution to which they are entitled, the preferred
shareholders will not be entitled to any further participation in any
distribution of assets by the Fund. A consolidation or merger of the Fund with
or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Fund will not be deemed to be a
liquidation, dissolution or winding up of the Fund.
Voting Rights. Except as otherwise indicated in this prospectus and except
as otherwise required by applicable law, holders of preferred shares will have
equal voting rights with holders of common shares (one vote per share) and
will vote together with holders of common shares as a single class.
In connection with the election of the Fund's trustees, holders of preferred
shares, voting as a separate class, will be entitled to elect two of the
Fund's trustees, and the remaining trustees will be elected by all holders of
capital shares, voting as a single class. So long as any preferred shares are
outstanding, the Fund will have not less than five trustees. If at any time
dividends on the Fund's preferred shares shall be unpaid in an amount equal to
two full years' dividends thereon, the holders of all outstanding preferred
shares, voting as a separate class, will be entitled to elect a majority of
the Fund's trustees until all dividends in default have been paid or declared
and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding
preferred shares, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of shares ranking prior to any
series of preferred shares with respect to payment of dividends or the
distribution of assets on liquidation or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred shares.
Redemption Provisions. It is anticipated that preferred shares will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference plus accumulated but unpaid dividends to the date of
redemption plus, under certain circumstances, a redemption premium. Preferred
shares will also be subject to
40
<PAGE>
mandatory redemption at a price equal to their liquidation preference plus
accumulated but unpaid dividends to the date of redemption upon the occurrence
of certain specified events, such as the failure of the Fund to maintain asset
coverage requirements for the preferred shares specified by the rating
agencies that issue ratings on the preferred shares.
CERTAIN PROVISIONS OF THE DECLARATION OF TRUST
The Fund's Declaration of Trust includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. A trustee may be removed
from office with or without cause, but only by vote of the holders of at least
66 2/3% of the votes entitled to be voted on the matter. A trustee elected by
all the holders of capital shares may be removed only by action of such
holders, and a trustee elected by the holders of preferred shares may be
removed only by action of such holders.
In addition, the Declaration of Trust requires the favorable vote of the
holders of at least 66 2/3% of the Fund's capital shares then entitled to be
voted, voting as a single class, to approve, adopt or authorize the following:
. a merger or consolidation or statutory share exchange of the Fund with
other corporations,
. a sale of all or substantially all of the Fund's assets (other than in the
regular course of the Fund's investment activities), or
. a liquidation or dissolution of the Fund, unless such action has been
approved, adopted or authorized by the affirmative vote of two-thirds of
the total number of Trustees fixed in accordance with the by-laws, in
which case the affirmative vote of a majority of the Fund's capital
shares is required. Following the proposed issuance of the preferred
shares, it is anticipated that the approval, adoption or authorization of
the foregoing would also require the favorable vote of a majority of the
Fund's preferred shares then entitled to be voted, voting as a separate
class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Declaration of Trust. The amendment would
have to be declared advisable by the Board of Trustees prior to its submission
to shareholders. Such an amendment would require the favorable vote of the
holders of at least 66 2/3% of the Fund's outstanding capital shares
(including any preferred shares) entitled to be voted on the matter, voting as
a single class (or a majority of such shares if the amendment was previously
approved, adopted or authorized by two-thirds of the total number of Trustees
fixed in accordance with the by-laws), and, assuming preferred shares are
issued, the affirmative vote of a majority of outstanding preferred shares of
the Fund, voting as a separate class. Such a vote also would satisfy a
separate requirement in the 1940 Act that the change be approved by the
shareholders. Shareholders of an open-end investment company may require the
company to redeem their common shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset
value, less such redemption charge, if any, as might be in effect at the time
of a redemption. All redemptions will be made in cash. If the Fund is
converted to an open-end investment company, it could be required to liquidate
portfolio securities to meet requests for redemption, and the common shares
would no longer be listed on a stock exchange.
Conversion to an open-end investment company would also require redemption
of all outstanding preferred shares and would require changes in certain of
the Fund's investment policies and restrictions, such as those relating to the
issuance of senior securities, the borrowing of money and the purchase of
illiquid securities.
41
<PAGE>
The Board of Trustees has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Massachusetts law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the Securities
and Exchange Commission for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with The
Bank of New York, 90 Washington Street, New York, NY 10286.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase 4,030,000 common shares from the
Fund. The Underwriter is committed to purchase all of such shares if any are
purchased.
The Underwriter has advised the Fund that it proposes initially to offer the
common shares to the public at the public offering price set forth on the
cover page of this prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of common shares in the offering.
The Investment Adviser or an affiliate has agreed to pay the Underwriter from
its own assets a commission in connection with the sale of common shares in
the offering in the amount of $ per share. Such payment is equal to %
of the initial public offering price per share. The Underwriter also has
advised the Fund that from this amount the Underwriter may pay a concession to
certain dealers not in excess of $ per share on sales by such dealers.
After the initial public offering, the public offering price and other selling
terms may be changed. Investors must pay for common shares purchased in the
offering on or before January , 1999.
The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to 604,500 additional common shares to
cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the common shares. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the common shares.
If the Underwriter creates a short position in the common shares in
connection with the offering, i.e., if it sells more common shares than are
set forth on the cover page of this prospectus, the Underwriter may reduce
that short position by purchasing common shares in the open market. The
Underwriter also may elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases common shares in the
open market to reduce the Underwriter's short position or to stabilize the
price of the common shares, it may reclaim the amount of the selling
concession from the selling group members who sold those common shares as part
of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a
42
<PAGE>
penalty bid might also have an effect on the price of a security to the extent
that it were to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of common stock. In addition,
neither the Fund nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Prior to this offering, there has been no public market for the common
shares. The Fund plans to apply to list its common shares on the NYSE.
However, during an initial period which is not expected to exceed two weeks
from the date of this prospectus, the Fund's common shares will not be listed
on any securities exchange. Additionally, before it begins trading, the
Underwriter does not intend to make a market in the Fund's common shares,
although a limited market may develop. Thus, it is anticipated that investors
may not be able to buy and sell shares of the Fund during such period. In
order to meet the requirements for listing, the Underwriter has undertaken to
sell lots of 100 or more shares to a minimum of 2,000 beneficial owners.
The Fund anticipates that the Underwriter may from time to time act as a
broker in connection with the execution of its portfolio transactions. The
Fund has obtained an exemptive order permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short-
term, tax-exempt securities subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions."
The Underwriter is an affiliate of the Investment Adviser of the Fund.
The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the common
shares of the Fund is The Bank of New York, 101 Barclay Street, New York, NY
10286.
LEGAL OPINIONS
Certain legal matters in connection with the common shares offered hereby
will be passed upon for the Fund and the Underwriter by Brown & Wood LLP, New
York, New York. Brown & Wood llp will rely as to matters of Massachusetts law
on the opinion of Bingham Dana llp, Boston, Massachusetts.
EXPERTS
The statement of assets, liabilities and capital of the Fund as of January
, 1999 included in this prospectus and Registration Statement has been
audited by , independent auditors, as set forth in their report
thereon appearing elsewhere herein, and is included in reliance upon such
report given upon authority of such firm as experts in accounting and
auditing. The selection of independent auditors is subject to ratification by
shareholders of the Fund.
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<PAGE>
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required
to file reports, proxy statements and other information with the Securities
and Exchange Commission (the "Commission"). Any such reports, proxy statements
and other information can be inspected and copies at the public reference
facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: Regional Office, at Seven World Trade Center, Suite 1300, New
York, New York 10048; Pacific Regional Office, at 5670 Wilshire Boulevard,
11th Floor, Los Angeles, California 90036; and Midwest Regional Office, at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Fund, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Fund can also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Additional information regarding the Fund is contained in the Registration
Statement on Form N-2, including amendments, exhibits and schedules thereto,
relating to such shares filed by the Fund with the Commission in Washington,
D.C. This prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the fund and the shares
offered hereby, reference is made to the Registration Statement. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the
Commission upon the payment of certain fees prescribed by the Commission.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the
Year 1900 (commonly known as the "Year 2000 Problem"). The Fund could be
adversely affected if the computer systems used by the Fund's management or
other Fund service providers do not properly address this problem before
January 1, 2000. The Fund's management expects to have addressed this problem
before then, and does not anticipate that the services it provides will be
adversely affected. The Fund's other service providers have told the Fund
management that they also expect to resolve the Year 2000 Problem, and the
Fund management will continue to monitor the situation as the Year 2000
approaches. However, if the problem has not been fully addressed, the Fund
could be negatively affected. The Year 2000 Problem could also have a negative
impact on the issuers of securities in which the Fund invests, and this could
hurt the Fund's investment returns.
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder of
MuniHoldings Pennsylvania Insured Fund
We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings Pennsylvania Insured Fund as of January , 1999. This
statement of assets, liabilities and capital is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this
statement of assets, liabilities and capital based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of assets, liabilities
and capital is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the statement
of assets, liabilities and capital. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets, liabilities and capital
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the statement of assets, liabilities and capital referred to
above presents fairly, in all material respects, the financial position of
MuniHoldings Pennsylvania Insured Fund at January , 1999, in conformity with
generally accepted accounting principles.
45
<PAGE>
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
JANUARY , 1999
<TABLE>
<S> <C>
ASSETS
Cash................................................................ $100,005
Offering costs (Note 1).............................................
Deferred organization costs (Note 1)................................
--------
Total assets......................................................
--------
LIABILITIES
Liabilities and accrued expenses (Note 1)...........................
--------
NET ASSETS............................................................ $100,005
========
CAPITAL
Common Shares, par value $.10 per share; unlimited shares
authorized; 6,667 shares issued and outstanding (Note 1)........... $ 667
Paid-in Capital in excess of par.................................... 99,338
--------
Total Capital-Equivalent to $15.00 net asset value per Common Share
(Note 1)........................................................... $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was organized under the laws of the Commonwealth of Massachusetts
on December 3, 1998 as a closed-end, non-diversified management investment
company and has had no operations other than the sale to Fund Asset
Management, L.P. (the "Investment Adviser") of an aggregate of 6,667 shares
for $100,005 on , 1999. The General Partner of the Investment Adviser is
an indirectly wholly owned subsidiary of Merrill Lynch & Co., Inc.
Deferred organization costs will be amortized on a straight-line basis over
a period not exceeding five years beginning with the commencement of
operations of the Fund. Direct costs relating to the public offering of the
Fund's shares will be charged to capital at the time of issuance of shares. In
accordance with Statement of Position 98-5, unamortized organization costs
existing at , 1999 (the start of the Fund's new fiscal year), will be
charged to expense at that date. At the present time, management believes that
this charge will not have any material impact on the operations of the Fund.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee at an annual rate of 0.55 of 1% of the Fund's average weekly net
assets, including proceeds from the issuance of preferred shares. The
Investment Adviser or an affiliate will pay Merrill Lynch, Pierce, Fenner &
Smith Incorporated a commission in the amount of % of the price to the
public per share in connection with the initial public offering of the Fund's
Common Shares.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
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APPENDIX I
ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA
The following information is a brief summary of factors affecting the
economy of the Commonwealth of Pennsylvania and does not purport to be a
complete description of such factors. Other factors will affect issuers. The
summary is based upon one or more of the most recent publicly available
offering statements relating to debt offerings of Pennsylvania issuers. The
Fund has not independently verified the information.
Many factors affect the financial condition of the Commonwealth of
Pennsylvania (also referred to herein as the "Commonwealth") and its political
subdivisions, such as social, environmental and economic conditions, many of
which are not within the control of such entities. Pennsylvania and certain of
its counties, cities and school districts and public bodies (most notably the
City of Philadelphia, sometimes referred to herein as the "City") have from
time to time in the past encountered financial difficulties which have
adversely affected their respective credit standings. Such difficulties could
affect outstanding obligations of such entities, including obligations held by
the Fund.
The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and Federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bonded indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
The period from fiscal year 1993 through fiscal 1997 was a time of steady,
modest economic growth and low rates of inflation. These economic conditions,
together with tax reductions in the several years following the tax rate
increases and tax base expansions enacted in fiscal 1991 for the General Fund,
produced tax revenue gains averaging 4.1% per year during the period. Total
revenues during the same period increased at a 4.7% average rate.
Intergovernmental revenue recorded the largest percentage gain during this
period, averaging 8.1% (due, in part, to an accounting change). Expenditures
and other uses during the fiscal 1993 through fiscal 1997 period rose at a
3.8% rate, led by and average 13.8% annual increase for protection of persons
and property program costs. This high rate of increase reflects the costs to
acquire, staff and operate expanded prison facilities to house a larger prison
population. Public health and welfare program costs expanded an average 5.4%
annually during this period, the second largest rate of increase for program
categories.
The fund balance at June 30, 1997 totaled $1,364.9 million, a $729.7 million
increase over the $635.2 million balance at June 30, 1996.
The unappropriated balance of Commonwealth revenues increased during the
1997 fiscal year by $432.9 million to $591.4 million (prior to reserves for
transfer to the Tax Stabilization Reserve Fund) at the close of the fiscal
year. Higher than estimated revenues and slightly lower expenditures than
budgeted caused the increase. Transfers to the Tax Stabilization Reserve Fund
for fiscal 1997 operations will be $88.7 million representing the normal
fifteen percent of the ending unappropriated balance, plus an additional $100
million authorized by the General Assembly when it enacted the fiscal 1998
budget.
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Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$17,320.6 million, $576.1 million (3.4%) above the estimate made at the time
the budget was enacted. Revenue from taxes was the largest contributor to
higher than estimated receipts. Tax revenue in fiscal 1997 grew 6.1% over tax
revenues in fiscal 1996. This rate of increase was not adjusted for legislated
tax reductions that affected receipts during both of those fiscal years and
therefore understates the actual underlying rate of growth of tax revenue
during fiscal 1997. Non-tax revenues were $19.8 million (5.8%) over estimate
mostly due to higher than anticipated interest earnings.
Expenditures from Commonwealth revenues (excluding pooled financing
expenditures) during fiscal 1997 totaled $16,347.7 million and were close to
the estimate made in February 1997 with the presentation of the Governor's
fiscal 1998 budget request. Total expenditures represent an increase over
fiscal 1996 expenditures of 1.7%. Lapses of appropriation authority during the
fiscal year totaled $200.6 million compared to an estimate of $100 million.
The higher amount of appropriation lapses was used to support $79.8 million in
fiscal 1997 supplemental appropriations over the February 1997 estimate.
Supplemental appropriations for fiscal 1997 totaled $169.3 million.
For GAAP purposes, assets increased $563.4 million and liabilities declined
$166.3 million to produce a $729.7 million increase in the fund balance at
June 30, 1997. Total revenues and other sources rose 3.5% for fiscal 1997. An
increase of 5.5% in tax revenue aided by an improving state economy was
partially offset by a $175.2 million decline in intergovernmental revenues.
Expenditures and other uses increased by 1% for this fiscal year.
Operations during the 1998 fiscal year increased the unappropriated balance
of Commonwealth revenues during that period by $86.4 million to $488.7 million
at June 30, 1998 (prior to reserves for transfer to the Tax Stabilization
Reserve Fund). Higher than estimated revenues, offset in part by increased
reserves for tax refunds, and slightly lower expenditures than budgeted were
responsible for the increase. Transfers to the Tax Stabilization Reserve Fund
for fiscal 1998 operations will total $223.3 million consisting of $73.3
million representing the required transfer of fifteen percent of the ending
unappropriated surplus balance, plus an additional $150 million authorized by
the General Assembly when it enacted the fiscal 1999 budget. With these
transfers, the balance in the Tax Stabilization Reserve Fund will exceed $664
million and represent 3.7% of fiscal 1998 revenues.
Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$18.123.2 million, $676.1 million (3.9%) above the estimate made at the time
the budget was enacted. Tax revenue received in fiscal 1998 grew 4.8% over tax
revenues received during fiscal 1997. This rate of increase includes the
effect of legislated tax reductions that affected receipts during both fiscal
years and therefore understates the actual underlying rate of growth of tax
revenue during fiscal 1998. Receipts from the personal income tax produced the
largest single component of higher revenues during fiscal 1998.
Expenditures from all fiscal 1998 appropriations of Commonwealth revenues
totaled $17,229.8 million (excluding pooled financing expenditures and net of
current year lapses). This amount represents an increase of 4.5% over fiscal
1997 appropriation expenditures. Lapses of appropriation authority during the
fiscal year totaled $161.8 million including $58.8 million from fiscal 1998
appropriations. These appropriation lapses were used to fund $120.5 million of
supplemental fiscal 1998 appropriations.
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Reserves established during fiscal 1998 for tax refunds totaled $910
million. This amount is a $370 million increase over tax refund reserves for
fiscal 1997 representing an increase of 68.5%. The fiscal 1998 amount includes
a one-time addition intended to fund all fiscal 1998 tax refund liabilities,
including that portion to be paid during fiscal 1999. In prior fiscal years,
tax refunds generally were budgeted for the year in which the disbursement was
anticipated to occur. This change in the recognition of tax refund liabilities
on a budgetary basis is expected to reduce the difference between the
budgetary basis unappropriated balance and the GAAP basis unreserved and
undesignated balance (when computed) for the 1998 fiscal year.
The budget for fiscal 1999 was enacted in April 1998 at which time the
official revenue estimate for the 1999 fiscal year was established at
$18,456.6 million. Only Commonwealth funds are included in the official
revenue estimate. The official revenue estimate is based on an economic
forecast for national gross domestic product, on a year-over-year basis, to
slow from an estimated annualized 3.9% rate in the fourth quarter of 1997 to a
projected 1.8% annualized growth rate by the second quarter of 1999. The
forecast of slowing economic activity is based on the expectation that
consumers will reduce their pace of spending, particularly on motor vehicles,
housing and other durable goods. Business is also expected to trim its
spending on fixed investments. Foreign demand for domestic goods is expected
to decline in reaction to economic difficulties in Asia and Latin America,
while an economic recovery in Europe is expected to proceed slowly. The
underlying growth rate, excluding any effect of scheduled or proposed tax
changes, for the General Fund fiscal 1999 official revenue estimate is 3.0%
over actual fiscal 1998 revenues. When adjusted to include the estimated
effect of enacted tax changes, fiscal 1999 Commonwealth revenues are projected
to increase by 1.66% over actual Commonwealth revenues for fiscal 1998.
Tax reductions anticipated to be included in the enacted 1999 fiscal year
budget totaled an estimated $241.0 million for fiscal 1999. Of the anticipated
reductions, legislation representing tax reductions totaling $15 million has
not yet been passed by the General Assembly. All estimates for fiscal 1999
assume enactment of those tax reductions currently pending before the General
Assembly. The major components of the enacted tax reductions and their
estimated fiscal 1999 cost are: (a) reduce the capital stock and franchise tax
rate from 12.75 mills to 11.99 mills ($72.5 million); (b) increase the
eligibility income limit for qualification for personal income tax forgiveness
($57.1 million); (c) eliminate personal income tax on gains from the sale of
an individual's residence ($30 million); (d) extend the time period from three
to ten years over which net operating loss deductions may be taken for the
corporate net income tax ($17.8 million); (e) expand various sales tax
exemptions ($40.4 million); and (f) reduce various other miscellaneous items
($23.2 million). The major tax changes were enacted with January 1, 1998
effective dates. Consequently, the first year's cost of these changes may be
above the expected annualized cost.
Reserves for tax refunds for fiscal 1999 total $603.9 million. This amount
includes $33.1 million of tax refunds anticipated to be due to the enacted
fiscal 1999 tax changes and included in the estimated cost of those changes.
Reserves for tax refunds for fiscal 1999 are $306.1 million below the reserve
established for fiscal 1998. The fiscal 1998 amount (described above) includes
a one-time addition intended to fund all fiscal 1998 tax refund liabilities,
including that portion to be paid during fiscal 1999. Without the necessity to
pay fiscal 1998 tax refund liabilities from fiscal 1999 reserves, the fiscal
1999 reserve need only be in an amount equal to the estimated fiscal 1999
estimate for tax refund liabilities.
Appropriations enacted for fiscal 1999 are 4.1% ($705.1 million) above the
appropriations enacted for fiscal 1998 (including supplemental
appropriations). Major increases in expenditures budgeted for fiscal 1999
include:
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(a) $249.5 million in direct support of local school district education costs
(local school districts will also benefit from an estimate $104 million of
reduced contributions by school districts to their worker's retirement cost
from a reduced employer contribution rate); (b) $60.4 million for higher
education, including scholarship grants; (c) $56.5 million to fund the
correctional system, including $21 million to operate a new correctional
facility; (d) $121.1 million for long-term care medical assistance costs; (e)
$14.4 million for technology and Year 2000 investments; (f) $55.9 million to
fund the first year's cost of a July 1, 1998 annuitant cost of living increase
for state and school district employees; and (g) $20 million to replace bond
funding for equipment loans for volunteer fire and rescue companies. The
balance of the increase is spread over many departments and program
operations.
The enacted fiscal 1999 budget assumes the drawn down of the $265.4 million
beginning budgetary balance by $141.1 million to an estimated closing balance,
prior to transfer of the required portion to the Tax Stabilization Reserve
Fund, of $124.3 million. The amount of the anticipated drawn down does not
consider the availability of appropriation lapses normally occurring during a
fiscal year that are used to fund supplemental appropriations or increase
unappropriated surplus.
Pennsylvania has historically been identified as a heavy industry state
although that reputation has changed over the last thirty years as the coal,
steel and railroad industries declined and the Commonwealth's business
environment readjusted to reflect a more diversified industrial base. This
economic readjustment was a direct result of a long-term shift in jobs,
investment and workers away from the northeast part of the nation. Currently,
the major sources of growth in Pennsylvania are in the service sector,
including trade, medical and the health services, education and financial
institutions.
Nonagricultural employment in Pennsylvania over the ten year period that
ended in 1997 increased at an annual rate of 0.76%. This compares to a 0.17%
rate for the Middle Atlantic region and a 1.69% rate for the United States as
a whole during the period 1988 through 1997. For the five years ended with
1997, employment in the Commonwealth has increased 5.4%. The growth in
employment during this period is higher than the 4.8% growth in the Middle
Atlantic region. The unemployment rate in Pennsylvania for June 1998 stood at
a seasonably adjusted rate of 4.3%. The seasonably adjusted national
unemployment rate for June 1998 was 4.5%.
The current Constitutional provisions pertaining to Commonwealth debt permit
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster, (ii) electorate-approved debt,
(iii) debt for capital projects subject to an aggregate debt limit of 1.75
times the annual average tax revenues of the preceding five fiscal years and
(iv) tax anticipation notes payable in the fiscal year of issuance. All debt
except tax anticipation notes must be amortized in substantial and regular
amounts.
Debt service on all bonded indebtedness of Pennsylvania, except that issued
for highway purposes or the benefit of other special revenue funds, is payable
from Pennsylvania's General Fund, which receives all Commonwealth revenues
that are not specified by law to be deposited elsewhere. As of June 30, 1998,
the Commonwealth had $4,724.5 million of general obligation debt outstanding.
Other state-related obligations include "moral obligations." Moral
obligation indebtedness may be issued by the Pennsylvania Housing Finance
Agency (the "PHFA"), a state-created agency which provides financing for
housing for lower and moderate income families, and The Hospitals and Higher
Education Facilities Authority of Philadelphia, a municipal authority
organized by the City of Philadelphia to, among other things, acquire and
prepare various sites for use as intermediate care facilities for the mentally
retarded. PHFA's bonds,
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but not its notes, are partially secured by a capital reserve fund required to
be maintained by PHFA in an amount equal to the maximum annual debt service on
its outstanding bonds in any succeeding calendar year. PHFA is not permitted
to borrow additional funds as long as any deficiency exists in the capital
reserve fund.
The Commonwealth, through several of its departments and agencies, has
entered into various agreements to lease, as lessee, certain real property and
equipment, and to make lease payments for the use of such property and
equipment. Some of those leases and their respective lease payments are, with
the Commonwealth's approval, pledged as security for debt obligations issued
by certain public authorities or other entities within the state. All lease
payments due from Commonwealth departments and agencies are subject to and
dependent upon an annual spending authorization approved through the
Commonwealth's annual budget process. The Commonwealth is not required by law
to appropriate or otherwise provide monies from which the lease payments are
to be made. The obligations to be paid from such lease payments are not bonded
debt of the Commonwealth.
Certain Commonwealth-created organizations have statutory authorization to
issue debt for which Commonwealth appropriations to pay debt service thereon
are not required. The debt of these agencies is funded by assets of, or
revenues derived from, the various projects financed and is not a statutory or
moral obligation of the Commonwealth. Some of these agencies, however, are
indirectly dependent on Commonwealth operating appropriations. The
Commonwealth may choose to take action to financially assist these
organizations. In addition, the Commonwealth may choose to take action to
financially assist these organizations. The Commonwealth also maintains
pension plans covering all state employees, public school employees and
employees of certain state-related organizations. For their fiscal years ended
in 1997 the State Employees' Retirement System had no accrued unfunded surplus
or liability and the Public School Employees' Retirement System had a total
unfunded actuarial accrued surplus of $1,633 million.
The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. Legislation
providing for the establishment of Pennsylvania Intergovernmental Cooperation
Authority (the "PICA") to assist Philadelphia in remedying fiscal emergencies
was enacted by the Pennsylvania General Assembly and approved by the Governor
in June 1991. PICA is designed to provide assistance through the issuance of
funding debt and to make factual findings and recommendations to Philadelphia
concerning its budgetary and fiscal affairs. At this time, Philadelphia is
operating under a five year fiscal plan approved by PICA on June 9, 1998.
PICA has issued $1.76 billion of its Special Tax Revenue Bonds. This
financial assistance has included the refunding of certain city general
obligation bonds, funding of capital projects and the liquidation of the
cumulative General Fund balance deficit as of June 30, 1992 of $224.9 million.
The audited General Fund balance of Philadelphia as of June 30, 1997 shows a
surplus of approximately $128.8 million.
No further bonds are to be issued by PICA for the purpose of financing a
capital project or deficit as the authority for such bond sales expired
December 31, 1994. PICA's authority to issue debt for the purpose of financing
a cash flow deficit expired on December 31, 1996. Its ability to refund
existing outstanding debt is unrestricted. PICA had $1,055 million in Special
Revenue bonds outstanding as of June 30, 1998.
There is various litigation pending against the Commonwealth, its officers
and employees. In 1978, the Pennsylvania General Assembly approved a limited
waiver of sovereign immunity. Damages for any loss are limited to $250,000 for
each person and $1 million for each accident. The Supreme Court held that this
limitation is constitutional. Approximately 3,500 suits against the
Commonwealth are pending.
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The following are among the cases with respect to which the Office of
Attorney General and the Office of General Counsel have determined that an
adverse decision may have a material effect on government operations of the
Commonwealth:
Baby Neal v. Commonwealth, et al.
In 1990, the American Civil Liberties Union and other various named
plaintiffs filed an action against the Commonwealth, the City of Philadelphia
and others in federal court seeking an order that, among other things, would
require the Commonwealth to provide additional funding for child welfare
services. No figures for the amount of funding sought are available. A similar
lawsuit filed in the Commonwealth Court of Pennsylvania was resolved through a
court approved settlement which provides, among other things, for more
Commonwealth funding for such services in fiscal year 1991 and a commitment to
pay Pennsylvania counties $30 million over five years. The Commonwealth sought
dismissal of the federal action based, among other things, on the settlement
of the Commonwealth Court case. In December 1994, the Third Circuit Court of
Appeals reversed the District Court's denial of the plaintiff's motion for
class certification in the federal action with respect to the interests of 16
minor plaintiffs. As a result, the District Court has recently certified the
class and the parties have resumed discovery. In July 1998, the plaintiffs
entered into a settlement agreement with the City of Philadelphia and related
parties and submitted the agreement to the district court for approval. The
plaintiffs have indicated that they intend to proceed with their claims
against the Commonwealth and other non-settling parties. The Commonwealth
intends to defend.
County of Allegheny v. Commonwealth of Pennsylvania
On December 7, 1987, the Supreme Court of Pennsylvania held that the
statutory scheme for county funding of the judicial system is in conflict with
the Pennsylvania Constitution. However, judgment was stayed in order to afford
the General Assembly an opportunity to enact appropriate funding legislation
consistent with its opinion. On December 7, 1992, the State Association of
County Commissioners filed a new action in mandamus seeking to compel the
Commonwealth to comply with the Supreme Court's decision in County of
Allegheny. The Court issued the writ on July 26, 1996, and appointed a special
master to devise and submit a plan for implementation. Following the issuance
of the writ, the President Pro Tempore of the Senate and the Speaker of the
House filed a petition seeking reconsideration from the Court. On January 28,
1997, the Supreme Court granted an extension of time within which the special
master must file his report and announced the establishment of a committee
comprised of members of the Executive Department, the Legislative Department
and the special master, to develop an implementation plan. On July 26, 1997,
the "Interim Report of the Master" was filed setting forth a state funding
proposal. Numerous objections to the report were filed, but the Court has
taken no action on them.
On April 22, 1998, the Pennsylvania General Assembly enacted legislation
appropriating approximately $12 million to the Supreme Court for the purpose
of funding county court administrators. The appropriation was designed to
enable the Commonwealth to implement Phase I of the special master's plan.
However, the legislation also provides that no funds from the appropriation
may be expended until legislation has been approved by the General Assembly
providing for the payment of Commonwealth compensation of county court
administrators. Because no such legislation has yet been enacted, the $12
million appropriated to the Judicial Department cannot be used.
On May 11, 1998, the Administrative Governing Board of the First Judicial
District (comprising the Court of Common Pleas of Philadelphia, the
Philadelphia Municipal Court, and the Traffic Court of Philadelphia) filed
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an action in mandamus in the Commonwealth Court of Pennsylvania against the
City of Philadelphia and several City officials, claiming that the City
government had failed to provide adequate funds for the operation of the
courts of the First Judicial District. The petitioners have demanded that the
court order the City of Philadelphia to disburse all funds reasonably
necessary for the continued operation of the courts during fiscal year 1998-99
in an amount totaling at least $110 million. The case is captioned Alex
Bonavitacola, et al. v. Edward G. Rendell, et al.
Also on May 11, 1998, the City of Philadelphia and related respondents in
Bonavitacola filed a complaint joining the Commonwealth of Pennsylvania, the
General Assembly and its elected leadership as additional respondents. In
their complaint, the City respondents assert that under the Supreme Court's
order issued July 26, 1996 in Pa. State Ass'n of County Commissioners v.
Commonwealth of Pennsylvania, the General Assembly was obligated to enact a
funding scheme for a unified court system no later than January 1, 1998.
Because the General Assembly has not done so, the City respondents allege, the
Commonwealth has failed to comply with the Supreme Court's order. Thus, the
City respondents have requested Commonwealth Court to require the General
Assembly to comply with the Supreme Court's mandamus order and to order the
Commonwealth to pay whatever sums are necessary to fund the cost of operating
the courts in fiscal 1998-99. The First Judicial District Governing Board
joined in the City respondents' request as an alternative to its demanded
relief against the City defendants.
On July 15, 1998, the Supreme Court of Pennsylvania assumed extraordinary
jurisdiction over the case and directed Commonwealth Court, on an expedited
basis, to prepare proposed findings of fact and conclusions of law. Acting
pursuant to the Supreme Court's June 15, 1998 order, President Judge James
Gardner Colins of Commonwealth Court on June 17, 1998 issued findings of fact,
conclusions of law and a proposed order. In his proposed order, President
Judge Colins recommended that the Supreme Court order the President of the
Philadelphia Council immediately to introduce legislation to fund the courts
of the First Judicial District for fiscal year 1998-99 and to take all
necessary steps to ensure its passage. President Judge Colins also recommended
that the Supreme Court order the General Assembly to pass legislation, prior
to June 30, 1999, to fund the entire state judicial system. By order entered
June 23, 1998, Commonwealth Court forwarded its findings of fact and
conclusions of law and proposed order to the Supreme Court for final
disposition. The Commonwealth and the General Assembly have objected to
President Judge Colins' proposed order.
Subsequent to Commonwealth Court's issuance of its findings of fact,
conclusions of law and proposed order, the City Council and Mayor of
Philadelphia acceded (at least temporarily) to President Judge Colins'
proposed mandate that the City fund the First Judicial District's courts for
fiscal year 1998-99, thus obviating the First Judicial District's request for
emergency relief. However, the First Judicial District petitioners and the
City of Philadelphia respondents continue to press their demands that the
General Assembly be required to enact legislation providing for state funding
of the courts. In addition, the County of Allegheny has petitioned the Supreme
Court for leave to intervene in the Bonavitacola case to secure the same
relief against the Commonwealth -- an order requiring Commonwealth to fund its
courts. The Bonavitacola case remains pending before the Supreme Court for
disposition.
Bank Shares Tax Litigation
On November 30, 1989, the Fidelity Bank, N.A. ("Fidelity") filed an action
in challenging the constitutional validity of a 1989 amendment increasing the
bank shares tax and related legislation. The Commonwealth Court ruled in favor
of the Commonwealth finding no constitutional deficiencies in the tax
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increase, but invalidating one element of the legislation which provided a
credit to new banks (the "new bank tax credit"). Fidelity, the Commonwealth
and certain investment intervener banks appealed to the Pennsylvania Supreme
Court. However, pursuant to a Settlement Agreement dated as of April 21, 1995,
the Commonwealth agreed to enter a credit in favor of Fidelity in the amount
of $4,100,000 in settlement of the constitutional and non-constitutional
issues. The credit represents approximately 5% of the potential claim of
Fidelity, had the constitutional issues been resolved in its favor.
Pursuant to a separate Settlement Agreement dated as of April 21, 1995, the
Commonwealth also settled with the intervening banks with respect to issues
concerning the new bank tax credit.
Notwithstanding the foregoing settlements, other banks have filed petitions
challenging the validity of the 1989 tax increase. One of these banks, Royal
Bank of Pennsylvania, has filed a Stipulation of Facts and is in effect
proceeding forward on behalf of the other banks. The issues in these cases
include those which were adjudicated by Fidelity, although not brought to
resolution by the Pennsylvania Supreme Court. By decision dated January 8,
1998, a panel of the Commonwealth Court ruled in favor of the Commonwealth,
finding no constitutional violation. Royal Bank filed exceptions which were
denied by the Commonwealth Court on July 30, 1998. On August 18, 1998, Royal
Bank filed a notice of appeal with the Pennsylvania Supreme Court.
Pennsylvania Association of Rural and Small Schools (PARSS) v. Casey
In January 1991, an association of rural and small schools and several
parties filed a lawsuit against then Governor Robert P. Casey and former
Secretary of Education, Donald M. Carroll challenging the constitutionality of
the Commonwealth system for funding local school districts. The litigation
consists of two parallel cases, one in the Commonwealth Court of Pennsylvania
and one in the United States District Court for the Middle District of
Pennsylvania. The federal court case has been indefinitely stayed pending
resolution of the state court case. On July 9, 1998, Commonwealth Court Judge
Dan Pellegrini issued an opinion and decree nisi dismissing the petitioners'
claims in its entirety, holding that Pennsylvania's system for funding public
schools is constitutional under both the education clause and the equal
protection clause of the Pennsylvania Constitution.
On July 20, 1998, the petitioners filed a motion for post-trial relief,
taking exception to many of Judge Pellegrini's findings of fact and
conclusions of law, and again asking the Common wealth Court to declare
Pennsylvania's public school funding system to be unconstitutional. The court
was scheduled to hear oral argument on the petitioner's motion on September
14, 1998. Also, the petitioners on July 21, 1998 filed an application asking
the Supreme Court of Pennsylvania to assume extraordinary, plenary
jurisdiction over the case to decide one legal issue -- whether the
petitioners' constitutional claims are justiciable in the courts of the
Commonwealth. The petitioners have asked the court to consider the issue in
conjunction with a separate appeal pending in another case, Marrerro v.
Commonwealth of Pennsylvania, involving the same provisions of the
Constitution and a similar issue of justiciability. The Commonwealth opposes
the petitioners' request that the Supreme Court assume extraordinary
jurisdiction in PARSS.
Austin v. Department of Corrections, et al.
In November 1990, the American Civil Liberties Union filed a class action
lawsuit in the United States District Court for the Eastern District of
Pennsylvania on behalf of inmate populations in various Pennsylvania
correctional institutions, challenging the conditions of confinement and
seeking injunctive relief. On January 17, 1995, the Court approved a
Settlement Agreement between the parties, pursuant to which the Commonwealth
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paid $1.3 million in attorney's fees to the plaintiffs' attorneys, with an
additional $100,000 paid upon dismissal of a preliminary injunction relating
to certain health issues. Monitoring provisions outlined in the Agreement
expired on January 6, 1998.
Envirotest/Synterra Partners
On December 15, 1995, Envirotest Systems Corporation, Envirotest Partners
("Envirotest") and the Commonwealth of Pennsylvania entered into a Settlement
Agreement pursuant to which the parties settled all claims which Envirotest
might have against the Commonwealth arising from the suspension of an
emissions testing program. Under the Settlement Agreement, Envirotest is to
receive $145 million, with interest at 6% per annum, in payments of $25
million in 1995 and $40 million each in 1996, 1997 and 1998. An additional $11
million may be required to be paid in 1998 depending on the results of
property liquidations by Envirotest. Pursuant to a Consent to Assignment
entered into in November 1996, Envirotest has assigned its right, title and
interest in the base settlement.
Pennsylvania Human Relations Commission v. School District of Philadelphia,
et al. v. Commonwealth of Pennsylvania, et al.
On November 3, 1995, the Commonwealth of Pennsylvania and the Governor of
Pennsylvania, along with the City of Philadelphia and the Mayor of
Philadelphia, were joined as addition respondents in an enforcement action
commenced in Commonwealth Court in 1973 by the Pennsylvania Human Relations
Commission against the School District of Philadelphia pursuant to the
Pennsylvania Human Relations Act. The enforcement action was pursued to remedy
unintentional conditions of segregation in the public schools of Philadelphia.
The Commonwealth and the City were joined in the "remedial phase" of the
proceeding "to determine their liability, if any, to pay additional costs
necessary to remedy the unlawful conditions found to exist in the Philadelphia
public schools."
On February 28, 1996, the School District of Philadelphia filed a third-
party complaint against the Commonwealth of Pennsylvania asking Commonwealth
Court to require the Commonwealth to "supply such funding as is necessary for
full compliance with the November 28, 1994 and other remedial orders of the
Commonwealth Court." In addition, a group of interveners on March 4, 1996
filed a third-party complaint against the Commonwealth of Pennsylvania and the
City of Philadelphia requesting Commonwealth Court to declare that "it is the
obligation of the Commonwealth and the City to supply the additional funds
identified as necessary for the District to comply with the orders of the
Commonwealth Court," and to require the Commonwealth and the City to supply
such additional funding as is necessary for the District to comply with the
orders.
On April 30, 1996, Commonwealth Court Judge Doris A. Smith overruled the
Commonwealth's and City's preliminary objections seeking dismissal of the
claims against them. The Commonwealth and the City thereafter filed answers to
the complaints, asserting numerous defenses. The Commonwealth also asserted a
cross-claim against the City of Philadelphia claiming that if any party is
liable, sole liability rests with the City; in the alternative, the
Commonwealth argued that if it is held to be liable, it has a right of
indemnity of contribution against the City.
Trial commenced on May 30, 1996. During the course of the trial, upon motion
of the Commonwealth, the Pennsylvania Supreme Court on July 3, 1996 assumed
extraordinary plenary jurisdiction and directed Judge Smith to concluded the
proceedings within 60 days and to file with the Supreme Court findings of
fact, conclusions of law and a final opinion.
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On August 20, 1996, Judge Smith issued an Opinion and Order pursuant to
which judgment was entered in favor of the School District of Philadelphia and
the interveners and against the Commonwealth of Pennsylvania and the Governor
of Pennsylvania. Judgment was also entered in favor of the City of
Philadelphia and the Mayor of Philadelphia with respect to the intervener's
claim and on the cross-claim filed by the Commonwealth and Governor. The Judge
ordered the Commonwealth and Governor to submit a plan to the Court within
thirty days detailing the means by which the Commonwealth will effectuate the
transfer of additional funds payable to the School District of Philadelphia to
enable it to comply with the remedial order during fiscal year 1996-1997 and
any future years during which the School District establishes its fiscal
incapacity to fund the remedial programs. Judge Smith specifically found that
"[b]ecause of the lack of adequate funds to comply with the remedial order,
the School District is entitled to additional resources for 1996-1997 of $45.1
million."
On August 30, 1996, the Commonwealth filed exceptions to the Findings of
Fact, Conclusions of Law and Opinion and Order of Judge Smith along with a
Motion to Vacate the purported Order and a Notice of Appeal and Jurisdictional
Statement.
On September 10, 1996, the Pennsylvania Supreme Court issued an order
granting the Commonwealth's Motion to Vacate and directed its Prothonotary to
establish a briefing schedule and date for oral argument. It also issued a
further order limiting the issues to be addressed and stated that the
Commonwealth Court is divested of jurisdiction of the matter and all further
proceedings in the Commonwealth Court are stayed pending further order of the
Supreme Court. The Supreme Court retained jurisdiction in the matter. On
January 28, 1997, the Supreme Court issued an Order directing the parties to
brief certain specific issues relative to the lower court proceedings. The
Supreme Court heard oral argument on February 3, 1998 and took the matter
under advisement.
Ridge v. State Employees' Retirement Board
On December 29, 1993, Joseph H. Ridge, a former judge of the Allegheny Court
of Common Pleas, filed in the Commonwealth Court a Petition for Review in the
Nature of Complaint in Mandamus and for a Declaratory Judgment against the
State Employees' Retirement Board alleging that the use of gender distinct
actuarial factors for benefits based upon his pre-August 1, 1983 service
violates the equal protection and equal rights clauses of the Pennsylvania
Constitution. The lawsuit requests that the petitioner's benefits be "topped
up" to equal those that a similarly situated female would be receiving. A
decision adverse to the Retirement Board could be applicable to other members
of the State Employees' Retirement System and Public School Employees'
Retirement System. The Commonwealth Court granted the Retirement Board's
preliminary objection to Judge Ridge's claims for punitive damages, attorney's
fees and compensatory damages (other than a recalculation of his pension
benefits should he prevail). On November 20, 1996, the Commonwealth Court
heard oral arguments en banc on Judge Ridge's motion for judgment on the
pleadings. On February 13, 1997, the Commonwealth Court denied Judge Ridge's
motion for judgment on the pleadings. The case is currently in discovery.
Yesenia Marrerro, et al. v. Commonwealth, et al.
On February 24, 1997, five residents of the City of Philadelphia, on their
own behalf, and on behalf of their school-age children, joined by the City of
Philadelphia, the School District of Philadelphia, and two non-profit
organizations, filed in the Commonwealth Court a civil action for declaratory
judgment against the
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Commonwealth of Pennsylvania, the General Assembly of Pennsylvania, the
presiding officers of the General Assembly, the Governor of Pennsylvania, the
State Board of Education, the Department of Education, and the Secretary of
Education, claiming that the statutory education financing system is
unconstitutional as applied to the School District of Philadelphia and the
system of funding public education violates the constitutional mandate to
provide a thorough and efficient system of education in the City of
Philadelphia. The lawsuit also alleges that the scheme for financing public
education precludes the Commonwealth from providing the constitutionally
required "thorough and efficient system of public education" in the
circumstances faced by the School District of Philadelphia, and that the
defendants have failed to provide the School District of Philadelphia with
resources and other assistance necessary to provide all of its students with
the quality of education to which they are constitutionally entitled. Among
other things, the petitioners seek a declaration that the legislature must
amend the present or enact new education legislation so as to assure that
education funding for the School District of Philadelphia accounts and makes
adequate provision for the greater and special educational challenges and
needs of students in the School District in order to address their
disadvantage. The respondents filed preliminary objections seeking dismissal
of the action. On March 2, 1998, Commonwealth Court sustained the respondents'
preliminary objections and dismissed the case on the grounds that the issues
presented are not justiciable. An appeal to the Supreme Court of Pennsylvania
is pending and briefing is complete, but the Court has not scheduled oral
argument.
As of August 1, 1998, Pennsylvania general obligation bonds were rate AA- by
Standard & Poor's, AA by Fitch and Aa3 by Moody's. There can be no assurance
that the economic conditions on which these ratings are based will continue or
that particular bond issues will not be adversely affected by changes in
economic or political conditions.
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APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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Short-term Notes: The three ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2, and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG 2/VMIG 2 denotes
"high quality" with "ample margins of protection"; MIG 3/VMIG 3 instruments
are of "favorable quality . . . but . . . lacking the undeniable strength of
the preceding grades."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES,
INC. ("STANDARD & POOR'S"), MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on circumstances.
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The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is
extremely strong.
AA Debt rated "AA" differs from the highest rated issues only in small
degree. The Obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least
CCC degree of speculation and "C" the highest degree of speculation. While
CC such debt will likely have some quality and protective
C characteristics, these may be outweighed by large uncertainties or
major risk exposures to adverse conditions.
D Debt rated "D" is in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition
or the taking of similar action if payments on an obligation are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest-quality obligations to "D" for the lowest. These categories
are as follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
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A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired unless
Standard & Poor's believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH IBCA, INC.'S ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
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Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
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FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying
its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD Bonds are in default on interest and/or principal payments. Such
DD bonds are extremely speculative and should be valued on the basis
D of their ultimate recovery value in liquidation or reorganization
of the obligor. "DDD" represents the highest potential for
recovery on these bonds, and "D" represents the lowest potential
for recovery.
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Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter
of credit issued by a commercial bank.
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APPENDIX III
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance
policies (the "Policies") that the Fund may obtain from several insurance
companies with respect to insured Pennsylvania Municipal Bonds and Municipal
Bonds held by the Fund. The Fund has no obligation to obtain any such
Policies, and the terms of any Policies actually obtained may vary
significantly from the terms discussed below.
In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards
such companies normally use in establishing the insurability of new issues of
Pennsylvania Municipal Bonds and Municipal Bonds and are not necessarily the
criteria that would be used in regard to the purchase of such bonds by the
Fund. The Policies do not insure (i) municipal securities ineligible for
insurance and (ii) municipal securities no longer owned by the Fund.
The Policies do not guarantee the market value of the insured Pennsylvania
Municipal Bonds and Municipal Bonds or the value of the shares of the Fund. In
addition, if the provider of an original issuance insurance policy is unable
to meet is obligations under such policy or if the rating assigned to the
insurance claims-paying ability of any such insurer deteriorates, the
insurance company will not have any obligation to insure any issue held by the
Fund that is adversely affected by either of the above described events. In
addition to the payment of premiums, the Policies may require that the Fund
notify the insurance company as to all Pennsylvania Municipal Bonds and
Municipal Bonds in the Fund's portfolio and permit the insurance company to
audit their records. The insurance premiums will be payable monthly by the
Fund in accordance with a premium schedule to be furnished by the insurance
company at the time the Policies are issued. Premiums are based upon the
amounts covered and the composition of the portfolio.
The insurance companies used by the Fund will have insurance claims-paying
ability ratings of AAA from Standard & Poor's ("S&P") or Fitch IBCA, Inc.
("Fitch") or Aaa from Moody's Investors Service, Inc. ("Moody's").
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P or
Fitch. Capacity to honor insurance contracts is considered by S&P and Fitch to
be extremely strong and highly likely to remain so over a long period of time.
A Moody's insurance claims-paying ability rating is an opinion of the ability
of an insurance company to repay punctually senior policyholder obligations
and claims. An insurer with an insurance claims-paying ability rating of Aaa
is considered by Moody's to be of the best quality. In the opinion of Moody's,
the policy obligations of an insurance company with an insurance claims-paying
ability rating of Aaa carry the smallest degree of credit risk and, while the
financial strength of these companies is likely to change, such changes as can
be visualized are most unlikely to impair the company's fundamentally strong
position. A Fitch insurance claims-paying ability rating provides an
assessment of an insurance company's financial strength and, therefore, its
ability to pay policy and contract claims under the terms indicated. An
insurer with an insurance claims-paying ability rating of AAA has the highest
rating assigned by Fitch. The ability to pay claims is adjudged by Fitch to be
extremely strong for insurance companies with this highest rating. In the
opinion of Fitch, foreseeable business and economic risk factors should not
have any material adverse impact on the ability of these insurers to pay
claims. In Fitch's opinion, profitability, overall balance sheet strength,
capitalization and
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liquidity are all at very secure levels and are unlikely to be affected by
potential adverse underwriting, investment or cyclical events.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can
only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet nonpolicy
obligations (i.e., debt contracts).
The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is
a separate process from the determination of claims-paying ability ratings.
The likelihood of a timely flow of funds from the insurer to the trustee for
the bondholders is a key element in the rating determination for such debt
issues.
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APPENDIX IV
TAXABLE EQUIVALENT YIELDS FOR INDIVIDUALS FOR 1999
<TABLE>
<CAPTION>
TAXABLE INCOME* 1999 A TAX-EXEMPT YIELD OF
- ------------------------------------ 1999 FEDERAL PENNSYLVANIA ---------------------------------------------
SINGLE RETURN JOINT RETURN TAX BRACKET TAX BRACKET 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
------------- ----------------- ------------ ------------- ------ ------ ------- ------- ------- -------
IS EQUAL TO A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 25,751-$ 62,450 $ 43,051-$104,050 28.00% 2.8% 7.144% 7.859% 8.573% 9.288% 10.002% 10.212%
$ 62,451-$130,250 $104,051-$158,550 31.00% 2.8% 7.455% 8.201% 8.946% 9.692% 10.437% 11,183%
$130,251-$283,150 $158,551-$283,150 36.00% 2.8% 8.038% 8.841% 9.645% 10.449% 11.253% 12.056%
Over $283,150 Over $283,150 39.60% 2.8% 8.517% 9.368% 10.220% 11.072% 11.923% 12.775%
</TABLE>
- --------
* An investor's marginal tax rate may exceed the rates shown in the above
table due to the reduction, or possible elimination, of the personal
exemption deduction for high-income taxpayers and an overall limit on
itemized deductions. Income also may be subject to certain state and local
taxes. For investors who pay alternative minimum tax, tax-exempt yields may
be equivalent to lower taxable yields than those shown above. The tax rates
shown above do not apply to corporate taxpayers. The tax characteristics of
the Fund are described more fully elsewhere in this prospectus. Consult your
tax adviser for further details. This chart is for illustrative purposes
only and cannot be taken as an indication of anticipated Fund performance.
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Through and including April , 1999 (the 90th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting underwriters and with respect to their unsold
allotments or subscriptions.
4,030,000 SHARES
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
COMMON SHARES
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
JANUARY , 1999
CODE 19052-1298
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Report of Independent Auditors
Statement of Assets, Liabilities and Capital as of January , 1999
(2) Exhibits:
(a)--Declaration of Trust(a)
(b)--By-Laws(a)
(c)--Not applicable
(d)(1)--Portions of the Declaration of Trust and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant(b)
(d)(2)--Form of specimen certificate for Common Shares of the Registrant
(e)--Form of Automatic Dividend Reinvestment Plan
(f)--Not applicable
(g)--Form of Investment Advisory Agreement between the Fund and Fund
Asset Management, L.P.
(h)(1)--Form of Purchase Agreement between the Fund and Merrill Lynch,
Pierce, Fenner & Smith Incorporated
(h)(2)--Merrill Lynch Standard Dealer Agreement
(i)--Not applicable
(j)--Form of Custodian Contract between the Fund and The Bank of New
York
(k)--Form of Registrar, Transfer Agency and Service Agreement between
the Fund and The Bank of New York
(l)--Opinion and Consent of Brown & Wood LLP*
(m)--Not applicable
(n)--Consent of , independent auditors for the Fund*
(o)--Not applicable
(p)--Certificate of Fund Asset Management, L.P.*
(q)--Not applicable
(r)--Not applicable
- --------
(a) Previously filed on December 7, 1998 as an Exhibit.
(b) Reference is made to Section 3.4, Article V, Article VI (sections 1, 2, 4,
5 and 7), Article VIII, Article IX and Article X of the Registrant's
Declaration of Trust, filed as Exhibit (a) to this Registration Statement;
and to Article II, Article III (sections 1, 2, 3, 5 and 17), Article VI,
Article VII, Article XII, Article XIII and Article XIV of the Registrant's
By-Laws, filed as Exhibit (b) to this Registration Statement.
* To be provided by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibits (h)(1) and (h)(2).
C-1
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees..................................................... $ *
New York Stock Exchange listing fee................................... *
Printing (other than share certificates).............................. *
Engraving and printing share certificates............................. *
Legal fees and expenses............................................... *
Accounting fees and expenses.......................................... *
NASD fees............................................................. *
Miscellaneous......................................................... *
-----
Total............................................................... $ *
=====
</TABLE>
- --------
* To be provided by amendment
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the prospectus under the captions "Investment Advisory
and Management Arrangements" and "Description of Capital Shares--Common
Shares" and in Note 1 to the Statement of Assets, Liabilities and Capital is
incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the common shares, par value $0.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers
or trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
being or having been such a trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties; provided, however, that as to any matter disposed
of by a compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence
or reckless disregard of duty, or the matter of good faith and reasonable
belief as to the best interests of the Trust, had been adjudicated, it
would have been adjudicated in favor of such person. The rights accruing to
any person under these provisions shall not exclude any other right to
which he may be lawfully entitled; provided that no person may satisfy any
right of indemnity or reimbursement granted herein or in Section 5.1 or to
which he may be otherwise entitled except out of the property of the Trust,
and no Shareholder shall be personally liable to any person with respect to
any claim for indemnity or reimbursement or otherwise. The Trustees may
make advance payments in connection with indemnification under this Section
5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification."
C-2
<PAGE>
The Registrant's By-Laws provide that insofar as the conditional advancing
of indemnification moneys pursuant to Section 5.3 of the Declaration of Trust
for actions based upon the Investment Company Act of 1940 may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount to which it is ultimately determined he is
entitled to receive from the Registrant by reason of indemnification; and
(iii) (a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient
of the advance ultimately will be found entitled to indemnification.
In Section 8 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "1933 Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to trustees, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Fund of expenses incurred or paid by a trustee, officer or controlling
person of the Fund in connection with any successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Fund will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
will be filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser") acts as investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
World Income Fund, Inc., and The Municipal Fund Accumulation Program, Inc.,
and for the following closed-end registered investment companies: Apex
Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings
California Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings California Insured Fund III, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHolding Florida Insured Fund
III, MuniHoldings Insured Fund, Inc., MuniHoldings
C-3
<PAGE>
New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc.,
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Global Bond Fund for Investment
and Retirement, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Growth Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global
Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch
Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Index Funds, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc.,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.
Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio, two investment
portfolios of EQ Advisors Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02110-2646.
The address of the Investment Adviser, FAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Princeton Funds
Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML&Co.") is World Financial Center, 250 Vesey Street, New York, New
York 10281. The address of Financial Data Services, Inc. ("FDS") is 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his or her or its own account or in
the capacity of director, officer, employee, partner or trustee. In addition,
Mr. Zeikel is President, Mr. Richard is Treasurer and Mr. Glenn is Executive
Vice President of all or substantially all of the investment companies
described in the preceding paragraphs and also hold the same positions with
all or substantially all of the investment companies advised by MLAM as they
do with those advised by the Investment Adviser. Messrs. Giordano, Harvey,
Kirstein and Monagle are officers of one or more of such companies.
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <C> <S>
ML & Co. ............. Limited Partner Financial Services Holding Company; Limited
Partner of MLAM
Princeton Services.... General Partner General Partner of MLAM
Arthur Zeikel......... Chairman Chairman of MLAM; President of MLAM and FAM
from 1977 to 1997; Chairman and Director of
Princeton Services; President of Princeton
Services from 1993 to 1997; Executive Vice
President of ML & Co.
Jeffrey M. Peek....... President President of MLAM; President and Director of
Princeton Services; Executive Vice President
of ML & Co.
Terry K. Glenn........ Executive Vice President Executive Vice President of MLAM; Executive
Vice President and Director of Princeton
Services; President and Director of PFD;
Director of FDS; President of Princeton
Administrators, L.P.
Mark De Sario......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Linda L. Federici..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Vincent R. Giordano... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Elizabeth A. Griffin.. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Norman R. Harvey...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Michael J. Senior Vice President, Senior Vice President, General Counsel and
Hennewinkel.......... General Counsel and Secretary of MLAM; Senior Vice President of
Secretary Princeton Services
Philip L. Kirstein.... Senior Vice President Senior Vice President of MLAM; Senior Vice
President, Director and Secretary of
Princeton Services
Ronald M. Kloss....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Debra W. Senior Vice President Senior Vice President of MLAM; Senior Vice
Landsman-Yaros....... President of Princeton Services; Vice
President of PFD
Stephen M. M. Miller.. Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Senior Vice President Senior Vice President of MLAM; Senior Vice
Jr................... President of Princeton Services
Michael L. Quinn...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <C> <S>
Brian A. Murdock...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Director of
PFD
Gerald M. Richard..... Senior Vice President Senior Vice President and Treasurer of MLAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of PFD
Gregory D. Upah....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Ronald L. Welburn..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNT AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend the offering of the common shares
covered hereby until it amends its prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per common share declines more than 10% from its net asset value per
common share as of the effective date of this Registration Statement, or (2)
its net asset value per common share increases to an amount greater than its
net proceeds as stated in the prospectus contained herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 15th day of December 1998.
MUNIHOLDINGS PENNSYLVANIA INSURED
FUND (Registrant)
/s/ Alice A. Pellegrino
By__________________________________
(ALICE A. PELLEGRINO, PRESIDENT)
Each person whose signature appears below hereby authorizes Alice A.
Pellegrino, William E. Zitelli, Jr. or Lori A. Martin, or any of them, as
attorney-in-fact, to sign on his or her behalf, individually and in each
capacity stated below, any amendment to this Registration Statement (including
post-effective amendments) and to file the same, with all exhibits thereto,
with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Alice A. Pellegrino President and
- ------------------------------------- Trustee December 15,
(ALICE A. PELLEGRINO) 1998
/s/ William E. Zitelli, Jr. Treasurer and
- ------------------------------------- Trustee December 15,
(WILLIAM E. ZITELLI, JR.) 1998
/s/ Lori A. Martin Secretary and
- ------------------------------------- Trustee December 15,
(LORI A. MARTIN) 1998
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT NAME
------- ------------
<C> <C> <S>
(d)(2) -- Form of Specimen Certificate
(e) -- Form of Dividend Reinvestment Plan
(g) -- Form of Investment Advisory Agreement
(h)(1) -- Form of Purchase Agreement
(h)(2) -- Merrill Lynch Standard Dealer Agreement
(j) -- Form of Custodian Contract
(k) -- Form of Registrar, Transfer Agency and Service Agreement
</TABLE>
<PAGE>
EXHIBIT 99(d)(2)
COMMON SHARES COMMON SHARES
PAR VALUE $.10 PAR VALUE $.10
CUSIP
See Reverse For Certain Definitions
ORGANIZED UNDER THE LAWS OF THE COMMOMNWEALTH OF MASSACHUSETTS
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
This certifies that
is the registered holder of
FULLY PAID AND NON-ASSESSABLE COMMON SHARES OF COMMON BENEFICIAL
INTEREST OF MuniHoldings Pennsylvania Insured Fund transferable on the books of
the Trust by the holder in person or by duly authorized attorney upon surrender
of this Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be subject to all of the provisions of
the Declaration of Trust and of the By-Laws of the Trust, and of all the
amendments from time to time made thereto. This Certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Trust and the facsimile signatures
of its duly authorized officers.
Dated:
President Secretary
Countersigned and Registered:
THE BANK OF NEW YORK
Transfer Agent and Registrar
Authorized Signature
<PAGE>
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
The Trust has the authority to issue common shares of more than one class.
A full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of each class which the
Trust is authorized to issue and the differences in the relative rights and
preferences between the shares of each class to the extent that they have been
set, and the authority of the Board of Trustees to set the relative rights and
preferences of subsequent classes and series, will be furnished by the Trust to
any stockholder, without charge, upon request to the Secretary of the Trust.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--_____Custodian_______
(Cust) (Minor)
TEN ENT--as tenants by the entireties under Uniform Gifts to Minors Act____
(State)
JT TEN --as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received,................. hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________________________________________________
Please print or typewrite name and address including zip code of assignee
__________________________________________________________________Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
________________________________________________________________________________
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated:__________________
Signature:___________________________________
2
<PAGE>
NOTICE: The signature to this assignment must correspond with the
name as written upon the face of the certificate, in every particular,
without alteration or enlargement, or any change whatever.
Signature Guaranteed:____________________________________
Signatures must be guaranteed by an "eligible guarantor institution" as
such term is defined in Rule 17Ad-15 u
3
<PAGE>
EXHIBIT 99(e)
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND REINVESTMENT PLAN
1. Appointment of Agent. You, __________, will act as Agent for me, and
--------------------
will open an account for me under the Dividend Reinvestment Plan (the "Plan") in
the same name as my present common shares, par value $.10 per share ("Common
Shares"), of MUNIHOLDINGS PENNSYLVANIA INSURED FUND (the "Fund") are registered,
and will automatically put into effect for me the dividend reinvestment option
of the Plan as of the first record date for a dividend or capital gains
distribution (collectively referred to herein as a "dividend"), payable at the
election of shareholders in cash or Common Shares.
2. Dividends Payable in Common Shares. My participation in the Plan
----------------------------------
constitutes an election by me to receive dividends in Common Shares whenever the
Fund declares a dividend. In such event, the dividend amount shall
-
automatically be made payable to me entirely in Common Shares which shall be
acquired by the Agent for my account, depending upon the circumstances described
in paragraph 3, either (i) through receipt of additional shares of unissued but
authorized Common Shares from the Fund ("newly-issued shares") as described in
paragraph 6 or (ii) by purchase of outstanding Common Shares on the open market
("open-market purchases") as described in paragraph 7.
3. Determination of Whether Newly-Issued Shares or Open-Market Purchases.
---------------------------------------------------------------------
If on the payment date for the dividend (the "valuation date"), the net asset
value per Common Share, as defined in paragraph 8, is equal to or less than the
market price per Common Share, as defined in paragraph 8, plus estimated
brokerage commissions (such condition being referred to herein as "market
premium"), the Agent shall invest the dividend amount in newly-issued shares on
my behalf as described in paragraph 6. If on the valuation date, the net asset
value per share is greater than the market value (such condition being referred
to herein as "market discount"), the Agent shall invest the dividend amount in
shares acquired on my behalf in open-market purchases as described in paragraph
7.
4. Purchase Period for Open-Market Purchases. In the event of a market
-----------------------------------------
discount on the valuation date, the Agent shall have until the last business day
before the next ex-dividend date with respect to the Common Shares or in no
event more than 30 days after the valuation date (the "last purchase date") to
invest the dividend amount in shares acquired in open-market purchases except
where temporary curtailment or suspension of purchases is necessary to comply
with applicable provisions of federal securities laws.
5. Failure to Complete Open-Market Purchases During Purchase Period. If
----------------------------------------------------------------
the Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period because the market discount has shifted to a market
premium or otherwise, the Agent will invest the uninvested portion of the
dividend amount in newly-issued shares at the close of business on the last
purchase date as described in paragraph 4; except that the Agent may not acquire
newly-issued shares after the valuation date under the foregoing circumstances
unless it has
<PAGE>
received a legal opinion that registration of such shares is not required under
the Securities Act of 1933, as amended, or unless the shares to be issued are
registered under such Act.
6. Acquisition of Newly-Issued Shares. In the event that all or part of
----------------------------------
the dividend amount is to be invested in newly-issued shares, you shall
automatically receive such newly-issued Common Shares, including fractions, for
my account, and the number of additional newly-issued Common Shares to be
credited to my account shall be determined by dividing the dollar amount of the
dividend on my shares to be invested in newly-issued shares by the net asset
value per Common Share on the date the shares are issued (the valuation date in
the case of an initial market premium or the last purchase date in case the
Agent is unable to complete open-market purchases during the purchase period);
provided, that the maximum discount from the then current market price per share
on the date of issuance shall not exceed 5%.
7. Manner of Making Open-Market Purchases. In the event that the dividend
--------------------------------------
amount is to be invested in Common Shares acquired in open-market purchases, you
shall apply the amount of such dividend on my shares (less my pro rata share of
brokerage commissions incurred with respect to your open-market purchases) to
the purchase on the open-market of Common Shares for my account. Open-market
purchases may be made on any securities exchange where the Common Shares are
traded, in the over-the-counter market or in negotiated transactions and may be
on such terms as to price, delivery and otherwise as you shall determine. My
funds held by you uninvested will not bear interest, and it is understood that,
in any event, you shall have no liability in connection with any inability to
purchase shares within 30 days after the initial date of such purchase as herein
provided, or with the timing of any purchases affected. You shall have no
responsibility as to the value of the Common Shares acquired for my account.
For the purposes of cash investments you may commingle my funds with those of
other shareholders of the Fund for whom you similarly act as Agent, and the
average price (including brokerage commissions) of all shares purchased by you
as Agent in the open market shall be the price per share allocable to me in
connection with open-market purchases.
8. Meaning of Market Price and Net Asset Value. For all purposes of the
-------------------------------------------
Plan: (a) the market price of the Common Shares on a particular date shall be
the last sales price on the New York Stock Exchange (the "Exchange") on that
date, or, if there is no sale on the Exchange on that date, then the mean
between the closing bid and asked quotations for such shares on the Exchange on
such date and (b) net asset value per Common Share on a particular date shall be
as determined by or on behalf of the Fund.
9. Registration of Shares Acquired Pursuant to the Plan. You may hold my
----------------------------------------------------
Common Shares acquired pursuant to the Plan, together with the shares of other
shareholders of the Fund acquired pursuant to the Plan, in noncertificated form
in your name or that of your nominee. You will forward to me any proxy
solicitation material and will vote any shares so held for me only in accordance
with the proxy returned by me to the Fund. Upon my written request, you will
deliver to me, without charge, a certificate or certificates for the full shares
held by you for my account.
10. Confirmations. You will confirm to me each acquisition made for my
-------------
account as soon as practicable but not later than 60 days after the date
thereof.
2
<PAGE>
11. Fractional Interests. Although I may from time to time have an
--------------------
undivided fractional interest (computed to three decimal places) in a share of
the Fund, no certificates for a fractional share will be issued. However,
dividends and distributions on fractional shares will be credited to my account.
In the event of termination of my account under the Plan, you will adjust for
any such undivided fractional interest in cash at the market value of the Fund's
shares at the time of termination less the pro rata expense of any sale required
to make such an adjustment.
12. Share Dividends or Share Purchase Rights. Any share dividends or
----------------------------------------
split shares distributed by the Fund on shares held by you for me will be
credited to my account. In the event that the Fund makes available to its
shareholders rights to purchase additional shares or other securities, the
shares held for me under the Plan will be added to other shares held by me in
calculating the number of rights to be issued to me.
13. Service Fee. Your service fee for handling capital gains
-----------
distributions or income dividends will be paid by the Fund. I will be charged
for my pro rata share of brokerage commissions on all open market purchases.
14. Termination of Account. I may terminate my account under the Plan by
----------------------
notifying you in writing. Such termination will be effective immediately if my
notice is received by you not less than ten days prior to any dividend or
distribution record date; otherwise such termination will be effective on the
first trading day after the payment date for such dividend or distribution with
respect to any subsequent dividend or distribution. The Plan may be terminated
by you or the Fund upon notice in writing mailed to me at least 90 days prior to
any record date for the payment of any dividend or distribution by the Fund.
Upon any termination you will cause a certificate or certificates for the full
shares held for me under the Plan and cash adjustment for any fraction to be
delivered to me without charge. If I elect by notice to you in writing in
advance of such termination to have you sell part or all of my shares and remit
the proceeds to me, you are authorized to deduct brokerage commissions for this
transaction from the proceeds.
15. Amendment of Plan. These terms and conditions may be amended or
-----------------
supplemented by you or the Fund at any time or times but, except when necessary
or appropriate to comply with applicable law or the rules or policies of the
Securities and Exchange Commission or any other regulatory authority, only by
mailing to me appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date, thereof, you receive written notice of the
termination of my account under the Plan. Any such amendment may include an
appointment by you in your place and stead of a successor Agent under these
terms and conditions, with full power and authority to perform all or any of the
acts to be performed by the Agent under these terms and conditions. Upon any
such appointment of an Agent for the purpose of receiving dividends and
distributions, the Fund will be authorized to pay to such successor Agent, for
my account, all dividends and distributions payable in Common Shares of the Fund
held in my name or under the Plan for retention or application by such successor
Agent as provided in these terms and conditions.
16. Extent of Responsibility of Agent. You shall at all times act in good
---------------------------------
faith and agree to use your best efforts within reasonable limits to insure the
accuracy of all services performed under this Agreement and to comply with
applicable law, but assume no responsibility and shall
3
<PAGE>
not be liable for loss or damage due to errors unless such error is caused by
your negligence, bad faith, or willful misconduct or that of your employees.
17. Governing Law. These terms and conditions shall be governed by the
-------------
laws of the State of New York without regard to its conflicts of laws
provisions.
4
<PAGE>
EXHIBIT 99(g)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the ____ day of __________, by and between
MUNIHOLDINGS PENNSYLVANIA INSURED FUND, a Massachusetts business trust (the
"Fund"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited partnership (the
"Investment Adviser").
W I T N E S S E T H:
----------------------------
WHEREAS, the Fund is engaged in business as a closed-end, non-diversified,
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Fund desires to retain the Investment Adviser to provide
management and investment advisory services to the Fund in the manner and on the
terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Fund on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Investment Adviser hereby agree as
follows:
<PAGE>
ARTICLE I
---------
Duties of the Investment Adviser
--------------------------------
The Fund hereby employs the Investment Adviser to act as a manager and
investment adviser of the Fund and to furnish, or arrange for its affiliates to
furnish, the management and investment advisory services described below,
subject to the policies of, review by and overall control of the Board of
Trustees of the Fund, for the period and on the terms and conditions set forth
in this Agreement. The Investment Adviser hereby accepts such employment and
agrees during such period, at its own expense, to render, or arrange for the
rendering of, such services and to assume the obligations herein set forth for
the compensation provided for herein. The Investment Adviser and its affiliates
for all purposes herein shall be deemed to be independent contractors and,
unless otherwise expressly provided or authorized, shall have no authority to
act for or represent the Fund in any way or otherwise be deemed agents of the
Fund.
(a) Management and Administrative Services. The Investment Adviser shall
--------------------------------------
perform, or arrange for its affiliates to perform, the management and
administrative services necessary for the operation of the Fund, including
administering shareholder accounts and handling shareholder relations. The
Investment Adviser shall provide the Fund with office space, facilities,
equipment and necessary personnel and such other services as the Investment
Adviser, subject to review by the Board of Trustees, from time to time shall
determine to be necessary or useful to perform its obligations under this
Agreement. The Investment Adviser, also on behalf of the Fund, shall conduct
relations with custodians, depositories, transfer agents, pricing agents,
dividend disbursing agents, other shareholder servicing agents, accountants,
attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers,
banks and such other persons in any such other capacity deemed to be necessary
or desirable. The Investment Adviser generally shall monitor the Fund's
compliance with investment policies and restrictions as set forth in
2
<PAGE>
filings made by the Fund under the Federal securities laws. The Investment
Adviser shall make reports to the Board of Trustees of its performance of
obligations hereunder and furnish advice and recommendations with respect to
such other aspects of the business and affairs of the Fund as it shall determine
to be desirable.
(b) Investment Advisory Services. The Investment Adviser shall provide,
----------------------------
or arrange for its affiliates to provide, the Fund with such investment
research, advice and supervision as the latter from time to time may consider
necessary for the proper supervision of the assets of the Fund, shall furnish
continuously an investment program for the Fund and shall determine from time to
time which securities shall be purchased, sold or exchanged and what portion of
the assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash, subject always to the
restrictions of the Articles of Incorporation and the By-Laws of the Fund, as
amended from time to time, the provisions of the Investment Company Act and the
statements relating to the Fund's investment objective, investment policies and
investment restrictions as the same are set forth in filings made by the Fund
under the Federal securities laws. The Investment Adviser shall make decisions
for the Fund as to the manner in which voting rights, rights to consent to
corporate action and any other rights pertaining to the Fund's portfolio
securities shall be exercised. Should the Board of Trustees at any time,
however, make any definite determination as to investment policy and notify the
Investment Adviser thereof in writing, the Investment Adviser shall be bound by
such determination for the period, if any, specified in such notice or until
similarly notified that such determination has been revoked. The Investment
Adviser shall take, on behalf of the Fund, all actions which it deems necessary
to implement the investment policies determined as provided above, and in
particular to place all orders for the purchase or sale of portfolio securities
for the
3
<PAGE>
Fund's account with brokers or dealers selected by it, and to that end, the
Investment Adviser is authorized as the agent of the Fund to give instructions
to the custodian of the Fund as to deliveries of securities and payments of cash
for the account of the Fund. In connection with the selection of such brokers or
dealers and the placing of such orders with respect to assets of the Fund, the
Investment Adviser is directed at all times to seek to obtain execution and
prices within the policy guidelines determined by the Board of Trustees and set
forth in filings made by the Fund under the Federal securities laws. Subject to
this requirement and the provisions of the Investment Company Act, the
Securities Exchange Act of 1934, as amended, and other applicable provisions of
law, the Investment Adviser may select brokers or dealers with which it or the
Fund is affiliated.
(c) Notice Upon Change in Partners of the Investment Adviser. The
--------------------------------------------------------
Investment Adviser is a limited partnership and its limited partner is Merrill
Lynch & Co., Inc. and its general partner is Princeton Services, Inc. The
Investment Adviser will notify the Fund of any change in the membership of the
partnership within a reasonable time after such change.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
(a) The Investment Adviser. The Investment Adviser shall provide the
----------------------
staff and personnel necessary to perform its obligations under this Agreement,
shall assume and pay or cause to be paid all expenses incurred in connection
with the maintenance of such staff and personnel, and, at its own expense, shall
provide the office space, facilities, equipment and necessary personnel which it
is obligated to provide under Article I hereof, and shall pay all compensation
of officers of the Fund and all Trustees of the Fund who are affiliated persons
of the Investment Adviser.
4
<PAGE>
(b) The Fund. The Fund assumes, and shall pay or cause to be paid, all
--------
other expenses of the Fund including, without limitation: taxes, expenses for
legal and auditing services, costs of printing proxies, share certificates,
shareholder reports and prospectuses, charges of the custodian, any sub-
custodian and transfer agent, charges of any auction agent and broker dealers in
connection with preferred shares of the Fund, expenses of portfolio
transactions, Securities and Exchange Commission fees, expenses of registering
the common shares and preferred shares under Federal, state and foreign laws,
fees and actual out-of-pocket expenses of Trustees who are not affiliated
persons of the Investment Adviser, accounting and pricing costs (including the
calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Fund. It also is understood that the Fund will
reimburse the Investment Adviser for its costs incurred in providing accounting
services to the Fund.
ARTICLE III
-----------
Compensation of the Investment Adviser
--------------------------------------
(a) Investment Advisory Fee. For the services rendered, the facilities
-----------------------
furnished and the expenses assumed by the Investment Adviser, the Fund shall pay
to the Investment Adviser at the end of each calendar month a fee based upon the
average weekly value of the net assets of the Fund at the annual rate of 0.55 of
1.0% (0.55%) of the average weekly net assets of the Fund (i.e., the average
weekly value of the total assets of the Fund, minus the sum of accrued
liabilities of the Fund and accumulated dividends on outstanding preferred
shares), commencing on the day following effectiveness hereof. For purposes of
this calculation, average weekly net assets are determined at the end of each
month on the basis of the average net assets of the Fund for each week during
the month. The assets for each weekly period are determined by averaging the
net
5
<PAGE>
assets at the last business day of a week with the net assets at the last
business day of the prior week. It is understood that the liquidation preference
of any outstanding preferred shares (other than accumulated dividends) is not
considered a liability in determining the Fund's average weekly net assets. If
this Agreement becomes effective subsequent to the first day of a month or shall
terminate before the last day of a month, compensation for that part of the
month this Agreement is in effect shall be prorated in a manner consistent with
the calculation of the fee as set forth above. Subject to the provisions of
subsection (b) hereof, payment of the Investment Adviser's compensation for the
preceding month shall be made as promptly as possible after completion of the
computations contemplated by subsection (b) hereof. During any period when the
determination of net asset value is suspended by the Board of Trustees, the
average net asset value of a share for the last week prior to such suspension
shall for this purpose be deemed to be the net asset value at the close of each
succeeding week until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the Fund,
-------------------
including amounts payable to the Investment Adviser pursuant to subsection (a)
hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed the expense limitations applicable to the Fund imposed by
applicable state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Investment Adviser shall reduce
its management and investment advisory fee by the extent of such excess and, if
required pursuant to any such laws or regulations, will reimburse the Fund in
the amount of such excess; provided, however, to the extent permitted by law,
-------- -------
there shall be excluded from such expenses the amount of any interest, taxes,
distribution fees, brokerage fees and commissions and extraordinary expenses
(including but not limited to legal claims and liabilities and litigation costs
and any indemnification related thereto) paid or payable by the Fund. Whenever
the expenses of the
6
<PAGE>
Fund exceed a pro rata portion of the applicable annual expense limitations, the
estimated amount of reimbursement under such limitations shall be applicable as
an offset against the monthly payment of the fee due to the Investment Adviser.
Should two or more such expense limitations be applicable as at the end of the
last business day of the month, that expense limitation which results in the
largest reduction in the Investment Adviser's fee shall be applicable.
ARTICLE IV
----------
Limitation of Liability of the Investment Adviser
-------------------------------------------------
The Investment Adviser shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Fund contemplated hereby and
trustees, officers and employees of the Investment Adviser and of such
affiliates.
ARTICLE V
---------
Activities of the Investment Adviser
------------------------------------
The services of the Investment Adviser to the Fund are not to be deemed to
be exclusive; the Investment Adviser and any person controlled by or under
common control with the Investment Adviser (for purposes of this Article V
referred to as "affiliates") are free to render services to others. It is
understood that trustees, officers, employees and shareholders of the Fund are
or may become interested in the Investment Adviser and its affiliates, as
trustees, officers, employees, partners and shareholders or otherwise, and that
trustees, officers,
7
<PAGE>
employees, partners and shareholders of the Investment Adviser and of its
affiliates are or may become similarly interested in the Fund, and that the
Investment Adviser and trustees, officers, employees, partners and shareholders
of its affiliates may become interested in the Fund as shareholders or
otherwise.
ARTICLE VI
----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until _________________, and thereafter, but only so
long as such continuance specifically is approved at least annually by (i) the
Board of Trustees of the Fund, or by the vote of a majority of the outstanding
voting securities of the Fund, and (ii) by the vote of a majority of those
Trustees who are not parties to this Agreement or interested persons of any such
party cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Board of Trustees or by vote of a majority of the outstanding
voting securities of the Fund, or by the Investment Adviser, on sixty (60) days'
written notice to the other party. This Agreement shall terminate automatically
in the event of its assignment.
ARTICLE VII
-----------
Amendment of this Agreement
---------------------------
This Agreement may be amended by the parties only if such amendment
specifically is approved by the vote of (i) a majority of the outstanding voting
securities of the Fund, and (ii) a majority of those Trustees who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
8
<PAGE>
ARTICLE VIII
------------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
----------
Governing Law
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York and the applicable provisions of the Investment
Company Act. To the extent that the applicable laws of the State of New York,
or any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MUNIHOLDINGS PENNSYLVANIA INSURED
FUND
By: _______________________________________
Authorized Signatory
ATTEST:
________________________
Secretary
FUND ASSET MANAGEMENT, L.P.
By: ________________________________________
Authorized Signatory
ATTEST:
________________________
Secretary
10
<PAGE>
EXHIBIT 99(h)(1)
- --------------------------------------------------------------------------------
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
(a Massachusetts business trust)
_________ Common Shares of Beneficial Interest
PURCHASE AGREEMENT
Dated: ________ __, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
SECTION 1. Representations and Warranties................................... 2
(a) Representations and Warranties by the Fund and the Adviser...... 2
(b) Additional Representations of the Adviser....................... 7
(c) Officers' Certificates.......................................... 7
SECTION 2. Sale and Delivery to the Underwriter; Closing.................... 7
(a) Initial Shares.................................................. 7
(b) Option Shares................................................... 8
(c) Payment......................................................... 8
(d) Denominations; Registration..................................... 8
SECTION 3. Covenants of the Fund............................................ 9
(a) Compliance with Securities Regulations and Commission Requests.. 9
(b) Filing of Amendments............................................ 9
(c) Delivery of Registration Statements............................. 9
(d) Delivery of Prospectus.......................................... 10
(e) Continued Compliance with Securities Laws....................... 10
(f) Blue Sky Qualifications......................................... 10
(g) Rule 158........................................................ 10
(h) Use of Proceeds................................................. 11
(i) Subchapter M.................................................... 11
(j) Listing......................................................... 11
(k) Restrictions on Sale of Shares.................................. 11
SECTION 4. Payment of Expenses.............................................. 11
(a) Expenses........................................................ 11
(b) Termination of Agreement........................................ 12
SECTION 5. Conditions of Underwriter's Obligations.......................... 12
(a) Effectiveness of Registration Statement......................... 12
(b) Opinion of Counsel for the Fund and the Underwriter............. 12
(c) Opinion of General Counsel of the Adviser....................... 12
(d) Officers' Certificates.......................................... 12
(e) Accountant's Comfort Letter..................................... 13
(f) Bring-down Comfort Letter....................................... 13
(g) Approval of Listing............................................. 13
(h) No Objection.................................................... 13
(i) Conditions to Purchase Option Shares............................ 13
(j) Additional Documents............................................ 14
(k) Termination of Agreement........................................ 14
(i)
<PAGE>
SECTION 6. Indemnification.................................................. 14
(a) Indemnification of the Underwriter.............................. 14
(b) Indemnification of Fund, Adviser, Trustees, General Partner and
Officers........................................................ 15
(c) Actions against Parties, Notification........................... 16
(d) Settlement without Consent if Failure to Reimburse.............. 16
SECTION 7. Contribution..................................................... 16
SECTION 8. Representations, Warranties and Agreements to
Survive Delivery................................................. 18
SECTION 9. Termination of Agreement......................................... 18
(a) Termination; General............................................ 18
(b) Liabilities..................................................... 18
SECTION 10.Notices.......................................................... 18
SECTION 11.Parties.......................................................... 18
SECTION 12.Governing Law and Time........................................... 19
SECTION 13.Liability of Shareholders, Trustees & Officers................... 19
SECTION 14.Effect of Headings............................................... 19
SCHEDULE A.................................................................. 21
EXHIBITS
Exhibit A - Form of Opinion of Fund's Counsel...............................A-1
Exhibit B - Form of Opinion of General Counsel of the Investment Adviser....B-1
Exhibit C - Form of Accountant's Comfort Letter.............................C-1
(ii)
<PAGE>
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
(a Massachusetts business trust)
________ Common Shares of Beneficial Interest
(Par Value $.10 Per Share)
PURCHASE AGREEMENT
, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1201
Ladies and Gentlemen:
MuniHoldings Pennsylvania Insured Fund , a Massachusetts business trust
(the "Fund"), and Fund Asset Management, L.P., a Delaware limited partnership
(the "Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"), with respect to
the issue and sale by the Fund and the purchase by the Underwriter of __________
common shares of beneficial interest, par value $.10 per share, of the Fund (the
"Common Shares"), and, with respect to the grant by the Fund to the Underwriter
of the option described in Section 2(b) hereof to purchase all or any part of
additional Common Shares to cover over-allotments, if any. The aforesaid
Common Shares (the "Initial Shares") to be purchased by the Underwriter and all
or any part of the Common Shares subject to the option described in
Section 2(b) hereof (the "Option Shares"), are hereinafter called, collectively,
the "Shares."
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems advisable after this
Agreement has been executed and delivered.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and a registration statement on Form N-2 (No. 333-
), including the related preliminary prospectus, for the registration of the
Shares under the Securities Act of 1933, as amended (the "1933 Act"), the
Investment Company Act, and the rules and regulations of the Commission under
the 1933 Act and the Investment Company Act (together, the "Rules and
Regulations"), and has filed such amendments to such registration statement on
Form N-2, if any, and such
<PAGE>
amended preliminary prospectuses as may have been required to the date hereof.
Promptly after execution and delivery of this Agreement, the Fund will either
(i) prepare and file a prospectus in accordance with the provisions of paragraph
(c) of Rule 497 ("Rule 497(c)") of the rules and regulations of the Commission
under the 1933 Act (the "1933 Act Regulations") or a certificate in accordance
with the provisions of paragraph (j) of Rule 497 ("Rule 497(j)") of the 1933 Act
Regulations, (ii) prepare and file a prospectus in accordance with the
provisions of Rule 430A ("Rule 430A") of the 1933 Act Regulations and paragraph
(h) of Rule 497 ("Rule 497(h)") of the 1933 Act Regulations, or (iii) if the
Fund has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations,
prepare and file a term sheet (a "Term Sheet") in accordance with the provisions
of Rule 434 and Rule 497(h). The information included in any such prospectus or
in any such Term Sheet, as the case may be, that was omitted from such
registration statement at the time it became effective but that is deemed to be
part of such registration statement at the time it became effective (a) pursuant
to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b)
pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information."
Each prospectus used before such registration statement became effective, and
any prospectus that omitted, as applicable, the Rule 430A Information or the
Rule 434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto, if any, at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
prospectus in the form first furnished to the Underwriter for use in connection
with the offering of the Shares is herein called the "Prospectus." If Rule 434
is relied on, the term "Prospectus" shall refer to the preliminary prospectus
dated _____________, 1999, together with the applicable Term Sheet and all
references in this Agreement to the date of such Prospectus shall mean the date
of the applicable Term Sheet. For purposes of this Agreement, all references to
the Registration Statement, any preliminary prospectus, the Prospectus, or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules and
other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be.
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Fund and the Adviser. The Fund
and the Adviser each severally represents and warrants to the Underwriter
as of the date hereof, as of the Closing Time referred to in Section 2(c)
hereof and as of the Date of Delivery (if any) referred to in Section 2(b)
hereof, and agrees with the Underwriter, as follows:
2
<PAGE>
(i) Compliance with Registration Requirements. The Fund meets
-----------------------------------------
the requirements for use of Form N-2 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Fund, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with. If
required, the Fund has received any orders exempting the Fund from any
provisions of the Investment Company Act.
(ii) At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Shares are
purchased, at the Date of Delivery) the Registration Statement, the Rule
462(b) Registration Statement and any amendments or supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act, the Investment Company Act and the Rules and Regulations and
did not and will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading. Neither the Prospectus, nor any
amendments or supplements thereto, at the time the Prospectus or any
amendments or supplements thereto were issued and at the Closing Time (and,
if any Option Shares are purchased, at the Date of Delivery) included or
will include an untrue statement of a material fact or omitted or will omit
to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading. The representations and warranties in this subsection shall not
apply to statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information
furnished to the Fund in writing by the Underwriter expressly for use in
the Registration Statement or in the Prospectus. If Rule 434 is used, the
Fund will comply with the requirements of Rule 434.
(iii) Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 497(c) or Rule 497(h) under
the 1933 Act, complied when so filed in all material respects with the
Rules and Regulations and each preliminary prospectus and the Prospectus
delivered to the Underwriter for use in connection with this offering was
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation
S-T.
(iv) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules, if any, included in the
Registration Statement are independent public accountants as required by
the 1933 Act and the Rules and Regulations.
(v) Financial Statements. The financial statements, included in
--------------------
the Registration Statement and Prospectus, together with the related
schedules and notes, present fairly the financial position of the Fund at
the date indicated and said statements
3
<PAGE>
have been prepared in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the period
involved. The supporting schedules, if any, included in the Registration
Statement present fairly in accordance with GAAP the information required
to be stated therein.
(vi) No Material Adverse Change in Business. Since the
--------------------------------------
respective dates as of which information is given in the Registration
Statement and in the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of
the Fund, whether or not arising in the ordinary course of business (a
"Material Adverse Effect"), (B) there have been no transactions entered
into by the Fund, other than those in the ordinary course of business,
which are material with respect to the Fund and (C) there has been no
dividend or distribution of any kind declared, paid or made by the Fund on
any class of its capital shares.
(vii) Good Standing of the Fund. The Fund has been duly organized
-------------------------
and is validly existing as a voluntary association (commonly referred to as
a business trust) under the laws of the Commonwealth of Massachusetts and
has power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter into and
perform its obligations under this Agreement; and the Fund is duly
qualified to transact business and is in good standing in each jurisdiction
in which such qualification is required, whether by reason of the ownership
or leasing of property or the conduct of business, except where the failure
so to qualify or to be in good standing would not result in a Material
Adverse Effect.
(viii) Subsidiaries. The Fund has no subsidiaries.
------------
(ix) Capitalization. The authorized, issued and outstanding
--------------
capital shares of the Fund is as set forth in the Prospectus under the
caption "Description of Capital Shares."
(x) Investment Company Act. The Fund is registered with the
----------------------
Commission under the Investment Company Act as a closed-end, non-
diversified, management investment company, and no order of suspension or
revocation of such registration has been issued or proceedings therefor
initiated or threatened by the Commission.
(xi) Authorization of Agreement. This Agreement has been duly
--------------------------
authorized, executed and delivered by the Fund.
(xii) Authorization and Description of Shares. The Shares to be
---------------------------------------
purchased by the Underwriter from the Fund have been duly authorized for
issuance and sale to the Underwriter pursuant to this Agreement, and, when
issued and delivered by the Fund pursuant to this Agreement against payment
of the consideration set forth in this Agreement will be validly issued,
fully paid and non-assessable (except for certain possible liability of
shareholders described in the Prospectus under "Description of Shares");
the Shares conform to all statements relating thereto contained in the
Prospectus and such description conforms to the rights set forth in the
instruments
4
<PAGE>
defining the same; no holder of the Shares will be subject to personal
liability by reason of being such a holder (except for certain possible
liability of shareholders described in the Prospectus under "Description of
Shares"); and the issuance of the Shares is not subject to the preemptive
or other similar rights of any securityholder of the Fund.
(xiii) Absence of Defaults and Conflicts. The Fund is not in
---------------------------------
violation of its declaration of trust or by-laws or in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any material contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Fund is a party or by which it or its properties
may be bound, or to which any of the property or assets of the Fund is
subject (collectively, "Agreements and Instruments"), except for such
defaults that would not result in a Material Adverse Effect; and the
execution, delivery and performance of this Agreement, the Investment
Advisory Agreement and the Custody Agreement referred to in the
Registration Statement (as used herein, the "Advisory Agreement" and the
"Custody Agreement," respectively) and the consummation of the transactions
contemplated in this Agreement and in the Registration Statement (including
the issuance and sale of the Shares and the use of the proceeds from the
sale of the Shares as described in the Prospectus under the caption "Use of
Proceeds") and compliance by the Fund with its obligations under this
Agreement have been duly authorized by all necessary corporate action and
do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or a
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Fund pursuant to the Agreements and Instruments (except
for such conflicts, breaches or defaults or liens, charges or encumbrances
that would not result in a Material Adverse Effect), nor will such action
result in any violation of the provisions of the declaration of trust or
the by-laws of the Fund, or any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Fund or any of its assets, properties or operations. As used herein, a
"Repayment Event" means any event or condition which gives the holder of
any note, debenture or other evidence of indebtedness (or any person acting
on such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Fund.
(xiv) Absence of Proceedings. There is no action, suit,
----------------------
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Fund, threatened against or affecting the Fund, which is
required to be disclosed in the Registration Statement (other than as
disclosed therein), or which might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in this Agreement or the
performance by the Fund of its obligations hereunder; the aggregate of all
pending legal or governmental proceedings to which the Fund is a party or
of which any of its respective property or assets is the subject which are
not described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
5
<PAGE>
(xv) Subchapter M Compliance. The Fund intends to, and will,
-----------------------
direct the investment of the proceeds of the offering described in the
Registration Statement in such a manner as to comply with the requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended
("Subchapter M of the Code"), and intends to qualify as a regulated
investment company under Subchapter M of the Code.
(xvi) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xvii) Possession of Intellectual Property. The Fund owns or
-----------------------------------
possesses, or can acquire on reasonable terms, adequate patents, patent
rights, licenses, inventions, copyrights, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade names
or other intellectual property (collectively, "Intellectual Property")
necessary to carry on the business now operated by it, and the Fund has not
received any notice or is otherwise aware of any infringement or conflict
with asserted rights of others with respect to any Intellectual Property or
of any facts or circumstances which would render any Intellectual Property
invalid or inadequate to protect the interest of the Fund therein, and
which infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, singly or in the aggregate,
would result in a Material Adverse Effect.
(xviii) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Fund of its obligations
hereunder, in connection with the offering, issuance or sale of the Shares
under this Agreement or the consummation of the transactions contemplated
by this Agreement, except such as have been already obtained or as may be
required under the 1933 Act or the 1940 Act or the Rules and Regulations
and foreign or state securities or blue sky laws.
(xix) Possession of Licenses and Permits. The Fund possesses such
----------------------------------
permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct
the business now operated by it; the Fund is in compliance with the terms
and conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, have a Material Adverse
Effect; all of the Governmental Licenses are valid and in full force and
effect, except when the invalidity of such Governmental Licenses or the
failure of such Governmental Licenses to be in full force and effect would
not have a Material Adverse Effect; and the Fund has not received any
notice of proceedings relating to the revocation or modification of any
such Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
6
<PAGE>
(b) Additional Representations of the Adviser. The Adviser represents and
warrants to the Underwriter as of the date hereof and as of the Representation
Date as follows:
(i) Organization and Authority of Adviser. The Adviser has been
-------------------------------------
duly organized as a limited partnership under the laws of the State of
Delaware, with power and authority to conduct its business as described in
the Registration Statement and the Prospectus.
(ii) Investment Advisers Act. The Adviser is duly registered as
-----------------------
an investment adviser under the Investment Advisers Act of 1940, as amended
(the "Investment Advisers Act"), and is not prohibited by the Investment
Advisers Act or the Investment Company Act, or the rules and regulations
under such acts, from acting under the Advisory Agreement for the Fund as
contemplated by the Registration Statement and the Prospectus.
(iii) Authorization of Agreements. This Agreement has been duly
---------------------------
authorized, executed and delivered by the Adviser; the Advisory Agreement
has been duly authorized, executed and delivered by the Adviser and
constitutes a valid and binding obligation of the Adviser, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting
creditors' rights and to general equitable principles; and neither the
execution and delivery of this Agreement or the Advisory Agreement, nor the
performance by the Adviser of its obligations hereunder or thereunder will
conflict with, or result in a breach of any of the terms and provisions of,
or constitute, with or without the giving of notice or the lapse of time or
both, a default under, any agreement or instrument to which the Adviser is
a party or by which it is bound, or any law, order, rule or regulation
applicable to it of any jurisdiction, court, Federal or state regulatory
body, administrative agency or other governmental body, stock exchange or
securities association having jurisdiction over the Adviser or its
respective properties or operations.
(iv) Financial Resources. The Adviser has the financial
-------------------
resources available to it necessary for the performance of its services and
obligations as contemplated in the Registration Statement and the
Prospectus.
(v) Rule 482 Compliance. Any advertisement approved by the
-------------------
Adviser for use in the public offering of the Shares pursuant to Rule 482
under the 1933 Act Regulations (an "Omitting Prospectus") complies with the
requirements of such Rule 482.
(c) Officers' Certificates. Any certificate signed by any officer of the
Fund or any officer of the Adviser delivered to the Underwriter or to counsel
for the Fund and the Underwriter shall be deemed a representation and warranty
by the Fund or the Adviser, as the case may be, to the Underwriter as to the
matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
---------------------------------------------
(a) Initial Shares. On the basis of the representations and warranties
herein contained, and subject to the terms and conditions herein set forth, the
Fund agrees to sell to the
7
<PAGE>
Underwriter and the Underwriter agrees to purchase from the Fund the Initial
Shares at the price per share set forth in Schedule A.
(b) Option Shares. In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Fund hereby grants an option to the Underwriter to purchase up to an
additional __________ Common Shares at the price per share set forth in Schedule
A, less an amount per shares equal to any dividends or distributions declared by
the Fund and payable on the Initial Shares but not payable on the Option Shares.
The option hereby granted will expire 45 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Shares upon notice by the Underwriter to the Fund
setting forth the number of Option Shares as to which the Underwriter is then
exercising the option and the time, date and place of payment and delivery for
such Option Shares. Any such time and date of delivery for the Option Shares (a
"Date of Delivery") shall be determined by the Underwriter, but shall not be
later than seven full business days after the exercise of said option, nor in
any event prior to Closing Time, as hereinafter defined.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Shares shall be made at the offices of Brown &
Wood LLP, One World Trade Center, New York, New York 10048-0557, or at such
other place as shall be agreed upon by the Underwriter and the Fund, at 9:00
A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day following the date hereof, or such
other time not later than ten business days after such date as shall be agreed
upon by the Underwriter and the Fund (such time and date of payment and delivery
herein being referred to as "Closing Time").
In addition, in the event that any or all of the Option Shares are
purchased by the Underwriter, payment of the purchase price for, and delivery of
certificates for, such Option Shares shall be made at the above-mentioned
offices of Brown & Wood LLP, or at such other place as shall be agreed upon by
the Underwriter and the Fund, on each Date of Delivery as specified in the
notice from the Underwriter to the Fund.
Payment shall be made to the Fund by wire transfer of immediately available
funds to a bank account designated by the Fund, against delivery to the
Underwriter of certificates for the Shares to be purchased by it.
(d) Denominations; Registration. Certificates for the Initial Shares and
the Option Shares, if any, shall be in such denominations and registered in such
names as the Underwriter may request in writing at least one full business day
before the Closing Time or the relevant Date of Delivery, as the case may be.
The certificates for the Initial Shares and the Option Shares will be made
available by the Fund for examination by the Underwriter not later than 10:00
A.M. on the last business day prior to Closing Time or the Date of Delivery, as
the case may be.
8
<PAGE>
SECTION 3. Covenants of the Fund. The Fund covenants with the
---------------------
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Fund, subject to Section 3(b), will comply with the requirements of Rule 430A or
Rule 434, as applicable, and will notify the Underwriter immediately, and
confirm the notice in writing, (i) if any post-effective amendment to the
Registration Statement shall have become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes, and (v) of the issuance by the Commission
of an order of suspension or revocation of the notification on Form N-8A of
registration of the Fund as an investment company under the Investment Company
Act or the initiation of any proceeding for that purpose. The Fund will make
every reasonable effort to prevent the issuance of any stop order described in
subsection (iv) hereunder or any order of suspension or revocation described in
subsection (v) hereunder and, if any such stop order or order of suspension or
revocation is issued, to obtain the lifting thereof at the earliest possible
moment. The Fund will promptly effect the filings necessary pursuant to Rule
497(c), Rule 497(j) or Rule 497(h) and will take such steps as it deems
necessary to ascertain promptly whether the certificate transmitted for filing
under Rule 497(j) or the form of prospectus transmitted for filing under Rule
497(c) or Rule 497(h) was received for filing by the Commission and, in the
event that it was not, it will promptly file such certificate or prospectus.
(b) Filing of Amendments. The Fund will give the Underwriter notice of
its intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment or filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus included
in the Registration Statement at the time it became effective or to the
Prospectus, whether pursuant to the Investment Company Act, the 1933 Act, or
otherwise, and will furnish the Underwriter with copies of any such documents a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file or use any such document to which the Underwriter or
counsel to the Underwriter and the Fund shall object.
(c) Delivery of Registration Statements. The Fund has furnished or will
deliver to the Underwriter and counsel to the Underwriter and the Fund, without
charge, signed copies of the notification of registration on Form N-8A and
Registration Statement as originally filed and of each amendment thereto,
(including exhibits filed therewith, or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also deliver
to the Underwriter a conformed copy, without charge, of the Registration
Statement as originally filed and of each amendment thereto (without exhibits)
for the Underwriter. The copies of the Registration Statement and each amendment
thereto furnished to the Underwriter will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
9
<PAGE>
(d) Delivery of Prospectus. The Fund has delivered to the Underwriter,
without charge, as many copies of each preliminary prospectus as the Underwriter
reasonably requested, and the Fund hereby consents to the use of such copies for
purposes permitted by the 1933 Act. The Fund will furnish to the Underwriter,
without charge, during the period when the Prospectus is required to be
delivered under the 1933 Act, such number of copies of the Prospectus (as
amended or supplemented) as the Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriter will be identical to the electronically transmitted copies thereof
field with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Fund will comply with
the 1933 Act, the Investment Company Act and the Rules and Regulations so as to
permit the completion of the distribution of the Shares as contemplated in this
Agreement and in the Prospectus. If at any time when a prospectus is required by
the 1933 Act to be delivered in connection with sales of the Shares, any event
shall occur or condition shall exist as a result of which it is necessary, in
the opinion of counsel to the Underwriter and the Fund, to amend the
Registration Statement or amend or supplement any Prospectus in order that the
Prospectus will not include any untrue statements of material fact or omit to
state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement any Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Fund will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Fund will
furnish to the Underwriter such number of copies of such amendment or supplement
as the Underwriter may reasonably request.
(f) Blue Sky Qualifications. The Fund will use its best efforts, in
cooperation with the Underwriter, to qualify the Shares for offering and sale
under the applicable securities laws of such states and other jurisdictions as
the Underwriter may designate and to maintain such qualifications in effect for
a period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement; provided,
however, that the Fund shall not be obligated to file any general consent to
service of process or to qualify as a dealer in securities in any jurisdiction
in which it is not so qualified or to subject itself to taxation in respect of
doing business in any jurisdiction in which it is not otherwise so subject. In
each jurisdiction in which the Shares have been so qualified, the Fund will file
such statements and reports as may be required by the laws of such jurisdiction
to continue such qualification in effect for a period of not less than one year
from the effective date of the Registration Statement and any Rule 462(b)
Registration Statement.
(g) Rule 158. The Fund will timely file such reports pursuant to the
Investment Company Act as are necessary in order to make generally available to
its securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
10
<PAGE>
(h) Use of Proceeds. The Fund will use the net proceeds received by it
from the sale of the Shares in the manner specified in the Prospectus under "Use
of Proceeds."
(i) Subchapter M. The Fund will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter M of the Code.
(j) Listing. The Fund will use its best efforts to effect the listing of
the Shares on the New York Stock Exchange so that trading on such Exchange will
begin no later than two weeks from the date of the Prospectus.
(k) Restrictions on Sale of Shares. During a period of 180 days from the
date of the Prospectus, the Fund will not, without your prior written consent,
directly or indirectly (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of any
Common Shares or any securities convertible into or exercisable or exchangeable
for Common Shares or file any registration statement under the 1933 Act with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Shares, whether
any such swap or transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Shares of such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold
hereunder or (B) any Common Shares issued pursuant to any dividend reinvestment
plan.
SECTION 4. Payment of Expenses.
-------------------
(a) Expenses. The Fund will pay all expenses incident to the performance
of its obligations under this Agreement, including (i) the preparation, printing
and filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery to the Underwriter of this Agreement and such
other documents as may be required in connection with the offering, purchase,
sale issuance or delivery of the Shares, (iii) the preparation, issuance and
delivery of the certificates for the Shares to the Underwriter, including any
stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Shares to the Underwriter, (iv) the fees and
disbursements of the Fund's counsel, accountants and other advisors, (v) the
qualification of the Shares under the securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel to the Underwriter and the Fund in connection
therewith and in connection with the preparation of the Blue Sky Survey and any
supplement thereto, (vi) the printing and delivery to the Underwriter of copies
of each preliminary prospectus, any Term Sheets and of the Prospectus and any
amendments or supplements thereto, (vii) the preparation, printing and delivery
to the Underwriter of copies of the Blue Sky Survey and any supplement thereto,
(viii) the fees and expenses of any transfer agent or registrar for the Shares
and (ix) the filing fees incident to, and the reasonable fees and disbursements
of counsel to the Underwriter and the Fund in connection with the review by the
National Association of Securities Dealers, Inc. (the "NASD") of the terms of
the sale of the Shares and (x) the fees and expenses incurred in connection with
the listing of the Shares on the New York Stock Exchange.
11
<PAGE>
(b) Termination of Agreement. If this Agreement is terminated by the
Underwriter in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Fund or the Adviser shall reimburse the Underwriter for all of its
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel to the Fund and the Underwriter. In the event the transactions
contemplated hereunder are not consummated, the Adviser agrees to pay all of the
costs and expenses set forth in paragraph (a) of this Section 4 which the Fund
would have paid if such transactions had been consummated.
SECTION 5. Conditions of Underwriter's Obligations. The obligations of
---------------------------------------
the Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Fund and the Adviser contained in Section 1 hereof, or in the
certificates of any officer of the Fund and the Adviser delivered pursuant to
the provisions hereof, to the performance by the Fund and the Adviser of their
respective covenants and obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration Statement
including any Rule 462(b) Registration Statement has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriter and the Fund. Either (i) a
certificate has been filed with the Commission in accordance with Rule 497(j) or
a prospectus has been filed with the Commission in accordance with Rule 497(c),
or (ii) a prospectus containing the Rule 430A Information shall have been filed
with the Commission in accordance with Rule 497(h) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the Fund has
elected to rely upon Rule 434, a Term Sheet shall have been filed with the
Commission in accordance with Rule 497(h).
(b) Opinion of Counsel for the Fund and the Underwriter. At Closing Time,
the Underwriter shall have received the favorable opinion, dated as of Closing
Time, of Brown & Wood LLP, counsel to the Fund and the Underwriter, to the
effect set forth in Exhibit A hereto. In giving their opinion, Brown &
---------
Wood LLP may rely as to matters involving the laws of the Commonwealth of
Massachusetts upon the opinion of Bingham Dana LLP.
(c) Opinion of General Counsel of the Adviser. At Closing Time, the
Underwriter shall have received the favorable opinion, dated as of Closing Time,
of Michael J. Hennewinkel, Esq., General Counsel to the Adviser, in form and
substance satisfactory to counsel to the Underwriter, to the effect set forth in
Exhibit B hereto and to such further effect as counsel to the Underwriter may
- ---------
reasonably request.
(d) Officers' Certificates. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Fund, whether or not arising in the ordinary course of business, and the
Underwriter shall have received (A) a certificate of the President or a Vice
President of the Fund, dated as of Closing Time, to the effect that (i) there
has been no such
12
<PAGE>
material adverse change, (ii) the representations and warranties in Section 1(a)
hereof are true and correct with the same force and effect as though expressly
made at and as of Closing Time, (iii) the Fund has complied with all agreements
and satisfied all conditions on its part to be performed or satisfied at or
prior to Closing Time, and (iv) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or are contemplated by the Commission and
(B) a certificate of the President or a Vice President of the Adviser, dated as
of Closing Time, to the effect that (i) the representations and warranties in
Sections 1(a) and 1(b) hereof are true and correct with the same force and
effect as though expressly made at and as of Closing Time, and (ii) the Adviser
has complied with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to Closing Time.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Underwriter shall have received from ___________________ a
letter, dated such date, in form and substance satisfactory to the Underwriter
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus, to the effect set forth in Exhibit C hereto and to
---------
such further effect as counsel to the Underwriter may reasonably request.
(f) Bring-down Comfort Letter. At Closing Time, the Underwriter shall have
received from __________________ a letter, dated as of Closing Time, to the
effect that they reaffirm the statements made in the letter, furnished pursuant
to subsection (f) of this Section, except that the "specified date" referred to
shall be a date not more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Shares shall have been
approved for listing on the New York Stock Exchange, subject only to official
notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) Conditions to Purchase Option Shares. In the event that the
Underwriter exercises its option provided in Section 2(b) hereof to purchase all
or any portion of the Option Shares, the representations and warranties of the
Fund and the Adviser contained herein and the statements in any certificates
furnished by the Fund and the Adviser hereunder shall be true and correct as of
each Date of Delivery and, at the relevant Date of Delivery, the Underwriter
shall have received:
(i) Officers' Certificates. Certificates, dated such Date of
----------------------
Delivery, of the President or a Vice President of the Fund and of the
President or a Vice President of the Adviser confirming that the respective
certificates delivered at the Closing Time pursuant to Section 5(e) hereof
remains true and correct as of such Date of Delivery.
(ii) Opinions of Counsel. The favorable opinions of Brown
-------------------
& Wood LLP, counsel to the Fund and the Underwriter, and of Michael J.
Hennewinkel, Esq., General Counsel of the Adviser, each in form and
substance satisfactory to the counsel for the
13
<PAGE>
Underwriter, dated such Date of Delivery, relating to the Option Shares to
be purchased on such Date of Delivery and otherwise to the same effect as
the opinions required by Sections 5(b) and 5(c) hereof, respectively.
(iii) Bring-down Comfort Letter. A letter from in form and
-------------------------
substance satisfactory to the Underwriter and dated such Date of Delivery,
substantially the same in form and substance as the letter furnished to the
Underwriter pursuant to Section 5(f), except that the "specified date" in
the letter furnished pursuant to this paragraph shall be a date not more
than five days prior to such Date of Delivery.
(j) Additional Documents. At Closing Time and at each Date of Delivery,
counsel to the Fund and the Underwriter shall have been furnished with such
documents and opinions as it may require for the purpose of enabling it to pass
upon the issuance and sale of the Shares as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Fund in connection with the issuance and sale of the Shares as
herein contemplated shall be satisfactory in form and substance to the
Underwriter and counsel to the Fund and the Underwriter.
(k) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option Shares on
a Date of Delivery which is after the Closing Time, the obligations of the
Underwriter to purchase the relevant Option Shares, may be terminated by the
Underwriter by notice to the Fund at any time at or prior to Closing Time or
such Date of Delivery, as the case may be, and such termination shall be without
liability of any party to any other party except as provided in Section 4 and
except that Sections 1, 6, 7 and 8 shall survive any such termination and remain
in full force and effect.
SECTION 6. Indemnification.
---------------
(a) Indemnification of the Underwriter. (1) The Fund and the Adviser
jointly and severally agree to indemnify and hold harmless the Underwriter and
each person, if any, who controls the Underwriter within the meaning of Section
15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus, any Omitting Prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
14
<PAGE>
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the indemnifying party; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by the Underwriter) reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434 Information, if
applicable, or any preliminary prospectus, any Omitting Prospectus or the
Prospectus (or any amendment or supplement thereto).
(2) Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of the Underwriter
or who controls the Underwriter within the meaning of Section 15 of the 1933 Act
and who, at the date of this Agreement, is a trustee or officer of the Fund or
controls the Fund within the meaning of Section 15 of the 1933 Act, such
indemnity agreement is subject to the undertaking of the Fund in the
Registration Statement under Item 29 thereof.
(b) Indemnification of Fund, Adviser, Trustees, General Partner and
Officers. The Underwriter agrees to indemnify and hold harmless the Fund, the
Adviser, the trustees of the Fund, the general partner of the Adviser, each of
the Fund's officers who signed the Registration Statement, and each person, if
any, who controls the Fund or the Adviser within the meaning of Section 15 of
the 1933 Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto) including the Rule 430A Information and the Rule 434
Information, if applicable, or in any preliminary prospectus, any Omitting
Prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the Fund
by the Underwriter expressly for use in the Registration Statement (or any
amendment thereto), or any preliminary prospectus, any Omitting Prospectus or
the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties, Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an
15
<PAGE>
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof and
in any event shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. In the case of parties indemnified
pursuant to Section 6(a) above, counsel to the indemnified parties shall be
selected by the Underwriter, and, in the case of parties indemnified pursuant to
Section 6(b) above, counsel to the indemnified parties shall be selected by the
Fund and the Adviser. An indemnifying party may participate at its own expense
in the defense of any such action; provided, however, that counsel to the
indemnifying party shall not (except with the consent of the indemnified party)
also be counsel to the indemnified party. In no event shall the indemnifying
parties be liable for the fees and expenses of more than one counsel (in
addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6 (a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
16
<PAGE>
SECTION 7. Contribution. If the indemnification provided for in Section
------------
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Fund and the
Adviser on the one hand and the Underwriter on the other hand from the offering
of the Shares pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Fund and the Adviser on the one hand
and of the Underwriter on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Adviser on the one hand
and the Underwriter on the other hand in connection with the offering of the
Shares pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Shares pursuant
to this Agreement (before deducting expenses) received by the Fund, and the
total underwriting commission received by the Underwriter, in each case as set
forth or otherwise indicated on the cover of the Prospectus, or, if Rule 434 is
used, the corresponding location on the Term Sheet, bear to the sum of the
aggregate initial public offering price of the Shares and the total underwriting
commission received by the Underwriter as set forth or otherwise indicated on
such cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund and the Adviser or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay by reason of any such untrue or alleged
untrue statement or omission or alleged omission.
17
<PAGE>
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Underwriter, and each director of the Fund and the
Adviser, respectively, each officer of the Fund who signed the Registration
Statement and each person, if any, who controls the Fund and the Adviser within
the meaning of Section 15 of the 1933 Act, shall have the same rights to
contribution as the Fund and the Adviser.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Fund or of the Adviser submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of the Underwriter or controlling person, or
by or on behalf of the Fund or the Adviser and shall survive delivery of the
Shares to the Underwriter.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The Underwriter may terminate this Agreement by
notice to the Fund, at any time at or prior to Closing Time (i) if there has
been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Fund or the Adviser, whether or not arising
in the ordinary course of business, or (ii) if there has occurred any material
adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Underwriter, impracticable to market the Shares or to enforce
contracts for the sale of the Shares, or (iii) if trading in any securities of
the Fund has been suspended or materially limited by the Commission or the New
York Stock Exchange, or if trading generally on the American Stock Exchange or
the New York Stock Exchange or in the Nasdaq National Market has been suspended
or materially limited, or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices for securities have been required, by any of said
exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of
18
<PAGE>
telecommunication. Notices to the Underwriter shall be directed to Merrill Lynch
& Co. Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated at North Tower,
World Financial Center, New York, New York 10281-1201, Attention: Richard Bruce,
Vice President; notices to the Fund or to the Adviser shall be directed to each
of them at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attention:
Arthur Zeikel, President.
SECTION 11. Parties. This Agreement shall inure to the benefit of and be
-------
binding upon the Underwriter, the Fund, the Adviser and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriter, the Fund, the Adviser and their respective successors and the
controlling persons and officers, trustees and general partner referred to in
Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the Underwriter,
the Fund and the Adviser and their respective successors, and said controlling
persons and officers, trustees and general partner and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Shares from the Underwriter shall be deemed to be a successor
merely by reason of such purchase.
SECTION 12. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND
----------------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES
OF DAY REFER TO NEW YORK CITY TIME.
SECTION 13. Effect of Headings. The Article and Section headings herein and
------------------
the Table of Contents are for convenience only and shall not affect the
construction hereof.
19
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Fund a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriter and the Fund and the Adviser in accordance with its terms.
Very truly yours,
MUNIHOLDINGS PENNSYLVANIA INSURED
FUND
By:
_______________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By:
_______________________________
Authorized Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
_______________________________
Authorized Signatory
20
<PAGE>
SCHEDULE A
----------
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
(a Massachusetts business trust)
_____________ Common Shares of Beneficial Interest
(Par Value $.10 Per Share)
1. The initial public offering price per share for the Shares, determined
as provided in Section 2 hereof, and the purchase price per share for the Shares
to be paid by the Underwriter, shall be $15.00.
2. The Adviser will pay, or arrange for an affiliate to pay, a commission
to the Underwriter in the amount of $ per share for the Shares
purchased by the Underwriter.
21
<PAGE>
Exhibit A
FORM OF OPINION OF FUND'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Fund has been duly organized and is validly existing as a
voluntary association (commonly referred to as a business trust) under the laws
of the Commonwealth of Massachusetts.
(ii) The Fund has power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and to
enter into and perform its obligations under the Purchase Agreement.
(iii) The Fund is duly qualified to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would not
result in a material adverse change in the condition, financial or otherwise, or
in the earnings, business affairs or business prospects of the Fund, whether or
not arising in the ordinary course of business (a "Material Adverse Effect").
(iv) The authorized, issued and outstanding capital shares of the Fund
is as set forth in the Prospectus under the caption "Description of Capital
Shares."
(v) The Shares to be purchased by the Underwriter from the Fund have
been duly authorized for issuance and sale to the Underwriter pursuant to the
Purchase Agreement and, when issued and delivered by the Fund pursuant to the
Purchase Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and non-assessable
(except for certain possible liability of shareholders described in the
Prospectus under "Description of Capital Shares") and no holder of the Shares is
or will be subject to personal liability by reason of being such a holder
(except for certain possible liability of shareholders described in the
Prospectus under "Description of Capital Shares").
(vi) The issuance of the Shares is not subject to the preemptive or
other similar rights of any securityholder of the Fund.
(vii) To the best of our knowledge, the Fund does not have any
subsidiaries.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Fund and complies with all applicable provisions of the
Investment Company Act.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the certificate pursuant to Rule 497(j) or the Prospectus pursuant to Rule
497(c) or Rule 497(h), as the case may be, has been made in the manner and
within the time period required by Rule 497(j), Rule 497(c) or Rule
A-1
<PAGE>
497(h), as the case may be; and, to the best of our knowledge, no stop order
suspending the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no proceedings for
that purpose have been instituted or are pending or threatened by the
Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, and each amendment or supplement to the Registration
Statement and the Prospectus, as of their respective effective or issue dates
(other than the financial statements and supporting schedules included therein
or omitted therefrom, as to which we need express no opinion) complied as to
form in all material respects with the requirements of the 1933 Act, the
Investment Company Act and the Rules and Regulations.
(xi) The form of certificate used to evidence the Common Shares complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the declaration of trust and by-laws of the Fund and
the requirements of the New York Stock Exchange.
(xii) To the best of our knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which the Fund is a
party, or to which the property of the Fund is subject, before or brought by any
court or governmental agency or body, domestic or foreign, which might
reasonably be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the properties or
assets thereof or the consummation of the transactions contemplated in the
Purchase Agreement or the performance by the Fund of its obligations thereunder,
other than those disclosed in the Prospectus.
(xiii) The information in the Prospectus under "Description of Capital
Shares," "Taxes" and in the Registration Statement under Item 29, to the extent
that it constitutes matters of law, summaries of legal matters, the Fund's
declaration of trust and bylaws or legal proceedings, or legal conclusions, has
been reviewed by us and is correct in all material respects.
(xiv) To the best of our knowledge, there are no statutes or regulations
that are required to be described in the Prospectus that are not described as
required.
(xv) All descriptions in the Prospectus of contracts and other documents
to which the Fund is a party are accurate in all material respects; to the best
of our knowledge, there are no franchises, contracts, indentures, mortgages,
loan agreements, notes, leases or other instruments of the Fund required to be
described or referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to therein or filed or
incorporated by reference as exhibits thereto, and the descriptions thereof or
references thereto are correct in all material respects.
(xvi) To the best of our knowledge, the Fund is not in violation of its
declaration of trust or by-laws and no default by the Fund exists in the due
performance or observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement, note,
lease or other agreement or instrument that is described or
A-2
<PAGE>
referred to in the Registration Statement or the Prospectus or filed or
incorporated by reference as an exhibit to the Registration Statement.
(xvii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act, the
Investment Company Act and the Rules and Regulations, which have been obtained,
or as may be required under the securities or blue sky laws of the various
states, as to which we need express no opinion) is necessary or required in
connection with the due authorization, execution and delivery of the Purchase
Agreement, the Advisory Agreement and the Custody Agreement or for the offering,
issuance, sale or delivery of the Shares.
(xviii) The Advisory Agreement and the Custody Agreement have each been
duly authorized and approved by the Fund and comply as to form in all material
respects with all applicable provisions of the Investment Company Act, and each
has been duly executed by the Fund.
(xix) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, non-diversified management investment company, and
all required action has been taken by the Fund under the 1933 Act, the
Investment Company Act and the Rules and Regulations to make the public offering
and consummate the sale of the Shares pursuant to the Purchase Agreement; the
provisions of the declaration of trust and the by-laws of the Fund comply as to
form in all material respects with the requirements of the Investment Company
Act; and, to the best of their knowledge and information, no order of suspension
or revocation of such registration under the Investment Company Act, pursuant to
Section 8(e) of the Investment Company Act, has been issued or proceedings
therefor initiated or threatened by the Commission.
(xx) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Shares, and the use of the proceeds from the sale of the Shares as described in
the Prospectus under the caption "Use of Proceeds") and compliance by the Fund
with its obligations under the Purchase Agreement do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(xi) of the Purchase Agreement) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Fund pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument, known to us,
to which the Fund is a party or by which it may be bound, or to which any of the
property or assets of the Fund is subject (except for such conflicts, breaches
or defaults or liens, charges or encumbrances that would not have a Material
Adverse Effect), nor will such action result in any violation of the provisions
of the declaration of trust or by-laws of the Fund, or any applicable law,
statute, rule, regulation, judgment, order, writ or decree, known to us, of any
government, government instrumentality or court, domestic or foreign, having
jurisdiction over the Fund or any of its properties, assets or operations.
<PAGE>
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included or incorporated by
reference therein or omitted therefrom, as to which we need make no statement),
at the time such Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any amendment or supplement thereto
(except for financial statements and schedules and other financial data included
or incorporated by reference therein or omitted therefrom, as to which we need
make no statement), at the time the Prospectus was issued, at the time any such
amended or supplemented prospectus was issued or at the Closing Time, included
or includes an untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact (but
not as to legal conclusions), to the extent they deem proper, on certificates
and written statements of responsible officers of and accountants for the Fund
and the Adviser and public officials. Such opinion shall not state that it is
to be governed or qualified by, or that it is otherwise subject to, any
treatise, written policy or other document relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991).
A-4
<PAGE>
Exhibit B
FORM OF OPINION OF GENERAL COUNSEL TO THE
INVESTMENT ADVISER TO BE DELIVERED
PURSUANT TO SECTION 5(c)
(i) The Adviser has been duly organized as a limited partnership under
the laws of the State of Delaware, with power and authority to conduct its
business as described in the Registration Statement and in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act and is not prohibited by the Investment Advisers Act or
the Investment Company Act, or the rules and regulations under such Acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement and the Advisory Agreement have been duly
authorized, executed and delivered by the Adviser, and the Advisory Agreement
constitutes a valid and binding obligation of the Adviser, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting creditors'
rights and to general equity principles; and, to the best of his knowledge and
information, neither the execution and delivery of this Agreement or the
Advisory Agreement nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of, any of the
terms and provisions of, or constitute, with or without the giving of notice or
the lapse of time or both, a default under, any agreement or instrument to which
the Adviser is a party or by which the Adviser is bound, or any law, order, rule
or regulation applicable to the Adviser of any jurisdiction, court, Federal or
state regulatory body, administrative agency or other governmental body, stock
exchange or securities association having jurisdiction over the Adviser or its
properties or operations.
(iv) To the best of his knowledge and information, the description of
the Adviser in the Registration Statement and in the Prospectus does not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
B-1
<PAGE>
Exhibit C
FORM OF ACCOUNTANTS'
COMFORT LETTER PURSUANT TO SECTION 5(e)
1. We are independent public accountants with respect to the Company
within the meaning of the 1933 Act and the 1933 Act Regulations.
2. In our opinion the financial statements audited by us and included in
the Registration Statement and the Prospectus comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act, the
Investment Company Act and the Rules and Regulations.
Such accountants shall also state that they have performed specified
procedures, not constituting an audit, including a reading of the latest
available interim financial statements of the Fund, a reading of the minute
books of the Fund, made inquiries of officials of the Fund responsible for
financial accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and procedures
nothing came to their attention that caused them to believe that at the date of
the latest available financial statements read by such accountants, or at a
subsequent specified date not more than three days prior to the date of the
Purchase Agreement, there was any change in the capital shares or net assets of
the Fund as compared with amounts shown on the financial statements included in
the Registration Statement and the Prospectus.
C-1
<PAGE>
EXHIBIT 99(h)(2)
Revised October 29, 1990
[LOGO]
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH WORLD HEADQUARTERS
NORTH TOWER WORLD FINANCIAL CENTER
NEW YORK, N.Y. 10281-1305
STANDARD DEALER AGREEMENT
-------------------------
Dear Sirs:
In connection with public offerings of securities underwritten by us, or by
a group of underwriters (the "Underwriters") represented by us, you may be
offered the opportunity to purchase a portion of such securities, as principal,
at a discount from the offering price representing a selling concession or
reallowance granted as consideration for services rendered by you in the sale of
such securities. We request that you agree to the following terms and
provisions, and make the following representations, which, together with any
additional terms and provisions set forth in any wire or letter sent to you in
connection with a particular offering, will govern all such purchases of
securities and the reoffering thereof by you.
Your subscription to, or purchase of, such securities will constitute your
reaffirmation of this Agreement.
1. When we are acting as representative (the "Representative") of the
Underwriters in offering securities to you, it should be understood that all
offers are made subject to prior sale of the subject securities, when, as and if
such securities are delivered to and accepted by the Underwriters and subject to
the approval of legal matters by their counsel. In such cases, any order from
you for securities will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part.
Upon release by us, you may reoffer such securities at the offering price fixed
by us. With our consent, you may allow a discount, not in excess of the
reallowance fixed by us, in selling such securities to other dealers, provided
that in doing so you comply with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD"). Upon our request, you
will advise us of the identity of any dealer to whom you allow such a discount
and any Underwriter or dealer from whom you receive such a discount. After the
securities are released for sale to the public, we may vary the offering price
and other selling terms.
2. You represent that you are a dealer actually engaged in the investment
banking or securities business and that you are either (i) a member in good
standing of the NASD or (ii) a dealer with its principal place of business
located outside the United States, its territories or possessions and not
registered under the Securities Exchange Act of 1934 (a "non-member foreign
dealer") or (iii) a bank not eligible for membership in the NASD. If you are a
non-member foreign dealer, you agree to make no sales of securities within the
United States, its
<PAGE>
territories or its possessions or to persons who are nationals thereof or
residents therein. Non-member foreign dealers and banks agree, in making any
sales, to comply with the NASD's interpretation with respect to free-riding and
withholding. In accepting a selling concession where we are acting as
Representative of the Underwriters, in accepting a reallowance from us whether
or not we are acting as such Representative, and in allowing a discount to any
other person, you agree to comply with the provisions of Section 24 of Article
III of the Rules of Fair Practice of the NASD, and, in addition, if you are a
non-member foreign dealer or bank, you agree to comply, as though you were a
member of the NASD, with the provisions of Sections 8 and 36 of Article III of
such Rules of Fair Practice and to comply with Section 25 of Article III thereof
as that Section applies to a non-member foreign dealer or bank. You represent
that you are fully familiar with the above provisions of the Rules of Fair
Practice of the NASD.
3. If the securities have been registered under the Securities Act of 1933
(the "1933 Act"), in offering and selling such securities, you are not
authorized to give any information or make any representation not contained in
the prospectus relating thereto. You confirm that you are familiar with the
rules and policies of the Securities and Exchange Commission relating to the
distribution of preliminary and final prospectuses, and you agree that you will
comply therewith in any offering covered by this Agreement. If we are acting as
Representative of the Underwriters, we will make available to you, to the extent
made available to us by the issuer of the securities, such number of copies of
the prospectus or offering documents, for securities not registered under the
1933 Act, as you may reasonably request.
4. If we are acting as Representative of the Underwriters of securities of
an issuer that is not required to file reports under the Securities Exchange Act
of 1934 (the "1934 Act"), you agree that you will not sell any of the securities
to any account over which you have discretionary authority.
5. Payment for securities purchased by you is to be made at our office,
Merrill Lynch World Headquarters North Tower World Financial Center New York,
N.Y. 10281-1305 (or at such other place as we may advise), at the offering price
less the concession allowed to you, on such date as we may advise, by certified
or official bank check in New York Clearing House funds (or such other funds as
we may advise), payable to our order, against delivery of the securities to be
purchased by you. We shall have authority to make appropriate arrangements for
payment for and/or delivery through the facility of The Depository Trust Company
or any such other depository or similar facility for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as Representative of
the Underwriters, you agree to repay to us for the accounts of the Underwriters
the amount of the concession allowed to you plus brokerage commissions and any
transfer taxes paid in connection with such purchase.
7. At any time prior to the completion of the distribution of securities
covered by this Agreement you will, upon our request as Representative of the
Underwriters, report to us the amount of securities purchased by you which then
remains unsold and will, upon our request, sell to us for the account of one or
more of the Underwriters such amount of such unsold
2
<PAGE>
securities as we may designate, at the offering price less an amount to be
determined by us not in excess of the concession allowed to you.
8. If we are acting as Representative of the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions of
the United States in which it is believed that the securities being offered are
qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell securities in any jurisdiction. We shall have authority to file
with the Department of State of the State of New York a Further State Notice
with respect to the securities, if necessary.
9. You agree that in connection with any offering of securities covered by
this Agreement you will comply with the applicable provisions of the 1933 Act
and the 1934 Act and the applicable rules and regulations of the Securities and
Exchange Commission thereunder, the applicable rules and regulations of the
NASD, and the applicable rules of any securities exchange having jurisdiction
over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by this
Agreement. We shall be under no liability to you except for our lack of good
faith and for obligations assumed by us in this Agreement, except that you do
not waive any rights that you may have under the 1933 Act or the rules and
regulations thereunder.
11. Any notice from us shall be deemed to have been duly given if mailed
or transmitted by any standard form of written telecommunications to you at the
above address or at such other address as you shall specify to us in writing.
12. With respect to any offering of securities covered by this Agreement,
the price restrictions contained in Paragraph 1 hereof and the provisions of
Paragraphs 6 and 7 hereof shall terminate as to such offering at the close of
business on the 45th day after the securities are released for sale or, as to
any or all such provisions, at such earlier time as we may advise. All other
provisions of this Agreement shall remain operative and in full force and effect
with respect to such offering.
13. This Agreement shall be governed by the laws of the State of New York.
3
<PAGE>
Please confirm your agreement hereto by signing the enclosed duplicate copy
hereof in the place provided below and returning such signed duplicate copy to
us at World Headquarters, North Tower, World Financial Center, New York, N.Y.
10281-1305, Attention: Corporate Syndicate. Upon receipt thereof, this
instrument and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ Fred F. Hessinger
---------------------------
Name: Fred F. Hessinger
Confirmed and accepted as of the
day of , 19
- ----------------------------------
Name of Dealer
- ----------------------------------
Authorized Officer or Partner
(if not Officer or Partner, attach
copy of Instrument of Authorization)
4
<PAGE>
EXHIBIT (J)
CUSTODY AGREEMENT
-----------------
Agreement made as of this day of , 1999, between
MUNIHOLDINGS PENNSYLVANIA INSURED FUND, a Massachusetts business trust
organized and existing under the laws of the Commonwealth of Pennsylvania,
having its principal office and place of business at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 (hereinafter called the "Fund"), and THE BANK OF
NEW YORK, a New York corporation authorized to do a banking business, having
its principal office and place of business at 48 Wall Street, New York, New
York 10286 (hereinafter called the "Custodian").
WITNESSETH:
that for and in consideration of the mutual promises hereinafter set forth,
the Fund and the Custodian agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1. "Book-Entry System" shall mean the Federal Reserve/Treasury book-
entry system for United States and federal agency securities, its successor or
successors and its nominee or nominees.
2. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
3. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Custodian which is actually received by the Custodian and signed on behalf
of the Fund by any two Officers, and the term Certificate shall also include
Instructions.
<PAGE>
4. "Clearing Member" shall mean a registered broker-dealer which is a
clearing member under the rules of O.C.C. and a member of a national
securities exchange qualified to act as a custodian for an investment
company, or any broker-dealer reasonably believed by the Custodian to be such
a clearing member.
5. "Collateral Account" shall mean a segregated account so denominated
which is specifically allocated to a Series and pledged to the Custodian as
security for, and in consideration of, the Custodian's issuance of (a) any Put
Option guarantee letter or similar document described in paragraph 8 of
Article V herein, or (b) any receipt described in Article V or VIII herein.
6. "Covered Call Option" shall mean an exchange traded option entitling
the holder, upon timely exercise and payment of the exercise price, as
specified therein, to purchase from the writer thereof the specified
underlying Securities (excluding Futures Contracts) which are owned by the
writer thereof and subject to appropriate restrictions.
7. "Composite Currency Unit" shall mean the European Currency Unit or
any other composite unit consisting of the aggregate of specified amounts of
specified Currencies as such unit may be constituted from time to time.
8. "Currency" shall mean money denominated in a lawful currency of any
country or the European Currency Unit.
9. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository"
shall further mean and include any other person authorized to act as a
depository under the Investment Company Act of 1940, its successor or
successors and its nominee or nominees, specifically identified in a certified
copy of a resolution of the Fund's Board of Directors specifically approving
deposits therein by the Custodian.
10. "Financial Futures Contract" shall mean the firm commitment to buy
or sell fixed income securities including, without limitation, U.S. Treasury
Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of
deposit, and Eurodollar certificates of deposit, during a specified month at
an agreed upon price.
11. "Futures Contract" shall mean a Financial Futures Contract and/or
Stock Index Futures Contracts.
12. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
-2-
<PAGE>
13. "FX Transaction" shall mean any transaction for the purchase by
one party of an agreed amount in one Currency against the sale by it to the
other party of an agreed amount in another Currency.
14. "Instructions" shall mean instructions communications transmitted
by electronic or telecommunications media including S.W.I.F.T.,
computer-to-computer interface, dedicated transmission line, facsimile
transmission (which may be signed by an Officer or unsigned) and tested telex.
15. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time determine. Securities held
in the Book-Entry System or the Depository shall be deemed to have been
deposited in, or withdrawn from, a Margin Account upon the Custodian's
effecting an appropriate entry in its books and records.
16. "Money Market Security" shall be deemed to include, without
limitation, certain Reverse Repurchase Agreements, debt obligations issued or
guaranteed as to interest and principal by the government of the United States
or agencies or instrumentalities thereof, any tax, bond or revenue
anticipation note issued by any state or municipal government or public
authority, commercial paper, certificates of deposit and bankers' acceptances,
repurchase agreements with respect to the same and bank time deposits, where
the purchase and sale of such securities normally requires settlement in
federal funds on the same day as such purchase or sale.
17. "O.C.C." shall mean the Options Clearing Corporation, a clearing
agency registered under Section 17A of the Securities Exchange Act of 1934,
its successor or successors, and its nominee or nominees.
18. "Officers" shall be deemed to include the President, any Vice
President, the Secretary, the Treasurer, the Controller, any Assistant
Secretary, any Assistant Treasurer, and any other person or persons, whether
or not any such other person is an officer of the Fund, duly authorized by the
Board of Trustees of the Fund to execute any Certificate, instruction, notice
or other instrument on behalf of the Fund and listed in the Certificate
annexed hereto as Appendix A or such other Certificate as may be received by
the Custodian from time to time.
-3-
<PAGE>
19. "Option" shall mean a Call Option, Covered Call Option, Stock
Index Option and/or a Put Option.
20. "Oral Instructions" shall mean verbal instructions actually
received by the Custodian from an Officer or from a person reasonably believed
by the Custodian to be an Officer.
21. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
22. "Reverse Repurchase Agreement" shall mean an agreement pursuant to
which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
23. "Security" shall be deemed to include, without limitation, Money
Market Securities, Call Options, Put Options, Stock Index Options, Stock Index
Futures Contracts, Stock Index Futures Contract Options, Financial Futures
Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements,
common stocks and other securities having characteristics similar to common
stocks, preferred stocks, debt obligations issued by state or municipal
governments and by public authorities, (including, without limitation, general
obligation bonds, revenue bonds, industrial bonds and industrial development
bonds), bonds, debentures, notes, mortgages or other obligations, and any
certificates, receipts, warrants or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidencing or
representing any other rights or interest therein, or any property or assets.
24. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically
allocated to such Series shall be deposited and withdrawn from time to time in
accordance with Certificates received by the Custodian in connection with such
transactions as the Fund may from time to time determine.
25. "Series" shall mean the various portfolios, if any, of the Fund
listed on Appendix B hereto as amended from time to time.
26. "Shares" shall mean the shares of capital stock of the Fund, each
of which is, in the case of a Fund having Series, allocated to a particular
Series.
-4-
<PAGE>
27. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the
value of a particular stock index at the close of the last business day of
the contract and the price at which the futures contract is originally
struck.
28. "Stock Index Option" shall mean an exchange traded option
entitling the holder, upon timely exercise, to receive an amount of cash
determined by reference to the difference between the exercise price and the
value of the index on the date of exercise.
ARTICLE II.
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian
of the Securities and moneys at any time owned by the Fund during the period
of this Agreement.
2. The Custodian hereby accepts appointment as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III.
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all moneys owned by it, at any time during the period of
this Agreement, and shall specify with respect to such Securities and money
the Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and moneys not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and moneys are
not finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all
Securities eligible for deposit therein, regardless of the Series to which the
same are specifically allocated and to utilize the Book-Entry System to the
extent possible in connection with its performance hereunder, including,
without limitation, in connection with settlements of purchases and sales of
Securities, loans of
-5-
<PAGE>
Securities and deliveries and returns of Securities collateral. Prior to a
deposit of Securities specifically allocated to a Series in the Depository,
the Fund shall deliver to the Custodian a certified resolution of the Board of
Directors of the Fund, substantially in the form of Exhibit B hereto,
approving, authorizing and instructing the Custodian on a continuous and
ongoing basis until instructed to the contrary by a Certificate actually
received by the Custodian to deposit in the Depository all Securities
specifically allocated to such Series eligible for deposit therein, and to
utilize the Depository to the extent possible with respect to such Securities
in connection with its performance hereunder, including, without limitation,
in connection with settlements of purchases and sales of Securities, loans of
Securities, and deliveries and returns of Securities collateral. Securities
and moneys deposited in either the Book-Entry System or the Depository will be
represented in accounts which include only assets held by the Custodian for
customers, including, but not limited to, accounts in which the Custodian acts
in a fiduciary or representative capacity and will be specifically allocated
on the Custodian's books to the separate account for the applicable Series.
Prior to the Custodian's accepting, utilizing and acting with respect to
Clearing Member confirmations for Options and transactions in Options for a
Series as provided in this Agreement, the Custodian shall have received a
certified resolution of the Fund's Board of Trustees, substantially in the
form of Exhibit C hereto, approving, authorizing and instructing the Custodian
on a continuous and on-going basis, until instructed to the contrary by a
Certificate actually received by the Custodian, to accept, utilize and act in
accordance with such confirmations as provided in this Agreement with respect
to such Series.
2. The Custodian shall establish and maintain separate accounts, in the
name of each Series, and shall credit to the separate account for each Series
all moneys received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed
by the Custodian only:
(a) as hereinafter provided;
(b) pursuant to Certificates setting forth the name and address
of the person to whom the payment is to be made, the Series account from which
payment is to be made and the purpose for which payment is to be made; or
(c) in payment of the fees and in reimbursement of the expenses
and liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian
shall furnish the Fund with confirmations and a summary, on a per Series
basis, of all transfers to or from
-6-
<PAGE>
the account of the Fund for a Series, either hereunder or with any co-
custodian or sub-custodian appointed in accordance with this Agreement during
said day. Where Securities are transferred to the account of the Fund for a
Series, the Custodian shall also by book-entry or otherwise identify as
belonging to such Series a quantity of Securities in a fungible bulk of
Securities registered in the name of the Custodian (or its nominee) or shown
on the Custodian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the Custodian shall
furnish the Fund with a detailed statement, on a per Series basis, of the
Securities and moneys held by the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, all Securities held by the Custodian hereunder, which are issued
or issuable only in bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the Fund, in the
name of any duly appointed registered nominee of the Custodian as the
Custodian may from time to time determine, or in the name of the Book-Entry
System or the Depository or their successor or successors, or their nominee or
nominees. The Fund agrees to furnish to the Custodian appropriate instruments
to enable the Custodian to hold or deliver in proper form for transfer, or to
register in the name of its registered nominee or in the name of the
Book-Entry System or the Depository any Securities which it may hold hereunder
and which may from time to time be registered in the name of the Fund. The
Custodian shall hold all such Securities specifically allocated to a Series
which are not held in the Book-Entry System or in the Depository in a separate
account in the name of such Series physically segregated at all times from
those of any other person or persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or
through the use of the Book-Entry System or the Depository with respect to
Securities held hereunder and therein deposited, shall with respect to all
Securities held for the Fund hereunder in accordance with preceding paragraph
4:
(a) collect all income, dividends and distributions due or
payable;
(b) give notice to the Fund and present payment and collect the
amount payable upon such Securities which are called, but only if either (i)
the Custodian receives a written notice of such call, or (ii) notice of such
call appears in one or more of the publications listed in Appendix C annexed
hereto, which may be amended at any time by the
-7-
<PAGE>
Custodian without the prior notification or consent of the Fund;
(c) present for payment and collect the amount payable upon all
Securities which mature;
(d) surrender Securities in temporary form for definitive
Securities;
(e) execute, as custodian, any necessary declarations or
certificates of ownership under the Federal Income Tax Laws or the laws or
regulations of any other taxing authority now or hereafter in effect;
(f) hold directly, or through the Book-Entry System or the
Depository with respect to Securities therein deposited, for the account of a
Series, all rights and similar securities issued with respect to any
Securities held by the Custodian for such Series hereunder; and
(g) deliver to the Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation, notices of tender offers and exchange offers, pendency of calls,
maturities of Securities and expiration of rights) relating to Securities held
pursuant to this Agrement which are actually received by the Custodian, such
proxies and other similar materials to be executed by the registered owner (if
Securities are registered otherwise than in the name of the Fund), but without
indicating the manner in which proxies or consents are to be voted.
6. Upon receipt of a Certificate and not otherwise, the Custodian,
directly or through the use of the Book-Entry System or the Depository, shall:
(a) execute and deliver to such persons as may be designated in
such Certificate proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as owner of any Securities held by the
Custodian hereunder for the Series specified in such Certificate may be
exercised;
(b) deliver any Securities held by the Custodian hereunder for
the Series specified in such Certificate in exchange for other Securities or
cash issued or paid in connection with the liquidation, reorganization,
refinancing, merger, consolidation or recapitalization of any corporation, or
the exercise of any conversion privilege and receive and hold hereunder
specifically allocated to such Series any cash or other Securities received in
exchange;
(c) deliver any Securities held by the Custodian hereunder for
the Series specified in such Certificate to any protective committee,
reorganization committee or other person
-8-
<PAGE>
in connection with the reorganization, refinancing, merger, consolidation,
recapitalization or sale of assets of any corporation, and receive and hold
hereunder specifically allocated to such Series such certificates of deposit,
interim receipts or other instruments or documents as may be issued to it to
evidence such delivery;
(d) make such transfers or exchanges of the assets of the
Series specified in such Certificate, and take such other steps as shall be
stated in such Certificate to be for the purpose of effectuating any duly
authorized plan of liquidation, reorganization, merger, consolidation or
recapitalization of the Fund; and
(e) present for payment and collect the amount payable upon
Securities not described in preceding paragraph 5(b) of this Article which may
be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any instrument or
certificate representing any Futures Contract, any Option, or any Futures
Contract Option until after it shall have determined, or shall have received a
Certificate from the Fund stating, that any such instruments or certificates
are available. The Fund shall deliver to the Custodian such a Certificate no
later than the business day preceding the availability of any such instrument
or certificate. Prior to such availability, the Custodian shall comply with
Section 17(f) of the Investment Company Act of 1940, as amended, in connection
with the purchase, sale, settlement, closing out or writing of Futures
Contracts, Options, or Futures Contract Options by making payments or
deliveries specified in Certificates received by the Custodian in connection
with any such purchase, sale, writing, settlement or closing out upon its
receipt from a broker, dealer, or futures commission merchant of a statement
or confirmation reasonably believed by the Custodian to be in the form
customarily used by brokers, dealers, or future commission merchants with
respect to such Futures Contracts, Options, or Futures Contract Options, as
the case may be, confirming that such Security is held by such broker, dealer
or futures commission merchant, in book-entry form or otherwise, in the name
of the Custodian (or any nominee of the Custodian) as custodian for the Fund,
provided, however, that notwithstanding the foregoing, payments to or
deliveries from the Margin Account, and payments with respect to Securities to
which a Margin Account relates, shall be made in accordance with the terms and
conditions of the Margin Account Agreement. Whenever any such instruments or
certificates are available, the Custodian shall, notwithstanding any provision
in this Agreement to the contrary, make payment for any Futures Contract,
Option, or Futures Contract Option for which such instruments or such
certificates are available only against
-9-
<PAGE>
the delivery to the Custodian of such instrument or such certificate, and
deliver any Futures Contract, Option or Futures Contract Option for which such
instruments or such certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or certificate delivered to
the Custodian shall be held by the Custodian hereunder in accordance with, and
subject to, the provisions of this Agreement.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount purchased and accrued interest, if any; (d) the date of
purchase and settlement; (e) the purchase price per unit; (f) the total amount
payable upon such purchase; (g) the name of the person from whom or the broker
through whom the purchase was made, and the name of the clearing broker, if
any; and (h) the name of the broker to whom payment is to be made. The
Custodian shall, upon receipt of Securities purchased by or for the Fund, pay
to the broker specified in the Certificate out of the moneys held for the
account of such Series the total amount payable upon such purchase, provided
that the same conforms to the total amount payable as set forth in such
Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund, other than a
sale of any Option, Futures Contract, Futures Contract Option, or any Reverse
Repurchase Agreement, the Fund shall deliver to the Custodian (i) with respect
to each sale of Securities which are not Money Market Securities, a
Certificate, and (ii) with respect to each sale of Money Market Securities, a
Certificate or Oral Instructions, specifying with respect to each such sale:
(a) the Series to which such Securities were specifically allocated; (b) the
name of the issuer and the title of the Security; (c) the number of shares or
principal amount sold, and accrued interest, if any; (d) the date of sale; (e)
the sale price per unit; (f) the total amount payable to the Fund upon such
sale; (g) the name of the broker through whom or the person to whom the sale
was made, and the name of the clearing broker, if
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any; and (h) the name of the broker to whom the Securities are to be
delivered. The Custodian shall deliver the Securities specifically allocated
to such Series to the broker specified in the Certificate against payment of
the total amount payable to the Fund upon such sale, provided that the same
conforms to the total amount payable as set forth in such Certificate or Oral
Instructions.
ARTICLE V.
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund
shall deliver to the Custodian a Certificate specifying with respect to each
Option purchased: (a) the Series to which such Option is specifically
allocated; (b) the type of Option (put or call); (c) the name of the issuer
and the title and number of shares subject to such Option or, in the case of a
Stock Index Option, the stock index to which such Option relates and the
number of Stock Index Options purchased; (d) the expiration date; (e) the
exercise price; (f) the dates of purchase and settlement; (g) the total amount
payable by the Fund in connection with such purchase; (h) the name of the
Clearing Member through whom such Option was purchased; and (i) the name of
the broker to whom payment is to be made. The Custodian shall pay, upon
receipt of a Clearing Member's statement confirming the purchase of such
Option held by such Clearing Member for the account of the Custodian (or any
duly appointed and registered nominee of the Custodian) as custodian for the
Fund, out of moneys held for the account of the Series to which such Option is
to be specifically allocated, the total amount payable upon such purchase to
the Clearing Member through whom the purchase was made, provided that the same
conforms to the total amount payable as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant
to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) the Series to which such Option
was specifically allocated; (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund
upon such sale; and (h) the name of the Clearing Member through whom the
sale was made. The Custodian shall consent to the delivery of the Option sold
by the Clearing Member which previously supplied the confirmation described in
preceding paragraph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the Fund, provided
that the same
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conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Call Option: (a) the
Series to which such Call Option was specifically allocated; (b) the name of
the issuer and the title and number of shares subject to the Call Option; (c)
the expiration date; (d) the date of exercise and settlement; (e) the exercise
price per share; (f) the total amount to be paid by the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such Call
Option was exercised. The Custodian shall, upon receipt of the Securities
underlying the Call Option which was exercised, pay out of the moneys held for
the account of the Series to which such Call Option was specifically allocated
the total amount payable to the Clearing Member through whom the Call Option
was exercised, provided that the same conforms to the total amount payable as
set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Put Option: (a) the
Series to which such Put Option was specifically allocated; (b) the name of
the issuer and the title and number of shares subject to the Put Option; (c)
the expiration date; (d) the date of exercise and settlement; (e) the exercise
price per share; (f) the total amount to be paid to the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such Put Option
was exercised. The Custodian shall, upon receipt of the amount payable upon
the exercise of the Put Option, deliver or direct the Depository to deliver
the Securities specifically allocated to such Series, provided the same
conforms to the amount payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver
to the Custodian a Certificate specifying with respect to such Stock Index
Option: (a) the Series to which such Stock Index Option was specifically
allocated; (b) the type of Stock Index Option (put or call); (c) the number of
Options being exercised; (d) the stock index to which such Option relates; (e)
the expiration date; (f) the exercise price; (g) the total amount to be
received by the Fund in connection with such exercise; and (h) the Clearing
Member from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to
such Covered Call Option: (a) the Series for which such Covered Call Option
was written; (b) the name of the issuer and the title and number of shares for
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which the Covered Call Option was written and which underlie the same; (c) the
expiration date; (d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Covered Call Option was written; and (g) the name of
the Clearing Member through whom the premium is to be received.
The Custodian shall deliver or cause to be delivered, in exchange for receipt
of the premium specified in the Certificate with respect to such Covered Call
Option, such receipts as are required in accordance with the customs
prevailing among Clearing Members dealing in Covered Call Options and shall
impose, or direct the Depository to impose, upon the underlying Securities
specified in the Certificate specifically allocated to such Series such
restrictions as may be required by such receipts. Notwithstanding the
foregoing, the Custodian has the right, upon prior written notification to the
Fund, at any time to refuse to issue any receipts for Securities in the
possession of the Custodian and not deposited with the Depository underlying a
Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver,
or to direct the Depository to deliver, the Securities subject to such Covered
Call Option and specifying: (a) the Series for which such Covered Call Option
was written; (b) the name of the issuer and the title and number of shares
subject to the Covered Call Option; (c) the Clearing Member to whom the
underlying Securities are to be delivered; and (d) the total amount payable to
the Fund upon such delivery. Upon the return and/or cancellation of any
receipts delivered pursuant to paragraph 6 of this Article, the Custodian
shall deliver, or direct the Depository to deliver, the underlying Securities
as specified in the Certificate against payment of the amount to be received
as set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Put
Option: (a) the Series for which such Put Option was written; (b) the name of
the issuer and the title and number of shares for which the Put Option is
written and which underlie the same; (c) the expiration date; (d) the exercise
price; (e) the premium to be received by the Fund; (f) the date such Put
Option is written; (g) the name of the Clearing-Member through whom the
premium is to be received and to whom a Put Option guarantee letter is to be
delivered; (h) the amount of cash, and/or the amount and kind of Securities,
if any, specifically allocated to such Series to be deposited in the Senior
Security Account for such Series; and (i) the amount of cash and/or the amount
and kind of Securities specifically allocated to such Series to be deposited
into the Collateral Account for such Series. The Custodian shall, after making
the deposits into the Collateral Account
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specified in the Certificate, issue a Put Option guarantee letter
substantially in the form utilized by the Custodian on the date hereof, and
deliver the same to the Clearing Member specified in the Certificate against
receipt of the premium specified in said Certificate. Notwithstanding the
foregoing, the Custodian shall be under no obligation to issue any Put Option
guarantee letter or similar document if it is unable to make any of the
representations contained therein.
9. Whenever a Put Option written by the Fund and described in the
preceding paragraph is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Put Option
was written; (b) the name of the issuer and title and number of shares subject
to the Put Option; (c) the Clearing Member from whom the underlying Securities
are to be received; (d) the total amount payable by the Fund upon such
delivery; (e) the amount of cash and/or the amount and kind of Securities
specifically allocated to such Series to be withdrawn from the Collateral
Account for such Series; and (f) the amount of cash and/or the amount and kind
of Securities, specifically allocated to such Series, if any, to be withdrawn
from the Senior Security Account. Upon the return and/or cancellation of any
Put Option guarantee letter or similar document issued by the Custodian in
connection with such Put Option, the Custodian shall pay out of the moneys
held for the account of the Series to which such Put Option was specifically
allocated the total amount payable to the Clearing Member specified in the
Certificate as set forth in such Certificate against delivery of such
Securities, and shall make the withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to
such Stock Index Option: (a) the Series for which such Stock Index Option was
written; (b) whether such Stock Index Option is a put or a call; (c) the
number of options written; (d) the stock index to which such Option relates;
(e) the expiration date; (f) the exercise price; (g) the Clearing Member
through whom such Option was written; (h) the premium to be received by the
Fund; (i) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Senior Security
Account for such Series; (j) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be deposited in
the Collateral Account for such Series; and (k) the amount of cash and/or the
amount and kind of Securities, if any, specifically allocated to such Series
to be deposited in a Margin Account, and the name in which such account is to
be or has been established. The Custodian shall, upon receipt of the premium
specified in the Certificate, make the deposits, if any, into the Senior
Security Account specified in the Certificate, and either (1) deliver such
receipts if any, which the Custodian
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<PAGE>
has specifically agreed to issue, which are in accordance with the customs
prevailing among Clearing Members in Stock Index Options and make the deposits
into the Collateral Account specified in the Certificate, or (2) make the
deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written;
(b) such information as may be necessary to identify the Stock Index Option
being exercised; (c) the Clearing Member through whom such Stock Index Option
is being exercised; (d) the total amount payable upon such exercise, and
whether such amount is to be paid by or to the Fund; (e) the amount of cash
and/or amount and kind of Securities, if any, to be withdrawn from the Margin
Account; and (f) the amount of cash and/or amount and kind of Securities, if
any, to be withdrawn from the Senior Security Account for such Series; and the
amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Collateral Account for such Series. Upon the return and/or
cancellation of the receipt, if any, delivered pursuant to the preceding
paragraph of this Article, the Custodian shall pay out of the moneys held for
the account of the Series to which such Stock Index Option was specifically
allocated to the Clearing Member specified in the Certificate the total amount
payable, if any, as specified therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs, 6, 8 or 10 of this Article in a
transaction expressly designated as a "Closing Purchase Transaction" in order
to liquidate its position as a writer of an Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to the Option
being purchased: (a) that the transaction is a Closing Purchase Transaction;
(b) the Series for which the Option was written; (c) the name of the issuer
and the title and number of shares subject to the Option, or, in the case of a
Stock Index Option, the stock index to which such Option relates and the
number of Options held; (d) the exercise price; (e) the premium to be paid by
the Fund; (f) the expiration date; (g) the type of Option (put or call); (h)
the date of such purchase; (i) the name of the Clearing Member to whom the
premium is to be paid; and (j) the amount of cash and/or the amount and kind
of Securities, if any, to be withdrawn from the Collateral Account, a
specified Margin Account, or the Senior Security Account for such Series. Upon
the Custodian's payment of the premium and the return and/or cancellation of
any receipt issued pursuant to paragraphs 6, 8 or 10 of this Article with
respect to the Option being liquidated through the Closing Purchase
Transaction, the Custodian shall remove,
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or direct the Depository to remove, the previously imposed restrictions on the
Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing
Purchase Transaction with respect to any Option purchased or written by the
Fund and described in this Article, the Custodian shall delete such Option
from the statements delivered to the Fund pursuant to paragraph 3 Article III
herein, and upon the return and/or cancellation of any receipts issued by the
Custodian, shall make such withdrawals from the Collateral Account, and the
Margin Account and/or the Senior Security Account as may be specified in a
Certificate received in connection with such expiration, exercise, or
consummation.
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund
shall deliver to the Custodian a Certificate specifying with respect to such
Futures Contract, (or with respect to any number of identical Futures
Contract(s)): (a) the Series for which the Futures Contract is being entered;
(b) the category of Futures Contract (the name of the underlying stock index
or financial instrument); (c) the number of identical Futures Contracts
entered into; (d) the delivery or settlement date of the Futures Contract(s);
(e) the date the Futures Contract(s) was (were) entered into and the maturity
date; (f) whether the Fund is buying (going long) or selling (going short) on
such Futures Contract(s); (g) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series; (h) the name of the broker, dealer, or futures commission merchant
through whom the Futures Contract was entered into; and (i) the amount of fee
or commission, if any, to be paid and the name of the broker, dealer, or
futures commission merchant to whom such amount is to be paid. The Custodian
shall make the deposits, if any, to the Margin Account in accordance with the
terms and conditions of the Margin Account Agreement. The Custodian shall make
payment out of the moneys specifically allocated to such Series of the fee or
commission, if any, specified in the Certificate and deposit in the Senior
Security Account for such Series the amount of cash and/or the amount and kind
of Securities specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be
made by the Fund to a broker, dealer, or futures commission merchant with
respect to an outstanding Futures Contract, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.
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(b) Any variation margin payment or similar payment from a
broker, dealer, or futures commission merchant to the Fund with respect to an
outstanding Futures Contract, shall be received and dealt with by the
Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is
retained by the Fund until delivery or settlement is made on such Futures
Contract, the Fund shall deliver to the Custodian a Certificate specifying:
(a) the Futures Contract and the Series to which the same relates; (b) with
respect to a Stock Index Futures Contract, the total cash settlement amount to
be paid or received, and with respect to a Financial Futures Contract, the
Securities and/or amount of cash to be delivered or received; (c) the broker,
dealer, or futures commission merchant to or from whom payment or delivery is
to be made or received; and (d) the amount of cash and/or Securities to be
withdrawn from the Senior Security Account for such Series. The Custodian
shall make the payment or delivery specified in the Certificate, and delete
such Futures Contract from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver to
the Custodian a Certificate specifying: (a) the items of information required
in a Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the
Fund, the Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Futures Contract Option: (a) the Series to
which such Option is specifically allocated; (b) the type of Futures Contract
Option (put or call); (c) the type of Futures Contract and such other
information as may be necessary to identify the Futures Contract underlying
the Futures Contract Option purchased; (d) the expiration date; (e) the
exercise price;
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(f) the dates of purchase and settlement; (g) the amount of premium to be paid
by the Fund upon such purchase; (h) the name of the broker or futures
commission merchant through whom such option was purchased; and (i) the name
of the broker, or futures commission merchant, to whom payment is to be made.
The Custodian shall pay out of the moneys specifically allocated to such
Series, the total amount to be paid upon such purchase to the broker or
futures commissions merchant through whom the purchase was made, provided that
the same conforms to the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to each such sale: (a) the
Series to which such Futures Contract Option was specifically allocated; (b)
the type of Future Contract Option (put or call); (c) the type of Futures
Contract and such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option; (d) the date of sale;
(e) the sale price; (f) the date of settlement; (g) the total amount payable
to the Fund upon such sale; and (h) the name of the broker of futures
commission merchant through whom the sale was made. The Custodian shall
consent to the cancellation of the Futures Contract Option being closed
against payment to the Custodian of the total amount payable to the Fund,
provided the same conforms to the total amount payable as set forth in such
Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures
Contract Option (put or call) being exercised; (c) the type of Futures
Contract underlying the Futures Contract Option; (d) the date of exercise;
(e)the name of the broker or futures commission merchant through whom the
Futures Contract Option is exercised; (f) the net total amount, if any,
payable by the Fund; (g) the amount, if any, to be received by the Fund; and
(h) the amount of cash and/or the amount and kind of Securities to be
deposited in the Senior Security Account for such Series. The Custodian shall
make, out of the moneys and Securities specifically allocated to such Series,
the payments, if any, and the deposits, if any, into the Senior Security
Account as specified in the Certificate. The deposits, if any, to be made to
the Margin Account shall be made by the Custodian in accordance with the terms
and conditions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to
such Futures Contract Option: (a) the Series for which such Futures Contract
Option was written;
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(b) the type of Futures Contract Option (put or call); (c) the type of Futures
Contract and such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option; (d) the expiration
date; (e) the exercise price; (f) the premium to be received by the Fund; (g)
the name of the broker or futures commission merchant through whom the premium
is to be received; and (h) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series. The Custodian shall, upon receipt of the premium specified in the
Certificate, make out of the moneys and Securities specifically allocated to
such Series the deposits into the Senior Security Account, if any, as
specified in the Certificate. The deposits, if any, to be made to the Margin
Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a
call is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Futures Contract Option
was specifically allocated; (b) the particular Futures Contract Option
exercised; (c) the type of Futures Contract underlying the Futures Contract
Option; (d) the name of the broker or futures commission merchant through whom
such Futures Contract Option was exercised; (e) the net total amount, if any,
payable to the Fund upon such exercise; (f) the net total amount, if any,
payable by the Fund upon such exercise; and (g) the amount of cash and/or the
amount and kind of Securities to be deposited in the Senior Security Account
for such Series. The Custodian shall, upon its receipt of the net total amount
payable to the Fund, if any, specified in such Certificate make the payments,
if any, and the deposits, if any, into the Senior Security Account as
specified in the Certificate. The deposits, if any, to be made to the Margin
Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and
which is a put is exercised, the Fund shall promptly deliver to the Custodian
a Certificate specifying: (a) the Series to which such Option was specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type
of Futures Contract underlying such Futures Contract Option; (d) the name of
the broker or futures commission merchant through whom such Futures Contract
Option is exercised; (e) the net total amount, if any, payable to the Fund
upon such exercise; (f) the net total amount, if any, payable by the Fund upon
such exercise; and (g) the amount and kind of Securities and/or cash to be
withdrawn from or deposited in, the Senior Security Account for such Series,
if any. The Custodian shall, upon its receipt of the net total amount payable
to the Fund, if any, specified in the Certificate, make out of the moneys and
Securities
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specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits to and/or withdrawals from the Margin Account, if
any, shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to
a previously written Futures Contract Option described in this Article in
order to liquidate its position as a writer of such Futures Contract Option,
the Fund shall promptly deliver to the Custodian a Certificate specifying with
respect to the Futures Contract Option being purchased: (a) the Series to
which such Option is specifically allocated; (b) that the transaction is a
closing transaction; (c) the type of Future Contract and such other
information as may be necessary to identify the Futures Contract underlying
the Futures Option Contract; (d) the exercise price; (e) the premium to be
paid by the Fund; (f) the expiration date; (g) the name of the broker or
futures commission merchant to whom the premium is to be paid; and (h) the
amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account for such Series. The Custodian
shall effect the withdrawals from the Senior Security Account specified in the
Certificate. The withdrawals, if any, to be made from the Margin Account shall
be made by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or purchased
by the Fund and described in this Article, the Custodian shall (a) delete such
Futures Contract Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdrawals from and/or
in the case of an exercise such deposits into the Senior Security Account as
may be specified in a Certificate. The deposits to and/or withdrawals from the
Margin Account, if any, shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a
Futures Contract Option described in this Article shall be subject to Article
VI hereof.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund
shall promptly deliver to the Custodian a Certificate specifying: (a) the
Series for which such short
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sale was made; (b) the name of the issuer and the title of the Security; (c)
the number of shares or principal amount sold, and accrued interest or
dividends, if any; (d) the dates of the sale and settlement; (e) the sale
price per unit; (f) the total amount credited to the Fund upon such sale, if
any; (g) the amount of cash and/or the amount and kind of Securities, if any,
which are to be deposited in a Margin Account and the name in which such
Margin Account has been or is to be established; (h) the amount of cash and/or
the amount and kind of Securities, if any, to be deposited in a Senior
Security Account, and (i) the name of the broker through whom such short sale
was made. The Custodian shall upon its receipt of a statement from such broker
confirming such sale and that the total amount credited to the Fund upon such
sale, if any, as specified in the Certificate is held by such broker for the
account of the Custodian (or any nominee of the Custodian) as custodian of the
Fund, issue a receipt or make the deposits into the Margin Account and the
Senior Security Account specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to
each such closing out: (a) the Series for which such transaction is being
made; (b) the name of the issuer and the title of the Security; (c) the number
of shares or the principal amount, and accrued interest or dividends, if any,
required to effect such closing-out to be delivered to the broker; (d) the
dates of closing-out and settlement; (e) the purchase price per unit; (f) the
net total amount payable to the Fund upon such closing-out; (g) the net total
amount payable to the broker upon such closing-out; (h) the amount of cash and
the amount and kind of Securities to be withdrawn, if any, from the Margin
Account; (i) the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Senior Security Account; and (j) the name of the
broker through whom the Fund is effecting such closing-out. The Custodian
shall, upon receipt of the net total amount payable to the Fund upon such
closing-out, and the return and/or cancellation of the receipts, if any,
issued by the Custodian with respect to the short sale being closed-out, pay
out of the moneys held for the account of the Fund to the broker the net total
amount payable to the broker, and make the withdrawals from the Margin Account
and the Senior Security Account, as the same are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters into a Reverse Repurchase Agreement with
respect to Securities and money held by the Custodian hereunder, the Fund shall
deliver to the
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Custodian a Certificate, or in the event such Reverse Repurchase Agreement is
a Money Market Security, a Certificate or Oral Instructions specifying: (a)
the Series for which the Reverse Repurchase Agreement is entered; (b) the
total amount payable to the Fund in connection with such Reverse Repurchase
Agreement and specifically allocated to such Series; (c) the broker or dealer
through or with whom the Reverse Repurchase Agreement is entered; (d) the
amount and kind of Securities to be delivered by the Fund to such broker or
dealer; (e) the date of such Reverse Repurchase Agreement; and (f) the amount
of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in a Senior Security Account for such
Series in connection with such Reverse Repurchase Agreement. The Custodian
shall, upon receipt of the total amount payable to the Fund specified in the
Certificate or Oral Instructions make the delivery to the broker or dealer,
and the deposits, if any, to the Senior Security Account, specified in such
Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money
Market Security, a Certificate or Oral Instructions to the Custodian
specifying: (a) the Reverse Repurchase Agreement being terminated and the
Series for which same was entered; (b) the total amount payable by the Fund in
connection with such termination; (c) the amount and kind of Securities to be
received by the Fund and specifically allocated to such Series in connection
with such termination; (d) the date of termination; (e) the name of the broker
or dealer with or through whom the Reverse Repurchase Agreement is to be
terminated; and (f) the amount of cash and/or the amount and kind of
Securities to be withdrawn from the Senior Securities Account for such Series.
The Custodian shall, upon receipt of the amount and kind of Securities to be
received by the Fund specified in the Certificate or Oral Instructions, make
the payment to the broker or dealer, and the withdrawals, if any, from the
Senior Security Account, specified in such Certificate or Oral Instructions.
ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically
allocated to a Series held by the Custodian hereunder, the Fund shall deliver
or cause to be delivered to the Custodian a Certificate specifying with
respect to each such loan: (a) the Series to which the loaned Securities are
specifically allocated; (b) the name of the issuer and the title of the
Securities, (c) the number of shares or the
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principal amount loaned, (d) the date of loan and delivery, (e) the total
amount to be delivered to the Custodian against the loan of the Securities,
including the amount of cash collateral and the premium, if any, separately
identified, and (f) the name of the broker, dealer, or financial institution
to which the loan was made. The Custodian shall deliver the Securities thus
designated to the broker, dealer or financial institution to which the loan
was made upon receipt of the total amount designated as to be delivered
against the loan of Securities. The Custodian may accept payment in connection
with a delivery otherwise than through the Book-Entry System or Depository
only in the form of a certified or bank cashier's check payable to the order
of the Fund or the Custodian drawn on New York Clearing House funds and may
deliver Securities in accordance with the customs prevailing among dealers in
securities.
2. Promptly after each termination of the loan of Securities by the
Fund, the Fund shall deliver or cause to be delivered to the Custodian a
Certificate specifying with respect to each such loan termination and return
of Securities: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities to be
returned, (c) the number of shares or the principal amount to be returned, (d)
the date of termination, (e) the total amount to be delivered by the Custodian
(including the cash collateral for such Securities minus any offsetting
credits as described in said Certificate); and (f) the name of the broker,
dealer, or financial institution from which the Securities will be returned.
The Custodian shall receive all Securities returned from the broker, dealer,
or financial institution to which such Securities were loaned and upon receipt
thereof shall pay, out of the moneys held for the account of the Fund, the
total amount payable upon such return of Securities as set forth in the
Certificate.
ARTICLE XI.
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the
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Custodian into, or withdrawn from, a Senior Securities Account, the Custodian
shall be under no obligation to make any such deposit or withdrawal and shall
so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin
Account to the broker, dealer, futures commission merchant or Clearing Member
in whose name, or for whose benefit, the account was established as specified
in the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with
respect to Securities deposited in any Margin Account shall be dealt with in
accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in
and to any property at any time held by the Custodian in any Collateral
Account described herein. In accordance with applicable law the Custodian may
enforce its lien and realize on any such property whenever the Custodian has
made payment or delivery pursuant to any Put Option guarantee letter or
similar document or any receipt issued hereunder by the Custodian. In the
event the Custodian should realize on any such property net proceeds which are
less than the Custodian's obligations under any Put Option guarantee letter or
similar document or any receipt, such deficiency shall be a debt owed the
Custodian by the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: (a)
the name of the Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custodian shall make
available upon request to any broker, dealer, or futures commission merchant
specified in the name of a Margin Account a copy of the statement furnished
the Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which
cash and/or Securities are maintained in a Collateral Account for any Series,
the Custodian shall furnish the Fund with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding
the delivery to the Fund of such statement, the Fund shall furnish to the
Custodian a Certificate specifying the then market value of the Securities
described in such statement. In the event such then market value is indicated
to be less than the Custodian's obligation with respect to any outstanding Put
Option guarantee letter or similar document, the Fund shall promptly specify
in a Certificate the additional cash and/or Securities to be
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deposited in such Collateral Account to eliminate such deficiency.
ARTICLE XII.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution of
the Board of Directors of the Fund, certified by the Secretary or any
Assistant Secretary, either (i) setting forth with respect to the Series
specified therein the date of the declaration of a dividend or distribution,
the date of payment thereof, the record date as of which shareholders entitled
to payment shall be determined, the amount payable per Share of such Series to
the shareholders of record as of that date and the total amount payable to the
Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund on
the payment date, or (ii) authorizing with respect to the Series specified
therein the declaration of dividends and distributions on a daily basis and
authorizing the Custodian to rely on Oral Instructions or a Certificate
setting forth the date of the declaration of such dividend or distribution,
the date of payment thereof, the record date as of which shareholders entitled
to payment shall be determined, the amount payable per Share of such Series to
the shareholders of record as of that date and the total amount payable to the
Dividend Agent on the payment date.
2. Upon the payment date specified in such resolution, Oral
Instructions or Certificate, as the case may be, the Custodian shall pay out
of the moneys held for the account of each Series the total amount payable to
the Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund
with respect to such Series.
ARTICLE XIII.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the
Custodian a Certificate duly specifying:
(a) the Series, the number of Shares sold, trade
date, and price; and
(b) the amount of money to be received by the Custodian for the
sale of such Shares and specifically allocated to the separate account in the
name of such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian
shall credit such money to the separate account in the name of the Series for
which such money was received.
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3. Upon issuance of any Shares of any Series described in the
foregoing provisions of this Article, the Custodian shall pay, out of the
money held for the account of such Series, all original issue or other taxes
required to be paid by the Fund in connection with such issuance upon the
receipt of a Certificate specifying the amount to be paid.
4. Whenever the Fund desires the Custodian to make payment out of the
money held by the Custodian hereunder in connection with a redemption of any
Shares, it shall furnish to the Custodian:
(a) a resolution by the Board of Directors of the Fund
directing the Transfer Agent to redeem the Shares; and
(b) a Certificate specifying the number and Series of Shares
redeemed; and
(c) the amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the
Series and number of Shares received by the Transfer Agent for redemption and
that such Shares are in good form for redemption, the Custodian shall make
payment to the Transfer Agent out of the moneys held in the separate account
in the name of the Series the total amount specified in the Certificate issued
pursuant to the foregoing paragraph 4 of this Article.
ARTICLE XIV.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds on
behalf of any Series which results in an overdraft because the moneys held by
the Custodian in the separate account for such Series shall be insufficient to
pay the total amount payable upon a purchase of Securities specifically
allocated to such Series, as set forth in a Certificate or Oral Instructions,
or which results in an overdraft in the separate account of such Series for
some other reason, or if the Fund is for any other reason indebted to the
Custodian with respect to a Series, including any indebtedness to The Bank of
New York under the Fund's Cash Management and Related Services Agreement,
(except a borrowing for investment or for temporary or emergency purposes
using Securities as collateral pursuant to a separate agreement and subject to
the provisions of paragraph 2 of this Article), such overdraft or indebtedness
shall be deemed to be a loan made by the Custodian to the Fund for such Series
payable on demand and shall bear interest from the date incurred at a
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rate per annum (based on a 360-day year for the actual number of days
involved) equal to 1/2% over Custodian's prime commercial lending rate in
effect from time to time, such rate to be adjusted on the effective date of
any change in such prime commercial lending rate but in no event to be less
than 6% per annum. In addition, the Fund hereby agrees that the Custodian
shall have a continuing lien and security interest in and to any property
specifically allocated to such Series at any time held by it for the benefit
of such Series or in which the Fund may have an interest which is then in the
Custodian's possession or control or in possession or control of any third
party acting in the Custodian's behalf. The Fund authorizes the Custodian, in
its sole discretion, at any time to charge any such overdraft or indebtedness
together with interest due thereon against any balance of account standing to
such Series' credit on the Custodian's books. In addition, the Fund hereby
covenants that on each Business Day on which either it intends to enter a
Reverse Repurchase Agreement and/or otherwise borrow from a third party, or
which next succeeds a Business Day on which at the close of business the Fund
had outstanding a Reverse Repurchase Agreement or such a borrowing, it shall
prior to 9 a.m., New York City time, advise the Custodian, in writing, of each
such borrowing, shall specify the Series to which the same relates, and shall
not incur any indebtedness not so specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the
Custodian) from which it borrows money for investment or for temporary or
emergency purposes using Securities held by the Custodian hereunder as
collateral for such borrowings, a notice or undertaking in the form currently
employed by any such bank setting forth the amount which such bank will loan
to the Fund against delivery of a stated amount of collateral. The Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to
each such borrowing: (a) the Series to which such borrowing relates; (b) the
name of the bank, (c) the amount and terms of the borrowing, which may be set
forth by incorporating by reference an attached promissory note, duly endorsed
by the Fund, or other loan agreement, (d) the time and date, if known, on
which the loan is to be entered into, (e) the date on which the loan becomes
due and payable, (f) the total amount payable to the Fund on the borrowing
date, (g) the market value of Securities to be delivered as collateral for
such loan, including the name of the issuer, the title and the number of
shares or the principal amount of any particular Securities, and (h) a
statement specifying whether such loan is for investment purposes or for
temporary or emergency purposes and that such loan is in conformance with the
Investment Company Act of 1940 and the Fund's prospectus. The Custodian shall
deliver on the borrowing date specified in a Certificate the specified
collateral and the executed promissory note, if any, against delivery by the
lending bank of the total amount of
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the loan payable, provided that the same conforms to the total amount payable
as set forth in the Certificate. The Custodian may, at the option of the
lending bank, keep such collateral in its possession, but such collateral
shall be subject to all rights therein given the lending bank by virtue of any
promissory note or loan agreement. The Custodian shall deliver such Securities
as additional collateral as may be specified in a Certificate to collateralize
further any transaction described in this paragraph. The Fund shall cause all
Securities released from collateral status to be returned directly to the
Custodian, and the Custodian shall receive from time to time such return of
collateral as may be tendered to it. In the event that the Fund fails to
specify in a Certificate the Series, the name of the issuer, the title and
number of shares or the principal amount of any particular Securities to be
delivered as collateral by the Custodian, the Custodian shall not be under any
obligation to deliver any Securities.
ARTICLE XV.
INSTRUCTIONS
1. with respect to any software provided by the Custodian to a Fund in
order for the Fund to transmit Instructions to the Custodian (the "Software"),
the Custodian grants to such Fund a personal, nontransferable and nonexclusive
license to use the Software solely for the purpose of transmitting
Instructions to, and receiving communications from, the Custodian in
connection with its account(s). The Fund agrees not to sell, reproduce, lease
or otherwise provide, directly or indirectly, the Software or any portion
thereof to any third party without the prior written consent of the Custodian.
2. The Fund shall obtain and maintain at its own cost and expense all
equipment and services, including but not limited to communications services,
necessary for it to utilize the Software and transmit Instructions to the
Custodian. The Custodian shall not be responsible for the reliability,
compatibility with the Software or availability of any such equipment or
services or the performance or nonperformance by any nonparty to this Custody
Agreement.
3. The Fund acknowledges that the Software, all data bases made
available to the Fund by utilizing the Software (other than data bases
relating solely to the assets of the Fund and transactions with respect
thereto), and any proprietary data, processes, information and documentation
(other than which are or become part of the public domain or are legally
required to be made available to the public) (collectively, the
"Information"), are the exclusive and confidential property of the Custodian.
The Fund shall keep
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the Information confidential by using the same care and discretion that the
Fund uses with respect to its own confidential property and trade secrets and
shall neither make nor permit any disclosure without the prior written consent
of the Custodian. Upon termination of this Agreement or the Software license
granted hereunder for any reason, the Fund shall return to the Custodian all
copies of the Information which are in its possession or under its control or
which the Fund distributed to third parties.
4. The Custodian reserves the right to modify the Software from time to
time upon reasonable prior notice and the Fund shall install new releases of
the Software as the Custodian may direct. The Fund agrees not to modify or
attempt to modify the Software without the Custodian's prior written consent.
The Fund acknowledges that any modifications to the Software, whether by the
Fund or the Custodian and whether with or without the Custodian's consent,
shall become the property of the Custodian.
5. The Custodian makes no warranties or representations of any kind
with regard to the Software or the method(s) by which the Fund may transmit
Instructions to the Custodian, express or implied, including but not limited
to any implied warranties or merchantability or fitness for a particular
purpose.
6. Where the method for transmitting Instructions by the Fund involves
an automatic systems acknowledgment by the Custodian of its receipt of such
Instructions, then in the absence of such acknowledgment the Custodian shall
not be liable for any failure to act pursuant to such Instructions, the Fund
may not claim that such Instructions were received by the Custodian, and the
Fund shall deliver a Certificate by some other means.
7. (a) The Fund agrees that where it delivers to the Custodian
Instructions hereunder, it shall be the Fund's sole responsibility to ensure
that only persons duly authorized by the Fund transmit such Instructions to
the Custodian. The Fund will cause all persons transmitting Instructions to
the Custodian to treat applicable user and authorization codes, passwords and
authentication keys with extreme care, and irrevocably authorizes the
Custodian to act in accordance with and rely upon Instructions received by it
pursuant hereto.
(b) The Fund hereby represents, acknowledges and agrees that it
is fully informed of the protections and risks associated with the various
methods of transmitting Instructions to the Custodian and that there may be
more secure methods of transmitting Instructions to the Custodian than the
method(s) selected by the Fund. The Fund hereby agrees that the security
procedures (if any) to be followed in connection with the Fund's transmission
of Instructions
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provide to it a commercially reasonable degree of protection in light of its
particular needs and circumstances.
8. The Fund hereby presents, warrants and covenants to the Custodian
that this Agreement has been duly approved by a resolution of its Board of
Directors, and that its transmission of Instructions pursuant hereto shall at
all times comply with the Investment Company Act of 1940, as amended.
9. The Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, its ability to send
Instructions as promptly as practicable, and in any event within 24 hours
after the earliest of (i) discovery thereof, (ii) the Business Day on which
discovery should have occurred through the exercise of reasonable care and
(iii) in the case of any error, the date of actual receipt of the earliest
notice which reflects such error, it being agreed that discovery and receipt
of notice may only occur on a business day. The Custodian shall promptly
advise the Fund whenever the Custodian learns of any errors, omissions or
interruption in, or delay or unavailability of, the Fund's ability to send
Instructions.
ARTICLE XVI.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as
sub-custodian for each Series' Foreign Securities (as such term is defined in
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, as
amended) and other assets, the foreign banking institutions and foreign
securities depositories and clearing agencies designated on Schedule I hereto
("Foreign Sub-Custodians") to carry out their respective responsibilities in
accordance with the terms of the sub-custodian agreement between each such
Foreign Sub-Custodian and the Custodian, copies of which have been previously
delivered to the Fund and receipt of which is hereby acknowledged (each such
agreement, a "Foreign Sub-Custodian Agreement"). Upon receipt of a
Certificate, together with a certified resolution substantially in the form
attached as Exhibit E of the Fund's Board of Trustees, the Fund may designate
any additional foreign sub-custodian with which the Custodian has an agreement
for such entity to act as the Custodian's agent, as its sub-custodian and any
such additional foreign sub-custodian shall be deemed added to Schedule I.
Upon receipt of a Certificate from the Fund, the Custodian shall cease the
employment of any one or more Foreign Sub-Custodians for maintaining custody
of the Fund's assets and such Foreign Sub-Custodian shall be deemed deleted
from Schedule I.
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2. Each Foreign Sub-Custodian Agreement shall be substantially in the
form previously delivered to the Fund and will not be amended in a way that
materially adversely affects the Fund without the Fund's prior written
consent.
3. The Custodian shall identify on its books as belonging to each
Series of the Fund the Foreign Securities of such Series held by each Foreign
Sub-Custodian. At the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims by the
Fund or any Series against a Foreign Sub-Custodian as a consequence of any
loss, damage, cost, expense, liability or claim sustained or incurred by the
Fund or any Series if and to the extent that the Fund or such Series has not
been made whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the
terms of the applicable Foreign Sub Custodian Agreement, use reasonable
efforts to arrange for the independent accountants of the Fund to be afforded
access to the books and records of any Foreign Sub-Custodian insofar as such
books and records relate to the performance of such Foreign Sub-Custodian
under its agreement with the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as
mutually agreed upon, statements in respect of the securities and other assets
of each Series held by Foreign Sub-Custodians, including but not limited to,
an identification of entities having possession of each Series' Foreign
Securities and other assets, and advices or notifications of any transfers of
Foreign Securities to or from each custodial account maintained by a Foreign
Sub-Custodian for the Custodian on behalf of the Series.
6. The Custodian shall furnish annually to the Fund, as mutually
agreed upon, information concerning the Foreign Sub-Custodians employed by the
Custodian. Such information shall be similar in kind and scope to that
furnished to the Fund in connection with the Fund's initial approval of such
Foreign Sub-Custodians and, in any event, shall include information pertaining
to (i) the Foreign Custodians' financial strength, general reputation and
standing in the countries in which they are located and their ability to
provide the custodial services required, and (ii) whether the Foreign Sub-
Custodians would provide a level of safeguards for safekeeping and custody of
securities not materially different from those prevailing in the United
States. The Custodian shall monitor the general operating performance of each
Foreign Sub-Custodian. The Custodian agrees that it will use reasonable care
in monitoring compliance by each Foreign Sub-Custodian with the terms of the
relevant Foreign Sub-Custodian Agreement
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and that if it learns of any breach of such Foreign Sub-Custodian Agreement
believed by the Custodian to have a material adverse effect on the Fund or any
Series it will promptly notify the Fund of such breach. The Custodian also
agrees to use reasonable and diligent efforts to enforce its rights under the
relevant Foreign Sub-Custodian Agreement.
7. The Custodian shall transmit promptly to the Fund all notices,
reports or other written information received pertaining to the Fund's Foreign
Securities, including without limitation, notices of corporate action, proxies
and proxy solicitation materials.
8. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any Series
and delivery of securities maintained for the account of such Series may be
effected in accordance with the customary or established securities trading
or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivery of securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or dealer.
9. Notwithstanding any other provision in this Agreement to the
contrary, with respect to any losses or damages arising out of or relating to
any actions or omissions of any Foreign Sub-Custodian the sole responsibility
and liability of the Custodian shall be to take appropriate action at the
Fund's expense to recover such loss or damage from the Foreign Sub-Custodian.
It is expressly understood and agreed that the Custodian's sole responsibility
and liability shall be limited to amounts so recovered from the Foreign
Sub-Custodian.
ARTICLE XVII.
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the Fund shall
promptly deliver to the Custodian a Certificate or Oral Instructions
specifying with respect to such FX Transaction: (a) the Series to which such
FX Transaction is specifically allocated; (b) the type and amount of Currency
to be purchased by the Fund; (c) the type and amount of Currency to be sold by
the Fund; (d) the date on which the Currency to be purchased is to be
delivered; (e) the date on which the Currency to be sold is to be delivered;
and (f) the name of the person from whom or through whom such currencies are
to be purchased and sold. Unless otherwise instructed by a Certificate or Oral
Instructions, the
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Custodian shall deliver, or shall instruct a Foreign Sub-Custodian to deliver,
the Currency to be sold on the date on which such delivery is to be made, as
set forth in the Certificate, and shall receive, or instruct a Foreign
Sub-Custodian to receive, the Currency to be purchased on the date as set
forth in the Certificate.
2. Where the Currency to be sold is to be delivered on the same day as
the Currency to be purchased, as specified in the Certificate or Oral
Instructions, the Custodian or a Foreign Sub-Custodian may arrange for such
deliveries and receipts to be made in accordance with the customs prevailing
from time to time among brokers or dealers in Currencies, and such receipt and
delivery may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in connection with
such receipts and deliveries, which responsibility and liability shall
continue until the Currency to be received by the Fund has been received in
full.
3. Any FX Transaction effected by the Custodian in connection with this
Agreement may be entered with the Custodian, any office, branch or subsidiary
of The Bank of New York Company, Inc., or any Foreign Sub-Custodian acting as
principal or otherwise through customary banking channels. The Fund may issue
a standing Certificate with respect to FX Transaction but the Custodian may
establish rules or limitations concerning any foreign exchange facility made
available to the Fund. The Fund shall bear all risks of investing in
Securities or holding Currency. Without limiting the foregoing, the Fund shall
bear the risks that rules or procedures imposed by a Foreign Sub-Custodian or
foreign depositories, exchange controls, asset freezes or other laws, rules,
regulations or orders shall prohibit or impose burdens or costs on the
transfer to, by or for the account of the Fund of Securities or any cash held
outside the Fund's jurisdiction or denominated in Currency other than its home
jurisdiction or the conversion of cash from one Currency into another
currency. The Custodian shall not be obligated to substitute another Currency
for a Currency (including a Currency that is a component of a Composite
Currency Unit) whose transferability, convertibility or availability has been
affected by such law, regulation, rule or procedure. Neither the Custodian nor
any Foreign Sub-Custodian shall be liable to the Fund for any loss resulting
from any of the foregoing events.
ARTICLE XVIII.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI,
neither the Custodian nor its nominee shall be
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<PAGE>
liable for any loss or damage, including counsel fees, resulting from its
action or omission to act or otherwise, either hereunder or under any Margin
Account Agreement, except for any such loss or damage arising out of its own
negligence or willful misconduct. In no event shall the Custodian be liable to
the Fund or any third party for special, indirect or consequential damages or
lost profits or loss of business, arising under or in connection with this
Agreement, even if previously informed of the possibility of such damages and
regardless of the form of action. The Custodian may, with respect to questions
of law arising hereunder or under any Margin Account Agreement, apply for and
obtain the advice and opinion of counsel to the Fund or of its own counsel, at
the expense of the Fund, and shall be fully protected with respect to anything
done or omitted by it in good faith in conformity with such advice or opinion.
The Custodian shall be liable to the Fund for any loss or damage resulting
from the use of the Book-Entry System or any Depository arising by reason of
any negligence or willful misconduct on the part of the Custodian or any of
its employees or agents.
2. Without limiting the generality of the foregoing, the Custodian
shall be under no obligation to inquire into, and shall not be liable for:
(a) the validity of the issue of any Securities purchased,
sold, or written by or for the Fund, the legality of the purchase, sale or
writing thereof, or the propriety of the amount paid or received therefor;
(b) the legality of the sale or redemption of any Shares, or
the propriety of the amount to be received or paid therefor;
(c) the legality of the declaration or payment of any dividend
by the Fund;
(d) the legality of any borrowing by the Fund using Securities
as collateral;
(e) the legality of any loan of portfolio Securities, nor shall
the Custodian be under any duty or obligation to see to it that any cash
collateral delivered to it by a broker, dealer, or financial institution or
held by it at any time as a result of such loan of portfolio Securities of the
Fund is adequate collateral for the Fund against any loss it might sustain as
a result of such loan. The Custodian specifically, but not by way of
limitation, shall not be under any duty or obligation periodically to check or
notify the Fund that the amount of such cash collateral held by it for the
Fund is sufficient collateral for the Fund, but such duty or obligation shall
be the sole responsibility of the Fund. In addition, the Custodian shall be
under no duty or obligation to see that any broker, dealer or financial
institution
-34-
<PAGE>
to which portfolio Securities of the Fund are lent pursuant to Article X of
this Agreement makes payment to it of any dividends or interest which are
payable to or for the account of the Fund during the period of such loan or at
the termination of such loan, provided, however, that the Custodian shall
promptly notify the Fund in the event that such dividends or interest are not
paid and received when due; or
(f) the sufficiency or value of any amounts of money and/or
Securities held in any Margin Account, Senior Security Account or Collateral
Account in connection with transactions by the Fund. In addition, the
Custodian shall be under no duty or obligation to see that any broker, dealer,
futures commission merchant or Clearing Member makes payment to the Fund of
any variation margin payment or similar payment which the Fund may be entitled
to receive from such broker, dealer, futures commission merchant or Clearing
Member, to see that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the amount the Fund
is entitled to receive, or to notify the Fund of the Custodian's receipt or
non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the
Custodian of, any money, whether or not represented by any check, draft, or
other instrument for the payment of money, received by it on behalf of the
Fund until the Custodian actually receives and collects such money directly or
by the final crediting of the account representing the Fund's interest at the
Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable
for ascertaining or acting upon any calls, conversions, exchange offers,
tenders, interest rate changes or similar matters relating to Securities held
in the Depository, unless the Custodian shall have actually received timely
notice from the Depository. In no event shall the Custodian have any
responsibility or liability for the failure of the Depository to collect, or
for the late collection or late crediting by the Depository of any amount
payable upon Securities deposited in the Depository which may mature or be
redeemed, retired, called or otherwise become payable. However, upon receipt
of a Certificate from the Fund of an overdue amount on Securities held in the
Depository the Custodian shall make a claim against the Depository on behalf
of the Fund, except that the Custodian shall not be under any obligation to
appear in, prosecute or defend any action suit or proceeding in respect to any
Securities held by the Depository which in its opinion may involve it in
expense or liability, unless indemnity satisfactory to it against all expense
and liability be furnished as often as may be required.
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<PAGE>
5. The Custodian shall not be under any duty or obligation to
take action to effect collection of any amount due to the Fund from the
Transfer Agent of the Fund nor to take any action to effect payment or
distribution by the Transfer Agent of the Fund of any amount paid by the
Custodian to the Transfer Agent of the Fund in accordance with this
Agreement.
6. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount if the Securities upon which such
amount is payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by
a Certificate and (ii) it shall be assured to its satisfaction of
reimbursement of its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Article XVI appoint one or more banking
institutions as Depository or Depositories, as Sub-Custodian or
Sub-Custodians, or as Co-Custodian or Co-Custodians including, but not limited
to, banking institutions located in foreign countries, of Securities and
moneys at any time owned by the Fund, upon such terms and conditions as may be
approved in a Certificate or contained in an agreement executed by the
Custodian, the Fund and the appointed institution.
8. The Custodian shall not be under any duty or obligation (a) to
ascertain whether any Securities at any time delivered to, or held by it or by
any Foreign Sub-Custodian, for the account of the Fund and specifically
allocated to a Series are such as properly may be held by the Fund or such
Series under the provisions of its then current prospectus, or (b) to
ascertain whether any transactions by the Fund, whether or not involving the
Custodian, are such transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian all out-of-pocket expenses and such compensation as may
be agreed upon from time to time between the Custodian and the Fund. The
Custodian may charge such compensation and any expenses with respect to a
Series incurred by the Custodian in the performance of its duties pursuant to
such agreement against any money specifically allocated to such Series. Unless
and until the Fund instructs the Custodian by a Certificate to apportion any
loss, damage, liability or expense among the Series in a specified manner, the
Custodian shall also be entitled to charge against any money held by it for
the account of a Series such Series' pro rata share (based on such Series net
asset value at the time of the charge to the aggregate net asset value of all
Series at that time) of the amount of any loss, damage, liability or expense,
including counsel fees, for which it shall be
.
-36-
<PAGE>
entitled to reimbursement under the provisions of this Agreement. The
expenses for which the Custodian shall be entitled to reimbursement hereunder
shall include, but are not limited to, the expenses of sub-custodians and
foreign branches of the Custodian incurred in settling outside of New York
City transactions involving the purchase and sale of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate,
notice or other instrument in writing received by the Custodian and reasonably
believed by the Custodian to be a Certificate. The Custodian shall be entitled
to rely upon any Oral Instructions actually received by the Custodian
hereinabove provided for. The Fund agrees to forward to the Custodian a
Certificate or facsimile thereof confirming such Oral Instructions in such
manner so that such Certificate or facsimile thereof is received by the
Custodian, whether by hand delivery, telecopier or other similar device, or
otherwise, by the close of business of the same day that such Oral
Instructions are given to the Custodian. The Fund agrees that the fact that
such confirming instructions are not received, or that contrary instructions
are received, by the Custodian shall in no way affect the validity of the
transactions or enforceability of the transactions hereby authorized by the
Fund. The Fund agrees that the Custodian shall incur no liability to the Fund
in acting upon Oral Instructions given to the Custodian hereunder concerning
such transactions provided such instructions reasonably appear to have been
received from an Officer.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any
Margin Account Agreement. Without limiting the generality of the foregoing,
the Custodian shall be under no duty to inquire into, and shall not be liable
for, the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the
-37-
<PAGE>
Custodian its expenses of providing such copies. Upon reasonable request of
the Fund, the Custodian shall provide in hard copy or on microfilm, whichever
the Custodian elects, any records included in any such delivery which are
maintained by the Custodian on a computer disk, or are similarly maintained,
and the Fund shall reimburse the Custodian for its expenses of providing such
hard copy or microfilm.
13. The Custodian shall provide the Fund with any report obtained by
the Custodian on the system of internal accounting control of the Book-Entry
System, the Depository or O.C.C., and with such reports on its own systems of
internal accounting control as the Fund may reasonably request from time to
time.
14. The Fund agrees to indemnify the Custodian against and save the
Custodian harmless from all liability, claims, losses and demands whatsoever,
including attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, including the Custodian's payment or
non-payment of checks pursuant to paragraph 6 of Article XIII as part of any
check redemption privilege program of the Fund, except for any such liability,
claim, loss and demand arising out of the Custodian's own negligence or
willful misconduct.
15. Subject to the foregoing provisions of this Agreement, including,
without limitation, those contained in Article XVI and XVII the Custodian may
deliver and receive Securities, and receipts with respect to such Securities,
and arrange for payments to be made and received by the Custodian in
accordance with the customs prevailing from time to time among brokers or
dealers in such Securities. When the Custodian is instructed to deliver
Securities against payment, delivery of such Securities and receipt of payment
therefor may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in connection with
the Custodian's delivery of Securities pursuant to instructions of the Fund,
which responsibility and liability shall continue until final payment in full
has been received by the Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XIX.
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving
to the other party a notice in writing
-38-
<PAGE>
specifying the date of such termination, which shall be not less than ninety
(90) days after the date of giving of such notice. In the event such notice is
given by the Fund, it shall be accompanied by a copy of a resolution of the
Board of Directors of the Fund, certified by the Secretary or any Assistant
Secretary, electing to terminate this Agreement and designating a successor
custodian or custodians, each of which shall be a bank or trust company having
not less than $2,000,000 aggregate capital, surplus and undivided profits.
In the event such notice is given by the Custodian, the Fund shall, on or
before the termination date, deliver to the Custodian a copy of a resolution
of the Board of Directors of the Fund, certified by the Secretary or any
Assistant Secretary, designating a successor custodian or custodians.
In the absence of such designation by the Fund, the Custodian may designate a
successor custodian which shall be a bank or trust company having not less
than $2,000,000 aggregate capital, surplus and undivided profits. Upon the
date set forth in such notice this Agreement shall terminate, and the
Custodian shall upon receipt of a notice of acceptance by the successor
custodian on that date deliver directly to the successor custodian all
Securities and moneys then owned by the Fund and held by it as Custodian,
after deducting all fees, expenses and other amounts for the payment or
reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the
Custodian in accordance with the preceding paragraph, the Fund shall upon the
date specified in the notice of termination of this Agreement and upon the
delivery by the Custodian of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund be deemed to be its own custodian and the Custodian shall thereby
be relieved of all duties and responsibilities pursuant to this Agreement,
other than the duty with respect to Securities held in the Book=Entry System
which cannot be delivered to the Fund to hold such Securities hereunder in
accordance with this Agreement.
ARTICLE XX.
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the
present Officers of the Fund under its seal, setting forth the names and the
signatures of the present Officers of the Fund. The Fund agrees to furnish to
the Custodian a new Certificate in similar form in the event that any such
present Officer ceases to be an Officer of the Fund, or in the event that
other or additional Officers are elected or appointed. Until such new
Certificate shall be received, the Custodian shall be fully protected in
acting under the
-39-
<PAGE>
provisions of this Agreement or Oral Instructions upon the signatures of the
Officers as set forth in the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Custodian, shall be sufficiently given
if addressed to the Custodian and mailed or delivered to it at its offices at
90 Washington Street, New York, New York 10286, or at such other place as the
Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Fund shall be sufficiently given if
addressed to the Fund and mailed or delivered to it at its office at the
address for the Fund first above written, or at such other place as the Fund
may from time to time designate in writing.
4. This Agreement may not be amended or modified in any manner except
by a written agreement executed by both parties with the same formality as
this Agreement and approved by a resolution of the Board of Directors of the
Fund.
5. This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable by the Fund without the
written consent of the Custodian, or by the Custodian without the written
consent of the Fund, authorized or approved by a resolution of the Fund's
Board of Directors.
6. This Agreement shall be construed in accordance with the laws of
the State of New York without giving effect to conflict of laws principles
thereof. Each party hereby consents to the jurisdiction of a state or federal
court situated in New York City, New York in connection with any dispute
arising hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
-40-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective Officers, thereunto duly
authorized and their respective seals to be hereunto affixed, as of the
day and year first above written.
MUNIHOLDINGS PENNSYLVANIA
INSURED FUND
[SEAL] By:
-----------------------
Attest:
---------------------------
THE BANK OF NEW YORK
[SEAL] By:
-----------------------
Name:
Title:
Attest:
---------------------------
<PAGE>
APPENDIX A
I, , and I,
, of
MUNIHOLDINGS PENNSYLVANIA INSURED FUND, a Massachusetts business trust (the
"Fund"), do hereby certify that:
The following individuals serve in the following positions with the
Fund and each has been duly elected or appointed by the Board of Trustees of
the Fund to each such position and qualified therefor in conformity with the
Fund's Articles of Incorporation and By-Laws, and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
---------------------- ---------------------- ----------------------
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<PAGE>
APPENDIX B
SERIES
-43-
<PAGE>
APPENDIX C
I, Jorge Ramos, a Vice President with THE BANK OF NEW YORK do
hereby designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
44
<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned, , hereby certifies that he or she is
the duly elected and acting of MUNIHOLDINGS PENNSYLVANIA
INSURED FUND, a Massachusetts business trust (the "Fund"), and further
certifies that the following resolution was adopted by the Board of Trustees
of the Fund at a meeting duly held on , 1999, at which a quorum
was at all times present and that such resolution has not been modified or
rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as
of , 1999, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis to deposit in the Book
Entry System, as defined in the Custody Agreement, all securities
eligible for deposit therein, regardless of the Series to which the
same are specifically allocated, and to utilize the Book-Entry System
to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of
purchases and sales of securities, loans of securities, and deliveries
and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
MUNIHOLDINGS PENNSYLVANIA INSURED FUND, as of the day of
, 1999.
-----------------------
[SEAL]
<PAGE>
EXHIBIT B
CERTIFICATION
The undersigned, , hereby certifies that he or she is
the duly elected and acting
of MUNIHOLDINGS PENNSYLVANIA INSURED FUND, a Massachusetts business trust (the
"Fund"), and further certifies that the following resolution was adopted by
the Board of Trustees of the Fund at a meeting duly held on , 1999,
at which a quorum was at all times present and that such resolution has not
been modified or rescinded and is in full force and effect as of the date
hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as of
, 1999, (the "Custody Agreement") is authorized and instructed on a
continuous and ongoing basis until such time as it receives a
Certificate, as defined in the Custody Agreement, to the contrary to
deposit in the Depository, as defined in the Custody Agreement, all
securities eligible for deposit therein, regardless of the Series to
which the same are specifically allocated, and to utilize the
Depository to the extent possible in connection with its performance
thereunder, including, without limitation, in connection with
settlements of purchases and sales of securities, loans of securities,
and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal
of MUNIHOLDINGS PENNSYLVANIA INSURED FUND, as of the day of ,
1999.
--------------------------
[SEAL]
<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned, , hereby certifies that he or she is
the duly elected and acting
of MUNIHOLDINGS PENNSYLVANIA INSURED FUND, a Massachusetts business trust (the
"Fund"), and further certifies that the following resolution was adopted by
the Board of Trustees of the Fund at a meeting duly held on , 1999, at
which a quorum was at all times present and that such resolution has not been
modified or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as of
, 1999, (the "Custody Agreement") is authorized and instructed on a
continuous and ongoing basis until such time as it receives a
Certificate, as defined in the Custody Agreement, to the contrary to
deposit in the Participants Trust Company as Depository, as defined in
the Custody Agreement, all securities eligible for deposit therein,
regardless of the Series to which the same are specifically allocated,
and to utilize the Participants Trust Company to the extent possible in
connection with its performance thereunder, including, without
limitation, in connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of MUNIHOLDINGS PENNSYLVANIA INSURED FUND, as of the day
of , 1999.
------------------------
[SEAL]
<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned, , hereby certifies that he or she is
the duly elected and acting of MUNIHOLDINGS PENNSYLVANIA
INSURED FUND, a Massachusetts business trust (the "Fund"), and further
certifies that the following resolution was adopted by the Board of Trustees
of the Fund at a meeting duly held on , 1999, at which a quorum was at all
times present and that such resolution has not been modified or rescinded and
is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as
of , 1999, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as it
receives a Certificate, as defined in the Custody Agreement, to the
contrary, to accept, utilize and act with respect to Clearing Member
confirmations for Options and transaction in Options, regardless of the
Series to which the same are specifically allocated, as such terms are
defined in the Custody Agreement, as provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MUNIHOLDINGS
PENNSYLVANIA INSURED FUND, as of the day of , 1999.
------------------------
[SEAL]
<PAGE>
EXHIBIT D
The undersigned, , hereby certifies that he or she is
the duly elected and acting of MUNIHOLDINGS PENNSYLVANIA
INSURED FUND, a Massachusetts business trust (the "Fund"), further certifies
that the following resolutions were adopted by the Board of Trustees of the
Fund at a meeting duly held on , 1999, at which a quorum was at all
times present and that such resolutions have not been modified or rescinded
and are in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
the Custody Agreement between The Bank of New York and the Fund dated
as of , 1999 (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis to act in accordance
with, and to rely on Instructions (as defined in the Custody
Agreement).
RESOLVED, that the Fund shall establish access codes and grant
use of such access codes only to Officers of the Fund as defined in the
Custody Agreement, shall establish internal safekeeping procedures to
safeguard and protect the confidentiality and availability of user and
access codes, passwords and authentication keys, and shall use
Instructions only in a manner that does not contravene the Investment
Company Act of 1940, as amended, or the rules and regulations
thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MUNIHOLDINGS
PENNSYLVANIA INSURED FUND, as of the day of
, 1999.
------------------------
[SEAL]
<PAGE>
EXHIBIT E
The undersigned, , hereby certifies that he or she is
the duly elected and acting of MUNIHOLDINGS PENNSYLVANIA
INSURED FUND, a Massachusetts business trust (the "Fund"), further certifies
that the following resolutions were adopted by the Board of Trustees of the
Fund at a meeting duly held on , 1999, at which a quorum was at all times
present and that such resolutions have not been modified or rescinded and are
in full force and effect as of the date hereof.
RESOLVED, that the maintenance of the Fund's assets in each
country listed in Schedule I hereto be, and hereby is, approved by the
Board of Trustees as consistent with the best interests of the Fund
and its shareholders; and further
RESOLVED, that the maintenance of the Fund's assets with the
foreign branches of The Bank of New York (the "Bank") listed in
Schedule I located in the countries specified therein, and with the
foreign sub-custodians and depositories listed in Schedule I located in
the countries specified therein be, and hereby is, approved by the
Board of Trustees as consistent with the best interest of the Fund and
its shareholders; and further
RESOLVED, that the Sub-Custodian Agreements presented to this
meeting between the Bank and each of the foreign sub-custodians and
depositories listed in Schedule I providing for the maintenance of the
Fund's assets with the applicable entity, be and hereby are, approved
by the Board of Trustees as consistent with the best interests of the
Fund and its shareholders; and further
RESOLVED, that the appropriate officers of the Fund are hereby
authorized to place assets of the Fund with the aforementioned foreign
branches and foreign sub-custodians and depositories as hereinabove
provided; and further
RESOLVED, that the appropriate officers of the Fund, or any of
them, are authorized to do any and all other acts, in the name of the
Fund and on its behalf, as they, or any of them, may determine to be
necessary or desirable and proper in connection with or in furtherance
of the foregoing resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
MUNIHOLDINGS PENNSYLVANIA INSURED FUND, as of the day of
, 1999.
------------------------
[SEAL]
<PAGE>
EXHIBIT (K)
THE
BANK OF
NEW
YORK
================================================================================
STOCK TRANSFER AGENCY AGREEMENT
between
MuniHoldings Pennsylvania Insured Fund
- --------------------------------------------------------------------------------
and
THE BANK OF NEW YORK
ACCOUNT NUMBER(S)
-------------------------------------------
================================================================================
<PAGE>
STOCK TRANSFER AGENCY AGREEMENT
AGREEMENT, made as of ___________________, by and between MuniHoldings
Pennsylvania Insured Fund, a business trust organized and existing under the
laws of the Commonwealth of Massachusetts (hereinafter referred to as the
"Customer"), and THE BANK OF NEW YORK, a New York trust company (hereinafter
referred to as the "Bank").
WITNESSETH:
That for and in consideration of the mutual promises hereinafter set forth,
the parties hereto covenant and agree as follows:
ARTICLE I
DEFINITIONS
-----------
Whenever used in this Agreement, the following words and phrases shall have
the following meanings:
1. "Business Day" shall be deemed to be each day on which the Bank is
open for business.
2. "Certificate" shall mean any notice, instruction, or other instrument
in writing, authorized or required by this Agreement to be given to the Bank by
the Customer which is signed by any Officer, as hereinafter defined, and
actually received by the Bank.
3. "Officer" shall be deemed to be the Customer's Chief Executive
Officer, President, any Vice President, the Secretary, the Treasurer, the
Controller, any Assistant Treasurer, and any Assistant Secretary duly authorized
by the Board of Trustees of the Customer to execute any Certificate,
instruction, notice or other instrument on behalf of the Customer and named in a
Certificate, as such Certificate may be amended from time to time.
4. "Shares" shall mean all or any part of each class of the capital
shares of the Customer which from time to time are authorized and/or issued by
the Customer and identified in a Certificate of the Secretary of the Customer
under corporate seal, as such Certificate may be amended from time to time, with
respect to which the Bank is to act hereunder.
ARTICLE II
APPOINTMENT OF BANK
-------------------
1. The Customer hereby constitutes and appoints the Bank as its agent to
perform the services described herein and as more particularly described in
Schedule I attached hereto (the "Services"), and the Bank hereby accepts
appointment as such agent and agrees to perform the Services in accordance with
the terms hereinafter set forth.
2. In connection with such appointment, the Customer shall deliver the
following documents to the Bank:
(a) A certified copy of the Certificate of Designation or other document
evidencing the Customer's form of organization (the "Charter") and all
amendments thereto;
(b) A certified copy of the By-Laws of the Customer;
<PAGE>
-2-
(c) A certified copy of a resolution of the Board of Trustees of the
Customer appointing the Bank to perform the Services and authorizing
the execution and delivery of this Agreement;
(d) A Certificate signed by the Secretary of the Customer specifying: the
number of authorized Shares, the number of such authorized Shares
issued and currently outstanding, and the names and specimen
signatures of all persons duly authorized by the Board of Trustees of
the Customer to execute any Certificate on behalf of the Customer, as
such Certificate may be amended from time to time;
(e) A Specimen Share certificate for each class of Shares in the form
approved by the Board of Trustees of the Customer, together with a
Certificate signed by the Secretary of the Customer as to such
approval and covenanting to supply a new such Certificate and specimen
whenever such form shall change;
(f) A copy of the Customer's Registration Statement, as amended to date,
and the most recently filed Post-Effective Amendment thereto, filed by
the Customer with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, together with any applications
filed in connection therewith; and
(g) An opinion of counsel for the Customer, in a form satisfactory to the
Bank, with respect to the validity of the authorized and outstanding
Shares, the obtaining of all necessary governmental consents, whether
such Shares are fully paid and non-assessable and the status of such
Shares under the Securities Act of 1933, as amended, and any other
applicable law or regulation (i.e., if subject to registration, that
----
they have been registered and that the Registration Statement has
become effective or, if exempt, the specific grounds therefor);
(h) A list of the name, address, social security or taxpayer
identification number of each Shareholder, number of Shares owned,
certificate numbers, and whether any "stops" have been placed; and
(i) An opinion of counsel for the Customer, in a form satisfactory to the
Bank, with respect to the due authorization by the Customer and the
validity and effectiveness of the use of facsimile signatures by the
Bank in connection with the countersigning and registering of Share
certificates of the Customer.
3. The Customer shall furnish the Bank with a sufficient supply of blank
Share certificates and from time to time will renew such supply upon request of
the Bank. Such blank Share certificates shall be properly signed, by facsimile
or otherwise, by Officers of the Customer authorized by law or by the By-Laws to
sign Share certificates, and, if required, shall bear the corporate seal or a
facsimile thereof.
ARTICLE III
AUTHORIZATION AND ISSUANCE OF SHARES
------------------------------------
1. The Customer shall deliver to the Bank the following documents on or
before the effective date of any increase, decrease or other change in the total
number of Shares authorized to be issued:
(a) A certified copy of the amendment to the Charter giving effect to such
increase, decrease or change;
<PAGE>
-3-
(b) An opinion of counsel for the Customer, in a form satisfactory to the
Bank, with respect to the validity of the Shares, the obtaining of all
necessary governmental consents, whether such Shares are fully paid
and non-assessable and the status of such Shares under the Securities
Act of 1933, as amended, and any other applicable federal law or
regulations (i.e., if subject to registration, that they have been
-----
registered and that the Registration Statement has become effective
or, if exempt, the specific grounds therefor); and
(c) In the case of an increase, if the appointment of the Bank was
theretofore expressly limited, a certified copy of a resolution of the
Board of Trustees of the Customer increasing the authority of the
Bank.
2. Prior to the issuance of any additional Shares pursuant to stock
dividends, stock splits or otherwise, and prior to any reduction in the number
of Shares outstanding, the Customer shall deliver the following documents to the
Bank:
(a) A certified copy of the resolutions adopted by the Board of Trustees
and/or the shareholders of the Customer authorizing such issuance of
additional Shares of the Customer or such reduction, as the case may
be;
(b) A certified copy of the order or consent of each governmental or
regulatory authority required by law as a prerequisite to the issuance
or reduction of such Shares, as the case may be, and an opinion of
counsel for the Customer that no other order or consent is required;
and
(c) An opinion of counsel for the Customer, in a form satisfactory to the
Bank, with respect to the validity of the Shares, the obtaining of all
necessary governmental consents, whether such Shares are fully paid
and non-assessable and the status of such Shares under the Securities
Act of 1933, as amended, and any other applicable law or regulation
(i.e., if subject to registration, that they have been registered and
-----
that the Registration Statement has become effective, or, if exempt,
the specific grounds therefor).
ARTICLE IV
RECAPITALIZATION OR CAPITAL ADJUSTMENT
--------------------------------------
1. In the case of any negative stock split, recapitalization or other
capital adjustment requiring a change in the form of Share certificates, the
Bank will issue Share certificates in the new form in exchange for, or upon
transfer of, outstanding Share certificates in the old form, upon receiving:
(a) A Certificate authorizing the issuance of Share certificates in
the new form;
(b) A certified copy of any amendment to the Charter with respect to
the change;
(c) Specimen Share certificates for each class of Shares in the new form
approved by the Board of Trustees of the Customer, with a Certificate
signed by the Secretary of the Customer as to such approval;
<PAGE>
-4-
(d) A certified copy of the order or consent of each governmental or
regulatory authority required by law as a prerequisite to the issuance
of the Shares in the new form, and an opinion of counsel for the
Customer that the order or consent of no other governmental or
regulatory authority is required; and
(e) An opinion of counsel for the Customer, in a form satisfactory to the
Bank, with respect to the validity of the Shares in the new form, the
obtaining of all necessary governmental consents, whether such Shares
are fully paid and non-assessable and the status of such Shares
under the Securities Act of 1933, as amended, and any other applicable
law or regulation (i.e., if subject to registration, that the Shares
-----
have been registered and that the Registration Statement has become
effective or, if exempt, the specific grounds therefore).
2. The Customer shall furnish the Bank with a sufficient supply of blank
Share certificates in the new form, and from time to time will replenish such
supply upon the request of the Bank. Such blank Share certificates shall be
properly signed, by facsimile or otherwise, by Officers of the Customer
authorized by law or by the By-Laws to sign Share certificates and, if required,
shall bear the corporate seal or a facsimile thereof.
ARTICLE V
ISSUANCE AND TRANSFER OF SHARES
-------------------------------
1. The Bank will issue Share certificates upon receipt of a Certificate
from an Officer, but shall not be required to issue Share certificates after it
has received from an appropriate federal or state authority written notification
that the sale of Shares has been suspended or discontinued, and the Bank shall
be entitled to rely upon such written notification. The Bank shall not be
responsible for the payment of any original issue or other taxes required to be
paid by the Customer in connection with the issuance of any Shares.
2. Shares will be transferred upon presentation to the Bank of Share
certificates in form deemed by the Bank properly endorsed for transfer,
accompanied by such documents as the Bank deems necessary to evidence the
authority of the person making such transfer, and bearing satisfactory evidence
of the payment of applicable stock transfer taxes. In the case of small estates
where no administration is contemplated, the Bank may, when furnished with an
appropriate surety bond, and without further approval of the Customer, transfer
Shares registered in the name of the decedents where the current market value of
the Shares being transferred does not exceed such amount as may from time to
time be prescribed by the various states. The Bank reserves the right to refuse
to transfer Shares until it is satisfied that the endorsements on Share
certificates are valid and genuine, and for that purpose it may require, unless
otherwise instructed by an Officer of the Customer, a guaranty of signature by
an "eligible guarantor institution" meeting the requirements of the Bank, which
requirements include membership or participation in STAMP or such other
"signature guarantee program" as may be determined by the Bank in addition to,
or in substitution for, STAMP, all in accordance with the Securities Exchange
Act of 1934, as amended. The Bank also reserves the right to refuse to transfer
Shares until it is satisfied that the requested transfer is legally authorized,
and it shall incur no liability for the refusal in good faith to make transfers
which the Bank, in its judgment, deems improper or unauthorized, or until it is
satisfied that there is no basis to any claims adverse to such transfer. The
Bank may, in effecting transfers of Shares, rely upon those provisions of the
Uniform Act for the Simplification of Fiduciary Security Transfers or the
Uniform Commercial Code, as the same may be amended from time to time,
applicable to the transfer of securities, and the Customer shall indemnify the
Bank for any act done or omitted by it in good faith in reliance upon such laws.
<PAGE>
-5-
3. All certificates representing Shares that are subject to restrictions
on transfer (e.g., securities acquired pursuant to an investment representation,
----
securities held by controlling person, securities subject to stockholders'
agreement, etc.), shall be stamped with a legend describing the extent and
conditions of the restrictions or referring to the source of such restrictions.
The Bank assumes no responsibility with respect to the transfer of restricted
securities where counsel for the Customer advises that such transfer may be
properly effected.
4. Notwithstanding the foregoing or any other provision contained in this
Agreement to the contrary, the Bank shall be fully protected by the Customer in
not requiring any instruments, documents, assurances, endorsements or
guarantees, including, without limitation, any signature guarantees, in
connection with a transfer of Shares whenever the Bank reasonably believes that
requiring the same would be inconsistent with the transfer procedures as
described in the Prospectus.
ARTICLE VI
DIVIDENDS AND DISTRIBUTIONS
---------------------------
1. The Customer shall furnish to the Bank a copy of a resolution of its
Board of Trustees, certified by the Secretary or any Assistant Secretary,
either (i) setting forth the date of the declaration of a dividend or
distribution, the date of accrual or payment, as the case may be, the record
date as of which shareholders entitled to payment, or accrual, as the case may
be shall be determined, the amount per Share of such dividend or distribution,
the payment date on which all previously accrued and unpaid dividends are to be
paid, and the total amount, if any, payable to the Bank on such payment date, or
(ii) authorizing the declaration of dividends and distributions on a periodic
basis and authorizing the Bank to rely on a Certificate setting forth the
information described in subsection (i) of this paragraph.
2. Prior to the payment date specified in such Certificate or resolution,
as the case may be, the Customer shall, in the case of a cash dividend or
distribution, pay to the Bank an amount of cash, sufficient for the Bank to make
the payment, specified in such Certificate or resolution, to the shareholders of
record as of such payment date. The Bank will, upon receipt of any such cash,
(i) in the case of shareholders who are participants in a dividend reinvestment
and/or cash purchase plan of the Customer, reinvest such cash dividends or
distributions in accordance with the terms of such plan, and (ii) in the case of
shareholders who are not participants in any such plan, make payment of such
cash dividends or distributions to the shareholders of record as of the record
date by mailing a check, payable to the registered shareholder, to the address
of record or dividend mailing address. The Bank shall not be liable for any
improper payment made in accordance with a Certificate or resolution described
in the preceding paragraph. If the Bank shall not receive sufficient cash prior
to the payment date to make payments of any cash dividend or distribution
pursuant to subsections (i) and (ii) above to all shareholders of the Customer
as of the record date, the Bank shall, upon notifying the Customer, withhold
payment to all shareholders of the Customer as of the record date until
sufficient cash is provided to the Bank.
3. It is understood that the Bank shall in no way be responsible for the
determination of the rate or form of dividends or distributions due to the
shareholders.
4. It is understood that the Bank shall file such appropriate information
returns concerning the payment of dividends and distributions with the proper
federal, state and local authorities as are required by law to be filed by the
Customer but shall in no way be responsible for the collection or withholding of
taxes due on such dividends or distributions due to shareholders, except and
only to the extent required of it by applicable law.
<PAGE>
-6-
ARTICLE VII
CONCERNING THE CUSTOMER
-----------------------
1. The Customer shall promptly deliver to the Bank written notice of any
change in the Officers authorized to sign Share certificates, Certificates,
notifications or requests, together with a specimen signature of each new
Officer. In the event any Officer who shall have signed manually or whose
facsimile signature shall have been affixed to blank Share certificates shall
die, resign or be removed prior to issuance of such Share certificates, the Bank
may issue such Share certificates as the Share certificates of the Customer
notwithstanding such death, resignation or removal, and the Customer shall
promptly deliver to the Bank such approvals, adoptions or ratifications as may
be required by law.
2. Each copy of the Charter of the Customer and copies of all amendments
thereto shall be certified by the Secretary of State (or other appropriate
official) of the state of incorporation, and if such Charter and/or amendments
are required by law also to be filed with a county or other officer or official
body, a certificate of such filing shall be filed with a certified copy
submitted to the Bank. Each copy of the By-Laws and copies of all amendments
thereto, and copies of resolutions of the Board of Trustees of the Customer,
shall be certified by the Secretary or an Assistant Secretary of the Customer
under the corporate seal.
3. Customer hereby represents and warrants:
(a) It is a business trust duly organized and validly existing under the
laws of Massachusetts.
(b) This Agreement has been duly authorized, executed and delivered on its
behalf and constitutes the legal, valid and binding obligation of
Customer. The execution, delivery and performance of this Agreement by
Customer do not and will not violate any applicable law or regulation
and do not require the consent of any governmental or other regulatory
body except for such consents and approvals as have been obtained and
are in full force and effect.
4. It shall be the sole responsibility of the Customer to deliver to the
Bank the Customer's currently effective Prospectus and, for purposes
of this Agreement, the Bank shall not be deemed to have notice of any
information contained in such Prospectus until it is actually received
by the Bank.
ARTICLE VIII
CONCERNING THE BANK
-------------------
1. The Bank shall not be liable and shall be fully protected in acting
upon any oral instruction, writing or document reasonably believed by it to be
genuine and to have been given, signed or made by the proper person or persons
and shall not be held to have any notice of any change of authority of any
person until receipt of written notice thereof from an Officer of the Customer.
It shall also be protected in processing Share certificates which it reasonably
believes to bear the proper manual or facsimile signatures of the duly
authorized Officer or Officers of the Customer and the proper countersignature
of the Bank.
2. The Bank may establish such additional procedures, rules and
regulations governing the transfer or registration of Share certificates as
it may deem advisable and consistent with such rules and regulations generally
adopted by bank transfer agents.
<PAGE>
-7-
3. The Bank may keep such records as it deems advisable but not
inconsistent with resolutions adopted by the Board of Directors of the Customer.
The Bank may deliver to the Customer from time to time at its discretion, for
safekeeping or disposition by the Customer in accordance with law, such records,
papers, Share certificates which have been cancelled in transfer or exchange and
other documents accumulated in the execution of its duties hereunder as the Bank
may deem expedient, other than those which the Bank is itself required to
maintain pursuant to applicable laws and regulations, and the Customer shall
assume all responsibility for any failure thereafter to produce any record,
paper, cancelled Share certificate or other document so returned, if and when
required. The records maintained by the Bank pursuant to this paragraph which
have not been previously delivered to the Customer pursuant to the foregoing
provisions of this paragraph shall be considered to be the property of the
Customer, shall be made available upon request for inspection by the Officers,
employees and auditors of the Customer, and shall be delivered to the Customer
upon request and in any event upon the date of termination of this Agreement, as
specified in Article IX of this Agreement, in the form and manner kept by the
Bank on such date of termination or such earlier date as may be requested by the
Customer.
4. The Bank may employ agents or attorneys-in-fact at the expense of the
Customer, and shall not be liable for any loss or expense arising out of, or in
connection with, the actions or omissions to act of its agents or attorneys-in-
fact, so long as the Bank acts in good faith and without negligence or willful
misconduct in connection with the selection of such agents or attorneys-in-fact.
5. The Bank shall only be liable for any loss or damage arising out of
its own negligence or willful misconduct; provided, however, that the Bank shall
not be liable for any indirect, special, punitive or consequential damages.
6. The Customer shall indemnify and hold harmless the Bank from and against
any and all claims (whether with or without basis in fact or law), costs,
demands, expenses and liabilities, including reasonable attorney's fees, which
the Bank may sustain or incur or which may be asserted against the Bank except
for any liability which the Bank has assumed pursuant to the immediately
preceding section. The Bank shall be deemed not to have acted with negligence
and not to have engaged in willful misconduct by reason of or as a result of any
action taken or omitted to be taken by the Bank without its own negligence or
willful misconduct in reliance upon (i) any provision of this Agreement, (ii)
any instrument, order or Share certificate reasonably believed by it to be
genuine and to be signed, countersigned or executed by any duly authorized
Officer of the Customer, (iii) any Certificate or other instructions of an
Officer, (iv) any opinion of legal counsel for the Customer or the Bank, or (v)
any law, act, regulation or any interpretation of the same even though such law,
act, or regulation may thereafter have been altered, changed, amended or
repealed. Nothing contained herein shall limit or in any way impair the right of
the Bank to indemnification under any other provision of this Agreement.
7. Specifically, but not by way of limitation, the Customer shall
indemnify and hold harmless the Bank from and against any and all claims
(whether with or without basis in fact or law), costs, demands, expenses and
liabilities, including reasonable attorney's fees, of any and every nature which
the Bank may sustain or incur or which may be asserted against the Bank in
connection with the genuineness of a Share certificate, the Bank's due
authorization by the Customer to issue Shares and the form and amount of
authorized Shares.
<PAGE>
-8-
8. At any time the bank may apply to an Officer of the Customer for
written instructions with respect to any matter arising in connection with the
Bank's duties and obligations under this Agreement, and the Bank shall not be
liable for any action taken or omitted to be taken by the Bank in good faith in
accordance with such instructions. Such application by the Bank for instructions
from an Officer of the Customer may, at the option of the Bank, set forth in
writing any action proposed to be taken or omitted to be taken by the Bank with
respect to its duties or obligations under this Agreement and the date on and/or
after which such action shall be taken, and the Bank shall not be liable for any
action taken or omitted to be taken in accordance with a proposal included in
any such application on or after the date specified therein unless, prior to
taking or omitting to take any such action, the Bank has received written
instructions in response to such application specifying the action to be taken
or omitted. The Bank may consult counsel to the Customer or its own counsel, at
the expense of the Customer, and shall be fully protected with respect to
anything done or omitted by it in good faith in accordance with the advice or
opinion of such counsel.
9. When mail is used for delivery of non-negotiable Share certificates,
the value of which does not exceed the limits of the Bank's Blanket Bond, the
Bank shall send such non-negotiable Share certificates by first class mail, and
such deliveries will be covered while in transit by the Bank's Blanket Bond.
Non-negotiable Share certificates, the value of which exceed the limits of the
Bank's Blanket Bond, will be sent by insured registered mail. Negotiable Share
certificates will be sent by insured registered mail. The Bank shall advise the
Customer of any Share certificates returned as undeliverable after being mailed
as herein provided for.
10. The Bank may issue new Share certificates in place of Share
certificates represented to have been lost, stolen or destroyed upon receiving
instructions in writing from an Officer and indemnity satisfactory to the Bank.
Such instructions from the Customer shall be in such form as approved by the
Board of Directors of the Customer in accordance with applicable law or the By-
Laws of the Customer governing such matters. If the Bank receives written
notification from the owner of the lost, stolen or destroyed Share certificate
within a reasonable time after he has notice of it, the Bank shall promptly
notify the Customer and shall act pursuant to written instructions signed by an
Officer. If the Customer receives such written notification from the owner of
the lost, stolen or destroyed Share certificate within a reasonable time after
he has notice of it, the Customer shall promptly notify the Bank and the Bank
shall act pursuant to written instructions signed by an Officer. The Bank shall
not be liable for any act done or omitted by it pursuant to the written
instructions described herein. The Bank may issue new Share certificates in
exchange for, and upon surrender of, mutilated Share certificates .
11. The Bank will issue and mail subscription warrants for Shares, Shares
representing stock dividends, exchanges or splits, or act as conversion agent
upon receiving written instructions from an Officer and such other documents as
the Bank may deem necessary.
12. The Bank will supply shareholder lists to the Customer from time to
time upon receiving a request therefor from an Officer of the Customer.
13. In case of any requests or demands for the inspection of the
shareholder records of the Customer, the Bank will notify the Customer and
endeavor to secure instructions from an Officer as to such inspection. The Bank
reserves the right, however, to exhibit the shareholder record to any person
whenever it is advised by its counsel that there is a reasonable likelihood that
the Bank will be held liable for the failure to exhibit the shareholder records
to such person.
14. At the request of an Officer, the Bank will address and mail such
appropriate notices to shareholders as the Customer may direct.
15. Notwithstanding any provisions of this Agreement to the contrary, the
Bank shall be under no duty or obligation to inquire into, and shall not be
liable for:
<PAGE>
-9-
(a) The legality of the issue, sale or transfer of any Shares, the
sufficiency of the amount to be received in connection therewith, or
the authority of the Customer to request such issuance, sale or
transfer;
(b) The legality of the purchase of any Shares, the sufficiency of the
amount to be paid in connection therewith, or the authority of the
Customer to request such purchase;
(c) The legality of the declaration of any dividend by the Customer, or
the legality of the issue of any Shares in payment of any stock
dividend; or
(d) The legality of any recapitalization or readjustment of the Shares.
16. The Bank shall be entitled to receive and the Customer hereby agrees
to pay to the Bank for its performance hereunder (i) out-of-pocket expenses
(including legal expenses and attorney's fees) incurred in connection with this
Agreement and its performance hereunder, and (ii) the compensation for services
as set forth in Schedule I.
17. The Bank shall not be responsible for any money, whether or not
represented by any check, draft or other instrument for the payment of money,
received by it on behalf of the Customer, until the Bank actually receives and
collects such funds.
18. The Bank shall have no duties or responsibilities whatsoever except
such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied against the Bank in
connection with this Agreement.
ARTICLE IX
TERMINATION
-----------
Either of the parties hereto may terminate this Agreement by giving to the
other party a notice in writing specifying the date of such termination, which
shall be not less than 60 days after the date of receipt of such notice. In the
event such notice is given by the Customer, it shall be accompanied by a copy of
a resolution of the Board of Trustees of the Customer, certified by the
Secretary, electing to terminate this Agreement and designating a successor
transfer agent or transfer agents. In the event such notice is given by the
Bank, the Customer shall, on or before the termination date, deliver to the Bank
a copy of a resolution of its Board of Trustees certified by the Secretary
designating a successor transfer agent or transfer agents. In the absence of
such designation by the Customer, the Bank may designate a successor transfer
agent. If the Customer fails to designate a successor Transfer agent and if the
Bank is unable to find a successor transfer agent, the Customer shall, upon the
date specified in the notice of termination of this Agreement and delivery of
the records maintained hereunder, be deemed to be its own transfer agent and the
Bank shall thereafter be relieved of all duties and responsibilities hereunder.
Upon termination hereof, the Customer shall pay to the Bank such compensation as
may be due to the Bank for any disbursements and expenses made or incurred by
the Bank and payable or reimbursable hereunder.
ARTICLE X
MISCELLANEOUS
-------------
1. The Customer agrees that prior to effecting any change in the
Prospectus which would increase or alter the duties and obligations of the Bank
hereunder, it shall advise the Bank of such proposed change at least 30 days
prior to the intended date of the same, and shall proceed with such change only
if it shall have received the written consent of the Bank thereto.
<PAGE>
-10-
2. The indemnities contained herein shall be continuing obligations of
the Customer, its successors and assigns, notwithstanding the termination of
this Agreement.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Customer shall be sufficiently given if
addressed to the Customer and mailed or delivered to it at 800 Scudders Mill
Road, Plainsboro, N.J. 08536, or at such other place as the Customer may from
time to time designate in writing.
4. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Bank shall be sufficiently given if addressed
to the Bank and mailed or delivered to it at its office at 101 Barclay Street
(12W), New York, New York 10286 or at such other place as the Bank may from time
to time designate in writing.
5. This Agreement may not be amended or modified in any manner except by a
written agreement duly authorized and executed by both parties. Any duly
authorized Officer may amend any Certificate naming Officers authorized to
execute and deliver Certificates, instructions, notices or other instruments,
and the Secretary or any Assistant Secretary may amend any Certificate listing
the Shares of capital stock of the Customer for which the Bank performs Services
hereunder.
6. This Agreement shall extend to and shall be binding upon the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable by either party without the prior written
consent of the other party, and provided, further, that any reorganization,
merger, consolidation, or sale of assets, by the Bank shall not be deemed to
constitute an assignment of this Agreement.
7. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
8. This Agreement may be executed in any number of counterparts each of
which shall be deemed to be an original; but such counterparts, together, shall
constitute only one instrument.
9. The provisions of this Agreement are intended to benefit only the Bank
and the Customer, and no rights shall be granted to any other person by virtue
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective corporate officers, thereunto duly authorized and
their respective corporate seals to be hereunto affixed, as of the day and year
first above written.
Attest:
--------------------------------------
- ----------------------- By: MuniHoldings Pennsylvania Insured Fund
--------------------------------------
Name:
---------------------------------
Title:
--------------------------------
Attest: THE BANK OF NEW YORK
By:
- ----------------------- ---------------------------------------
Name:
----------------------------------
Title:
--------------------------------
