<PAGE>
As filed with the Securities and Exchange Commission on October 4, 1999
Securities Act File No. 333-
Investment Company Act File No. 811-08573
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------
PRE-EFFECTIVE AMENDMENT NO. [_] POST-EFFECTIVE AMENDMENT NO. [_]
(check appropriate box or boxes)
--------------
MuniYield Pennsylvania Fund
(Exact Name of Registrant as Specified in its Charter)
--------------
(609) 282-2800
(Area Code and Telephone Number)
--------------
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices: Number, Street, City, State, Zip
Code)
--------------
Terry K. Glenn
MuniYield Pennsylvania 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:
Frank P. Bruno, Esq. Brown & Wood LLP Michael J. Hennewinkel, Esq. Merrill
One World Trade Center New York, NY Lynch Asset Management, L.P. 800
10048-0557 Scudders Mill Road Plainsboro, NJ
08536
--------------
Approximate Date of Proposed Public Offering: As soon as practicable after
the Registration Statement becomes effective under the Securities Act of 1933.
--------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum Amount of
Amount Being Offering Price Aggregate Offering Registration
Title of Securities Being Registered Registered(1) Per Unit(1) Price(1) Fee(3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares ($.10 par
value)................. 6,108,788 $13.99 $85,461,944 $23,759
- --------------------------------------------------------------------------------------------------
Auction Market Preferred
Shares, Series B....... 1,920 $25,000(2) $48,000,000 $13,344
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the filing fee.
(2) Represents the liquidation preference of a preferred share after the
reorganization.
(3) Paid by wire transfer to the designated lockbox of the Securities and
Exchange Commission in Pittsburgh, Pennsylvania.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MUNIYIELD PENNSYLVANIA FUND
MUNIVEST PENNSYLVANIA INSURED FUND
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
P.O. Box 9011
Princeton, New Jersey 08543-9011
----------------
NOTICE OF SPECIAL MEETINGS OF SHAREHOLDERS OF
MUNIYIELD PENNSYLVANIA FUND
AND
MUNIVEST PENNSYLVANIA INSURED FUND
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS OF
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
----------------
TO BE HELD ON DECEMBER 15, 1999
TO THE SHAREHOLDERS OF
MUNIYIELD PENNSYLVANIA FUND
MUNIVEST PENNSYLVANIA INSURED FUND
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
NOTICE IS HEREBY GIVEN that special meetings of the shareholders of
MuniYield Pennsylvania Fund ("MuniYield Pennsylvania") and MuniVest
Pennsylvania Insured Fund ("MuniVest Pennsylvania") and the annual meeting of
the shareholders of MuniHoldings Pennsylvania Insured Fund ("MuniHoldings
Pennsylvania") (together the "Meetings") will be held at the offices of
Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New
Jersey on Wednesday, December 15, 1999 at 4:15 p.m. Eastern time (for
MuniYield Pennsylvania), 2:45 p.m. Eastern time (for MuniVest Pennsylvania)
and 1:45 p.m. Eastern time (for MuniHoldings Pennsylvania) for the following
purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization (the
"Agreement and Plan of Reorganization") contemplating (i) the acquisition
of substantially all of the assets and the assumption of substantially all
of the liabilities of MuniVest Pennsylvania by MuniYield Pennsylvania, in
exchange solely for an equal aggregate value of newly-issued common shares
of beneficial interest of MuniYield Pennsylvania ("MuniYield Pennsylvania
Common Shares") and shares of a newly-created series of auction market
preferred shares of MuniYield Pennsylvania to be designated Series B
("MuniYield Pennsylvania Series B AMPS") and the distribution by MuniVest
Pennsylvania of such MuniYield Pennsylvania Common Shares to the holders of
common shares of beneficial interest of MuniVest Pennsylvania ("MuniVest
Pennsylvania Common Shares") and such MuniYield Pennsylvania Series B AMPS
to the holders of auction market preferred shares of MuniVest Pennsylvania
("MuniVest Pennsylvania AMPS") and (ii) the acquisition of substantially
all of the assets and the assumption of substantially all of the
liabilities of MuniHoldings Pennsylvania by MuniYield Pennsylvania, in
exchange solely for an equal aggregate value of newly-issued MuniYield
Pennsylvania Common Shares and MuniYield Pennsylvania Series B AMPS and the
distribution by MuniHoldings Pennsylvania of such MuniYield Pennsylvania
Common Shares to the holders of common shares of beneficial interest of
MuniHoldings Pennsylvania ("MuniHoldings Pennsylvania Common Shares") and
such MuniYield Pennsylvania Series B AMPS to the holders of auction market
preferred shares of MuniHoldings Pennsylvania designated Series A
("MuniHoldings Pennsylvania Series A AMPS"), (iii) the amendment of the
investment policies of MuniYield Pennsylvania to provide that under normal
circumstances, at least 80% of its 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, as well as the change of the same fund's name to "MuniYield
Pennsylvania Insured Fund" and (iv) the designation of the currently
outstanding series of AMPS of MuniYield Pennsylvania as Series A. A vote in
favor of this proposal also will constitute a vote in favor of the
liquidation of each of MuniVest Pennsylvania and MuniHoldings Pennsylvania
and the termination of their respective registration under the Investment
Company Act of 1940; and
<PAGE>
For the shareholders of MuniHoldings Pennsylvania only:
(2) To elect a Board of Trustees to serve for the ensuing year;
(3) To consider and act upon a proposal to ratify the selection of
Deloitte & Touche LLP to serve as independent auditors for the Fund for its
current fiscal year; and
For shareholders of all the Funds:
(4) To transact such other business as properly may come before the
Meetings or any adjournment thereof.
If the proposed Reorganization is approved by the shareholders of each of
the Funds at the Meetings and effected by the Funds, any shareholder (1) who
files with the applicable Fund before the taking of the vote on the approval
of such Agreement and Plan of Reorganization, written objection to the
proposed Reorganization stating that he or she intends to demand payment for
his or her shares if the Reorganization takes place and (2) whose shares are
not voted in favor of such Agreement and Plan of Reorganization has or may
have the right to demand in writing from MuniYield Pennsylvania, within twenty
days after the date of mailing to him or her of notice in writing that the
Reorganization has become effective, payment for his or her shares and an
appraisal of the value thereof. MuniYield Pennsylvania and any such
shareholders shall in such cases have the rights and duties and shall follow
the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of
the General Laws of Massachusetts. See Item 1. "The Reorganization--Agreement
and Plan of Reorganization--Appraisal Rights" in the Proxy Statement and
Prospectus, particularly with respect to the intention of MuniYield
Pennsylvania to petition a court to determine whether this right of appraisal
has been superseded by a rule of the Securities and Exchange Commission, in
the event that any shareholder elects to exercise such right.
The Boards of Trustees of MuniYield Pennsylvania, MuniVest Pennsylvania and
MuniHoldings Pennsylvania have fixed the close of business on October 20, 1999
as the record date for the determination of shareholders entitled to notice
of, and to vote at, the Meetings or any adjournment thereof.
A complete list of the shareholders of MuniYield Pennsylvania, MuniVest
Pennsylvania and MuniHoldings Pennsylvania entitled to vote at the Meetings
will be available and open to the examination of any shareholder of MuniYield
Pennsylvania, MuniVest Pennsylvania and MuniHoldings Pennsylvania,
respectively, for any purpose germane to the Meetings during ordinary business
hours from and after December 1, 1999, at the offices of MuniYield
Pennsylvania, 800 Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meetings. Shareholders who do not
expect to attend the Meetings in person are requested to complete, date and
sign the enclosed form of proxy applicable to their fund and return it
promptly in the envelope provided for that purpose. The enclosed proxy is
being solicited on behalf of the Board of Trustees of MuniYield Pennsylvania,
MuniVest Pennsylvania or MuniHoldings Pennsylvania, as applicable.
By Order of the Boards of Trustees
Alice A. Pellegrino
Secretary of:
MuniYield Pennsylvania Fund,
MuniVest Pennsylvania Insured Fund
and MuniHoldings Pennsylvania
Insured Fund
Plainsboro, New Jersey
Dated: , 1999
2
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not use this prospectus to sell 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 is not soliciting an +
+offer to buy these securities in any State where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROXY STATEMENT AND PROSPECTUS DATED OCTOBER 4, 1999
PROXY STATEMENT AND PROSPECTUS
MUNIYIELD PENNSYLVANIA FUND
MUNIVEST PENNSYLVANIA INSURED FUND
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
P.O. Box 9011, Princeton, New Jersey 08543-9011
(609) 282-2800
-----------
SPECIAL MEETINGS OF SHAREHOLDERS OF
MUNIYIELD PENNSYLVANIA FUND
AND
MUNIVEST PENNSYLVANIA INSURED FUND
ANNUAL MEETING OF SHAREHOLDERS OF
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
-----------
DECEMBER 15, 1999
This Joint Proxy Statement and Prospectus is furnished to you as a
shareholder of one of the funds listed above. An annual meeting of the
shareholders of MuniHoldings Pennsylvania Insured Fund and special meetings of
the shareholders of each of MuniYield Pennsylvania Fund and MuniVest
Pennsylvania Insured Fund (the "Meetings") will be held on December 15, 1999 to
consider several items that are listed below and discussed in greater detail
elsewhere in this Proxy Statement and Prospectus. The Board of Trustees of each
of the funds is requesting that its shareholders submit a proxy to be used at
the annual meeting or special meeting, as the case may be, to vote the shares
held by the shareholder submitting the proxy.
The proposals to be considered at the Meetings are:
1. To approve or disapprove an Agreement and Plan of Reorganization among
the funds; and
For the shareholders of MuniHoldings Pennsylvania Insured Fund only:
2. To elect a Board of Trustees for the fund; and
3. To ratify the selection of the independent auditors of the fund; and
For the shareholders of all of the Funds:
4. To transact such other business as may properly come before the Meetings
or any adjournment thereof.
(continued on next page)
This Proxy Statement and Prospectus serves as a prospectus of MuniYield
Pennsylvania in connection with the issuance of MuniYield Pennsylvania Common
Shares and the newly-created series of MuniYield Pennsylvania Series B AMPS in
the Reorganization.
-----------
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Proxy Statement and Prospectus.
Any representation to the contrary is a criminal offense.
-----------
The date of this Proxy Statement and Prospectus is November , 1999.
The Proxy Statement and Prospectus sets forth information about MuniYield
Pennsylvania, MuniVest Pennsylvania and MuniHoldings Pennsylvania that
shareholders of the Funds should know before considering the Reorganization and
should be retained for future reference. Each of the Funds has authorized the
solicitation of proxies in connection with the Reorganization solely on the
basis of this Proxy Statement and Prospectus and the accompanying documents.
The address of the principal executive offices of MuniYield Pennsylvania,
MuniVest Pennsylvania and MuniHoldings Pennsylvania is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800.
<PAGE>
The common shares of beneficial interest of MuniYield Pennsylvania and
MuniVest Pennsylvania are listed on the New York Stock Exchange (the "NYSE")
under the symbols "MPA" (MuniYield Pennsylvania) and "MVP" (MuniVest
Pennsylvania). The common shares of beneficial interest of MuniHoldings
Pennsylvania are listed on the American Stock Exchange ("AMEX") under the
symbol "MPI". Subsequent to the Reorganization, MuniYield Pennsylvania Common
Shares will continue to be listed on the NYSE under the symbol "MPA". Reports,
proxy materials and other information concerning MuniYield Pennsylvania and
MuniVest Pennsylvania may be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005 or at the American Stock Exchange, 980
Washingtonia Boulevard, Gaithersburg, Maryland 20878 in the case of
MuniHoldings Pennsylvania.
The Agreement and Plan of Reorganization that you are being asked to
consider involves a transaction that will be referred to in this Proxy
Statement and Prospectus as the Reorganization. The Reorganization involves
the combination of three funds into one fund. The three funds are:
MuniYield Pennsylvania Fund ("MuniYield Pennsylvania"), which will be the
surviving fund,
MuniVest Pennsylvania Insured Fund ("MuniVest Pennsylvania") and
MuniHoldings Pennsylvania Insured Fund ("MuniHoldings Pennsylvania").
MuniVest Pennsylvania and MuniHoldings Pennsylvania are sometimes referred
to herein collectively as the "Acquired Funds" and, together with MuniYield
Pennsylvania, as the "Funds."
In the Reorganization, MuniYield Pennsylvania will acquire substantially all
of the assets and assume substantially all of the liabilities of each of the
Acquired Funds solely in exchange for its common shares of beneficial
interest, par value $.10 per share ("MuniYield Pennsylvania Common Shares"),
and shares of a newly-created series of its auction market preferred shares to
be designated Series B ("MuniYield Pennsylvania Series B AMPS"), with a par
value of $.05 per share and a liquidation preference of $25,000 per share. The
Acquired Funds will distribute the common shares and auction market preferred
shares received in the Reorganization to their respective shareholders and
will then liquidate and terminate their registration under the Investment
Company Act of 1940 (the "Investment Company Act"). MuniYield Pennsylvania
will continue to operate as a registered closed-end investment company with
the investment objective and policies described in this Proxy Statement and
Prospectus, including an amendment to the Fund's investment policies providing
that the Fund, under normal circumstances, will invest at least 80% of its
assets 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, as well as a change in the Fund's name to "MuniYield
Pennsylvania Insured Fund".
In the Reorganization, MuniYield Pennsylvania will issue common shares and
auction market preferred shares to each of the Acquired Funds based on the
value of the assets transferred to MuniYield Pennsylvania by that Acquired
Fund. These shares will then be distributed by each Acquired Fund to its
shareholders based on the value of the shares held by each shareholder just
prior to the Reorganization. A holder of common shares of an Acquired Fund
will receive MuniYield Pennsylvania Common Shares and a holder of auction
market preferred shares ("AMPS") of an Acquired Fund will receive MuniYield
Pennsylvania Series B AMPS.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTION.............................................................. 5
ITEM 1. THE REORGANIZATION................................................ 6
SUMMARY................................................................. 6
RISK FACTORS AND SPECIAL CONSIDERATIONS................................. 15
Pennsylvania Municipal Bonds.......................................... 15
Interest Rate and Credit Risk......................................... 16
Non-diversification................................................... 16
Rating Categories..................................................... 16
Private Activity Bonds................................................ 16
Portfolio Insurance................................................... 16
Leverage.............................................................. 16
Portfolio Management.................................................. 17
Inverse Floating Obligations.......................................... 18
Options and Futures Transactions...................................... 18
Antitakeover Provisions............................................... 18
Ratings Considerations................................................ 18
COMPARISON OF THE FUNDS................................................. 19
Financial Highlights.................................................. 19
Investment Objective and Policies..................................... 25
Portfolio Insurance................................................... 27
Description of Pennsylvania Municipal Bonds and Municipal Bonds....... 28
Special Considerations Relating to Pennsylvania Municipal Bonds....... 29
Other Investment Policies............................................. 30
Information Regarding Options and Futures Transactions................ 31
Investment Restrictions............................................... 34
Rating Agency Guidelines.............................................. 35
Portfolio Composition................................................. 36
Portfolio Transactions................................................ 38
Portfolio Turnover.................................................... 39
Net Asset Value....................................................... 39
Capital Shares........................................................ 40
Management of the Funds............................................... 43
Code of Ethics........................................................ 44
Voting Rights......................................................... 44
Shareholder Inquiries................................................. 45
Dividends and Distributions........................................... 45
Automatic Dividend Reinvestment Plan.................................. 47
Mutual Fund Investment Option......................................... 48
Liquidation Rights of Holders of AMPS................................. 49
Tax Rules Applicable to the Funds and their Shareholders.............. 49
AGREEMENT AND PLAN OF REORGANIZATION.................................... 54
General............................................................... 54
Procedure............................................................. 55
Terms of the Agreement and Plan of Reorganization..................... 56
Potential Benefits to Holders of Common Shares of the Funds as a
Result of the Reorganization......................................... 57
Surrender and Exchange of Share Certificates.......................... 59
Tax Consequences of the Reorganization................................ 59
Appraisal Rights...................................................... 61
Capitalization........................................................ 62
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
ITEM 2. ELECTION OF TRUSTEES............................................ 63
Committee and Board Meetings........................................ 65
Compliance with Section 16(a) of the Securities Exchange Act of
1934............................................................... 65
Interested Persons.................................................. 65
Compensation of Trustees............................................ 65
Officers of MuniHoldings Pennsylvania............................... 65
ITEM 3. SELECTION OF INDEPENDENT AUDITORS............................... 66
INFORMATION CONCERNING THE ANNUAL MEETING OF MUNIHOLDINGS PENNSYLVANIA
AND THE SPECIAL MEETINGS OF MUNIYIELD PENNSYLVANIA AND MUNIVEST
PENNSYLVANIA........................................................... 66
Date, Time and Place of Meetings.................................... 66
Solicitation, Revocation and Use of Proxies......................... 66
Record Date and Outstanding Shares.................................. 66
Security Ownership of Certain Beneficial Owners and Management...... 67
Voting Rights and Required Vote..................................... 67
ADDITIONAL INFORMATION.................................................. 68
Year 2000 Issues.................................................... 69
CUSTODIAN............................................................... 69
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR................. 69
LEGAL PROCEEDINGS....................................................... 70
LEGAL OPINIONS.......................................................... 70
EXPERTS................................................................. 70
SHAREHOLDER PROPOSALS................................................... 70
INDEX TO FINANCIAL STATEMENTS........................................... F-1
EXHIBIT I--INFORMATION PERTAINING TO EACH FUND.......................... I-1
EXHIBIT II--AGREEMENT AND PLAN OF REORGANIZATION........................ II-1
EXHIBIT III--ECONOMIC AND OTHER CONDITIONS IN PENNSYLVANIA.............. III-1
EXHIBIT IV--RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER............. IV-1
EXHIBIT V--PORTFOLIO INSURANCE.......................................... V-1
EXHIBIT VI--SECTIONS OF MASSACHUSETTS BUSINESS CORPORATION LAW.......... VI-1
</TABLE>
4
<PAGE>
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Trustees of MuniYield
Pennsylvania, MuniVest Pennsylvania and MuniHoldings Pennsylvania for use at
the Meetings to be held at the offices of Merrill Lynch Asset Management, L.P.
("MLAM"), 800 Scudders Mill Road, Plainsboro, New Jersey on December 15, 1999,
at the time specified for each Fund in Exhibit I to this Proxy Statement and
Prospectus. The mailing address for each of the Funds is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The approximate mailing date of this Proxy
Statement and Prospectus is November , 1999.
Any person giving a proxy may revoke it at any time prior to its exercise by
executing a superseding proxy, by giving written notice of the revocation to
the Secretary of MuniYield Pennsylvania, MuniVest Pennsylvania or MuniHoldings
Pennsylvania, as applicable, at the address indicated above or by voting in
person at the appropriate Meeting. All properly executed proxies received
prior to the Meetings will be voted at the Meetings in accordance with the
instructions marked thereon or otherwise as provided therein. Unless
instructions to the contrary are marked, (a) all proxies will be voted "FOR"
Item 1 to approve the Agreement and Plan of Reorganization among MuniYield
Pennsylvania, MuniVest Pennsylvania and MuniHoldings Pennsylvania (the
"Agreement and Plan of Reorganization"); and (b) for the shareholders of
MuniHoldings Pennsylvania only, all proxies submitted by MuniHoldings
Pennsylvania shareholders will be voted "FOR" Item 2 to elect a Board of
Trustees of MuniHoldings Pennsylvania to serve for the ensuing year; and "FOR"
Item 3 to ratify the selection of Deloitte & Touche LLP as the independent
auditors of MuniHoldings Pennsylvania for its current fiscal year.
With respect to Item 1, assuming a quorum is present at the Meetings,
approval of the Agreement and Plan of Reorganization will require the
affirmative vote of shareholders representing (i) a majority of the
outstanding Common Shares of MuniYield Pennsylvania and MuniYield Pennsylvania
AMPS, voting together as a single class, and a majority of the outstanding
shares of MuniYield Pennsylvania AMPS, to be designated Series A, voting
separately as a class, (ii) a majority of the outstanding Common Shares of
MuniVest Pennsylvania and MuniVest Pennsylvania AMPS, voting together as a
single class, and a majority of the outstanding shares of MuniVest
Pennsylvania AMPS, voting separately as a class, and (iii) a majority of the
outstanding Common Shares of MuniHoldings Pennsylvania and MuniHoldings
Pennsylvania AMPS, voting together as a single class, and a majority of the
outstanding shares of MuniHoldings Pennsylvania AMPS, Series A, voting
separately as a class. Because of the requirement that the Agreement and Plan
of Reorganization be approved by shareholders of all three Funds, the
Reorganization will not take place if shareholders of any one Fund do not
approve the Agreement and Plan of Reorganization.
With respect to Item 2, holders of MuniHoldings Pennsylvania AMPS are
entitled to elect two Trustees of MuniHoldings Pennsylvania, and holders of
MuniHoldings Pennsylvania Common Shares and AMPS, voting together as a single
class, are entitled to elect the remaining Trustees of MuniHoldings
Pennsylvania. Assuming a quorum is present at the annual meeting of
MuniHoldings Pennsylvania, election of the two Trustees of MuniHoldings
Pennsylvania to be elected by the holders of AMPS, voting separately as a
class, will require the affirmative vote of a majority of the votes cast by
the holders of MuniHoldings Pennsylvania AMPS, represented at the annual
meeting and entitled to vote; and election of the remaining Trustees of
MuniHoldings Pennsylvania will require the affirmative vote of a majority of
the votes cast by the holders of Common Shares and the holders of AMPS,
represented at the annual meeting and entitled to vote, voting together as a
single class.
With respect to Item 3, assuming a quorum is present at the annual meeting
of MuniHoldings Pennsylvania, approval of the ratification of the selection of
independent auditors of MuniHoldings Pennsylvania will require the affirmative
vote of a majority of the MuniHoldings Pennsylvania Common Shares and AMPS
represented at the annual meeting in person or by proxy, and entitled to vote,
voting together as a single class.
The Board of Trustees of each of the Funds has fixed the close of business
on October 20, 1999 as the record date (the "Record Date") for the
determination of shareholders entitled to notice of, and to vote at, the
5
<PAGE>
Meetings or any adjournment thereof. Shareholders on the Record Date will be
entitled to one vote for each share held, with no shares having cumulative
voting rights. At the Record Date, each Fund had outstanding the number of
Common Shares and AMPS indicated in Exhibit I. To the knowledge of the
management of each of the Funds, no person owned beneficially more than 5% of
the respective outstanding shares of either class of capital stock of any Fund
at the Record Date.
The Boards of Trustees of the Funds know of no business other than that
discussed in Items 1, 2 and 3 above that will be presented for consideration
at the Meetings. If any other matter is properly presented, it is the
intention of the persons named in the enclosed proxy to vote in accordance
with their best judgment.
The class of shareholders solicited and entitled to vote on each proposal is
outlined in the chart below:
<TABLE>
<CAPTION>
MuniYield MuniVest MuniHoldings
Pennsylvania Pennsylvania Pennsylvania
- ------------------------------------------------------------------------------------
Common Common Common
Item Shares AMPS Shares AMPS Shares AMPS
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Approval of Agreement and
Plan of Reorganization....... Yes Yes Yes Yes Yes Yes
- ------------------------------------------------------------------------------------
2. Election of Trustees (1)..... No No No No Yes Yes
- ------------------------------------------------------------------------------------
3. Ratification of Selection of
Independent Auditors......... No No No No Yes Yes
</TABLE>
- --------
(1) Seven Trustees of MuniHoldings Pennsylvania are to be elected: two
Trustees are to be elected by the holders of MuniHoldings Pennsylvania
AMPS voting separately as a class; and the remaining five Trustees are to
be elected by holders of MuniHoldings Pennsylvania Common Shares and AMPS,
voting together as a single class.
ITEM 1. THE REORGANIZATION
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus and is qualified in its entirety by
reference to the more complete information contained in this Proxy Statement
and Prospectus and in the Agreement and Plan of Reorganization attached hereto
as Exhibit II.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to (i) the acquisition of substantially all of the assets and the
assumption of substantially all of the liabilities of MuniVest Pennsylvania by
MuniYield Pennsylvania and the subsequent distribution of MuniYield
Pennsylvania Common Shares and MuniYield Pennsylvania Series B AMPS,
respectively, to the holders of Common Shares of MuniVest Pennsylvania and
MuniVest Pennsylvania AMPS; (ii) the acquisition of substantially all of the
assets and the assumption of substantially all of the liabilities of
MuniHoldings Pennsylvania by MuniYield Pennsylvania and the subsequent
distribution of MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS, respectively, to the holders of Common Shares of
MuniHoldings Pennsylvania and MuniHoldings Pennsylvania AMPS, Series A; (iii)
the designation of the currently outstanding series of AMPS of MuniYield
Pennsylvania as Series A, (iv) the amendment to the investment policies of
MuniYield Pennsylvania to provide that the Fund be subject to the requirement
that under normal circumstances the Fund will invest at least 80% of its total
assets 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, as well as the change in the Fund's name to "MuniYield
Pennsylvania Insured Fund" and (v) the subsequent deregistration and
termination of each of MuniVest Pennsylvania and MuniHoldings Pennsylvania.
6
<PAGE>
At meetings of the Boards of Trustees of each of the Funds, the Board of
Trustees of each of the Funds approved the Reorganization. Subject to
obtaining the necessary approvals from the shareholders of each of the Funds,
the Board of Trustees of each Acquired Fund also deemed advisable the
deregistration of the Fund under the Investment Company Act of 1940, as
amended (the "Investment Company Act") and its termination under the laws of
the Commonwealth of Massachusetts. The Reorganization requires approval of the
shareholders of each of the three Funds. The Reorganization will not take
place if the shareholders of any one Fund do not approve the Agreement and the
Plan of Reorganization.
Each of the Funds seeks to provide shareholders with current income exempt
from Federal income tax and Pennsylvania personal income taxes. Each of the
Funds seeks to achieve its investment objective by investing primarily in a
portfolio of long-term investment grade Pennsylvania municipal obligations,
the interest on which, in the opinion of bond counsel to the issuer, is exempt
from Federal income tax and Pennsylvania personal income taxes. With the
exception of MuniYield Pennsylvania, at least 80% of each Fund's total 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. Unlike the other Funds, MuniYield
Pennsylvania is not currently required to invest in municipal obligations that
are covered by insurance; however, after the Reorganization, MuniYield
Pennsylvania will be subject to the same requirement as the Acquired Funds. In
connection with approving the Reorganization, the Board of Trustees of
MuniYield Pennsylvania approved this change in the investment policies of that
Fund to provide that the Fund will invest at least 80% of its assets in
municipal obligations 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 Board of Trustees of MuniYield Pennsylvania
also approved a change in the name of that Fund to "MuniYield Pennsylvania
Insured Fund".
Investing in insured Municipal Bonds and Pennsylvania Municipal Bonds may
result in a Fund's having a lower yield than a fund that does not invest in
insured bonds. FAM believes, however, that any such decrease in yield would
not be material and would be offset by the lower overall operating expense
ratio of the combined fund after the Reorganization. In addition, because the
portfolio of MuniYield Pennsylvania currently consists of a high percentage of
insured Municipal Bonds and Pennsylvania Municipal Bonds (as of , 1999,
approximately %), it is not anticipated that it will be necessary to engage
in a significant restructuring of the portfolio of MuniYield Pennsylvania or
to dispose of a substantial number of holdings as a result of the
Reorganization.
Each of the Funds is a non-diversified, leveraged, closed-end management
investment company registered under the Investment Company Act. If the
shareholders of the Funds approve the Reorganization, (i) MuniYield
Pennsylvania Common Shares and MuniYield Pennsylvania Series B AMPS will be
issued to MuniVest Pennsylvania in exchange for the assets of MuniVest
Pennsylvania; (ii) MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS will be issued to MuniHoldings Pennsylvania in
exchange for the assets of MuniHoldings Pennsylvania; and (iii) MuniVest
Pennsylvania and MuniHoldings Pennsylvania will distribute these shares to
their respective shareholders as provided in the Agreement and Plan of
Reorganization. After the Reorganization, each of MuniVest Pennsylvania and
MuniHoldings Pennsylvania will terminate its registration under the Investment
Company Act and its organization under Massachusetts law.
Based upon their evaluation of all relevant information, the Trustees of
each of the Funds have determined that the Reorganization will potentially
benefit the holders of Common Shares of that Fund. Specifically, after the
Reorganization, shareholders of each of the Acquired Funds will remain
invested in a closed-end fund that has an investment objective and policies
substantially similar to the Acquired Fund's investment objective and policies
and that uses substantially the same management personnel. In addition, it is
anticipated that holders of Common Shares of each of the Funds will be subject
to a reduced overall operating expense ratio based on the anticipated pro
forma combined total operating expenses and the total combined assets of the
surviving fund after the Reorganization. The Boards also considered the
relative tax positions of the Funds' portfolios. It is not anticipated that
the Reorganization will directly benefit the holders of shares of AMPS of any
of the Funds; however, the Reorganization will not adversely affect the
holders of shares of AMPS of any of the Funds and the expenses of the
Reorganization will not be borne by the holders of shares of AMPS of any of
the Funds.
7
<PAGE>
If all of the requisite approvals are obtained, it is anticipated that the
Reorganization will occur as soon as practicable after such approval, provided
that the Funds have obtained prior to that time a favorable private letter
ruling from the Internal Revenue Service (the "IRS") concerning the tax
consequences of the Reorganization as set forth in the Agreement and Plan of
Reorganization or an opinion of counsel to the same effect. Under the
Agreement and Plan of Reorganization, however, the Board of Trustees of any
Fund may cause the Reorganization to be postponed or abandoned in certain
circumstances should such Board determine that it is in the best interests of
the shareholders of that Fund to do so. The Agreement and Plan of
Reorganization may be terminated, and the Reorganization abandoned, whether
before or after approval by the Funds' shareholders, at any time prior to the
Exchange Date (as defined below), (i) by mutual consent of the Boards of
Trustees of all of the Funds or (ii) by the Board of Trustees of any Fund if
any condition to that Fund's obligations has not been fulfilled or waived by
such Fund's Board of Trustees.
Pro Forma Fee Table for MuniYield Pennsylvania, MuniVest Pennsylvania,
MuniHoldings Pennsylvania and the Combined Fund as of June 30, 1999
(Unaudited) (a)
<TABLE>
<CAPTION>
Actual
--------------------------------------
MuniYield MuniVest MuniHoldings Pro Forma
Pennsylvania Pennsylvania Pennsylvania Combined
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Common Shareholder Transaction
Expenses
Maximum Sales Load (as a
percentage of the offering
price) imposed on purchases
of Common Shares............ None(b) None(b) None(b) None(c)
Dividend Reinvestment and
Cash Purchase Plan Fees..... None None None None
Annual Expenses (as a
percentage of net assets
attributable to Common Shares
at June 30, 1999)(d)
Investment Advisory Fees(e).. 0.73% 0.76% 0.92% 0.76%
Interest Payments on Borrowed
Funds....................... None None None None
Other Expenses............... 0.43% 0.57% 0.79% 0.34%
---- ---- ---- ----
Total Annual Operating
Expenses(e).................. 1.16% 1.33% 1.71% 1.10%
==== ==== ==== ====
</TABLE>
- --------
(a) No information is presented with respect to AMPS because no Fund's
operating expenses or expenses of the Reorganization will be borne by the
holders of AMPS of any of the Funds. Generally, AMPS are sold at a fixed
liquidation preference of $25,000 per share and investment return is set
at an auction.
(b) Common Shares purchased in the secondary market may be subject to
brokerage commissions or other charges.
(c) No sales load will be charged on the issuance of shares in the
Reorganization. Common Shares are not available for purchase from the
Funds but may be purchased through a broker-dealer subject to individually
negotiated commission rates.
(d) The pro forma annual operating expenses for the combined fund are
projections for a 12-month period.
(e) Based on average net assets of each Fund and the combined fund, excluding
assets attributable to AMPS. If assets attributable to AMPS are included,
the Investment Advisory Fees would be 0.50% for MuniYield Pennsylvania,
MuniVest Pennsylvania and the combined fund, and 0.55% for MuniHoldings
Pennsylvania. The Total Annual Expenses would be 0.79%, 0.87%, 1.01%, and
0.72% for each Fund, respectively.
8
<PAGE>
Example:
Cumulative Expenses Paid on Common Shares
for the Periods Indicated:
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) the operating expense
ratio for each Fund (as a percentage of net assets
attributable to Common Shares) set forth in the table
above and (2) a 5% annual return throughout the
period:
MuniYield Pennsylvania............................... $12 $37 $64 $141
MuniVest Pennsylvania................................ $14 $42 $73 $160
MuniHoldings Pennsylvania............................ $17 $54 $93 $202
Combined Fund*....................................... $11 $35 $61 $134
</TABLE>
- --------
* Assumes that the Reorganization had taken place on June 30, 1999.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a holder of Common Shares of each of the Funds will
bear directly or indirectly as compared to the costs and expenses that would
be borne by such investors taking into account the Reorganization. The Example
set forth above assumes that Common Shares were purchased in the initial
offerings and the reinvestment of all dividends and distributions and uses a
5% annual rate of return as mandated by Securities and Exchange Commission
(the "SEC") regulations. The Example should not be considered a representation
of past or future expenses or annual rates of return. Actual expenses or
annual rates of return may be more or less than those assumed for purposes of
the Example. See "The Reorganization--Potential Benefits to Shareholders of
the Funds as a Result of the Reorganization."
Business of MuniYield MuniYield Pennsylvania was organized as a
Pennsylvania.................. business trust under the laws of the
Commonwealth of Massachusetts on August 24,
1992 and commenced operations on October 30,
1992. MuniYield Pennsylvania is a non-
diversified, leveraged, closed-end management
investment company whose investment objective
is to provide shareholders with current
income exempt from Federal income tax and
Pennsylvania personal income taxes. MuniYield
Pennsylvania seeks to achieve its investment
objective by investing primarily in a
portfolio of long-term investment grade
municipal obligations issued by or on behalf
of the Commonwealth of Pennsylvania, the
interest on which, in the opinion of bond
counsel to the issuer, is exempt from Federal
income taxes and Pennsylvania personal income
taxes ("Pennsylvania Municipal Bonds").
Unlike the other Funds, MuniYield
Pennsylvania currently is not required to
invest in municipal obligations that are
covered by insurance. Upon approval of the
Reorganization, however, the combined fund
will be subject to the requirement that under
normal circumstances, at least 80% of its
total 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. See "Comparison of
the Funds--Investment Objectives and
Policies."
9
<PAGE>
MuniYield Pennsylvania has outstanding Common
Shares and one series of AMPS ("MuniYield
Pennsylvania AMPS"). As of August 31, 1999,
MuniYield Pennsylvania had net assets of
$123,636,608.
Business of MuniVest MuniVest Pennsylvania was organized as a
Pennsylvania.................. business trust under the laws of the
Commonwealth of Massachusetts on May 6, 1993
and commenced operations on July 30, 1993.
MuniVest Pennsylvania is a non-diversified,
leveraged, closed-end management investment
company whose investment objective is to
provide shareholders with current income
exempt from Federal income tax and
Pennsylvania income taxes. MuniVest
Pennsylvania seeks to achieve its objective
by investing primarily in a portfolio of
Pennsylvania Municipal Bonds. Under normal
circumstances, at least 80% of MuniVest
Pennsylvania's total 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. See "Comparison of the Funds--
Investment Objectives and Policies."
MuniVest Pennsylvania has outstanding Common
Shares and one outstanding series of AMPS
referred to herein as "MuniVest Pennsylvania
AMPS." As of August 31, 1999, MuniVest
Pennsylvania had net assets of $78,049,552.
Business of MuniHoldings
Pennsylvania.................. MuniHoldings Pennsylvania was organized as a
business trust under the laws of the
Commonwealth of Massachusetts on December 3,
1998 and commenced operations on February 26,
1999. MuniHoldings Pennsylvania is a non-
diversified, leveraged, closed-end management
investment company whose investment objective
is to provide shareholders with current
income exempt from Federal income taxes and
Pennsylvania personal income taxes.
MuniHoldings Pennsylvania seeks to achieve
its investment objective by investing
primarily in a portfolio of Pennsylvania
Municipal Bonds. Under normal circumstances,
at least 80% of MuniHoldings Pennsylvania's
total 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. See "Comparison of
the Funds--Investment Objectives and
Policies."
MuniHoldings Pennsylvania has outstanding
Common Shares and one series of AMPS,
referred to herein as "MuniHoldings
Pennsylvania AMPS." As of August 31, 1999,
MuniHoldings Pennsylvania had net assets of
$49,404,902.
Comparison of the Funds........ Investment Objectives and Policies. The Funds
have substantially similar investment
objectives and policies. All three Funds seek
to provide current income exempt from Federal
10
<PAGE>
income tax and Pennsylvania personal income
taxes and seek to maintain as much of their
respective portfolios invested in
Pennsylvania Municipal Bonds as possible. The
policies of MuniYield Pennsylvania, however,
differ from the policies of the other Funds
in that MuniYield Pennsylvania currently is
not subject to the requirement that 80% of
its assets be invested in municipal
obligations covered by insurance. After the
Reorganization, however, the combined fund
will be subject to this requirement. See
"Comparison of the Funds--Investment
Objectives and Policies."
Capital Shares. Each Fund has outstanding
both Common Shares and AMPS. The Common
Shares of MuniYield Pennsylvania and MuniVest
Pennsylvania are traded on the NYSE while the
Common Shares of MuniHoldings Pennsylvania
are traded on the AMEX. As of August 31,
1999, (i) the net asset value per share of
MuniYield Pennsylvania Common Shares was
$14.20 and the market price per share was
$13.4375; (ii) the net asset value per share
of MuniVest Pennsylvania Common Shares was
$12.51 and the market price per share was
$12.0625; and (iii) the net asset value per
share of MuniHoldings Pennsylvania Common
Shares was $13.32 and the market price per
share was $12.9375. The AMPS of each of the
Funds have a liquidation preference of
$25,000 per share and are sold principally at
auctions. See "Comparison of the Funds--
Capital Stock."
Auctions generally have been held and will be
held every seven days for each series of AMPS
of each of the Funds unless the applicable
Fund elects, subject to certain limitations,
to have a special dividend period. In
connection with the Reorganization, a holder
of AMPS of MuniHoldings Pennsylvania will
receive MuniYield Pennsylvania AMPS with a
dividend payment date and an auction date
that fall on a day of the week that is
different from the schedule of the AMPS of
MuniHoldings Pennsylvania that he or she
holds. See "Comparison of the Funds--Capital
Shares." The following table provides
information about the dividend rates for each
series of AMPS of each of the Funds as of a
recent auction.
<TABLE>
<CAPTION>
Dividend
Auction Date Fund Series Rate
------------ ------------ ------ --------
<S> <C> <C> <C>
September 20, 1999............ MuniYield * 3.40%
Pennsylvania
September 21, 1999............ MuniVest * 2.73%
Pennsylvania
September 17, 1999............ MuniHoldings A 3.05%
Pennsylvania
</TABLE>
--------
* No series designation.
Advisory Fees. The investment adviser for
each of the Funds is Fund Asset Management,
L.P. ("FAM"). FAM is an affiliate of MLAM,
and both FAM and MLAM are owned and
controlled by
11
<PAGE>
Merrill Lynch & Co., Inc. ("ML & Co."). The
principal business address of FAM is 800
Scudders Mill Road, Plainsboro, New Jersey
08536. Companies in the Asset Management
Group of ML & Co. (which includes FAM) act as
investment advisers for over 100 other
registered investment companies and also
offer portfolio management and portfolio
analysis services to individuals and
institutional accounts.
FAM is responsible for the management of each
Fund's investment portfolio and for providing
administrative services to each Fund. Robert
A. DiMella and William R. Bock serve as the
portfolio managers for MuniHoldings
Pennsylvania; William R. Bock serves as the
portfolio manager for MuniYield Pennsylvania
and for MuniVest Pennsylvania and he will
serve as portfolio manager of the combined
fund after the Reorganization.
Pursuant to separate investment advisory
agreements between each Fund and FAM,
MuniYield Pennsylvania and MuniVest
Pennsylvania pay FAM a monthly fee at the
annual rate of 0.50% of such Fund's average
weekly net assets, including assets acquired
from the sale of AMPS, and MuniHoldings
Pennsylvania pays FAM a monthly fee at the
annual rate of 0.55% of such Fund's average
weekly net assets, including assets acquired
from the sale of AMPS. Subsequent to the
Reorganization, FAM will continue to receive
compensation pursuant to the investment
advisory agreement with MuniYield
Pennsylvania at the rate of 0.50% of the
average weekly net assets, including assets
acquired from the sale of AMPS, of the
combined fund. For MuniHoldings Pennsylvania,
this represents a fee reduction. See
"Comparison of the Funds--Management of the
Funds."
Other Significant Fees. The Bank of New York
is the custodian, transfer agent, dividend
disbursing agent and registrar for the Common
Shares of MuniVest Pennsylvania and
MuniHoldings Pennsylvania. State Street Bank
and Trust Company is the custodian, transfer
agent, dividend disbursing agent and
registrar for the Common Shares of MuniYield
Pennsylvania. The Bank of New York is the
transfer agent, dividend disbursing agent,
registrar and auction agent for each Fund's
AMPS. The principal business addresses are as
follows: The Bank of New York, 90 Washington
Street, New York, New York 10286 (for its
custodial services) and 101 Barclay Street,
New York, New York 10286 (for its transfer
and auction agency services); State Street
Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 (for its transfer
agency services) and One Heritage Drive, PZN,
North Quincy, Massachusetts 02171 (for its
custodial services). See "Comparison of the
Funds--Management of the Funds."
Overall Expense Ratio. As of June 30, 1999,
the overall annualized operating expense
ratio for MuniYield Pennsylvania
12
<PAGE>
was 1.16%, based on average net assets of
approximately $86.3 million excluding AMPS,
and 0.79%, based on average net assets of
approximately $126.3 million including AMPS;
the overall annualized operating expense
ratio for MuniVest Pennsylvania was 1.33%,
based on average net assets of approximately
$52.2 million excluding AMPS, and 0.87%,
based on average net assets of approximately
$79.7 million including AMPS; and the overall
annualized operating expense ratio for
MuniHoldings Pennsylvania was 1.71%, based on
average net assets of approximately $30.1
million excluding AMPS, and 1.01%, based on
average net assets of approximately $50.6
million including AMPS. If the Reorganization
had taken place on June 30, 1999, the overall
operating expense ratio for the combined fund
on a pro forma basis would have been 1.10%,
based on average net assets of approximately
$168.6 million excluding AMPS, and 0.72%,
based on average net assets of approximately
$256.6 million including AMPS.
Purchases and Sales of Common Shares and
AMPS. Purchase and sale procedures for the
Common Shares of each of the Funds are
identical, and investors typically purchase
and sell Common Shares of the Funds through a
registered broker-dealer on the NYSE or the
AMEX, thereby incurring a brokerage
commission set by the broker-dealer.
Alternatively, investors may purchase or sell
Common Shares of the Funds through privately
negotiated transactions with existing
shareholders.
Purchase and sale procedures for the AMPS of
each of the Funds also are identical. Such
AMPS generally are purchased and sold at
separate auctions conducted on a regular
basis by The Bank of New York, as the auction
agent for each Fund's AMPS (the "Auction
Agent"). Unless otherwise permitted by the
Funds, existing and potential holders of AMPS
only may participate in auctions through
their broker-dealers. Broker-dealers submit
the orders of their respective customers who
are existing and potential holders of AMPS to
the Auction Agent. On or prior to each
auction date for the AMPS (the business day
next preceding the first day of each dividend
period), each holder may submit orders to
buy, sell or hold AMPS to its broker-dealer.
Outside of these auctions, shares of AMPS may
be purchased or sold through broker-dealers
for the AMPS in a secondary trading market
maintained by the broker-dealers. However,
there can be no assurance that a secondary
market will develop or if it does develop,
that it will provide holders with a liquid
trading market for the AMPS of any of the
Funds.
Ratings of AMPS. The AMPS of each Fund have
been assigned a rating of AAA from Standard &
Poor's ("S&P") and "aaa" from Moody's
Investors Service, Inc. ("Moody's"). See
"Comparison of the Funds--Rating Agency
Guidelines."
Portfolio Insurance. With the exception of
MuniYield Pennsylvania, each of the other
Funds has a similar policy with
13
<PAGE>
respect to obtaining insurance for portfolio
securities. Under normal circumstances, at
least 80% of each Fund's assets will be
invested in municipal obligations 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. MuniYield
Pennsylvania currently has no policy with
respect to maintaining insurance on its
portfolio; however, after the Reorganization,
MuniYield Pennsylvania also will, under
normal circumstances, have at least 80% of
its assets invested in municipal obligations
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. See "Comparison
of the Funds--Investment Objectives and
Policies--Portfolio Insurance."
Ratings of Municipal Obligations. Each of the
Funds will invest only in municipal
obligations that at the time of purchase are
considered investment grade.
Portfolio Transactions. The portfolio
transactions in which the Funds may engage
are similar, as are the procedures for such
transactions. See "Comparison of the Funds--
Portfolio Transactions."
Dividends and Distributions. The methods of
dividend payment and distributions are
similar for all of the Funds, both with
respect to the Common Shares and the AMPS of
each Fund. See "Comparison of the Funds--
Dividends and Distributions."
Net Asset Value. The net asset value per
Common Share of each Fund is determined after
the close of business on the NYSE (generally,
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 of each
Fund, 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 AMPS of the Fund is divided by
the total number of Common Shares of the Fund
outstanding at such time. Expenses, including
fees payable to FAM, are accrued daily. See
"Comparison of the Funds--Net Asset Value."
Voting Rights. The corresponding voting
rights of the holders of Common Shares of
each of the Funds are substantially similar.
Likewise, the corresponding voting rights of
the holders of each Fund's AMPS are
substantially similar. See "Comparison of the
Funds--Capital Stock."
Shareholder Services. An automatic dividend
reinvestment plan is available to holders of
Common Shares of each Fund. The plans are
similar for the three Funds. See "Comparison
of the Funds--Automatic Dividend Reinvestment
Plan." Other shareholder services, including
the provision of annual and semi-annual
reports, are the same for the three Funds.
14
<PAGE>
Outstanding Securities of MuniYield Pennsylvania, MuniVest Pennsylvania and
MuniHoldings Pennsylvania as of August 31, 1999
<TABLE>
<CAPTION>
Amount Outstanding
Amount Held By Exclusive of Amount
Amount Fund for its Shown in
Title of Class Authorized Own Account Previous Column
-------------- ---------- -------------- -------------------
<S> <C> <C> <C>
MuniYield Pennsylvania
Shares......................... Unlimited -0- 5,891,406
AMPS........................... 1,000,000 -0- 1,600
MuniVest Pennsylvania
Shares......................... Unlimited -0- 4,041,184
AMPS........................... 1,000,000 -0- 1,100
MuniHoldings Pennsylvania
Shares......................... Unlimited -0- 2,170,570
AMPS........................... 1,000,000 -0- 820
</TABLE>
Tax Considerations............. The Funds have jointly requested a private
letter ruling from the IRS with respect to
the Reorganization to the effect that, among
other things, no Fund will recognize gain or
loss on the transaction and the shareholders
of the Acquired Funds will not recognize gain
or loss on the exchange of their shares for
MuniYield Pennsylvania Common Shares (except
to the extent that a holder of Common Shares
in an Acquired Fund receives cash
representing an interest in less than a full
share of MuniYield Pennsylvania Common Shares
in the Reorganization) or MuniYield
Pennsylvania AMPS. The consummation of the
Reorganization is subject to the receipt of
such ruling or of an opinion of counsel to
the same effect. The Reorganization will not
affect the status of MuniYield Pennsylvania
as a regulated investment company (a "RIC")
under the Internal Revenue Code of 1986, as
amended (the "Code"). Each of the Acquired
Funds will liquidate pursuant to the
Reorganization. See "Agreement and Plan of
Reorganization--Tax Consequences of the
Reorganization."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Since each of the three Funds invests primarily in a portfolio of
Pennsylvania Municipal Bonds, any risks inherent in such investments are
equally applicable to all three Funds and will be similarly pertinent to the
combined fund after the Reorganization. It is expected that the Reorganization
itself will not adversely affect the rights of holders of Common Shares or of
any series of AMPS of any of the Funds or create additional risks.
Pennsylvania Municipal Bonds
Each of the Funds ordinarily invests at least 65% of its portfolio in
Pennsylvania Municipal Bonds. As a result, each Fund is more exposed to risks
affecting issuers of Pennsylvania Municipal Bonds than is a municipal bond
fund that invests more widely. See "Comparison of the Funds--Special
Considerations Relating to Pennsylvania Municipal Bonds" and Exhibit III--
"Economic and Other Conditions in Pennsylvania."
15
<PAGE>
Interest Rate and Credit Risk
Each Fund invests in municipal bonds, which are subject to interest rate and
credit risk. Interest rate risk is the risk that prices of municipal bonds
generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer-term securities generally change more in
response to interest rate changes than prices of shorter-term securities.
Credit risk is the risk that the issuer will be unable to pay the interest or
principal when due. The degree of credit risk depends on both the financial
condition of the issuer and the terms of the obligation.
Non-diversification
Each 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. Since a Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more exposed to the effects of any single economic, political or
regulatory occurrence than a more widely-diversified fund. Even as a non-
diversified fund, each Fund must still meet the diversification requirements
of applicable Federal income tax law.
Rating Categories
The Funds intend to invest in municipal bonds that are rated investment
grade by S&P, Moody's or Fitch IBCA, Inc. ("Fitch") or are considered by FAM
to be of comparable quality. Obligations rated in the lowest investment grade
category may have certain speculative characteristics.
Private Activity Bonds
Each Fund may invest all or a portion of its assets in certain tax-exempt
securities classified as "private activity bonds." These bonds may subject
certain investors in a Fund to the Federal alternative minimum tax.
Portfolio Insurance
Each of the Funds, other than MuniYield Pennsylvania, currently is subject
to certain investment restrictions imposed by guidelines of the insurance
companies that issue portfolio insurance. Following the Reorganization,
MuniYield Pennsylvania also will be subject to these guidelines. The Funds do
not believe these guidelines prevent FAM from managing the Funds' portfolios
in accordance with the Funds' investment objectives and policies.
Leverage
Currently, the outstanding MuniYield Pennsylvania AMPS represent
approximately 35% of that Fund's capital, the outstanding MuniVest
Pennsylvania AMPS represent approximately 35% of that Fund's capital and the
outstanding MuniHoldings Pennsylvania AMPS represent approximately 40% of that
Fund's capital. After the Reorganization, the outstanding AMPS of the combined
fund will be permitted to represent approximately 40% of the combined fund's
capital.
Use of leverage, through the issuance of AMPS, involves certain risks to
holders of Common Shares of each of the Funds. For example, each Fund's
issuance of AMPS may result in higher volatility of the net asset value of its
Common Shares and potentially more volatility in the market value of its
Common Shares. In addition, changes in the short-term and medium-term dividend
rates on, and the amount of taxable income allocable to, the AMPS will affect
the yield to holders of Common Shares. Under certain circumstances, when a
Fund is required to allocate taxable income to holders of AMPS, the Fund may
be required to make an additional distribution to such holders in an amount
approximately equal to the tax liability resulting from that allocation (an
"Additional Distribution"). Leverage will allow holders of each Fund's Common
Shares to realize a higher
16
<PAGE>
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) paid on the AMPS. Similarly,
since a pro rata portion of each Fund's net realized capital gains is
generally payable to holders of the Fund's Common Shares, the use of leverage
will increase the amount of such gains distributed to holders of the Fund's
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 each Fund may be
invested. To the extent that the current dividend rate (and any Additional
Distribution) on the AMPS approaches the net return on a 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 AMPS were to exceed the net return on a 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 costs of issuing AMPS and any decline in
the value of a Fund's investments (including investments purchased with the
proceeds from any AMPS offering) will be borne entirely by holders of the
Fund's 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 a Fund is liquidated, holders of that
Fund's AMPS will be entitled to receive liquidating distributions before any
distribution is made to holders of Common Shares of that Fund.
In an extreme case, a decline in net asset value could affect each Fund's
ability to pay dividends on its Common Shares. Failure to make such dividend
payments could adversely affect the Fund's qualification as a RIC under the
Federal tax laws. See "Comparison of Funds--Tax Rules Applicable to the Funds
and their Shareholders." However, each Fund intends to take all measures
necessary to make dividend payments on its Common Shares. If a Fund's current
investment income is ever insufficient to meet dividend payments on either the
Common Shares or the AMPS, the Fund may have to liquidate certain of its
investments. In addition, each Fund has the authority to redeem its AMPS for
any reason and may redeem all or part of its AMPS under the following
circumstances:
. if the Fund anticipates that its leveraged capital structure will result
in a lower rate of return for any significant amount of time to holders
of Common Shares than the Fund can obtain if the Common Shares were not
leveraged,
. if the asset coverage for the AMPS 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
otherwise, or
. in order to maintain the asset coverage established by Moody's and S&P
in rating the AMPS.
Redemption of the AMPS 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 to do so.
Portfolio Management
The portfolio management strategies of the Funds are the same. In the event
of an increase in short-term or medium-term rates or other change in market
conditions to the point where a Fund's leverage could adversely affect holders
of Common Shares as noted above, or in anticipation of such changes, each Fund
may attempt to shorten the average maturity of its investment portfolio, which
would tend to offset the negative impact of leverage on holders of its Common
Shares. Each Fund also may attempt to reduce the degree to which it is
leveraged by redeeming AMPS pursuant to the provisions of the Fund's
Certificate of Designation establishing the rights and preferences of the AMPS
or otherwise purchasing shares of AMPS. Purchases and sales or redemptions of
AMPS, whether on the open market or in negotiated transactions, are subject to
limitations under
17
<PAGE>
the Investment Company Act. If market conditions subsequently change, each
Fund may sell previously unissued shares of AMPS or shares of AMPS that the
Fund previously issued but later repurchased or redeemed.
Inverse Floating Obligations
A 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
Each Fund may engage in certain options and futures transactions to reduce
its exposure to interest rate movements. If a Fund incorrectly forecasts
market values, interest rates or other factors, that Fund's performance could
suffer. Each Fund also may suffer a loss if the other party to the transaction
fails to meet its obligations. The Funds are not required to use hedging and
may choose not to do so.
Antitakeover Provisions
The Declaration of Trust of each of the Funds includes provisions that could
limit the ability of other entities or persons to acquire control of that 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.
Ratings Considerations
The Funds have received ratings of their AMPS of AAA from S&P and "aaa" from
Moody's. In order to maintain these ratings, the Funds are required to
maintain portfolio holdings meeting specified guidelines of such rating
agencies. These guidelines may impose asset coverage requirements that are
more stringent than those imposed by the Investment Company Act.
As described by Moody's and S&P, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings of the AMPS are not recommendations to purchase, hold
or sell AMPS, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor, nor do the rating agency guidelines
address the likelihood that a holder of AMPS will be able to sell such shares
in an auction. The ratings are based on current information furnished to
Moody's and S&P by the Funds and FAM and information obtained from other
sources. The ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, such information. The Common Shares of
the Funds has not been rated by a nationally recognized statistical rating
organization.
The Board of Trustees of each of the Funds, without shareholder approval,
may amend, alter or repeal certain definitions or restrictions which have been
adopted by the Fund pursuant to the rating agency guidelines, in the event the
Fund receives confirmation from the rating agencies that any such amendment,
alteration or repeal would not impair the ratings then assigned to AMPS.
18
<PAGE>
COMPARISON OF THE FUNDS
Financial Highlights
MuniYield Pennsylvania
The financial information in the table below, except for the six months ended
April 30, 1999, which is unaudited and has been provided by FAM, has been
audited in conjunction with the annual audits of the financial statements of
the Fund by Deloitte & Touche LLP, independent auditors. The following per
share data and ratios have been derived from information provided in the
financial statements of the Fund.
<TABLE>
<CAPTION>
Six
Months
Ended For The Year Ended October 31,
April 30, ---------------------------------
1999 1998 1997 1996 1995
--------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
Per Share Operating Performance:
Net asset value, beginning of
period......................... $ 16.01 $15.86 $ 15.32 $ 15.36 $13.86
------- ------ -------- ------- ------
Investment income--net.......... .53 1.12 1.13 1.15 1.17
Realized and unrealized gain
(loss) on investments--net..... (.24) .46 .66 (.03) 1.53
------- ------ -------- ------- ------
Total from investment
operations..................... .29 1.58 1.79 1.12 2.70
------- ------ -------- ------- ------
Less dividends and distributions
to holders of Common Shares:
Investment income--net......... (.46) (.88) (.89) (.91) (.89)
Realized gain on investments--
net........................... (.45) (.27) (.09) -- --
In excess of realized gain on
investments--net.............. -- -- -- -- (.05)
------- ------ -------- ------- ------
Total dividends and
distributions to holders of
Common Shares.................. (.91) (1.15) (.98) (.91) (.94)
------- ------ -------- ------- ------
Effect of Preferred Share
activity:
Dividends and distributions to
holders of Preferred Shares:
Investment income--net......... (.07) (.18) (.24) (.25) (.25)
Realized gain on investments--
net........................... (.06) (.10) (.03) -- --
In excess of realized gain on
investments--net.............. -- -- -- -- (.01)
------- ------ -------- ------- ------
Total effect of Preferred Share
activity....................... (.13) (.28) (.27) (.25) (.26)
------- ------ -------- ------- ------
Net asset value, end of period.. $ 15.26 $16.01 $ 15.86 $ 15.32 $15.36
======= ====== ======== ======= ======
Market price per share, end of
period......................... $15.125 $16.50 $14.8125 $14.125 $13.75
======= ====== ======== ======= ======
Total Investment Return:**
Based on market price per
share.......................... (2.97%)# 19.82% 12.15% 9.48% 34.17%
======= ====== ======== ======= ======
Based on net asset value per
share.......................... .89%# 8.58% 10.71% 6.30% 18.95%
======= ====== ======== ======= ======
Ratios to Average Net Assets:***
Expenses........................ .78%* .77% .79% .78% .82%
======= ====== ======== ======= ======
Investment income--net.......... 4.77%* 4.90% 5.07% 5.14% 5.44%
======= ====== ======== ======= ======
</TABLE>
(footnotes on following page)
19
<PAGE>
<TABLE>
<CAPTION>
Six
Months
Ended For The Year Ended October 31,
April 30, ----------------------------------
1999 1998 1997 1996 1995
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Supplemental Data:
Net assets, net of Preferred
Shares, end of period (in
thousands)...................... $89,808 $92,767 $91,071 $88,001 $88,226
======= ======= ======= ======= =======
Preferred Shares outstanding, end
of period (in thousands)........ $40,000 $40,000 $40,000 $40,000 $40,000
======= ======= ======= ======= =======
Portfolio turnover............... 16.87% 60.52% 70.14% 75.83% 43.59%
======= ======= ======= ======= =======
Dividends Per Share on Preferred
Shares Outstanding
Investment income--net........... $ 268 $ 655 $ 853 $ 901 $ 902
======= ======= ======= ======= =======
Leverage:
Asset coverage per $1,000........ $ 3,245 $ 3,319 $ 3,277 $ 3,200 $ 3,206
======= ======= ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or less than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Does not reflect the effect of dividends to holders of Preferred Shares.
# Aggregate total investment return.
20
<PAGE>
MuniVest Pennsylvania
The financial information in the table below, except for the six months ended
April 30, 1999, which is unaudited and has been provided by FAM, has been
audited in conjunction with the annual audits of the financial statements of
the Fund by Deloitte & Touche LLP, independent auditors. The following per
share data and ratios have been derived from information provided in the
financial statements of the Fund.
<TABLE>
<CAPTION>
Six
Months
Ended For The Year Ended October 31,
April 30, ---------------------------------
1999 1998 1997 1996 1995
--------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
Per Share Operating Performance:
Net asset value, beginning of
period......................... $ 13.70 $ 13.28 $12.68 $ 12.91 $ 11.54
-------- ------- ------ ------- -------
Investment income--net.......... .45 .94 .95 .97 1.01
Realized and unrealized gain
(loss) on investments--net..... (.17) .42 .59 (.23) 1.37
-------- ------- ------ ------- -------
Total from investment
operations..................... .28 1.36 1.54 .74 2.38
-------- ------- ------ ------- -------
Less dividends and distributions
to holders of Common Shares:
Investment income--net......... (.36) (.71) (.71) (.73) (.75)
Realized gain on investments--
net........................... -- -- -- -- --
-------- ------- ------ ------- -------
Total dividends and
distributions to holders of
Common Shares.................. (.36) (.71) (.71) (.73) (.75)
-------- ------- ------ ------- -------
Effect of Preferred Share
activity:
Dividends to holders of
Preferred Shares:
Investment income--net........ (.10) (.23) (.23) (.24) (.26)
-------- ------- ------ ------- -------
Net asset value, end of period.. $ 13.52 $ 13.70 $13.28 $ 12.68 $ 12.91
======== ======= ====== ======= =======
Market price per share, end of
period......................... $13.0625 $13.875 $12.25 $11.625 $11.875
======== ======= ====== ======= =======
Total Investment Return:**
Based on market price per share. (3.29)%# 19.62% 11.80% 3.98% 16.58%
======== ======= ====== ======= =======
Based on net asset value per
share.......................... 1.38%# 8.95% 11.12% 4.32% 19.44%
======== ======= ====== ======= =======
</TABLE>
(footnotes on following page)
21
<PAGE>
<TABLE>
<CAPTION>
Six
Months
Ended For The Year Ended October 31,
April 30, ----------------------------------
1999 1998 1997 1996 1995
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Ratios to Average Net Assets:***
Expenses, net of reimbursement.. .87%* .86% .88% .90% .83%
======= ======= ======= ======= =======
Expenses........................ .87%* .86% .88% .90% .95%
======= ======= ======= ======= =======
Investment income--net.......... 4.54%* 4.66% 4.77% 4.91% 5.33%
======= ======= ======= ======= =======
Supplemental Data:
Net assets, net of Preferred
Shares, end of period
(in thousands)................. $54,587 $55,207 $53,456 $51,050 $51,867
======= ======= ======= ======= =======
Preferred Shares outstanding,
end of period (in thousands)... $27,500 $27,500 $27,500 $27,500 $27,500
======= ======= ======= ======= =======
Portfolio turnover.............. 19.64% 60.37% 61.03% 113.65% 73.19%
======= ======= ======= ======= =======
Dividends Per Share on Preferred
Shares Outstanding:
Investment income--net.......... $ 369 $ 848 $ 837 $ 879 $ 966
======= ======= ======= ======= =======
Leverage:
Asset coverage per $1,000....... $ 2,985 $ 3,008 $ 2,944 $ 2,856 $ 2,886
======= ======= ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or less than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Does not reflect the effect of dividends to holders of Preferred Shares.
# Aggregate total investment return.
22
<PAGE>
MuniHoldings Pennsylvania
The financial information in the table below, has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. The following per share data and
ratios have been derived from information provided in the financial statements
of the Fund.
<TABLE>
<CAPTION>
For the Period
February 26, 1999+ to
September 30, 1999##
---------------------
<S> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.....................
---
Investment income--net...................................
Realized and unrealized gain (loss) on investments--net..
---
Total from investment operations.........................
---
Less dividends and distributions to holders of Common
Shares:
Investment income--net..................................
Realized gain on investment--net........................
---
Total dividends and distributions to holders of Common
Shares..................................................
---
Capital charge resulting from issuance of Common Shares..
---
Effect of Preferred Share activity:++
Dividends and distributions to holders of Preferred
Shares:
Investment income--net..................................
Realized gain on investments--net.......................
Capital charge resulting from issuance of Preferred
Shares.................................................
---
Total effect of Preferred Share activity.................
---
Net asset value, end of period...........................
===
Market price per share, end of period....................
===
Total Investment Return:**
Based on market price per share..........................
===
Based on net asset value per share.......................
===
Ratios Based on Average Net Assets Attributable to Common
Shares:***
Amount of Dividends to Preferred Shareholders............
===
Investment Income Net, to Common Shareholders............
===
Ratios Based on Total Average Net Assets.................
===
Expenses, net of reimbursement...........................
===
Expenses.................................................
===
Investment income--net...................................
===
Supplemental Data:
Net assets, net of Preferred Shares, end of period (in
thousands)..............................................
===
Preferred Shares outstanding, end of period (in
thousands)..............................................
===
Portfolio turnover.......................................
===
Dividends Per Share on Preferred Shares Outstanding:
Investment income--net...................................
===
Leverage:
Asset coverage per $1,000................................
===
</TABLE>
- --------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or less than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
*** Does not reflect the effect of dividends to holders of Preferred Shares.
+ Commencement of operations.
++ The Fund's Preferred Shares were issued on March 18, 1999.
# Aggregate total investment return.
## To be filed by amendment.
23
<PAGE>
Per Share Data for Common Shares*
Traded on the New York Stock Exchange (unaudited)
MuniYield Pennsylvania
<TABLE>
<CAPTION>
Premium
(Discount)
to Net
Market Price Net Asset Asset Value
($)** Value ($) (%)
--------------- ----------- ------------
Quarter Ended* High Low High Low High Low
-------------- ------- ------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
January 31, 1997...................... 14.50 13.875 15.21 15.04 (5.30) (9.20)
April 30, 1997........................ 14.25 13.75 15.07 14.88 (3.28) (8.27)
July 31, 1997......................... 15.0625 14.625 15.94 15.44 (3.07) (6.68)
October 31, 1997...................... 15.8125 14.8125 15.90 15.60 (0.30) (6.60)
January 31, 1998...................... 16.1875 15.25 16.09 15.80 0.86 (5.76)
April 30, 1998........................ 15.50 14.75 15.90 15.43 0.88 (5.74)
July 31, 1998......................... 16.125 15.8125 15.89 15.77 1.66 (3.66)
October 31, 1998...................... 16.625 15.875 16.40 15.98 3.06 (1.52)
January 31, 1999...................... 16.75 15.6875 15.55 15.35 8.89 2.68
April 30, 1999........................ 16.00 15.00 15.41 15.26 7.34 (2.41)
July 31, 1999......................... 14.3125 13.75 14.76 14.58 (0.08) (6.34)
</TABLE>
MuniVest Pennsylvania
<TABLE>
<CAPTION>
Premium
(Discount)
to Net
Market Price Net Asset Asset Value
($)** Value ($) (%)
--------------- ----------- -------------
Quarter Ended* High Low High Low High Low
-------------- ------- ------- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
January 31, 1997..................... 11.375 11.125 12.71 12.51 (8.13) (13.32)
April 30, 1997....................... 11.625 11.25 12.47 12.30 (4.90) (9.20)
July 31, 1997........................ 12.3125 11.1875 13.32 12.86 (5.62) (9.02)
October 31, 1997..................... 12.6875 11.9375 13.31 13.05 (3.37) (8.94)
January 31, 1998..................... 13.125 12.6875 13.80 13.53 (3.95) (8.69)
April 30, 1998....................... 12.9375 12.25 13.59 13.14 (1.48) (8.59)
July 31, 1998........................ 16.0625 12.8125 13.54 13.44 (1.56) (7.32)
October 31, 1998..................... 14.25 13.1875 14.06 13.66 2.49 (3.21)
January 31, 1999..................... 13.8125 13.4375 13.74 13.52 3.71 (0.84)
April 30, 1999....................... 13.50 12.9375 13.64 13.50 0.00 (4.23)
July 31, 1999........................ 13.0625 12.375 13.15 12.88 1.26 (5.22)
</TABLE>
Per Share Data for Common Shares*
Traded on the American Stock Exchange (unaudited)
MuniHoldings Pennsylvania
<TABLE>
<CAPTION>
Premium
(Discount)
to Net
Market Price Net Asset Asset Value
($)** Value ($) (%)
------------- ----------- -----------
Quarter Ended* High Low High Low High Low
-------------- ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
April 30, 1999+.......................... 16.125 15.25 14.90 14.81 13.41 0.13
July 31, 1999............................ 14.625 13.875 14.02 13.83 8.77 (3.38)
</TABLE>
- --------
* Calculations are based upon Common Shares outstanding at the end of each
quarter.
** As reported in the consolidated transaction operating system.
+ For the period February 26, 1999 to April 30, 1999.
24
<PAGE>
As indicated in the tables above, for the periods shown Common Shares of the
Funds generally have traded at prices close to net asset value, with small
premiums or discounts to net asset value of generally less than 10% being
reflected in the market value of the shares from time to time. Although there
is no reason to believe that this pattern should be affected by the
Reorganization, it is not possible to predict whether shares of the surviving
fund will trade at a premium or discount to net asset value following the
Reorganization, or what the extent of any such premium or discount might be.
Investment Objective and Policies
The structure, organization and investment policies of the Funds are
substantially similar, with the differences among the three Funds set forth
below. Each Fund seeks as a fundamental investment objective current income
exempt from Federal income tax and Pennsylvania personal income taxes. The
investment objective of each Fund is a fundamental policy that may not be
changed without a vote of a majority of the Fund's outstanding voting
securities.
Each Fund seeks to achieve its investment objective by investing primarily
in a portfolio of Pennsylvania Municipal Bonds. At all times, at least 65% of
each Fund's total assets will be invested in Pennsylvania Municipal Bonds and
at least 80% of each Fund's total assets will be invested in Pennsylvania
Municipal Bonds and in other long-term municipal obligations exempt from
Federal income tax but not Pennsylvania income taxes ("Municipal Bonds"),
except during interim periods pending investment of the net proceeds of public
offerings of its securities and during temporary defensive periods. At times,
each Fund may seek to hedge its portfolio through the use of futures and
options transactions to reduce volatility in the net asset value of its Common
Shares. Currently, with respect to MuniVest Pennsylvania and MuniHoldings
Pennsylvania, and after the Reorganization with respect to MuniYield
Pennsylvania, under normal circumstances, at least 80% of each Fund's total
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. MuniYield Pennsylvania is not currently
subject to this requirement regarding insurance coverage for its portfolio
securities but will adopt this requirement upon approval of the Reorganization
by all the Funds.
Ordinarily, none of the Funds intends to realize significant investment
income subject to Federal income tax and Pennsylvania personal income taxes.
To the extent FAM considers that suitable Pennsylvania Municipal Bonds are not
available for investment, the Funds may purchase Municipal Bonds. Each 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 a
Federal alternative minimum tax.
Each 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. 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.
The investment grade Pennsylvania Municipal Bonds and Municipal Bonds in
which each Fund primarily invests are those Pennsylvania Municipal Bonds and
Municipal Bonds that are rated at the date of purchase in the four highest
rating categories of S&P, Moody's or Fitch or, if unrated, are considered to
be of comparable quality by FAM. In the case of long-term debt, the investment
grade rating categories are AAA through BBB for S&P and Fitch and Aaa through
Baa for Moody's. 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
25
<PAGE>
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 above. In assessing the
quality of Pennsylvania Municipal Bonds and Municipal Bonds with respect to
the foregoing requirements, FAM takes into account the portfolio insurance as
well as the nature of any letters of credit or similar credit enhancement 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 enhancements. 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, FAM 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. See Exhibit IV--"Ratings of Municipal Bonds and
Commercial Paper" and Exhibit V--"Portfolio Insurance."
Each of the Funds may invest in 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 each Fund may invest are tax-
exempt obligations, in the opinion of counsel to the issuer, that contain a
floating or variable interest rate adjustment formula and a 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 each 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. Each 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 for Federal income
tax purposes.
The average maturity of each Fund's portfolio securities varies based upon
FAM's assessment of economic and market conditions. The net asset value of the
Common Shares of a closed-end investment company, such as each 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, such as that used by the Funds.
Each Fund intends to invest primarily in long-term Pennsylvania Municipal
Bonds and Municipal Bonds with a maturity of more than ten years. However,
each Fund may also 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 each Fund's total assets except
during interim periods pending investment of the net proceeds from 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 FAM, prevailing market or economic conditions warrant.
Each Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act
in the proportion of its total assets that it may invest in securities of a
single issuer. However, each Fund's investments are limited so as to qualify
the Fund for the special tax treatment afforded RICs under the Federal tax
laws. To qualify, among other requirements, each Fund limits its investments
so that, at the close of each quarter of the taxable year, (i) not more than
25% of the market value of
26
<PAGE>
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 Investment Company Act must satisfy the foregoing 5%
requirement with respect to 75% of its total assets. To the extent that any
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 assets of MuniVest
Pennsylvania and MuniHoldings Pennsylvania (referred to in this section as the
"Insured Funds") will be invested in Pennsylvania Municipal Bonds and
Municipal Bonds either (i) insured under an insurance policy purchased by the
Insured Fund, or (ii) insured under an insurance policy obtained by the issuer
thereof or any other party. The Insured Funds will seek to limit their
investments to municipal obligations 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 available. See Exhibit V to this Proxy
Statement and Prospectus for a brief description of insurance claims-paying
ability ratings of S&P, Moody's and Fitch. Currently, it is anticipated that a
majority of the insured Pennsylvania Municipal Bonds and Municipal Bonds in
each Insured Fund's portfolio will be insured by the following insurance
companies which satisfy the foregoing criteria: AMBAC Indemnity Corporation,
Financial Guaranty Insurance Company, Financial Security Assurance and
Municipal Bond Investors Assurance Corporation. Each Insured Fund also may
purchase Pennsylvania Municipal Bonds and Municipal Bonds covered by insurance
issued by any other insurance company that satisfies the foregoing criteria. A
majority of insured Pennsylvania Municipal Bonds and Municipal Bonds held by
each Insured Fund will be insured under policies obtained by parties other
than the Fund.
MuniYield Pennsylvania is not currently subject to any requirement to invest
in Pennsylvania Municipal Bonds or Municipal Bonds that are insured; however,
after the Reorganization, MuniYield Pennsylvania will be subject to the same
requirement as the Acquired Funds described above. After the Reorganization,
therefore, MuniYield Pennsylvania shareholders will share in the cost of
maintaining such insurance. Currently % of the portfolio of MuniYield
Pennsylvania is comprised of insured Pennsylvania Municipal Bonds and
Municipal Bonds.
Each Insured 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 payment of principal and interest on
specified eligible Pennsylvania Municipal Bonds and Municipal Bonds purchased
by the Insured Funds. A Pennsylvania Municipal Bond or 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 of an
insured Pennsylvania Municipal Bond or 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 an Insured Fund. In the event
of a sale of any Pennsylvania Municipal Bonds and Municipal Bonds held by an
Insured 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 an insured Pennsylvania Municipal Bond
or Municipal Bond or the value of the shares of an Insured Fund.
The insurer will not have the right to withdraw coverage on securities
insured by its Policies and held by an Insured Fund so long as such securities
remain in the Insured Fund's portfolio. In addition, the insurer may not
27
<PAGE>
cancel its Policies for any reason except failure to pay premiums when due.
The Board of Trustees of each Insured Fund reserves the right to terminate any
of the Policies if it determines that the benefits to the Insured 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 Insured Fund and the yield on
its portfolio is reduced thereby. FAM estimates that the cost of the annual
premiums for the Policies of each Insured Fund currently range 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 each Insured Fund's portfolio
of Pennsylvania Municipal Bonds and Municipal Bonds. Additional information
regarding the Policies is set forth in Exhibit V to this Proxy Statement and
Prospectus. In instances in which an Insured Fund purchases Pennsylvania
Municipal Bonds and Municipal Bonds insured under policies obtained by parties
other than the Insured Fund, the Insured 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 FAM 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 which are
not in default. In certain circumstances, however, FAM 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. FAM's
ability to manage the portfolio of an Insured Fund may be limited to the
extent it 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 each
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 each Insured Fund. In the event the Board of Trustees of an
Insured Fund determines that such insurance is unavailable or that the cost of
such insurance outweighs the benefits to the Insured Fund, the Insured Fund
may modify the criteria for insurance carriers or the terms of the insurance,
or may discontinue its policy of maintaining insurance for all or any of the
Pennsylvania Municipal Bonds and Municipal Bonds held in the Insured Fund's
portfolio. Although FAM 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 private activity
bonds ("PABs") are issued by or on behalf of public authorities to finance
various privately operated facilities, including, among other things,
airports, public ports, mass commuting facilities and multi-family housing
projects as well as facilities for water supply, gas, electricity, sewage or
solid waste disposal. For purposes of this Proxy Statement and Prospectus,
such obligations are considered Municipal Bonds if the interest paid thereon
is exempt from Federal income tax and as Pennsylvania Municipal Bonds if the
interest thereon is exempt from Federal income tax and Pennsylvania personal
income taxes, even though such bonds may be PABs as discussed below.
28
<PAGE>
The two principal classifications of Pennsylvania Municipal Bonds and
Municipal Bonds are "general obligation" bonds and "revenue" bonds, which
latter category includes PABs and, for bonds issued on or before August 15,
1986, industrial development bonds or IDBs. 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 generally 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. PABs 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 the principal and the payment of
interest on such IDBs 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" financing, which are normally issued by special purpose
public authorities. In Pennsylvania, moral obligation financing is a financing
arrangement in which designated officials of the Commonwealth of Pennsylvania,
its departments or agencies agree, when necessary, to request the General
Assembly to appropriate funds as may be required to make up any deficiency in
a debt service reserve fund established to assure payment of obligations
issued under the arrangement. The General Assembly is not required to approve
such appropriation requests.
Each Fund may purchase Pennsylvania Municipal Bonds and Municipal Bonds
classified as PABs. Interest received on certain PABs is treated as an item of
"tax preference" for purposes of the Federal alternative minimum tax and may
impact the overall tax liability of investors in the Fund. There is no
limitation on the percentage of each Fund's assets that may be invested in
Pennsylvania Municipal Bonds and Municipal Bonds the interest on which is
treated as an item of "tax preference" for purposes of the Federal alternative
minimum tax. See "Comparison of the Funds--Tax Rules Applicable to the Funds
and their Shareholders."
Also included within the general category of Pennsylvania Municipal Bonds
and Municipal Bonds are certificates of participation ("COPs") executed and
delivered for the benefit of government authorities or entities to finance the
acquisition or construction of equipment, land and/or facilities. COPs
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.
Federal tax legislation has limited and may continue to limit the types and
volume of bonds the interest on which is excludable from income for Federal
income tax purposes. 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 Funds.
Special Considerations Relating to Pennsylvania Municipal Bonds
Each Fund ordinarily will invest at least 65% of its total assets in
Pennsylvania Municipal Bonds and, therefore, is more susceptible to factors
adversely affecting issuers of Pennsylvania Municipal Bonds than is a
municipal bond fund that is not concentrated in issuers of Pennsylvania
Municipal Bonds to this degree. As of June 2, 1999, Moody's and S&P rated
Pennsylvania's outstanding general obligation bonds Aa3 and AAA, respectively.
Because each Fund's portfolio will comprise investment grade securities, each
Fund is expected to be insulated from the market and credit risks that may
exist in connection with investments in non-investment grade Pennsylvania
Municipal Bonds. There is no assurance that a particular rating will continue
for any given period of time or that any such rating will not be revised
downward or withdrawn entirely if, in the judgment of the agency originally
establishing the rating, circumstances so warrant. The value of Municipal
Bonds generally may be affected by uncertainties in the municipal markets as a
result of legislation or litigation changing the taxation of Municipal Bonds
or the rights of Municipal Bond holders in the event of a bankruptcy.
Municipal
29
<PAGE>
bankruptcies are rare, and certain provisions of the U.S. Bankruptcy Code
governing such bankruptcies are unclear. Further, the application of state law
to Municipal Bond issuers could produce varying results among the states or
among Municipal Bond issuers within a state. These uncertainties could have a
significant impact on the prices of the Municipal Bonds or the Pennsylvania
Municipal Bonds in which the Funds invest. FAM does not believe that the
current economic conditions in Pennsylvania or other factors described above
will have a significant adverse effect on any Fund's ability to invest in high
quality Pennsylvania Municipal Bonds. For a discussion of economic and other
conditions in the State of Pennsylvania, see Exhibit III, "Economic and Other
Conditions in Pennsylvania," to this Proxy Statement and Prospectus.
Other Investment Policies
The Funds have adopted certain other policies as set forth below:
Borrowings. Each Fund is authorized to borrow amounts of up to 5% of the
value of its total assets at the time of such borrowings; provided,
however, that each 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 each 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. Each 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 a
Fund with payment and delivery taking place in the future. The purchase
will be recorded on the date that the Fund enters into the commitment, and
the value of the obligation thereafter will 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. Each 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, each 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 a
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, a 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 reference to a short-term tax-exempt interest rate
index). Each Fund may purchase synthetically-created inverse floating
obligations evidenced by custodial or trust receipts. Generally, income on
inverse floating obligations will decrease when short-term rates increase,
and will increase when short-term 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, as an illustration,
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, a Fund may purchase inverse floating obligations with shorter-
term maturities or limitations on the extent to which the interest rate may
vary. FAM believes that indexed and
30
<PAGE>
inverse floating obligations represent a flexible portfolio management
instrument for the Funds that allows FAM to vary the degree of investment
leverage relatively efficiently under different market conditions.
Call Rights. Each of the Funds may purchase a Pennsylvania Municipal Bond
or Municipal Bond issuer's rights 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 Funds 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 Funds 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 Funds 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. In addition, amounts earned under such agreements will not likely be
considered tax-exempt interest for Pennsylvania tax purposes.
Information Regarding Options and Futures Transactions
Each 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 and options thereon. While each 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 a Fund's hedging transactions will be
effective. In addition, because of the leveraged nature of the Common Shares,
hedging transactions will result in a larger impact on the net asset value of
the Common Shares than would be the case if the Common Shares were not
leveraged. Furthermore, a 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. No Fund has an obligation to enter into
hedging transactions and each may choose not to do so.
Certain Federal income tax requirements may limit a 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. In
addition, in order to obtain ratings of the AMPS from one or more NRSROs, a
Fund may be required to limit its use of hedging techniques in accordance with
the specified guidelines of such rating organizations. See "Rating Agency
Guidelines" below.
The following is a description of the options and futures transactions in
which each 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 a 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. Each Fund is authorized to 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
31
<PAGE>
option expires. Each 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.
Each Fund receives 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, a 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 serve as a partial
hedge against a decline in the price of the underlying security. Each Fund may
engage in closing transactions in order to terminate outstanding options that
it has written.
Purchase of Options. Each 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 its 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 which it intends to purchase. A 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. Each Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for
the purposes of hedging its investments in Pennsylvania Municipal Bonds and
Municipal Bonds against declines in value and hedging 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 financial 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 or options. 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 financial futures contracts.
The purchase or sale of a financial 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.
Each 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. Each 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.
32
<PAGE>
Subject to policies adopted by its Board of Trustees, each 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 FAM 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. Each 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 option transactions are two-party contracts with price and terms
negotiated by the buyer and seller.
Restrictions on OTC Options. Each 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 Funds are 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 otherwise might be
realized.
Risk Factors in Financial Futures Contracts and Options Thereon. Use 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, a 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 different from those of 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
which have a disparate impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in a 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 do 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 a 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.
Although certain risks are involved in options and futures transactions, FAM
believes that, because each Fund will engage in options and futures
transactions only for hedging purposes, the options and futures portfolio
strategies of a Fund will not subject the Fund to the risks associated with
speculation in options and futures transactions.
33
<PAGE>
The volume of trading in the exchange markets with respect to Pennsylvania
Municipal Bonds 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.
Each 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 option or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on a Fund's ability to hedge effectively its portfolio. There
is also the risk of loss by a 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.
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 reached or exceeded the daily limit on a number of
consecutive trading days.
If it is not possible to close a financial futures position entered into by
a 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 FAM
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 a 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 engaging in hedging transactions when
movements in interest rates occur.
Investment Restrictions
The Funds have substantially similar investment restrictions. The following
are the current fundamental investment restrictions of MuniYield Pennsylvania.
Following the Reorganization, these restrictions will be the fundamental
investment restrictions for the combined fund. Fundamental investment
restrictions may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and the outstanding AMPS and any
other preferred shares, voting together as a single class, and a majority of
the outstanding AMPS and any other preferred shares, voting separately as a
class. (For this purpose and under the Investment Company Act, "majority"
means for each such class the lesser of (i) 67% of the shares of each class of
capital stock represented at a meeting at which more than 50% of the
outstanding shares of each class of capital stock are represented or (ii) more
than 50% of the outstanding shares of each class of capital shares.) No Fund
may:
1. Make investments for the purpose of exercising control or management.
2. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by
purchase in the open market of securities of closed-end investment
companies and only if immediately thereafter not more than 10% of the
Fund's total assets would be invested in such securities.
3. Purchase or sell real estate, real estate limited partnerships,
commodities or commodity contracts; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
34
<PAGE>
companies that invest in real estate or interests therein and the Fund
may purchase and sell financial futures contracts and options thereon.
4. Issue senior securities other than preferred shares or borrow amounts in
excess of 5% of its total assets taken at market value; provided,
however, that the Fund is authorized to borrow moneys in excess of 5% of
the value of its total assets for the purpose of repurchasing Common
Shares or redeeming preferred shares.
5. Underwrite securities of other issuers except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 (the "Securities
Act") in selling portfolio securities.
6. Make loans to other persons, except that the Fund may purchase
Pennsylvania Municipal Bonds, Municipal Bonds and other debt securities
in accordance with its investment objective, policies and limitations.
7. 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).
8. 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.
9. 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.
An additional investment restriction adopted by the Fund, which may be
changed by the Trustees, provides that the Fund may not 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 (4) above or except as may be necessary in
connection with transactions in financial futures contracts and options
thereon.
If a percentage restriction on 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.
FAM and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
are owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co."). Because of
the affiliation of Merrill Lynch with FAM, each 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
Investment Company 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 Funds to effect principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities subject to conditions set forth in such order. The Funds 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.
Rating Agency Guidelines
Each Fund intends that, so long as its AMPS are outstanding, the composition
of its portfolio will reflect guidelines established by Moody's and S&P in
connection with the Fund's receipt of a rating for such shares on or prior to
their date of original issue of at least "aaa" from Moody's and AAA from S&P.
Moody's and S&P, which are nationally recognized statistical rating
organizations, issue ratings for various securities reflecting the
35
<PAGE>
perceived creditworthiness of such securities. The guidelines for rating AMPS
have been developed by Moody's and S&P in connection with issuances of asset-
backed and similar securities, including debt obligations and variable rate
preferred shares, generally on a case-by-case basis through discussions with
the issuers of these securities. The guidelines are designed to ensure that
assets underlying outstanding debt or preferred shares will be varied
sufficiently and will be of sufficient quality and amount to justify
investment-grade ratings. The guidelines do not have the force of law but have
been adopted by each Fund in order to satisfy current requirements necessary
for Moody's and S&P to issue the above-described ratings for AMPS, which
ratings generally are relied upon by institutional investors in purchasing
such securities. The guidelines provide a set of tests for portfolio
composition and asset coverage that supplement (and in some cases are more
restrictive than) the applicable requirements under the Investment Company
Act.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of the ratings altogether. In addition, any
rating agency providing a rating for the shares of AMPS, at any time, may
change or withdraw any such rating. As set forth in the Certificate of
Designation of each Fund, the Board of Trustees, without shareholder approval,
may modify certain definitions or restrictions that have been adopted by the
Fund pursuant to the rating agency guidelines, provided the Board of Trustees
has obtained written confirmation from Moody's and S&P that any such change
would not impair the ratings then assigned by Moody's and S&P to the AMPS. See
"The Reorganization--Risk Factors and Special Considerations--Ratings
Considerations."
For so long as any shares of a Fund's AMPS are rated by Moody's or S&P, as
the case may be, a Fund's use of options and financial futures contracts and
options thereon will be subject to certain limitations mandated by the rating
agencies.
Portfolio Composition
There are small differences in concentration among the categories of issuers
of the Pennsylvania Municipal Bonds and Municipal Bonds held in the portfolios
of the Funds. For MuniYield Pennsylvania, as of August 31, 1999, the highest
concentration of Pennsylvania Municipal Bonds and Municipal Bonds was in
Industrial Revenue/Pollution Control, Education and Hospitals/Healthcare,
accounting for 22%, 15%, and 13% of the Fund's portfolio, respectively; for
MuniVest Pennsylvania, the highest concentration was in Industrial
Revenue/Pollution Control, Hospitals/Healthcare and General Obligation Bonds,
accounting for 24%, 15% and 13% of the Fund's portfolio; for MuniHoldings
Pennsylvania, the highest concentration was in General Obligation Bonds,
Education and Industrial Revenue/Pollution Control, accounting for 25%, 18%
and 15% of the Fund's portfolio, respectively.
Although the investment portfolios of all three Funds must satisfy the same
standards of credit quality, the actual securities owned by each Fund are
different, as a result of which there are certain differences in the
composition of the four investment portfolios. The tables below set forth
rating information for the Pennsylvania Municipal Bonds and Municipal Bonds
held by each Fund, as of a certain date.
36
<PAGE>
MuniYield Pennsylvania
As of August 31, 1999, approximately 93% of the market value of MuniYield
Pennsylvania's portfolio was invested in long-term municipal obligations and
approximately 7% of the market value of MuniYield Pennsylvania's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of MuniYield
Pennsylvania's long-term municipal obligation investment portfolio as of
August 31, 1999.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 26 $ 80,392 69.9%
AA Aa 6 $ 13,689 11.9%
A A 6 $ 14,152 12.3%
BBB Baa 2 $ 6,788 5.9%
--- -------- -----
40 $115,021 100.0%
=== ======== =====
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations, S&P's rating categories may be modified further by a
plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating categories
may be modified further by a 1, 2 or 3 in Aa, A and Baa ratings. See
Exhibit IV--"Ratings of Municipal Bonds and Commercial Paper."
MuniVest Pennsylvania
As of August 31, 1999, approximately 95% of the market value of MuniVest
Pennsylvania's portfolio was invested in long-term municipal obligations and
approximately 5% of the market value of MuniVest Pennsylvania's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of MuniVest Pennsylvania's
long-term municipal obligation investment portfolio as of August 31, 1999.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 26 $64,885 88.0%
AA Aa 3 $ 4,577 6.2%
BBB Baa 2 $ 4,238 5.8%
--- ------- -----
31 $73,700 100.0%
=== ======= =====
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations, S&P's rating categories may be modified further by a
plus (+) or minus (-) in AA, A, and BBB ratings. Moody's rating categories
may be modified further by a 1, 2 or 3 in Aa, A and Baa ratings. See
Exhibit IV--"Ratings of Municipal Bonds and Commercial Paper."
37
<PAGE>
MuniHoldings Pennsylvania
As of August 31, 1999, approximately 91% of the market value of MuniHoldings
Pennsylvania's portfolio was invested in long-term municipal obligations and
approximately 9% of the market value of MuniHoldings Pennsylvania's portfolio
was invested in short-term municipal obligations. The following table sets
forth certain information with respect to the composition of MuniHoldings
Pennsylvania's long-term municipal obligation investment portfolio as of .
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 20 $39,985 88.6%
AA Aa 2 $ 5,129 11.4
--- ------- -----
22 $45,114 100.0%
=== ======= =====
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations, S&P's rating categories may be modified further by a
plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating categories
may be modified further by a 1, 2 or 3 in Aa, A and Baa ratings. See
Exhibit IV--"Ratings of Municipal Bonds and Commercial Paper."
Portfolio Transactions
The procedures for engaging in portfolio transactions are the same for each
of the Funds. Subject to policies established by the Board of Trustees of each
Fund, FAM is primarily responsible for the execution of each Fund's portfolio
transactions. In executing such transactions, FAM seeks to obtain the best
results for each 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 FAM generally
seeks reasonably competitive commission rates, the Funds do not necessarily
pay the lowest commission or spread available.
None of the Funds has any obligation to deal with any broker or dealer in
the execution of transactions in portfolio securities. Subject to obtaining
the best price and execution, securities firms that provide supplemental
investment research to FAM, including Merrill Lynch, may receive orders for
transactions by a Fund. Information so received will be in addition to, and
not in lieu of, the services required to be performed by FAM under its
investment advisory agreements with the Funds, and the expenses of FAM will
not necessarily be reduced as a result of the receipt of such supplemental
information.
Each Fund invests in securities that are primarily traded in the over-the-
counter markets, and each Fund normally deals directly with the dealers who
make markets in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Under the Investment
Company Act, except as permitted by exemptive order, persons affiliated with a
Fund are prohibited from dealing with the Fund as principals in the purchase
and sale of securities. Since transactions in the over-the-counter markets
usually involve transactions with dealers acting as principals for their own
account, the Funds do not deal with affiliated persons, including Merrill
Lynch and its affiliates, in connection with such transactions, except that,
pursuant to an exemptive order obtained by FAM, a Fund may engage in principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities. An affiliated person of a Fund may serve as its broker in over-
the-counter transactions conducted on an agency basis.
The Funds 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 Funds may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
38
<PAGE>
The Board of Trustees of each Fund has considered the possibility of
recapturing for the benefit of the Funds brokerage commissions, dealer spreads
and other expenses of possible portfolio transactions, such as underwriting
commissions, by conducting portfolio transactions through affiliated entities,
including Merrill Lynch. For example, brokerage commissions received by
Merrill Lynch could be offset against the investment advisory fees paid by the
Fund to FAM. After considering all factors deemed relevant, the Trustees of
each Fund made a determination not to seek such recapture. The Trustees will
reconsider this matter from time to time.
Periodic auctions are conducted for the AMPS of each of the Funds by the
Auction Agent for the Funds. The auctions require the participation of one or
more broker-dealers, each of whom enters into an agreement with the Auction
Agent. After each auction, the Auction Agent pays a service charge, from funds
provided by the issuing Fund, to each broker-dealer at the annual rate of
.25%, calculated on the basis of the purchase price of shares of the relevant
AMPS placed by such broker-dealer at such auction.
Portfolio Turnover
Generally, no Fund purchases securities for short-term trading profits.
However, any of the Funds may dispose of securities without regard to the time
that they have been held when such action, for defensive or other reasons,
appears advisable to FAM. (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 a 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
results in greater transaction costs, which are borne directly by the Fund,
and also has certain tax consequences for shareholders. The portfolio turnover
rate for each of the Funds for the periods indicated is set forth below:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
April 30, 1999 October 31, 1998
-------------- ----------------
<S> <C> <C>
MuniYield Pennsylvania.................... 16.87% 60.52%
MuniVest Pennsylvania..................... 19.64% 60.37%
</TABLE>
<TABLE>
<CAPTION>
Period February
26, 1999+ to
September 30,
1999
---------------
<S> <C>
MuniHoldings Pennsylvania.................................. %
</TABLE>
- --------
+ Commencement of operations
Net Asset Value
The net asset value per share of Common Shares of each Fund is determined
after the close of business on the NYSE (generally, 4:00 p.m., Eastern time)
on the last business day in each week. For purposes of determining the net
asset value of a share of Common Shares of each Fund, 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 AMPS is
divided by the total number of Common Shares outstanding at such time.
Expenses, including the fees payable to FAM, are accrued daily.
The Pennsylvania Municipal Bonds and Municipal Bonds in which each Fund
invests are traded primarily in the over-the-counter markets. In determining
net asset value, each Fund uses the valuations of portfolio securities
furnished by a pricing service approved by its Board of Trustees. The pricing
service typically values portfolio securities at the bid price or the yield
equivalent when quotations are readily available. Pennsylvania
39
<PAGE>
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 each Fund under the general supervision of the Board of Trustees
of the Fund. The Board of Trustees of each Fund 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 of each Fund.
Each 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.
Capital Shares
Each of the Funds has outstanding both Common Shares and AMPS. The Common
Shares of MuniYield Pennsylvania and MuniVest Pennsylvania are traded on the
NYSE, while the Common Shares of MuniHoldings Pennsylvania are traded on the
AMEX. The MuniYield Pennsylvania Common Shares commenced trading on the NYSE
on . As of August 31, 1999, the net asset value per MuniYield Pennsylvania
Common Share was $14.20 and the market price per share was $13.4375. The
MuniVest Pennsylvania Common Shares commenced trading on the NYSE on . As
of August 31, 1999, the net asset value per MuniVest Pennsylvania Common Share
was $12.51 and the market price per share was $12.0625. The MuniHoldings
Pennsylvania Common Shares commenced trading on the AMEX on . As of August
31, 1999, the net asset value per MuniHoldings Pennsylvania Common Share was
$13.32 and the market price per share was $12.9375.
The Board of Trustees of each Fund is authorized to issue an unlimited
number of shares of beneficial interest. The Board of Trustees of each of the
Funds 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 authorized the issuance of an unlimited number
of Common Shares together with 1,000,000 preferred shares of beneficial
interest. In connection with each respective Fund's offering of AMPS,
MuniYield Pennsylvania issued 1,600 preferred shares as AMPS, MuniVest
Pennsylvania issued 1,100 preferred shares as AMPS and MuniHoldings
Pennsylvania issued 820 shares as AMPS.
Each 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 each Fund contains an
express disclaimer of shareholder liability for acts or obligations of that
Fund and provides for indemnification and reimbursement of expenses out of
that Fund's property for any shareholder held personally liable for the
obligations of that Fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Funds themselves would be unable to meet their obligations. Given the
nature of the Funds' assets and operations, the possibility of any of the
Funds being unable to meet their obligations is remote and, in the opinion of
Massachusetts counsel to the Funds, the risk to the Funds' shareholders is
remote.
The Declaration of Trust of each Fund further provides that no Trustee,
officer, employee or agent of that Fund is liable to that Fund or to any
shareholder, nor is any Trustee, officer, employee or agent liable to any
third persons in connection with the affairs of that 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 Funds' property for satisfaction of
claims arising in connection with the affairs of each Fund. With the
exceptions stated, the Declaration of Trust of each Fund provides that a
Trustee, officer, employee or agent is entitled to be indemnified against all
liability in connection with the affairs of that Fund.
40
<PAGE>
Common Shares
Holders of each Fund's Common Shares are entitled to share equally in
dividends declared by the Fund's Board of Trustees payable to holders of the
Common Shares and in the net assets of the Fund available for distribution to
holders of the Common Shares after payment of the preferential amounts payable
to holders of any outstanding preferred shares. See "Voting Rights" and
"Liquidation Rights of Holders of AMPS" below. Holders of a Fund's Common
Shares do not have preemptive or conversion rights and a Fund's Common Shares
are not redeemable. The outstanding Common Shares of each Fund are fully paid
and nonassessable.
So long as any AMPS of a Fund or any other preferred shares are outstanding,
holders of the Fund's Common Shares will not be entitled to receive any
dividends of or other distributions from the Fund unless all accumulated
dividends on the Fund's outstanding AMPS and any other preferred shares have
been paid, and unless asset coverage (as defined in the Investment Company
Act) with respect to such AMPS and any other preferred shares would be at
least 200% after giving effect to such distributions.
Preferred Shares
The AMPS of each of the Funds have a similar structure. The AMPS of each
Fund are preferred shares of the Fund that entitle their holders to receive
dividends when, as and if declared by the Board of Trustees, out of funds
legally available therefor, at a rate per annum that may vary for the
successive dividend periods. The AMPS of all of the Funds have liquidation
preferences of $25,000 per share; none of the Fund's AMPS are traded on any
stock exchange or over-the-counter. Each Fund's AMPS can be purchased at an
auction or through broker-dealers who maintain a secondary market in the AMPS.
Auctions generally have been held and will be held every seven days for the
AMPS of each of the Funds, unless the applicable Fund elects, subject to
certain limitations, to declare a special dividend period. The following table
provides information about the dividend rates for each series of AMPS of each
of the Funds as of a recent auction.
<TABLE>
<CAPTION>
Dividend
Auction Date Fund Series Rate
------------ ---- ------ --------
<S> <C> <C> <C>
September 20, 1999............... MuniYield Pennsylvania * 3.40%
September 21, 1999............... MuniVest Pennsylvania * 2.73%
September 17, 1999............... MuniHoldings Pennsylvania A 3.05%
</TABLE>
- --------
*No series designation.
Under the Investment Company Act, each Fund is permitted to have outstanding
more than one series of preferred shares as long as no single series has
priority over another series as to the distribution of assets of the Fund or
the payment of dividends. Holders of a Fund's preferred shares do not have
preemptive rights to purchase any shares of AMPS or any other preferred shares
that might be issued. The net asset value per share of a Fund's AMPS equals
its liquidation preference plus accumulated dividends per share.
The redemption provisions pertaining to the AMPS of each Fund are
substantially similar. It is anticipated that shares of AMPS of each Fund will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference of $25,000 per share plus accumulated but unpaid
dividends (whether or not earned or declared) to the date of redemption plus,
under certain circumstances, a redemption premium. AMPS will also be subject
to mandatory redemption at a price equal to their liquidation preference plus
accumulated but unpaid dividends (whether or not earned or declared) to the
date of redemption upon the occurrence of certain specified events, such as
the failure of the Fund to maintain the asset coverage for the AMPS specified
by Moody's and S&P in connection with their issuance of ratings on the AMPS.
41
<PAGE>
Certain Provisions of the Declaration of Trust
Each 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 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 of
the holders of capital stock may be removed only by action of such holders,
and a Trustee elected by the holders of AMPS and any other preferred shares
may be removed only by action of the holders of AMPS and any other preferred
shares.
In addition, the Declaration of Trust of each Fund requires the favorable
vote of the holders of at least 66 2/3% of all of the Fund's shares of capital
stock, 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
any other corporation or entity,
. 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 at least 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 all of the votes entitled to be cast by shareholders of the Fund, voting as
a single class, is required. Such approval, adoption or authorization of the
foregoing also would require the favorable vote of at least a majority of the
Fund's preferred shares then entitled to be voted thereon, including the AMPS,
voting as a separate class.
In addition, conversion of a 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 affirmative vote of the
holders of at least 66 2/3% of the Fund's outstanding capital shares
(including the AMPS and any other 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 at least two-
thirds of the total number of Trustees fixed in accordance with the by-laws),
and the affirmative vote of at least a majority of outstanding preferred
shares of a Fund (including the AMPS), voting as a separate class. Such a vote
also would satisfy a separate requirement in the Investment Company 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
Investment Company 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 no longer would be listed on a
stock exchange. Conversion to an open-end investment company would also
require redemption of all outstanding preferred shares (including the AMPS)
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.
The Board of Trustees of each Fund has determined that the 66 2/3% voting
requirements described above, which are greater than the minimum requirements
under Massachusetts law or the Investment Company Act, are in the best
interests of shareholders generally. Reference should be made to the
Declaration of Trust of each Fund on file with the SEC for the full text of
these provisions.
42
<PAGE>
Management of the Funds
Trustees and Officers. The Boards of Trustees of MuniVest Pennsylvania and
MuniHoldings Pennsylvania currently consist of the same seven persons, five of
whom are not "interested persons," as defined in the Investment Company Act,
of any of those Funds. The Board of Trustees of MuniYield Pennsylvania
currently consists of eight persons, six of whom are not "interested persons"
of MuniYield Pennsylvania. Terry K. Glenn serves as a Trustee and President of
each of the Funds and Arthur Zeikel serves as a Trustee of each of the Funds.
The Trustees of each Fund are responsible for the overall supervision of the
operations of the Fund and perform the various duties imposed on the trustees
of investment companies by the Investment Company Act and under applicable
Massachusetts law. The Funds have the same slate of officers with a few
exceptions. For further information regarding the Trustees and officers of
each Fund, see "Item 2.: Election of Trustees" and Exhibit I--"Information
Pertaining to Each Fund."
William R. Bock serves as the portfolio manager for MuniYield Pennsylvania
and MuniVest Pennsylvania. Robert A. DiMella and William R. Bock serve as the
portfolio managers for MuniHoldings Pennsylvania. Mr. Bock will continue to
serve as the portfolio manager of the combined fund after the Reorganization.
The portfolio managers are primarily responsible for the management of the
applicable Fund's portfolio. Biographical information about Messrs. DiMella,
and Bock is contained in Exhibit I--"Information Pertaining to Each Fund."
Management and Advisory Arrangements. FAM, which is owned and controlled by
ML & Co., serves as the investment adviser for each of the Funds pursuant to
separate investment advisory agreements that, except for their termination
dates and advisory fee rates, are identical. FAM provides each Fund with the
same investment advisory and management services. The Asset Management Group
of ML & Co. (which includes FAM) acts as the investment adviser to more than
100 other registered investment companies and offers services to individuals
and institutional accounts. As of , the Asset Management Group had a
total of approximately $ billion in investment company and other portfolio
assets under management (approximately $ billion of which were invested in
municipal securities). This amount includes assets managed for certain
affiliates of FAM. FAM is a limited partnership, the partners of which are ML
& Co. and Princeton Services, Inc. The principal business address of FAM is
800 Scudders Mill Road, Plainsboro, New Jersey 08536.
Each Fund's investment advisory agreement with FAM provides that, subject to
the supervision of the Board of Trustees of the Fund, FAM is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security for each Fund rests with
FAM, subject to review by the Board of Trustees of the Fund.
FAM provides the portfolio management for each of the Funds. Such portfolio
management considers analyses from various sources (including brokerage firms
with which each Fund does business), makes the necessary investment decisions,
and places orders for transactions accordingly. FAM also is responsible for
the performance of certain administrative and management services for each
Fund.
For the services provided by FAM under the investment advisory agreement,
MuniYield Pennsylvania and MuniVest Pennsylvania currently pay FAM, and after
the Reoganization, the combined fund will pay, a monthly fee at the annual
rate of .0.50% of each Fund's average weekly net assets, and MuniHoldings
Pennsylvania currently pays a monthly fee at an annual rate of .55% of the
Fund's average weekly net assets. "Average weekly net assets" refers to the
average weekly value of the total assets of the Fund, including assets
acquired from the sale of preferred shares, minus the sum of accrued
liabilities of the Fund and accumulated dividends on its 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. For MuniHoldings
Pennsylvania, approval of the Reorganization represents a fee reduction.
43
<PAGE>
Each Fund's investment advisory agreement obligates FAM 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 FAM
or any of its affiliates. Each 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, share
certificates and shareholder reports, charges of the custodian and the
transfer agent, dividend disbursing agent and registrar, fees and expenses
with respect to the issuance of AMPS, SEC fees, fees and expenses of
unaffiliated 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. FAM provides
accounting services to each Fund, and each Fund reimburses FAM for its
respective costs in connection with such services.
Unless earlier terminated as described below, the investment advisory
agreement between each Fund and FAM will continue from year to year if
approved annually (a) by the Board of Trustees of the Fund or by a majority of
the outstanding Common Shares and AMPS of the Fund, voting together as a
single class, and (b) by a majority of the Trustees of the Fund who are not
parties to such contract or "interested persons," as defined in the Investment
Company Act, of any such party. The contract is not assignable and it 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 a Fund may also be held by, or be appropriate investments
for, other funds or investment advisory clients for which FAM 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
FAM for a 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 FAM (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 each of the Funds has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act that incorporates the
Code of Ethics of FAM (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of FAM and, as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of FAM 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 FAM
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 FAM.
Furthermore, the Codes provide for trading "blackout periods" that prohibit
trading by investment personnel of each of the Funds within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
Voting Rights
Voting rights are identical for the holders of each Fund's Common Shares.
Holders of each Fund's Common Shares are entitled to one vote for each share
held and will vote with the holders of any of the Fund's outstanding AMPS or
other preferred shares on each matter submitted to a vote of holders of Common
Shares, except as set forth below.
44
<PAGE>
Shareholders of each Fund are entitled to one vote for each share held. Each
Fund's Common Shares, AMPS and any other preferred shares do not have
cumulative voting rights, which means that the holders of more than 50% of a
Fund's Common Shares, AMPS and any other preferred shares voting for the
election of Trustees can elect all of the Trustees standing for election by
such holders, and, in such event, the holders of a Fund's remaining Common
Shares, AMPS and any other preferred shares will not be able to elect any of
such Trustees.
Voting rights of the holders of each Fund's AMPS are identical. Except as
otherwise indicated below, and except as otherwise required by applicable law,
holders of a Fund's AMPS will be entitled to one vote per share on each matter
submitted to a vote of the Fund's shareholders and will vote together with the
holders of Common Shares of the Fund as a single class.
In connection with the election of a Fund's Trustees, holders of a Fund's
AMPS, voting separately as a class, shall be entitled at all times to elect
two of the Fund's Trustees, and the remaining Trustees will be elected by
holders of Common Shares of the Fund and the Fund's AMPS and any other
preferred shares, voting together as a single class. In addition, if at any
time dividends on a Fund's outstanding AMPS shall be unpaid in an amount equal
to at least two full years' dividends thereon or if at any time holders of any
of a Fund's preferred shares are entitled, together with the holders of the
Fund's AMPS, to elect a majority of the Trustees of the Fund under the
Investment Company Act, then the number of Trustees constituting the Board of
Trustees automatically shall be increased by the smallest number that, when
added to the two Trustees elected exclusively by the holders of AMPS and any
other preferred shares as described above, would constitute a majority of the
Board of Trustees as so increased by such smallest number, and at a special
meeting of shareholders which will be called and held as soon as practicable,
and at all subsequent meetings at which Trustees are to be elected, the
holders of shares of the Fund's AMPS and any other preferred shares, voting
separately as a class, will be entitled to elect the smallest number of
additional Trustees that, together with the two Trustees which such holders in
any event will be entitled to elect, constitutes a majority of the total
number of Trustees of the Fund as so increased. The terms of office of the
persons who are Trustees at the time of that election will continue. If the
Fund thereafter shall pay, or declare and set apart for payment in full, all
dividends payable on all outstanding AMPS and any other preferred shares for
all past dividend periods, the additional voting rights of the holders of AMPS
and any other preferred shares as described above shall cease, and the terms
of office of all of the additional Trustees elected by the holders of AMPS and
any other preferred shares (but not of the Trustees with respect to whose
election the holders of Common Shares were entitled to vote or the two
Trustees the holders of AMPS and any other preferred shares have the right to
elect in any event) will terminate automatically.
The affirmative vote of the holders of a majority of a Fund's outstanding
AMPS, 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 Declaration
of Trust, whether by merger, consolidation or otherwise, so as to adversely
affect any of the contract rights expressly set forth in the Declaration of
Trust of holders of preferred shares.
Shareholder Inquiries
Shareholder inquiries with respect to any of the Funds may be addressed to
such Fund by telephone at (609) 282-2800 or at the address set forth on the
cover page of this Proxy Statement and Prospectus.
Dividends and Distributions
The Funds' current policies with respect to dividends and distributions
relating to their Common Shares are identical. Each Fund intends to distribute
all of its net investment income. Dividends from such net investment income
are declared and paid monthly to holders of a Fund's Common Shares. Monthly
distributions to holders of a Fund's Common Shares normally consist of
substantially all of the net investment income remaining after the payment of
dividends on the Fund's AMPS. All net realized long-term or short-term capital
gains, if any, are distributed at least annually, pro rata to holders of a
Fund's Common Shares and AMPS. While any of a Fund's
45
<PAGE>
AMPS are outstanding, the Fund may not declare any cash dividend or other
distribution on the Fund's Common Shares, unless at the time of such
declaration (1) all accumulated dividends on the Fund's AMPS have been paid,
and (2) 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 Fund's outstanding AMPS. This limitation on a
Fund's ability to make distributions on its Common Shares under certain
circumstances could impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment company under the Federal
tax laws which would have an adverse impact on shareholders. See "Comparison
of the Funds--Tax Rules Applicable to the Funds and their Shareholders."
Similarly, the Funds' current policies with respect to dividends and
distributions on their AMPS are identical. The holders of a Fund's AMPS are
entitled to receive, when, as and if declared by the Board of Trustees of the
Fund, out of funds legally available therefor, cumulative cash dividends on
their shares. Dividends on a Fund's AMPS so declared and payable shall be paid
(i) in preference to and in priority over any dividends so declared and
payable on the Fund's Common Shares, and (ii) to the extent permitted under
the Code and to the extent available, out of net tax-exempt income earned on
the Fund's investments. Dividends for each Fund's AMPS are paid through The
Depository Trust Company ("DTC") (or a successor securities depository) on
each dividend payment date. DTC's normal procedures now provide for it to
distribute dividends in same-day funds to agent members, who in turn are
expected to distribute such dividends to the person for whom they are acting
as agent in accordance with the instructions of such person. Prior to each
dividend payment date, the relevant Fund is required to deposit with the
Auction Agent sufficient funds for the payment of such declared dividends.
None of the Funds intends to establish any reserves for the payment of
dividends, and no interest will be payable in respect of any dividend payment
or payment on a Fund's AMPS which may be in arrears.
Dividends paid by each Fund, to the extent paid from tax-exempt income
earned on Pennsylvania Municipal Bonds, are exempt from Federal income tax and
Pennsylvania personal income taxes, subject to the possible application of the
alternative minimum tax. However, each Fund is required to allocate net
capital gains and other income subject to regular Federal income tax, if any,
proportionately between its Common Shares and its AMPS in accordance with the
current position of the IRS described herein. Such allocation will also apply
for Pennsylvania personal income tax purposes. See "Tax Rules Applicable to
the Funds and their Shareholders" below. Each Fund notifies the Auction Agent
of the amount of any net capital gains or other taxable income to be included
in any dividend on AMPS prior to the auction establishing the applicable rate
for such dividend. The Auction Agent in turn notifies each broker-dealer
whenever it receives any such notice from a Fund, and each broker-dealer then
notifies its customers who are holders of the Fund's AMPS. Each Fund also may
include such income in a dividend on shares of its AMPS without giving advance
notice thereof if it increases the dividend by an additional amount to offset
the tax effect thereof. The amount of taxable income allocable to a Fund's
AMPS will depend upon the amount of such income realized by the Fund and other
factors, but generally is not expected to be significant.
For information concerning the manner in which dividends and distributions
to each Fund's holders of Common Shares may be reinvested automatically in the
Fund's Common Shares, see "Automatic Dividend Reinvestment Plan" below.
Dividends and distributions will be subject to the tax treatment discussed
below, whether they are reinvested in shares of a Fund or received in cash.
If any Fund retroactively allocates any net capital gains or other income
subject to regular Federal income tax and Pennsylvania personal income taxes
to shares of its AMPS without having given advance notice thereof as described
above, which only may happen when such allocation is made as a result of the
redemption of all or a portion of its outstanding AMPS or the liquidation of
the Fund, the Fund will make certain payments to holders of its AMPS to which
such allocation was made to offset substantially the tax effect thereof. In no
other instances will the Fund be required to make payments to holders of its
AMPS to offset the tax effect of any reallocation of net capital gains or
other taxable income.
46
<PAGE>
Automatic Dividend Reinvestment Plan
Pursuant to each Fund's Automatic Dividend Reinvestment Plan (each, a
"Plan"), unless a holder of a Fund's Common Shares elects otherwise, all
dividend and capital gains distributions are automatically reinvested by
either The Bank of New York or State Street Bank and Trust Company, as
applicable, as agent for shareholders in administering the Plan (as
applicable, the "Plan Agent"), in additional Common Shares of the Fund. The
Bank of New York is the Plan Agent for MuniVest Pennsylvania and MuniHoldings
Pennsylvania, while State Street Bank and Trust Company is the Plan Agent for
MuniYield Pennsylvania and will be the Plan Agent following the
Reorganization. Holders of a Fund's Common Shares who elect not to participate
in the Plan 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 or State Street
Bank and Trust Company, as applicable, as dividend paying agent. Such
shareholders may elect not to participate in the Plan and to receive all
distributions of dividends and capital gains in cash by sending written
instructions to The Bank of New York or State Street Bank and Trust Company,
as applicable, 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 capital gains distribution.
Whenever a Fund declares an ordinary income dividend or a capital gain
dividend (collectively referred to as "dividends") payable either in shares or
in cash, non-participants in the Plan receive cash, and participants in the
Plan receive the equivalent in the Fund's Common Shares. The shares are
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 of the Fund on the open market
("open-market purchases"), on the NYSE or elsewhere. If on the payment date
for the dividend, the net asset value per share of the Fund's Common Shares is
equal to or less than the market price per share of the Fund's Common Shares
plus estimated brokerage commissions (such condition being referred to herein
as "market premium"), the Plan Agent invests the dividend amount in newly-
issued shares on behalf of the participant. The number of newly-issued shares
of the Fund's Common Shares to be credited to the participant's account is
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 invests the dividend amount in
shares acquired on behalf of the participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan
Agent has 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. Each Fund intends to pay monthly
income dividends. Therefore, the period during which open-market purchases can
be made exists only from the payment date on the dividend through the date
before the next "ex-dividend" date, which typically is approximately ten days.
If, before the Plan Agent has completed its open-market purchases, the market
price of a share of a Fund's Common Shares exceeds the net asset value per
share, the average per share purchase price paid by the Plan Agent may exceed
the net asset value of the Fund's Common 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 ceases making open-market purchases and
invests 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
47
<PAGE>
of each Plan participant are held by the Plan Agent in non-certificated form
in the name of the participant, and each shareholder's proxy includes 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.
In the case of shareholders such as banks, brokers or nominees which 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 are no brokerage charges with respect to shares issued directly by any
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant pays 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 does not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Comparison of the Funds--Tax
Rules Applicable to the Funds and their Shareholders".
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price (plus
commissions) of a Fund's Common Shares is higher than net asset value,
participants in the Plan receive shares of the Fund's Common Shares at less
than they otherwise could purchase them and 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 less than net asset
value, participants receive distributions of 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 of shares at prices below the net asset value.
Also, since the Funds normally do not redeem their shares, the price on resale
may be more or less than the net asset value. See "Comparison of the Funds--
Tax Rules Applicable to the Funds and their Shareholders" for a discussion of
the tax consequences of the Plan.
Each Fund reserves the right to amend or terminate its Plan. There is no
direct service charge to participants in the Plan; however, each Fund reserves
the right to amend its Plan to include a service charge payable by the
participants.
After the Reorganization, a holder of shares of an Acquired Fund who has
elected to receive dividends in cash will continue to receive dividends in
cash; all other holders will have their dividends automatically reinvested in
shares of the combined fund. However, if a shareholder owns shares in an
Acquired Fund and in MuniYield Pennsylvania, after the Reorganization, the
shareholder's election with respect to the dividends of MuniYield Pennsylvania
will control unless the shareholder specifically elects a different option at
that time. Following the Reorganization, all correspondence should be directed
to the Plan Agent, State Street Bank and Trust Company, at 225 Franklin
Street, Boston, Massachusetts 02110.
Mutual Fund Investment Option
A holder of Common Shares of any Fund, who purchased his or her shares
through Merrill Lynch in the Fund's initial public offering, has the right to
reinvest the net proceeds from a sale of such shares in Class A shares (in the
case of MuniYield Pennsylvania and MuniVest Pennsylvania shareholders) and
Class D shares (in the case of MuniHoldings Pennsylvania shareholders) of
certain Merrill Lynch-sponsored open-end funds without the imposition of an
initial sales charge, if certain conditions are satisfied. A holder of Common
Shares of an Acquired Fund who qualifies for this option will continue to have
this option after consummation of the Reorganization. Thus after the
Reorganization, qualifying shareholders of MuniYield Pennsylvania and MuniVest
Pennsylvania will retain their option with respect to Class A shares, while
qualifying shareholders of MuniHoldings Pennsylvania will retain their option
with respect to Class D shares.
48
<PAGE>
Liquidation Rights of Holders of AMPS
Upon any liquidation, dissolution or winding up of any Fund, whether
voluntary or involuntary, the holders of the Fund's AMPS will be entitled to
receive, out of the assets of the Fund available for distribution to
shareholders, before any distribution or payment is made upon any of the
Fund's Common Shares or any other capital stock of the Fund ranking junior in
right of payment upon liquidation to AMPS, $25,000 per share together with the
amount of any dividends accumulated but unpaid (whether or not earned or
declared) thereon to the date of distribution, and after such payment the
holders of AMPS will be entitled to no other payments except for any
additional dividends. If such assets of the Fund shall be insufficient to make
the full liquidation payment on the AMPS and liquidation payments on any other
outstanding class or series of preferred shares of the Fund ranking on a
parity with the AMPS as to payment upon liquidation, then such assets will be
distributed among the holders of AMPS and the holders of shares of such other
class or series ratably in proportion to the respective preferential amounts
to which they are entitled. After payment of the full amount of liquidation
distribution to which they are entitled, the holders of a Fund's AMPS will not
be entitled to any further participation in any distribution of assets by the
Fund except for any additional dividends. A consolidation, merger or share
exchange of a Fund with or into any other entity or entities or a sale,
whether for cash, shares of stock, securities or properties, of all or
substantially all or any part of the assets of the Fund shall not be deemed or
construed to be a liquidation, dissolution or winding up of the Fund for this
purpose.
Tax Rules Applicable to the Funds and their Shareholders
The tax consequences of investing in Common Shares or AMPS of each of the
Funds are identical. MuniYield Pennsylvania and MuniVest Pennsylvania have
elected and qualified (and MuniHoldings Pennsylvania will elect and qualify)
for the special tax treatment afforded RICs under the Code. As a result, in
any taxable year in which they distribute an amount equal to at least 90% of
taxable net income and 90% of tax-exempt net income (see below), the Funds are
not subject to Federal income tax to the extent that they distribute their net
investment income and net realized capital gains. In all taxable years through
the taxable year of the Reorganization, each Fund has distributed
substantially all of its income. MuniYield Pennsylvania intends to continue to
distribute substantially all of its income following the Reorganization.
Each Fund is qualified 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 a Fund's 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 is qualified to
pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by a Fund which are attributable to
interest on tax-exempt obligations and designated by the Fund as exempt-
interest dividends in a written notice mailed to shareholders within 60 days
after the close of its taxable year. To the extent that the dividends
distributed to a Fund's shareholders are derived from interest income exempt
from Federal income tax under Code Section 103(a) and are properly designated
as exempt-interest dividends, they are 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 benefits and railroad retirement benefits subject to Federal income
taxes. Interest on indebtedness incurred or continued to purchase or carry a
Fund's shares is not deductible for Federal income tax purposes to the extent
attributable to exempt-interest dividends. A tax adviser should be consulted
with respect to whether exempt-interest dividends retain the exclusion under
Code Section 103(a) if a shareholder would be treated as a "substantial user"
or "related person" under Code Section 147(a) with respect to property
financed with the proceeds from an issue of "industrial development bonds" or
"private activity bonds," if any, held by a Fund.
The portion of exempt-interest dividends paid from interest received by a
Fund from Pennsylvania Municipal Bonds also will be exempt from Pennsylvania
personal income tax. In the case of residents of the City of Philadelphia,
distributions which are derived from interest on 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.
49
<PAGE>
Shares of the Funds will be exempt from the personal property taxes imposed
by various Pennsylvania municipalities to the extent the Funds' portfolio
securities consist of Pennsylvania Municipal Bonds on the annual assessment
date. It should be noted, however, that at present, Pennsylvania counties
generally have stopped assessing personal property taxes. This is due, in
part, to ongoing litigation challenging the validity of the tax.
Other Pennsylvania counties, cities and townships generally do not tax
individuals on unearned income.
As a result of a pronouncement by the Pennsylvania Department of Revenue, an
investment in the Funds 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 Funds 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.
Shareholders subject to income taxation by states other than Pennsylvania
realize a lower after-tax rate of return than Pennsylvania shareholders since
the dividends distributed by a Fund generally are not exempt, to any
significant degree, from income taxation by such other states or cities. Each
Fund informs its shareholders annually as to the portion of the Fund's
distributions that constitutes exempt-interest dividends and the portion that
is exempt from Pennsylvania personal income taxes. Interest on indebtedness
incurred or continued to purchase or carry a Fund's shares is not deductible
for Federal income tax or Pennsylvania personal income tax purposes to the
extent attributable to exempt-interest dividends.
The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the currently outstanding
AMPS of each of the Funds, as well as the Series B AMPS to be issued by
MuniYield Pennsylvania, are substantially similar, but not identical, to the
AMPS discussed in the revenue ruling. In the opinion of Brown & Wood LLP,
counsel to all three Funds, each Fund's currently outstanding AMPS, as well as
the Series B AMPS to be issued by MuniYield Pennsylvania, constitute stock,
and distributions with respect such AMPS (other than distributions in
redemption of AMPS subject to Section 302(b) of the Code) will constitute
dividends to the extent of current and accumulated earnings and profits as
calculated for Federal income tax purposes. Nevertheless, the IRS (and/or the
Pennsylvania Department of Revenue) could take a contrary position, asserting,
for example, that the AMPS constitute debt. If this position were upheld, the
discussion of the treatment of distributions below would not apply to holders
of AMPS. Instead, distributions by each Fund to holders of shares of its AMPS
would constitute interest, whether or not they exceed the earnings and profits
of the Fund, would be included in full in the income of the recipient and
taxed as ordinary income. Counsel believes that such a position, if asserted
by the IRS, would be unlikely to prevail.
To the extent that a 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 are
considered taxable ordinary income for Federal income tax and Pennsylvania
personal 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, and for Pennsylvania personal income tax purposes will be
treated as taxable dividends. Certain categories of capital gains are taxable
at different rates for Federal income tax purposes. Generally not later than
60 days after the close of its taxable year, a Fund provides its shareholders
with a written notice designating the amounts of any exempt-interest dividends
and/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 a Fund, whether from exempt-interest income, ordinary income or capital
gains, are not eligible for the dividends received deduction for corporations
under the Code.
50
<PAGE>
A loss realized on a sale or exchange of shares of a Fund is disallowed for
Federal income tax purposes if other Fund shares are acquired (whether under
the Automatic Dividend Reinvestment Plan or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
All or a portion of a 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 for Federal income tax purposes. This rule may
increase the amount of ordinary income dividends received by shareholders. Any
loss upon the sale or exchange of Fund shares held for six months or less is
treated as long-term capital loss for Federal income tax purposes to the
extent of exempt-interest dividends received by the shareholder. In addition,
such loss is disallowed to the extent of any capital gain dividends received
by the shareholder. Distributions in excess of a Fund's earnings and profits
first will 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). If a Fund pays a
dividend in January which 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 is treated for Federal income tax purposes as paid by the
Fund and received by its shareholders on December 31 of the year in which such
dividend was declared.
The IRS has taken the position in a revenue ruling that if a RIC has two or
more classes 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 dividends and capital
gain dividends. 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 AMPS are outstanding, each Fund intends to designate
distributions made to the classes as consisting of particular types of income
in accordance with each class's proportionate share of such income. After the
Reorganization, MuniYield Pennsylvania will, likewise, so designate
distributions with respect to its Common Shares and its AMPS, Series A and B.
Each Fund may notify the Auction Agent of the amount of any net capital gains
and other taxable income to be included in any dividend on shares of its AMPS
prior to the auction establishing the applicable rate for such dividend.
Except for the portion of any dividend that a Fund informs the Auction Agent
will be treated as capital gains or other taxable income, the dividends paid
on the AMPS constitute exempt-interest dividends. Alternatively, each Fund may
include such income in a dividend on its AMPS without giving advance notice
thereof if it increases the dividend by an additional amount to offset the tax
effect thereof. The amount of net capital gains and ordinary income allocable
to a Fund's AMPS (the "taxable distribution") depends upon the amount of such
gains and income realized by the Fund and the total dividends paid by the Fund
on its Common Shares and shares of its AMPS during a taxable year, but the
taxable distribution generally is not significant.
In the opinion of Brown & Wood LLP, counsel to all three Funds, under
current law the manner in which each Fund allocates, and MuniYield
Pennsylvania will allocate, items of tax-exempt income, net capital gains, and
other taxable income, if any, among Common Shares and outstanding AMPS
(including, for MuniYield Pennsylvania, AMPS to be designated Series A and the
newly issued Series B AMPS) will be respected for Federal income tax purposes.
However, the tax treatment of additional dividends may affect a Fund's
calculation of each class' allocable share of capital gains and other taxable
income. In addition, there is currently no direct guidance from the IRS or
other sources specifically addressing whether a Fund's method for allocating
tax-exempt income, net capital gains and other taxable income among Common
Shares and the outstanding series of AMPS will be respected for Federal income
tax purposes, and it is possible that the IRS could disagree with counsel's
opinion and attempt to reallocate a Fund's net capital gains or other taxable
income. In the event of a reallocation, some of the dividends identified by a
Fund as exempt-interest dividends to holders of shares of its AMPS could be
recharacterized as additional capital gains or other taxable income. In the
event of such recharacterization, a Fund is not required to make payments to
such shareholders to offset the tax effect of such reallocation. In addition,
a reallocation could cause a Fund to be liable for income tax and excise tax
on all reallocated taxable income. Brown & Wood LLP has advised each Fund
that, in its opinion, if the IRS were to challenge in court a Fund's
allocations of income and gain, the IRS would be unlikely to prevail. The
opinion of
51
<PAGE>
Brown & Wood LLP, however, represents only its best legal judgment and is not
binding on the IRS or the courts. Similarly, there is no guidance from the
Pennsylvania Department of Revenue addressing the method of allocating tax-
exempt income, net capital gains and other taxable income among the Common
Shares and the outstanding series of AMPS, and it is possible that the
Pennsylvania Department of Revenue could also attempt to reallocate such
items.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
it 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 does not apply
to the tax-exempt income of RICs, such as the Funds, that pay exempt-interest
dividends.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The alternative minimum tax
applies to interest received on "private activity bonds" issued after August
7, 1986. "Private activity bonds" are bonds which, although tax-exempt, are
used for purposes other than those generally performed by governmental units
and which 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" which could subject investors in such bonds,
including shareholders of the Funds, to an increased Federal alternative
minimum tax. Each Fund purchases such "private activity bonds" and reports to
shareholders within 60 days after calendar year-end the portion of its
dividends declared during the year which constitutes an item of tax preference
for alternative minimum tax purposes. The Code further provides that
corporations are subject to a Federal 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 a Fund is included in adjusted current earnings, a corporate
shareholder may be required to pay a Federal alternative minimum tax on
exempt-interest dividends paid by such Fund.
If at any time when AMPS are outstanding a Fund does not meet the asset
coverage requirements of the Investment Company 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 such Fund
from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. If a
Fund were to fail to qualify as a RIC, some or all of the distributions paid
by the Fund would be fully taxable to shareholders for Federal income and
Pennsylvania personal income tax purposes. Upon any failure to meet the asset
coverage requirements of the Investment Company Act, a Fund, in its sole
discretion, may redeem AMPS 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, a 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 Funds have issued and that
MuniYield Pennsylvania 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. Counsel has advised
the Funds that the outstanding preferred shares and the preferred shares to be
issued by MuniYield Pennsylvania will not result in the payment of a
preferential dividend. If a Fund ultimately relies solely on a legal opinion
when it issues such preferred shares, there is no assurance that the IRS would
agree that dividends on the preferred shares are not preferential. If the IRS
successfully disallowed the dividends paid deduction for dividends on the
preferred shares, the Funds could be disqualified as RICs. In this case,
dividends paid by the Funds on the Common Shares and the AMPS would not be
exempt from Federal income taxes (or, possibly, Pennsylvania income taxes).
Additionally, the Funds would be subject to the Federal alternative minimum
tax.
Under certain circumstances when a Fund is required to allocate taxable
income to the AMPS, it will pay Additional Distributions to holders of AMPS.
The Federal income tax consequences of Additional Distributions
52
<PAGE>
under existing law are uncertain. The Funds treat and MuniYield Pennsylvania
intends to continue to treat a holder as receiving a dividend distribution in
the amount of any Additional Distribution only as and when such Additional
Distribution is paid. An Additional Distribution generally is designated by a
Fund as an exempt-interest dividend except as otherwise required by applicable
law. However, the IRS may assert that all or part of an Additional
Distribution is a taxable dividend either in the taxable year for which the
allocation of taxable income is made or in the taxable year in which the
Additional Distribution is paid.
The value of shares acquired pursuant to a Fund's dividend reinvestment plan
is generally excluded from gross income for Federal income tax purposes to the
extent that the cash amount reinvested would be excluded from gross income.
If, when a 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 Fund's
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 the allocable share of the discount.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no taxpayer
identification number is on file with a 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 shareholder is not otherwise subject to backup withholding.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities are 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.
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 Funds) during the taxable
year.
Tax Treatment of Options and Futures Transactions. Each Fund may purchase or
sell municipal bond index financial futures contracts and interest rate
financial futures contracts on U.S. Government securities. Each Fund may also
purchase and write call and put options on such financial futures contracts.
In general, unless an election is available to a 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 a 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 a 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 a Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, a 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.
53
<PAGE>
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 the applicable 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, foreign, state or local tax consequences of an
investment in a Fund.
AGREEMENT AND PLAN OF REORGANIZATION
General
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
II), (i) MuniYield Pennsylvania will acquire substantially all of the assets,
and will assume substantially all of the liabilities, of MuniVest
Pennsylvania, in exchange solely for an equal aggregate value of MuniYield
Pennsylvania Common Shares and MuniYield Pennsylvania Series B AMPS to be
issued by MuniYield Pennsylvania, (ii) MuniYield Pennsylvania will acquire
substantially all of the assets, and will assume substantially all of the
liabilities, of MuniHoldings Pennsylvania, in exchange solely for an equal
aggregate value of MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS to be issued by MuniYield Pennsylvania and (iii)
MuniYield Pennsylvania will be subject to the requirement that under normal
circumstances, at least 80% of its 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, as well as change its name to "MuniYield Pennsylvania Insured Fund."
The number of MuniYield Pennsylvania Common Shares issued to each Acquired
Fund will have an aggregate net asset value equal to the aggregate net asset
value of the Common Shares of that Acquired Fund (except that cash will be
paid in lieu of any fractional shares), and the number of shares of MuniYield
Pennsylvania Series B AMPS issued to MuniVest Pennsylvania and MuniHoldings
Pennsylvania, respectively, will have an aggregate liquidation preference and
value equal to the aggregate liquidation preference and value of each such
Fund's AMPS. Upon receipt by the Acquired Funds of such shares, the Acquired
Funds will (i) distribute the MuniYield Pennsylvania Common Shares to the
holders of Common Shares of MuniVest Pennsylvania, and MuniHoldings
Pennsylvania, as applicable, in exchange for their Common Shares in the
Acquired Funds and (ii) distribute the MuniYield Pennsylvania Series B AMPS to
the holders of MuniVest Pennsylvania AMPS and to the holders of MuniHoldings
Pennsylvania AMPS, in exchange for their AMPS in the Acquired Funds. MuniYield
Pennsylvania will file with the Office of the Secretary of State of The
Commonwealth of Massachusetts a Certificate of Designation of MuniYield
Pennsylvania, establishing the powers, rights and preferences of the MuniYield
Pennsylvania Series B AMPS prior to the closing of the Reorganization. As soon
as practicable after the date that the Reorganization takes place (the
"Exchange Date"), each of the Acquired Funds will execute and lodge among the
records of the respective Acquired Fund an instrument in writing setting forth
the fact of the Fund's termination and cause a copy to be filed in the Office
of the Secretary of State of The Commonwealth of Massachusetts.
Each of the Acquired Funds will distribute MuniYield Pennsylvania Common
Shares and the MuniYield Pennsylvania Series B AMPS pro rata to its holders of
record of Common Shares and AMPS, as applicable, in exchange for such
shareholders' shares in the Acquired Funds. Such distribution would be
accomplished by opening new accounts on the books of MuniYield Pennsylvania in
the names of the holders of Common Shares and AMPS of each of the Acquired
Funds and transferring to those shareholder accounts the MuniYield
Pennsylvania Common Shares or MuniYield Pennsylvania Series B AMPS previously
credited on those books to the accounts of the Acquired Funds. Each newly-
opened account on the books of MuniYield Pennsylvania for the previous holders
of Common Shares of the Acquired Funds would represent the respective pro rata
number of MuniYield Pennsylvania Common Shares (rounded down, in the case of
fractional shares, to the next largest number of whole shares) due such holder
of Common Shares. No fractional MuniYield Pennsylvania Common Shares will be
issued. In lieu thereof, MuniYield Pennsylvania's transfer agent, State Street
Bank and Trust Company, will aggregate all fractional MuniYield Pennsylvania
Common Shares and sell the resulting whole
54
<PAGE>
shares on the NYSE for the account of all holders of fractional interests, and
each such holder will be entitled to the pro rata share of the proceeds from
such sale upon surrender of the share certificates of the applicable Acquired
Fund. Similarly, each newly-opened account on the books of MuniYield
Pennsylvania for the previous holders of AMPS of an Acquired Fund would
represent the respective pro rata number of MuniYield Pennsylvania Series B
AMPS due such holder of AMPS. See "Surrender and Exchange of Share
Certificates" below for a description of the procedures to be followed by the
shareholders of the Acquired Funds to obtain their MuniYield Pennsylvania
Common Shares and cash in lieu of fractional shares, if any. Because AMPS are
held in "street name" by The Depository Trust Company, all transfers are
accomplished by book entry and no surrender of share certificates representing
AMPS is necessary.
Accordingly, as a result of the Reorganization, every holder of Common
Shares of an Acquired Fund would own MuniYield Pennsylvania Common Shares that
(except for cash payments received in lieu of fractional shares) would have an
aggregate net asset value immediately after the Exchange Date equal to the
aggregate net asset value of that shareholder's Common Shares immediately
prior to the Exchange Date. Since the MuniYield Pennsylvania Common Shares
would be issued at net asset value and the Common Shares of the Acquired Fund
would be valued at net asset value for the purposes of the exchange the
holders of Common Shares of each of the Funds will not be diluted as a result
of the Reorganization. Similarly, since the MuniYield Pennsylvania Series B
AMPS would be issued at a liquidation preference and value per share equal to
the liquidation preference and value per share of the AMPS of the Acquired
Funds, holders of AMPS of each of the Funds will not be diluted as a result of
the Reorganization. However, as a result of the Reorganization, a shareholder
of any of the Funds likely will hold a reduced percentage of ownership in the
larger combined entity than he or she did in any of the constituent Funds.
Procedure
At meetings of the Boards of Trustees of each of the Acquired Funds, and at
a meeting of the Board of Trustees of MuniYield Pennsylvania, the Board of
Trustees of each of the Funds, including all of the Trustees who are not
"interested persons," as defined in the Investment Company Act, of the
applicable Fund, approved the Agreement and Plan of Reorganization and the
submission of such Agreement and Plan of Reorganization to the shareholders of
each of the Funds for approval.
The Board of Trustees of MuniYield Pennsylvania approved the filing of a
Certificate of Designation establishing the powers, rights and preferences of
the MuniYield Pennsylvania Series B AMPS in order that they may be distributed
to holders of AMPS of each of the Acquired Funds as part of the
Reorganization. The Board of MuniYield Pennsylvania, in approving the
Reorganization, also approved the change in the investment policies of that
Fund to provide that the Fund will invest at least 80% of its assets in
municipal obligations 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, as well as the change in the name of the Fund to
"MuniYield Pennsylvania Insured Fund".
As a result of such Board approvals, the Funds have jointly filed this proxy
statement with the SEC soliciting a vote of the shareholders of each of the
Funds to approve the Reorganization. The costs of such solicitation are to be
paid by MuniYield Pennsylvania after the Reorganization so as to be borne
equally and exclusively on a per share basis by the holders of Common Shares
of each of the Funds. The special and annual meetings of shareholders of the
Funds will be held on December 15, 1999. If the shareholders of all three
Funds approve the Reorganization, the Reorganization will take place as soon
as practicable after such approval, provided that the Funds have obtained
prior to that time a favorable private letter ruling from the IRS concerning
the tax consequences of the Reorganization as set forth in the Agreement and
Plan of Reorganization or an opinion of counsel to the same effect.
The Boards of Trustees of MuniYield Pennsylvania, MuniVest Pennsylvania and
MuniHoldings Pennsylvania recommend that the shareholders of the respective
Funds approve the Agreement and Plan of Reorganization.
55
<PAGE>
Terms of the Agreement and Plan of Reorganization
The following is a summary of the significant terms of the Agreement and
Plan of Reorganization. This summary is qualified in its entirety by reference
to the Agreement and Plan of Reorganization, attached hereto as Exhibit II.
Valuation of Assets and Liabilities. The respective assets of each of the
Funds will be valued on the business day prior to the Exchange Date (the
"Valuation Date"). The valuation procedures are the same for all three Funds:
net asset value per share of the Common Shares of each Fund will be determined
after the close of business on the NYSE (generally, 4:00 P.M., Eastern time)
on the Valuation Date. For the purpose of determining the net asset value of a
common share of beneficial interest of each Fund, the value of the securities
held by the issuing 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 AMPS of the
issuing Fund is divided by the total number of Common Shares of the issuing
Fund outstanding at such time. Daily expenses, including the fees payable to
FAM, will accrue on the Valuation Date.
The Pennsylvania Municipal Bonds and Municipal Bonds in which each Fund
invests are traded primarily in the over-the-counter markets. In determining
net asset value on the Valuation Date, each Fund will use the valuations of
portfolio securities furnished by a pricing service approved by the Boards of
Trustees of the Funds. 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 will be valued at fair market value on a
consistent basis as determined by the pricing service using a matrix system to
determine valuations. The Boards of Trustees of the Funds have determined in
good faith that the use of a pricing service is a fair method of determining
the valuation of portfolio securities. Positions in financial futures
contracts will be valued on the Valuation Date at closing prices for such
contracts established by the exchange on which they are traded, or if market
quotations are not readily available, will be valued at fair value on a
consistent basis using methods determined in good faith by the Board of
Trustees.
Distribution of MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS. On the Exchange Date, MuniYield Pennsylvania will
issue to each Acquired Fund a number of MuniYield Pennsylvania Common Shares
the aggregate net asset value of which will equal the respective aggregate net
asset value of Common Shares of the Acquired Fund on the Valuation Date. Each
holder of Common Shares of an Acquired Fund will receive the number of
MuniYield Pennsylvania Common Shares corresponding to his or her proportionate
interest in the respective aggregate net asset value of the Common Shares of
the Acquired Fund, as applicable.
On the Exchange Date, MuniYield Pennsylvania also will issue (i) to MuniVest
Pennsylvania a number of MuniYield Pennsylvania Series B AMPS, the aggregate
liquidation preference and value of which will equal the aggregate liquidation
preference and value of MuniVest Pennsylvania AMPS on the Valuation Date and
(ii) to MuniHoldings Pennsylvania a number of MuniYield Pennsylvania Series B
AMPS, the aggregate liquidation preference and value of which will equal the
aggregate liquidation preference and value of MuniHoldings Pennsylvania AMPS
on the Valuation Date. Each holder of AMPS of an Acquired Fund will receive
the number of MuniYield Pennsylvania Series B AMPS, corresponding to his or
her proportionate interest in the aggregate liquidation preference and value
of the AMPS of the Acquired Fund. No sales charge or fee of any kind will be
charged to shareholders of the Acquired Funds in connection with their receipt
of MuniYield Pennsylvania Common Shares or AMPS in the Reorganization. Holders
of MuniHoldings Pennsylvania AMPS will find that the auction date and dividend
payment date for the MuniYield Pennsylvania Series B AMPS received in the
Reorganization fall on different days of the week than the auction date and
dividend payment date of the AMPS currently held. Any such change in the
auction date and dividend payment date will not adversely affect the value of
a holder's AMPS. It is anticipated that (i) the auction for MuniYield
Pennsylvania Series B AMPS will be held on Tuesday; MuniVest Pennsylvania
Series A AMPS are auctioned on Tuesday, but MuniHoldings Pennsylvania Series A
AMPS are auctioned on Friday. The auction procedures for all of the AMPS are
substantially the same. As a result of the Reorganization, the last dividend
period for the AMPS of each Acquired
56
<PAGE>
Fund prior to the Exchange Date may be shorter than the dividend period for
such AMPS determined as set forth in the applicable Certificate of
Designation.
Expenses. MuniYield Pennsylvania shall pay, subsequent to the Exchange Date,
all expenses incurred in connection with the Reorganization, including, but
not limited to, all costs related to the preparation and distribution of
materials distributed to each Fund's Board of Trustees, expenses incurred in
connection with the preparation of the Agreement and Plan of Reorganization, a
registration statement on Form N-14 and a private letter ruling request
submitted to the IRS, SEC and state securities commission filing fees and
legal and audit fees in connection with the Reorganization, costs of printing
and distributing this Proxy Statement and Prospectus, legal fees incurred
preparing each Fund's board materials, attending each Fund's board meetings
and preparing the minutes, accounting fees associated with each Fund's
financial statements, stock exchange fees, rating agency fees, portfolio
transfer taxes (if any) and any similar expenses incurred in connection with
the Reorganization. In this regard, expenses of the Reorganization will be
deducted from the assets of the combined fund so as to be borne equally and
exclusively on a per share basis by the holders of Common Shares of each of
the Funds. No Fund shall pay any expenses of its respective shareholders
arising out of or in connection with the Reorganization.
Required Approvals. Under the Declaration of Trust of each Fund (as amended
to date and including Certificates of Designation establishing the powers,
rights and preferences of the AMPS of each Fund), relevant Massachusetts law
and the rules of the NYSE and AMEX, shareholder approval of the Agreement and
Plan of Reorganization requires the affirmative vote of shareholders
representing more than 50% of the outstanding Common Shares and AMPS, voting
together as a single class, and more than 50% of the AMPS, voting separately
as a class. Because of the requirement that the Agreement and Plan of
Reorganization be approved by the shareholders of all three Funds, the
Reorganization will not take place if the shareholders of any one Fund do not
approve the Agreement and Plan of Reorganization.
Deregistration and Dissolution. Following the transfer of the assets and
liabilities of the Acquired Funds and the distribution of MuniYield
Pennsylvania Common Shares and MuniYield Pennsylvania Series B AMPS to
shareholders of the Acquired Funds, in accordance with the foregoing, each of
the Acquired Funds will terminate its registration under the Investment
Company Act and its organization under Massachusetts law and will withdraw its
authority to do business in any state where it is required to do so.
Amendments and Conditions. The Agreement and Plan of Reorganization may be
amended at any time prior to the Exchange Date with respect to any of the
terms therein. The obligations of each Fund pursuant to the Agreement and Plan
of Reorganization are subject to various conditions, including a registration
statement on Form N-14 being declared effective by the Commission, approval by
the shareholders of each of the Funds, favorable IRS rulings or an opinion of
counsel being received as to tax matters, an opinion of counsel as to
securities matters being received and the continuing accuracy of various
representations and warranties of the Funds being confirmed by the respective
parties.
Postponement, Termination. Under the Agreement and Plan of Reorganization,
the Board of Trustees of any of the Funds may cause the Reorganization to be
postponed or abandoned under certain circumstances should such Board determine
that it is in the best interests of the shareholders of its respective Fund to
do so. The Agreement and Plan of Reorganization may be terminated, and the
Reorganization abandoned at any time (whether before or after adoption thereof
by the shareholders of any of the Funds) prior to the Exchange Date, or the
Exchange Date may be postponed: (i) by mutual consent of the Boards of
Trustees of the three Funds and (ii) by the Board of Trustees of any Fund if
any condition to that Fund's obligations set forth in the Agreement and Plan
of Reorganization has not been fulfilled or waived by such Board.
Potential Benefits to Holders of Common Shares of the Funds as a Result of the
Reorganization
In approving the Reorganization, the Board of Trustees of each Fund
identified certain benefits that are likely to result from the Reorganization,
including lower aggregate operating expenses per share of Common
57
<PAGE>
Shares, greater efficiency and flexibility in portfolio management and a more
liquid trading market for the Common Shares of the combined fund. With respect
to each of the Acquired Funds, following the Reorganization their respective
shareholders will remain invested in a closed-end fund that has investment
objectives and policies substantially similar to those of the Acquired Fund.
The Boards also considered the possible risks and costs of combining the
Funds, and examined the relative credit strength, maturity characteristics,
mix of type and purpose, and yield of the Funds' portfolios of Pennsylvania
Municipal Bonds and Municipal Bonds and the costs involved in a transaction
such as the Reorganization. The Boards noted the many similarities between the
Funds, including their substantially similar investment objectives and
investment policies, their use of substantially the same management personnel
and their similar portfolios of Pennsylvania Municipal Bonds and Municipal
Bonds. The Boards also considered the relative tax positions of each of the
Fund's portfolios. Based on these factors, the Boards concluded that the
Reorganization will potentially benefit the shareholders of each Fund in that
it (i) presents no significant risks that would outweigh the benefits
discussed above and (ii) involves minimal costs (including relatively minor
legal, accounting and administrative costs).
The surviving fund that would result from the Reorganization would have a
larger asset base than any of the Funds has currently. Based on data presented
by FAM, the Board of each Fund believes that administrative expenses for a
larger combined fund would be less than the aggregate expenses for the
individual Funds, resulting in a lower expense ratio for common shareholders
of the combined fund and higher earnings per common share. In particular,
certain fixed costs, such as costs of printing shareholder reports and proxy
statements, legal expenses, audit fees, mailing costs and other expenses will
be spread across a larger asset base, thereby lowering the expense ratio for
the combined fund. To illustrate the potential economies of scale, the table
below shows the total annualized operating expense ratio of each Fund based on
average net assets both excluding and including assets attributable to AMPS as
of June 30, 1999:
<TABLE>
<CAPTION>
Average
Total annualized net assets, Total annualized Average net
operating excluding operating assets, including
expense ratio AMPS expense ratio AMPS
Fund excluding AMPS (in millions) including AMPS (in millions)
---- ---------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
MuniYield Pennsylvania.. 1.16% $ 86.3 0.79% $126.3
MuniVest Pennsylvania... 1.33% $ 52.2 0.87% $ 79.7
MuniHoldings
Pennsylvania........... 1.71% $ 30.1 1.01% $ 50.6
Combined Fund(1)........ 1.10% $168.6 0.72% $256.6
</TABLE>
- --------
(1) Assumes Reorganization had taken place on June 30, 1999.
Management projections estimate that MuniYield Pennsylvania will have net
assets in excess of $256.6 million including assets attributable to AMPS upon
completion of the Reorganization. A larger asset base should provide benefits
in portfolio management. After the Reorganization, MuniYield Pennsylvania
should be able to purchase larger amounts of Pennsylvania Municipal Bonds and
Municipal Bonds at more favorable prices than any of the Funds separately and,
with this greater purchasing power, request improvements in the terms of the
Pennsylvania Municipal Bonds and Municipal Bonds (e.g., added indenture
provisions covering call protection, sinking funds and audits for the benefit
of large holders) prior to purchase.
Based on the foregoing, the Boards concluded that the Reorganization is in
the best interests of the shareholders of each of the Funds because the
Reorganization presents no significant risks or costs (including legal,
accounting and administrative costs) that would outweigh the benefits
discussed above.
In approving the Reorganization, the Board of Trustees of each Fund
determined that the Reorganization is in the best interests of that Fund and,
with respect to net asset value and liquidation preference, that the interests
of existing shareholders of that Fund would not be diluted as a result of the
Reorganization. Although the Reorganization is expected to result in a
reduction in net asset value per share of the combined fund after the
Reorganization of approximately $.03 as a result of the estimated costs of the
Reorganization, management of each Fund advised its Board that it expects that
such costs would be recovered within [18] months after the Exchange Date due
to a decrease in the operating expense ratio.
58
<PAGE>
It is not anticipated that the Reorganization directly would benefit the
holders of AMPS of any of the Funds; however, the Reorganization will not
adversely affect the holders of AMPS of any of the Funds and the expenses of
the Reorganization will not be borne by the holders of AMPS of any of the
Funds.
Surrender and Exchange of Share Certificates
After the Exchange Date, each holder of an outstanding certificate or
certificates formerly representing Common Shares of any one of the Acquired
Funds will be entitled to receive, upon surrender of his or her certificate or
certificates, a certificate or certificates representing the number of
MuniYield Pennsylvania Common Shares distributable with respect to such
holder's Common Shares of the Acquired Fund, together with cash in lieu of any
fractional shares of beneficial interest. Promptly after the Exchange Date,
the transfer agent for the MuniYield Pennsylvania Common Shares will mail to
each holder of certificates formerly representing Common Shares of an Acquired
Fund a letter of transmittal for use in surrendering his or her certificates
for certificates representing MuniYield Pennsylvania Common Shares and cash in
lieu of any fractional Common Shares.
Shares of AMPS are held in "street name" by the Depository Trust Company,
and all transfers will be accomplished by book entry. Surrender of physical
certificates for AMPS is not required.
<TABLE>
<CAPTION>
If prior to the Reorganization you held: After the Reorganization, you will hold:
- ---------------------------------------- ----------------------------------------
<S> <C>
MuniYield Pennsylvania Common Shares MuniYield Pennsylvania Common Shares
MuniYield Pennsylvania AMPS MuniYield Pennsylvania Series A AMPS
MuniVest Pennsylvania Common Shares MuniYield Pennsylvania Common Shares
MuniVest Pennsylvania AMPS MuniYield Pennsylvania Series B AMPS
MuniHoldings Pennsylvania Common
Shares MuniYield Pennsylvania Common Shares
MuniHoldings Pennsylvania Series A
AMPS MuniYield Pennsylvania Series B AMPS
</TABLE>
Please do not send in any share certificates at this time. Upon consummation
of the Reorganization, holders of Common Shares of the Acquired Funds will be
furnished with instructions for exchanging their share certificates for
MuniYield Pennsylvania share certificates and, if applicable, cash in lieu of
fractional shares.
From and after the Exchange Date, certificates formerly representing Common
Shares of an Acquired Fund will be deemed for all purposes to evidence
ownership of the number of full shares of MuniYield Pennsylvania Common Shares
and AMPS distributable with respect to the shares of the Acquired Fund held
before the Reorganization as described above and as shown in the table above,
provided that, until such share certificates have been so surrendered, no
dividends payable to the holders of record of Common Shares or AMPS of an
Acquired Fund as of any date subsequent to the Exchange Date will be paid to
the holders of such outstanding share certificates. Dividends payable to
holders of record of Common Shares or AMPS of MuniYield Pennsylvania, as of
any date after the Exchange Date and prior to the exchange of certificates by
any shareholder of an Acquired Fund, will be paid to such shareholder, without
interest, at the time such shareholder surrenders his or her share
certificates for exchange.
From and after the Exchange Date, there will be no transfers on the stock
transfer books of any Acquired Fund. If, after the Exchange Date, certificates
representing Common Shares or AMPS of an Acquired Fund are presented to
MuniYield Pennsylvania, they will be canceled and exchanged for certificates
representing Common Shares or AMPS of MuniYield Pennsylvania, as applicable,
and cash in lieu of fractional Common Shares, if any, distributable with
respect to such Common Shares or AMPs in the Reorganization.
Tax Consequences of the Reorganization
General. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. Each of the three Funds has elected
59
<PAGE>
and qualified for the special tax treatment afforded RICs under the Code, and
MuniYield Pennsylvania intends to continue to so qualify after the
Reorganization. The Funds have jointly requested a private letter ruling from
the IRS that for Federal income tax purposes: (i) the exchange of assets by
each Acquired Fund for MuniYield Pennsylvania shares, as described, will
constitute a reorganization within the meaning of Section 361(a)(1)(C) of the
Code, and each of the Acquired Funds and MuniYield Pennsylvania will be deemed
a "party" to a reorganization within the meaning of Section 368(b) of the
Code; (ii) in accordance with Section 368(a) of the Code, no gain or loss will
be recognized to the Acquired Funds as a result of the Reorganization or on
the distribution of MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS, to the respective shareholders of the Acquired
Funds under Section 361(c)(1) of the Code; (iii) under Section 1032 of the
Code, no gain or loss will be recognized to MuniYield Pennsylvania as a result
of the Reorganization; (iv) in accordance with Section 354(a)(1) of the Code,
no gain or loss will be recognized to the shareholders of the Acquired Funds
on the receipt of MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS in exchange for their corresponding Common Shares
or AMPS of an Acquired Fund (except to the extent that holders of Common
Shares receive cash representing an interest in fractional Common Shares of
MuniYield Pennsylvania in the Reorganization); (v) in accordance with Section
362(b) of the Code, the tax basis of the assets of the Acquired Funds in the
hands of MuniYield Pennsylvania will be the same as the tax basis of such
assets in the hands of the Acquired Fund that transferred them immediately
prior to the consummation of the Reorganization; (vi) in accordance with
Section 358 of the Code, immediately after the Reorganization, the tax basis
of the MuniYield Pennsylvania Common Shares and MuniYield Pennsylvania Series
B AMPS received by the shareholders of the Acquired Funds in the
Reorganization will be equal to the tax basis of the Common Shares or AMPS of
the Acquired Funds surrendered in exchange; (vii) in accordance with Section
1223 of the Code, a shareholder's holding period for the MuniYield
Pennsylvania Common Shares and MuniYield Pennsylvania Series B AMPS, will be
determined by including the period for which such shareholder held the Common
Shares or AMPS of the Acquired Fund exchanged therefor, provided that such
shares were held as a capital asset; (viii) in accordance with Section 1223 of
the Code, MuniYield Pennsylvania's holding period with respect to the assets
of the Acquired Funds transferred will include the period for which such
assets were held by the Acquired Fund; (ix) the payment of cash to holders of
Common Shares of an Acquired Fund in lieu of fractional MuniYield Pennsylvania
Common Shares will be treated as though the fractional shares were distributed
as part of the Reorganization and then redeemed, with the result that such
shareholders will have short- or long-term capital gain or loss to the extent
that the cash distribution differs from the shareholder's basis allocable to
the MuniYield Pennsylvania fractional shares; and (x) the taxable year of each
of the Acquired Funds will end on the effective date of the Reorganization and
pursuant to Section 381(a) of the Code and regulations thereunder, MuniYield
Pennsylvania will succeed to and take into account certain tax attributes of
the Acquired Funds, such as earnings and profits, capital loss carryovers and
method of accounting.
As noted in the discussion under "Comparison of the Funds--Tax Rules
Applicable to the Funds and Their Shareholders," a Fund must distribute
annually at least 90% of its net taxable and tax-exempt income. A distribution
only will be counted for this purpose if it qualifies for the dividends paid
deduction under the Code. In the opinion of Brown & Wood LLP, the issuance of
MuniYield Pennsylvania Series B AMPS pursuant to the Reorganization in
addition to the already existing preferred shares of MuniYield Pennsylvania
(to be redesignated MuniYield Pennsylvania Series A AMPS) will not cause
distributions on any series of MuniYield Pennsylvania AMPS to be treated as
preferential dividends ineligible for the dividends paid deduction. It is
possible, however, that the IRS may assert that, because there is more than
one series of AMPS, distributions on such shares are preferential under the
Code and therefore not eligible for the dividends paid deduction. If the IRS
successfully disallowed the dividends paid deduction for dividends on the
AMPS, MuniYield Pennsylvania could lose the special tax treatment afforded
RICs. In this case, dividends on the MuniYield Pennsylvania Common Shares and
AMPS would not be exempt from Federal income tax. Additionally, MuniYield
Pennsylvania would be subject to the Federal alternative minimum tax.
Under Section 381(a) of the Code, MuniYield Pennsylvania will succeed to and
take into account certain tax attributes of the Acquired Funds, including, but
not limited to, earnings and profits, any net operating loss carryovers, any
capital loss carryovers and method of accounting. The Code, however, contains
special
60
<PAGE>
limitations with regard to the use of net operating losses, capital losses and
other similar items in the context of certain reorganizations, including tax-
free reorganizations pursuant to Section 368(a)(1)(C) of the Code, which could
reduce the benefit of these attributes to MuniYield Pennsylvania.
Shareholders should consult their tax advisers regarding the effect of the
Reorganization in light of their individual circumstances. As the foregoing
relates only to Federal income tax consequences, shareholders also should
consult their tax advisers as to the foreign, state and local tax consequences
of the Reorganization.
Regulated Investment Company Status. The Funds have elected and qualified
for (or, in the case of MuniHoldings Pennsylvania, will elect and qualify for)
taxation as RICs under Sections 851-855 of the Code, and after the
Reorganization MuniYield Pennsylvania intends to continue to so qualify.
Appraisal Rights
A shareholder of any of the Funds who does not vote in favor of the
Reorganization may have the right under Massachusetts law to object to the
Reorganization and demand payment for his or her shares from the applicable
Fund and an appraisal thereof upon compliance with the procedures specified in
Sections 86 through 98 of the Massachusetts Business Corporation Law (the
"Massachusetts Business Corporation Law"), which are set forth in Exhibit VI
hereto. A vote against the Reorganization or the execution of a proxy
directing such a vote will not satisfy the requirements of those provisions. A
failure to vote against the Reorganization will not constitute a waiver of
such rights. The Funds take the position that, if available, this statutory
right of appraisal may be exercised only by shareholders of record.
Section 92 of the Massachusetts Business Corporation Law provides that for
purposes of payment to any shareholder who elects to exercise his or her
statutory right of appraisal, the value of shares of such shareholder is to be
determined as of the day preceding the date of the shareholders' vote
approving the Agreement and Plan of Reorganization. However, the SEC's
Division of Investment Management has taken the position that such valuation
procedures would constitute violation of Rule 22c-1 under the Investment
Company Act (the "forwarded pricing" rule which in substance prohibits a
registered investment company from redeeming its shares except at a price
based on the net asset value of such shares next computed after such shares
have been tendered for redemption) and that Rule 22c-1 supersedes contrary
provisions of state statutes. Under the terms of the Agreement and Plan of
Reorganization, MuniYield Pennsylvania will assume the obligations of each of
the Funds, if any, with respect to statutory rights of appraisal. In the event
that any shareholder elects to exercise his or her statutory right of
appraisal under Massachusetts law, it is the present intention of MuniYield
Pennsylvania to petition a court of competent jurisdiction to determine
whether such right of appraisal has been superseded by the provisions of Rule
22c-1. In such event a dissenting shareholder may not receive any payment
until disposition of any such court proceeding.
For federal income tax purposes, dissenting shareholders obtaining payment
for their shares will recognize gain or loss measured by the difference
between any such payment and the tax basis for their shares. Shareholders are
advised to consult their personal tax advisers as to the tax consequences of
dissenting.
61
<PAGE>
Capitalization
The following table sets forth as of April 30, 1999 (i) the capitalization
of MuniYield Pennsylvania, (ii) the capitalization of MuniVest Pennsylvania,
(iii) the capitalization of MuniHoldings Pennsylvania and (iv) the pro forma
capitalization of the combined fund as adjusted to give effect to the
Reorganization.
Pro Forma Capitalization of MuniYield Pennsylvania,
MuniVest Pennsylvania, MuniHoldings Pennsylvania and the
Combined Fund as of April 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Combined
MuniYield MuniVest MuniHoldings Pro Forma Fund as
Pennsylvania Pennsylvania Pennsylvania Adjustment adjusted(a)
------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets:
Net Assets
Attributable to
Common Shares........ $89,807,780 $54,587,268 $31,959,162 (1,755,441) $174,598,769
Net Assets
Attributable to AMPS. $40,000,000 $27,500,000 $20,500,000 -- $ 88,000,000
Shares Outstanding:
Common Shares......... 5,883,760 4,037,179 2,156,567 -- 11,590,165(b)
AMPS
Series A............ 1,600 1,100 820 -- 1,600
Series B............ -- -- -- -- 1,920(b)
Net Asset Value Per
Share:
Common Shares......... $ 15.26 $ 13.52 $ 14.82 -- $ 15.06(c)
AMPS.................. $ 25,000 $ 25,000 $ 25,000 -- $ 25,000
</TABLE>
- --------
(a) The adjusted balances are presented as if the Reorganization had been
consummated on April 30, 1999 and are for informational purposes only.
Assumes distribution of undistributed net investment income. No assurance
can be given as to how many MuniYield Pennsylvania Common Shares
shareholders of MuniVest Pennsylvania and MuniHoldings Pennsylvania will
receive on the Exchange Date, and the foregoing should not be relied upon
to reflect the number of MuniYield Pennsylvania Common Shares that
actually will be received on or after such date.
(b) Assumes the issuance of 5,706,405 MuniYield Pennsylvania Common Shares and
one newly-created series of AMPS consisting of 1,920 shares of Series B
shares, respectively, in exchange for the net assets of each of MuniVest
Pennsylvania and MuniHoldings Pennsylvania. The number of shares issued
was based on the net asset value of each Fund, net of distributions, on
April 30, 1999.
(c) Net Asset Value Per Common Share after distribution of undistributed net
investment income.
62
<PAGE>
ITEM 2. ELECTION OF TRUSTEES
At the annual meeting of MuniHoldings Pennsylvania, the Board of Trustees
for MuniHoldings Pennsylvania will be elected to serve until the next annual
meeting of shareholders and until their successors are elected and qualified.
If the shareholders of all of the Funds approve the Reorganization, then the
current Board of Trustees of MuniYield Pennsylvania will serve as the Board of
the combined fund, until its next annual meeting of shareholders. If the
shareholders of any Fund vote against the Reorganization, then the Board of
Trustees elected at the annual meeting of MuniHoldings Pennsylvania will
continue to serve until the next annual meeting of shareholders of
MuniHoldings Pennsylvania and the current Board of MuniYield Pennsylvania and
MuniVest Pennsylvania will continue to serve until the next annual meeting of
that Fund. It is intended that all properly executed proxies will be voted
(unless such authority has been withheld in the proxy) as follows:
(1) All proxies of the holders of AMPS of MuniHoldings Pennsylvania,
voting separately as a class, will be voted in favor of the two persons
designated as Trustees to be elected by the holders of AMPS of MuniHoldings
Pennsylvania; and
(2) All proxies of the holders of Common Shares and AMPS of MuniHoldings
Pennsylvania, voting together as a single class, will be voted in favor of
the five persons designated as Trustees to be elected by the holders of
Common Shares and AMPS of MuniHoldings Pennsylvania.
The Board of Trustees of MuniHoldings Pennsylvania knows of no reason why
any of these nominees will be unable to serve, but in the event of any such
unavailability, the proxies received will be voted for such substitute nominee
or nominees as the appropriate Board of Trustees may recommend.
Certain information concerning the nominees is set forth below. Additional
information concerning the nominees and other information relevant to the
election of Trustees is set forth in Exhibit I.
To Be Elected by the holders of MuniHoldings Pennsylvania AMPS Voting
Separately As A Class:
<TABLE>
<CAPTION>
Principal Occupation During Past
Name and Address Age Five Years and Public Directorships(1)
---------------- --- --------------------------------------
<S> <C> <C>
Joseph L. May(1)(2)(3).............. 70 Attorney in private practice since
424 Church Street 1984; President, May and Athens
Suite 2000 Hosiery Mills Division. Wayne-Gossard
Nashville, Tennessee 37219 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.
</TABLE>
<TABLE>
<S> <C> <C>
Andre F. Perold(1)(2)(3)............. 47 Professor, Harvard Business School
Morgan Hall since 1989 and Associate Professor
Soldiers Field from 1983 to 1989; Trustee, The Common
Boston, Massachusetts 02163 Fund since 1989; Director, Quantec
Limited since 1991, TIBCO from 1994 to
1996 and Genbel Securities Limited and
Genbel Bank since 1999.
</TABLE>
(footnotes on following page)
63
<PAGE>
To be Elected by Holders of MuniHoldings Pennsylvania Common Shares and
MuniHoldings Pennsylvania AMPS, Voting Together as a Single Class:
<TABLE>
<CAPTION>
Principal Occupation During Past
Name and Address Age Five Years and Public Directorships(1)
---------------- --- --------------------------------------
<S> <C> <C>
Terry K. Glenn(1)(3)*............... 59 Executive Vice President of FAM and
P.O. Box 9011 MLAM (which terms as used herein
Princeton, New Jersey 08543-9011 include their corporate predecessors)
since 1983; Executive Vice President
and Director of Princeton Services,
Inc. ("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.
James H. Bodurtha(1)(2)(3).......... 55 Director and Executive Vice President,
36 Popponesset Road The China Business Group, Inc. since
Cotuit, Massachusetts 02635 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(1)(2)(3).......... 60 John M. Olin Professor of Humanities,
2 Washington Square Village New York University since 1993 and
New York, New York 10012 Professor since 1980; President,
Hudson Institute since 1997 and
Trustee thereof 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 Corp. from 1991
to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993; Limited
Partner, Hypertech LP in 1996.
Robert R. Martin(1)(2)(3)........... 72 Chairman and Chief Executive Officer,
513 Grand Hill Kinnard Investments, Inc. from 1990 to
St. Paul, Minnesota 55103 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.
Arthur Zeikel(1)(3)*................ 67 Chairman of FAM and MLAM from 1997 to
300 Woodland Avenue 1999; President of FAM and MLAM from
Westfield, New Jersey 07090 1977 to 1997; Chairman of Princeton
Services from 1997 to 1999, Director
thereof from 1993 to 1999 and
President thereof from 1993 to 1997;
Executive Vice President of ML & Co.
from 1990 to 1999.
</TABLE>
- --------
(1) Each of the nominees is a director, trustee or member of an advisory board
of one or more additional investment companies for which FAM, MLAM or their
affiliates act as investment adviser. See "Compensation of Board Members"
in Exhibit I.
(2) Member of Audit Committee of the Board of Trustees.
* Interested person, as defined in the Investment Company Act, of each of the
Funds.
64
<PAGE>
Committee and Board Meetings
The Board of each Fund has a standing Audit Committee, which consists of
Board members who are not "interested persons" of the Fund within the meaning
of the Investment Company Act. The principal purpose of the Audit Committee is
to review the scope of the annual audit conducted by the Fund's independent
auditors and the evaluation by such auditors of the accounting procedures
followed by the Fund. The non-interested Board members have retained
independent legal counsel to assist them in connection with these duties. No
Fund's Board has a nominating committee.
During each Fund's last fiscal year, each of the Board members then in
office attended at least 75% of the aggregate of the total number of meetings
of the Board held during the fiscal year and, if a member, of the total number
of meetings of the Audit Committee held during the period for which he or she
served. See Exhibit I for further information about Audit Committee and Board
meetings.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the officers and Trustees of each Fund and persons
who own more than ten percent of a registered class of the Fund's equity
securities, to file reports of ownership and changes in ownership on Forms 3,
4 and 5 with the SEC and the NYSE or the AMEX, as applicable. Officers,
trustees and greater than ten percent shareholders are required by SEC
regulations to furnish the Fund with copies of all Forms 3, 4 and 5 they file.
Based solely on each Fund's review of the copies of such forms, and
amendments thereto, furnished to it during or with respect to its most recent
fiscal year, and written representations from certain reporting persons that
they were not required to file Form 5 with respect to the most recent fiscal
year, each Fund believes that all of its officers, trustees, greater than ten
percent beneficial owners and other persons subject to Section 16 of the
Exchange Act because of the requirements of Section 30 of the Investment
Company Act, i.e., any advisory board member, investment adviser or affiliated
person of the Fund's investment adviser, have complied with all filing
requirements applicable to them with respect to transactions during the Fund's
most recent fiscal year, except that [ ].
Interested Persons
Each Fund considers Mr. Zeikel and Mr. Glenn to be "interested persons" of
the Fund within the meaning of Section 2(a)(19) of the Investment Company Act
because of the positions each holds or has held with FAM and its affiliates.
Mr. Glenn is the President of each Fund.
Compensation of Trustees
FAM, the investment adviser of each Fund, pays all compensation to all
officers of each Fund and all Trustees of each Fund who are affiliated with ML
& Co. or its subsidiaries. Each Fund pays each Trustee not affiliated with FAM
(each a "non-affiliated Trustee") an annual fee plus a fee for each meeting
attended, and each Fund also pays each member of its Audit Committee, which
consists of all of the non-affiliated Trustees, an annual fee plus a fee for
each meeting attended, together with such Trustee's out-of-pocket expenses
relating to attendance at such meetings. Information with respect to fees and
expenses paid to the non-affiliated Trustees for each Fund's most recently
completed fiscal year is set forth in Exhibit I.
Officers of MuniHoldings Pennsylvania
Information regarding the officers of MuniHoldings Pennsylvania is set forth
in Exhibit I. Officers of the Funds are elected and appointed by the Board and
hold office until they resign, are removed or are otherwise disqualified to
serve.
65
<PAGE>
ITEM 3. SELECTION OF INDEPENDENT AUDITORS
The Board of Trustees of MuniHoldings Pennsylvania, including a majority of
the Trustees who are not interested persons of the Fund, has selected
independent auditors to examine the financial statements of the Fund for the
Fund's current fiscal year. Deloitte & Touche LLP ("D&T") acts as independent
auditors for each of the Funds and is expected to act as independent auditors
for the combined fund. The current fiscal year for MuniHoldings Pennsylvania
is the fiscal year ending September 30, 2000.
The Fund knows of no direct or indirect financial interest of such auditors
in the Fund. Such appointment is subject to ratification or rejection by the
shareholders of MuniHoldings Pennsylvania. If the shareholders of all of the
Funds approve the Reorganization, D&T, currently acting as independent
auditors for MuniYield Pennsylvania will serve as the independent auditors of
the combined fund until its next annual meeting of shareholders. Unless a
contrary specification is made, the accompanying proxy will be voted in favor
of ratifying the selection of such auditors.
D&T also acts as independent auditors for ML & Co. and most of its
subsidiaries, including FAM and MLAM, and for most other investment companies
for which FAM or MLAM acts as investment adviser. The fees received by the
independent auditors from these other entities are substantially greater, in
the aggregate, than the total fees received by the independent auditors from
the Fund. The Board of Trustees of MuniHoldings Pennsylvania considered the
fact that D&T have been retained as the independent auditors for ML & Co. and
the other entities described above in its evaluation of the independence of
D&T with respect to the Fund.
Representatives of the independent auditors are expected to be present at
the Meetings and will have the opportunity to make a statement if they so
desire and to respond to questions from shareholders.
INFORMATION CONCERNING THE ANNUAL MEETING OF MUNIHOLDINGS PENNSYLVANIA AND THE
SPECIAL MEETINGS OF MUNIYIELD PENNSYLVANIA AND MUNIVEST PENNSYLVANIA
Date, Time and Place of Meetings
The Meetings will be held on December 15, 1999 at the offices of MLAM, 800
Scudders Mill Road, Plainsboro, New Jersey at the times listed on Exhibit I.
Solicitation, Revocation and Use of Proxies
A shareholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy, by giving
written notice of the revocation to the Secretary of the appropriate Fund or
by voting in person at the Meeting. Although mere attendance at the Meetings
will not revoke a proxy, a shareholder present at the Meetings may withdraw
his or her proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meetings in accordance with
the directions on the proxies; if no direction is indicated, the shares will
be voted "FOR" (i) the approval of the Agreement and Plan of Reorganization
and, for the shareholders of MuniHoldings Pennsylvania only, "FOR" (ii) the
election of the nominees to the Board of Trustees and (iii) the ratification
of the selection of D&T or as independent auditors of MuniHoldings
Pennsylvania. It is not anticipated that any other matters will be brought
before the Meetings. If, however, any other business properly is brought
before the Meetings, proxies will be voted in accordance with the judgment of
the persons designated on such proxies.
Record Date and Outstanding Shares
Only holders of record of Common Shares or AMPS of any of the Funds at the
close of business on the Record Date are entitled to vote at the Meetings or
any adjournment thereof. At the close of business on the Record Date, the
Funds had the number of shares outstanding indicated in Exhibit I.
66
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
To the knowledge of the Funds, at the date hereof, no person or entity owns
beneficially 5% or more of the Common Shares or AMPS of any Fund.
As of the Record Date, none of the nominees held shares of the Funds except
as set forth in the table below:
<TABLE>
<CAPTION>
Nominee Fund and Class of Shares No. of Shares Held*
- ------- ------------------------ -------------------
<S> <C> <C>
</TABLE>
- --------
* These holdings represent less than [ ]% of the Common Shares outstanding.
As of the Record Date, the Trustees and officers of MuniYield Pennsylvania
as a group (11 persons) owned an aggregate of less than 1% of the outstanding
Common Shares of MuniYield Pennsylvania and [owned no] MuniYield Pennsylvania
AMPS.
As of the Record Date, the Trustees and officers of MuniVest Pennsylvania as
a group (13 persons) owned an aggregate of less than 1% of the outstanding
Common Shares of MuniVest Pennsylvania and [owned no] MuniVest Pennsylvania
AMPS.
As of the Record Date, the Trustees and officers of MuniHoldings
Pennsylvania as a group (13 persons) owned an aggregate of less than 1% of the
outstanding Common Shares of MuniHoldings Pennsylvania and [owned no]
MuniHoldings Pennsylvania AMPS.
On the Record Date, Mr. Glenn, a Trustee and an officer of each of the
Funds, Mr. Zeikel, a Trustee of each of the Funds, and the other Trustees and
officers of each Fund owned an aggregate of less than 1% of the outstanding
shares of common stock of ML & Co.
Voting Rights and Required Vote
For purposes of this Proxy Statement and Prospectus, holders of Common
Shares and AMPS of each of the Funds are entitled to one vote for each share
held. Approval of the Agreement and Plan of Reorganization requires the
approval of each Fund. With respect to each Fund, approval of the Agreement
and Plan of Reorganization requires the affirmative vote of shareholders
representing (i) a majority of the Fund's outstanding Common Shares and AMPS,
voting together as a single class, and (ii) a majority of the Fund's
outstanding AMPS, voting separately as a class. See "Agreement and Plan of
Reorganization--Appraisal Rights" and Exhibit VI--"Sections 86 through 98 of
Chapter 156B of the Massachusetts General Laws (the Massachusetts Business
Corporation Law)" for a discussion of dissenters' rights under Massachusetts
law.
For purposes of each Meeting, a quorum consists of a majority of the
outstanding shares of each Fund, present in person or by proxy. If, by the
time scheduled for each Meeting, a quorum of the applicable Fund's
shareholders is not present, or if a quorum is present but sufficient votes to
approve or disapprove the Agreement and Plan of Reorganization are not
received from the shareholders of the applicable Fund, the persons named as
proxies may propose one or more adjournments of the Meeting to permit further
solicitation of proxies from shareholders. Any such adjournment will require
the affirmative vote of a majority of the shares of the applicable Fund
present in person or by proxy and entitled to vote at the session of the
Meeting to be adjourned. The persons named as proxies will vote in favor of
any such adjournment if they determine that adjournment and additional
solicitation are reasonable and in the interests of the applicable Fund's
shareholders.
With respect to the election of Trustees of MuniHoldings Pennsylvania,
assuming a quorum is present, holders of MuniHoldings Pennsylvania AMPS,
voting separately as a class, are entitled to elect two Trustees of the Fund
and holders of the Fund's Common Shares and AMPS, voting together as a single
class, are entitled to elect the remaining Trustees of that Fund. Assuming a
quorum is present, (x) election of the two Trustees of MuniHoldings
Pennsylvania to be elected by the holders of that Fund's AMPS, voting
separately as a class, will
67
<PAGE>
require the affirmative vote of a majority of the votes cast by the holders of
that Fund's AMPS, represented at the Meeting and entitled to vote, voting
together as a single class; and (y) election of the remaining Trustees of the
Fund will require the affirmative vote of a majority of the votes cast by the
holders of that Fund's Common Shares and AMPS, represented at the annual
meeting and entitled to vote, voting together as a single class.
Assuming a quorum is present, approval of the ratification of the selection
of the independent auditors of MuniHoldings Pennsylvania, will require the
affirmative vote of a majority of the votes cast by the holders of Common
Shares and AMPS of MuniHoldings Pennsylvania represented at the annual meeting
and entitled to vote, voting together as a single class.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by MuniYield Pennsylvania, the surviving fund after the Reorganization,
so as to be borne equally and exclusively on a per share basis by the holders
of Common Shares of each of the Funds. If the Reorganization is not approved,
these expenses will be allocated among the Funds according to the net asset
value of Common Shares of each Fund on the Meeting date.
The Funds likewise will reimburse banks, brokers and others for their
reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of each of the Funds and certain persons that the
Funds may employ for their reasonable expenses in assisting in the
solicitation of proxies from such beneficial owners of capital shares of the
Funds.
In order to obtain the necessary quorum at the Meetings, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview
by officers of the Funds. Each of the Funds has retained Shareholders
Communications Corp., 17 State Street, New York, NY 10004 to aid in the
solicitation of proxies, at a cost to be borne by each of the Funds of
approximately $7,500, plus out-of-pocket expenses.
Broker-dealer firms, including Merrill Lynch, holding Fund shares in "street
name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares on each
proposal before the Meetings. The Funds understand that, under the rules of
the NYSE and the AMEX, such broker-dealer firms may, without instructions from
their customers and clients, grant authority to the proxies designated to vote
on the election of the Trustees of each Fund (Item 2) and the ratification of
the selection of independent auditors for each Fund (Item 3) if no
instructions have been received prior to the date specified in the broker-
dealer firm's request for voting instructions. With respect to Common Shares
of each Fund, broker-dealer firms, including Merrill Lynch, will not be
permitted to grant voting authority without instructions with respect to the
approval of the Agreement and Plan of Reorganization (Item 1). AMPS of a Fund
held in "street name," however, may be voted without instructions under
certain conditions by broker-dealer firms with respect to Item 1 and counted
for purposes of establishing a quorum of that Fund if no instructions are
received one business day before the Meeting or, if adjourned, one business
day before the day to which the Meeting is adjourned. With respect to each
Fund, these conditions include, among others, that (i) at least 30% of that
Fund's AMPS outstanding have voted on Item 1, (ii) less than 10% of that
Fund's AMPS outstanding have voted against Item 1 and (iii) holders of that
Fund's Common Shares have voted to approve Item 1. In such instances, the
broker-dealer firm will vote that Fund's AMPS on Item 1 in the same proportion
as the votes cast by all holders of that Fund's AMPS who voted on Item 1. The
Funds will include shares held of record by broker-dealers as to which such
authority has been granted in its tabulation of the total number of shares
present for purposes of determining whether the necessary quorum of
shareholders of each Fund exists. Proxies that are returned to a Fund but that
are marked "abstain" or on which a broker-dealer has declined to vote on any
Item ("broker non-votes") will be counted as present for the purposes of
determining a quorum. Merrill Lynch has advised the Funds that it intends to
vote shares held in its name for which no instructions are received, except as
limited by agreement or applicable law, on Items 2 and 3 (with respect to
Common Shares and AMPS) and on Item 1 (with respect to AMPS only) in the same
proportion as the votes received from beneficial owners of those shares for
68
<PAGE>
which instructions have been received, whether or not held in nominee name.
Abstentions and broker non-votes will not be counted as votes cast.
Abstentions and broker non-votes, therefore, will not have an effect on the
vote on Items 2 and 3. Abstentions and broker non-votes will have the same
effect as a vote against Item 1.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statement and the exhibits relating thereto that
MuniYield Pennsylvania has filed with the Commission under the Securities Act
and the Investment Company Act, to which reference is hereby made.
The Funds are subject to the informational requirements of the Exchange Act
and the Investment Company Act and in accordance therewith are required to
file reports, proxy statements and other information with the SEC. Any such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the SEC: 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 SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The SEC maintains a Web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Funds, that file electronically with the
SEC. Reports, proxy statements and other information concerning the Funds can
also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005 in the case of MuniYield Pennsylvania and
MuniVest Pennsylvania and at the office of the American Stock Exchange, 980
Washington Boulevard, Gaithersburg, Maryland 20878.
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 Funds could be
adversely affected if the computer systems used by FAM or other service
providers of the Funds do not properly address this problem before January 1,
2000. FAM expects to have addressed this problem before then, and does not
anticipate that the services it provides will be adversely affected. The
Funds' other service providers have told FAM that they also expect to resolve
the Year 2000 Problem, and FAM will continue to monitor the situation as the
Year 2000 approaches. However, if the problem has not been fully addressed,
the Funds could be negatively affected. The Year 2000 Problem could also have
a negative impact on the issuers of securities in which the Funds invest, and
this could hurt the Funds' investment returns.
CUSTODIAN
The Bank of New York acts as the custodian for cash and securities of
MuniVest Pennsylvania and MuniHoldings Pennsylvania. The principal business
address of The Bank of New York in such capacity is 90 Washington Street, New
York, New York 10286. State Street Bank and Trust Company acts as the
custodian for cash and securities of MuniYield Pennsylvania. The principal
business address of State Street Bank and Trust Company in such capacity is
One Heritage Drive, P2N, North Quincy, Massachusetts 02171. It is anticipated
that State Street Bank and Trust Company will act as the custodian for the
combined fund after the Reorganization.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Bank of New York serves as the transfer agent, dividend disbursing agent
and registrar with respect to the Common Shares of MuniVest Pennsylvania and
MuniHoldings Pennsylvania, pursuant to separate registrar, transfer agency and
service agreements with each of the Funds. The principal business address of
The Bank of New York in such capacity is 101 Barclay Street, New York, New
York 10286.
69
<PAGE>
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent and registrar with respect to the Common Shares of MuniYield
Pennsylvania, pursuant to a registrar, transfer agency and service agreement
with the Fund. The principal business address of State Street Bank and Trust
Company in such capacity is 225 Franklin Street, Boston, Massachusetts 02110.
It is anticipated that State Street Bank and Trust Company will act as
transfer agent, dividend disbursing agent and registrar with respect to the
Common Shares of the combined fund after the Reorganization.
The Bank of New York serves as the transfer agent, dividend disbursing
agent, registrar and auction agent to the Funds in connection with their
respective AMPS. The principal business address of The Bank of New York in
such capacity is 101 Barclay Street, New York, New York 10286.
LEGAL PROCEEDINGS
There are no material legal proceedings to which any Fund is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for the Funds 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 financial statements for the fiscal year ended October 31, 1998 and the
financial highlights for each of the years in the five-year period then ended
of MuniYield Pennsylvania and MuniVest Pennsylvania included in this Proxy
Statement and Prospectus have been so included in reliance on the reports of
D&T, independent auditors, given their authority as experts in auditing and
accounting. The principal business address of D&T is 117 Campus Drive,
Princeton, New Jersey 08540. D&T will serve as independent auditors for the
combined fund after the Reorganization.
SHAREHOLDER PROPOSALS
If a shareholder of any of the Funds intends to present a proposal at the
2000 Annual Meeting of Shareholders of any of the Funds, anticipated to be
held in April 2000 for MuniYield Pennsylvania and MuniHoldings Pennsylvania
and in December 2000 for MuniHoldings Pennsylvania, and desires to have the
proposal included in the Fund's proxy statement and form of proxy for that
meeting, the shareholder must deliver the proposal to the offices of the
appropriate Fund by .
By Order of the Boards of Trustees
ALICE A. PELLEGRINO
Secretary of MuniYield Pennsylvania
Fund, MuniVest Pennsylvania Insured
Fund and MuniHoldings Pennsylvania
Insured Fund
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements for MuniYield Pennsylvania Fund for the
Fiscal Year Ended October 31, 1998.......................................
Unaudited Financial Statements for MuniYield Pennsylvania Fund for the
Six-Month Period Ended April 30, 1999.................................... F-2
Audited Financial Statements for MuniVest Pennsylvania Insured Fund for
the Fiscal Year Ended October 31, 1998...................................
Unaudited Financial Statements for MuniVest Pennsylvania Insured Fund for
the Six-Month Period Ended April 30, 1999................................ F-13
Unaudited Financial Statements for MuniHoldings Pennsylvania Insured Fund
for the Period
February 26, 1999 to March 31, 1999...................................... F-24
Unaudited Financial Statements for the Combined Fund on a Pro Forma Basis,
as of April 30, 1999..................................................... F-35
</TABLE>
F- 1
<PAGE>
Audited Financial Statements for MuniYield Pennsylvania Fund for the Fiscal
Year Ended October 31, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
MuniYield Pennsylvania Fund:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniYield Pennsylvania Fund as of
October 31, 1998, the related statements of operations for the year then ended
and changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and the financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at October 31, 1998 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniYield
Pennsylvania Fund as of October 31, 1998, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 7, 1998
F-3
<PAGE>
MuniYield Pennsylvania Fund
October 31, 1998
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield Pennsylvania Fund's portfolio
holdings in the Schedule of Investments, we have abbreviated the
names of many of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
F-4
<PAGE>
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Pennsylvania--101.2%
<S> <S> <C> <S> <C>
Allegheny County, Pennsylvania, Hospital Developement Authority Revenue
Bonds, Series A:
AAA Aaa $ 2,000 (Allegheny General Hospital Project), 6.25% due 9/01/2020 (d) $ 2,068
NR* A2 3,000 (South Hills Health System), 6.50% due 5/01/2014 3,315
BBB- Baa2 2,680 Allegheny County, Pennsylvania, IDA, Environmental Improvement Revenue
Refunding Bonds (USX Corp.), 5.60% due 9/01/2030 2,700
AAA Aaa 5,750 Allegheny County, Pennsylvania, Sanitation Authority, Sewer Revenue Bonds,
RITR, Series 20, 7.02% due 12/01/2024 (d)(h) 6,172
NR* P1 200 Beaver County, Pennsylvania, IDA, Environmental Improvement Recreation Revenue
Bonds (BASF Corporation Project), VRDN, AMT, 3.80% due 9/01/2032 (g) 200
NR* Aaa 2,500 Berks County, Pennsylvania, GO, UT, 5% due 11/15/2025 (a) 2,463
AAA Aaa 1,100 Delaware County, Pennsylvania, Interboro School District, UT, 5.375% due
8/15/2025 (d) 1,132
NR* Aaa 4,000 Delaware County, Pennsylvania, University Authority Revenue Bonds (Villanova
University), Series A, 5% due 12/01/2028 (d) 3,939
AAA Aaa 1,750 Greater Johnstown, Pennsylvania, School District, Refunding, GO, UT, 5%
due 2/01/2019 (d) 1,748
AAA Aaa 1,000 Lancaster, Pennsylvania, Area Sewer Authority Revenue Bonds, 4.50% due
4/01/2018 (d) 941
AAA Aaa 4,000 Lehigh County, Pennsylvania, General Purpose Authority Revenue Bonds (Saint
Lukes Hospital--Bethlehem), 6.25% due 7/01/2022 (a) 4,366
AAA Aaa 3,000 Lehigh County, Pennsylvania, IDA, PCR, Refunding (Pennsylvania Power and
Light Company Project), Series A, 6.40% due 11/01/2021 (d) 3,315
AAA Aaa 4,570 Lower Providence Township, Pennsylvania, Sewer Authority, Sewer Revenue
</TABLE>
F-5
<PAGE>
<TABLE>
<S> <C> <C> <C>
Refunding Bonds, 5.25% due 5/01/2022 (d) 4,635
Luzerne County, Pennsylvania, IDA, Exempt Facilities Revenue Bonds (Pennsylvania
Gas and Water Company Project), AMT:
A A3 2,500 Refunding, Series A, 7.20% due 10/01/2017 2,754
AAA Aaa 2,000 Series A, 7% due 12/01/2017 (a) 2,300
A- A3 1,500 Series B, 7.125% due 12/01/2022 1,650
AAA Aaa 3,700 McGuffey School District, Pennsylvania, GO, 4.75% due 8/01/2028 (a) 3,557
Montgomery County, Pennsylvania, IDA, PCR, Refunding (Philadelphia Electric
Company):
BBB+ Baa2 1,800 AMT, Series A, 7.60% due 4/01/2021 1,939
AAA Aaa 4,400 Series B, 6.70% due 12/01/2021 (d) 4,801
AAA Aaa 2,000 Northeastern Pennsylvania, Hospital and Education Authority, Health Care
Revenue Bonds (Wyoming Valley Health Care), Series A, 5.25% due 1/01/2026 (a) 2,017
</TABLE>
MuniYield Pennsylvania Fund
October 31, 1998
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Pennsylvania (continued)
<S> <S> <C> <S> <C>
BBB Baa3 $ 4,000 Pennsylvania Economic Development Financing Authority, Wastewater Treatment
Revenue Bonds (Sun Company Inc.--R & M Project), AMT, Series A, 7.60% due
12/01/2024 $ 4,653
AAA Aaa 4,000 Pennsylvania HFA, Refunding (Rental Housing), 6.50% due 7/01/2023 (e) 4,279
Pennsylvania HFA, S/F Mortgage, Revenue Bonds, AMT:
AA+ Aa 3,000 Refunding, Series 41B, 6.65% due 4/01/2025 3,228
AA+ Aa2 1,720 Refunding, Series 60A, 5.85% due 10/01/2027 1,786
AA+ Aa 2,630 Series 34B, 7% due 4/01/2024 2,752
AA+ Aa2 1,000 Series 62A, 5.50% due 10/01/2022 1,019
AA+ Aa2 1,500 Series 64, 5% due 10/01/2017 1,485
A NR* 2,000 Pennsylvania State Finance Authority, Revenue Refunding Bonds (Municipal
Capital Improvements Program), 6.60% due 11/01/2009 2,237
AAA Aaa 2,500 Pennsylvania State, GO, Second Series, 5% due 8/01/2018 (b) 2,506
AAA Aaa 2,000 Pennsylvania State Higher Educational Assistance Agency, Student Loan Revenue
</TABLE>
F-6
<PAGE>
<TABLE>
<S> <S> <C> <S> <C>
Bonds, AMT, Series C, 7.15% due 9/01/2021 (a) 2,159
AAA Aaa 1,255 Pennsylvania State Higher Educational Facilities Authority, College and
University Revenue Refunding Bonds (Duquesne University), Series A, 6.75%
due 4/01/2020 (d) 1,335
Pennsylvania State Higher Educational Facilities Authority, Revenue Refunding
Bonds:
A1+ NR* 800 (Carnegie Mellon University), VRDN, Series B, 3.70% due 11/01/2027 (g) 800
AAA Aaa 1,600 (University of Pennsylvania--Health Services), Series A, 5.375% due
1/01/2015 (d) 1,670
Pennsylvania State Turnpike Commission, Tax Revenue Bonds (Oil Franchise)(a):
AAA Aaa 2,075 Senior Series A, 4.75% due 12/01/2027 1,984
AAA Aaa 3,670 Sub-Series B, 4.75% due 12/01/2027 3,508
AA- Aa3 2,500 Pennsylvania State University, Refunding, 6.25% due 3/01/2011 2,710
AAA Aaa 1,500 Philadelphia, Pennsylvania, Airport Revenue Bonds (Philadelphia Airport System),
AMT, Series B, 5.40% due 6/15/2027 (b) 1,534
AA Aa3 2,000 Philadelphia, Pennsylvania, Authority for Industrial Development, Industrial
and Commercial Revenue Bonds (Girard Estates Facilities Leasing Project), 5%
due 5/15/2027 1,950
AAA Aaa 4,000 Philadelphia, Pennsylvania, Authority for Industrial Development, Lease Revenue
Bonds (City of Philadelphia Project), Series A, 5.375% due 2/15/2027 (d) 4,135
AAA Aaa 2,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds (First), Series B, 5% due
7/01/2028 (c) 1,966
Philadelphia, Pennsylvania, Hospitals and Higher Educational Facilities
Authority, Hospital Revenue Bonds:
A- NR* 1,000 (Children's Seashore House), Series B, 7% due 8/15/2022 1,101
AAA NR* 3,000 Refunding (Presbyterian Medical Center), 6.65% due 12/01/2019 (i) 3,646
AAA NR* 1,630 Philadelphia, Pennsylvania, Hospitals and Higher Educational Facilities
Authority Revenue Bonds (Northwestern Corporation), 7% due 6/01/2003 (f) 1,859
AAA Aaa 4,820 Pittsburgh, Pennsylvania, Water and Sewer Authority, Water and Sewer System
Revenue Bonds, Sub-Series C, 5.05% due 9/01/2025 (c) 4,771
</TABLE>
MuniYield Pennsylvania Fund
October 31, 1998
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<S> <S> <C> <S> <C>
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Pennsylvania (concluded)
<C> <C> <S> <S> <C>
A1+ NR* $ 3,800 Schuylkill County, Pennsylvania, IDA, Resource Recovery Revenue Refunding
Bonds (Northeastern Power Company), VRDN, AMT, Series B, 3.85% due 12/01/2022 (g) $ 3,800
A- NR* 2,520 Scranton--Lackawanna, Pennsylvania, Health and Welfare Authority, Revenue
Refunding Bonds (University of Scranton Project), Series B, 6.50% due 3/01/2015 2,706
NR* Aaa 5,000 Somerset County, Pennsylvania, GO, UT, Series A, 5% due 10/01/2027 (b) 4,925
AA+ Aaa 3,985 Swarthmore Borough Authority, Pennsylvania, College Revenue Refunding Bonds,
6% due 9/15/2020 4,337
AA Aa3 3,500 Upper Saint Clair Township, Pennsylvania, School District, Refunding, UT,
5.20% due 7/15/2027 3,526
Total Investments (Cost--$126,036)--101.2% 134,379
Liabilities in Excess of Other Assets--(1.2%) (1,612)
--------
Net Assets--100.0% $132,767
========
</TABLE>
[FN]
(a)AMBAC Insured.
(b)FGIC Insured.
(c)FSA Insured.
(d)MBIA Insured.
(e)FNMA Collateralized.
(f)Prerefunded.
(g)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at October 31, 1998.
(h)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at October 31, 1998.
(i)Escrowed to maturity.
*Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
QUALITY PROFILE
F-8
<PAGE>
The quality ratings of securities in the Fund as of October 31, 1998
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 66.3%
AA/Aa 13.9
A/A 10.4
BBB/Baa 7.0
Other++ 3.6
[FN]
++Temporary investments in short-term municipal securities.
MuniYield Pennsylvania Fund
October 31, 1998
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of October 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$126,036,032) (Note 1a) $134,378,983
Cash 3,826,673
Interest receivable 2,117,911
Prepaid expenses and other assets 6,504
------------
Total assets 140,330,071
------------
Liabilities: Payables:
Securities purchased $ 7,371,713
Investment adviser (Note 2) 58,504
Dividends to shareholders (Note 1e) 42,368 7,472,585
------------
Accrued expenses and other liabilities 90,653
------------
Total liabilities 7,563,238
------------
Net Assets: Net assets $132,766,833
------------
Capital: Capital Shares (unlimited number of shares of beneficial interest
authorized) (Note 4):
</TABLE>
F-9
<PAGE>
<TABLE>
<S> <C> <C>
Preferred Shares, par value $.05 per share (1,600 shares of
AMPS* issued and outstanding at $25,000 per share liquidation
preference) $ 40,000,000
Common Shares, par value $.10 per share (5,792,744 shares
issued and outstanding) $ 579,274
Paid-in capital in excess of par 80,808,153
Undistributed investment income--net 1,160,698
Undistributed realized capital gains on investments--net 1,875,757
Unrealized appreciation on investments--net 8,342,951
------------
Total--Equivalent to $16.01 net asset value per Common Share
(market price--$16.50) 92,766,833
------------
Total capital $132,766,833
============
<FN>
*Auction Market Preferred Shares.
See Notes to Financial Statements.
</TABLE>
MuniYield Pennsylvania Fund
October 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended
October 31, 1998
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 7,431,283
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 655,306
Commission fees (Note 4) 101,488
Professional fees 69,429
Accounting services (Note 2) 48,818
Transfer agent fees 41,216
Trustees' fees and expenses 26,197
Printing and shareholder reports 21,511
Listing fees 16,170
Custodian fees 9,442
Pricing fees 8,296
Other 14,990
------------
</TABLE>
F-10
<PAGE>
<TABLE>
<S> <C>
Total expenses 1,012,863
------------
Investment income--net 6,418,420
------------
Realized & Realized gain on investments--net 3,150,329
Unrealized Gain Change in unrealized appreciation on investments--net (402,818)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 9,165,931
(Notes 1b, ============
1d & 3):
See Notes to Financial Statements.
</TABLE>
MuniYield Pennsylvania Fund
October 31, 1998
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 6,418,420 $ 6,545,559
Realized gain on investments--net 3,150,329 2,016,285
Change in unrealized appreciation on investments--net (402,818) 1,698,298
------------ ------------
Net increase in net assets resulting from operations 9,165,931 10,260,142
------------ ------------
Dividends & Investment income--net:
Distributions to Common Shares (5,040,266) (5,129,565)
Shareholders Preferred Shares (1,048,448) (1,364,112)
(Note 1e): Realized gain on investments--net:
Common Shares (1,574,973) (544,213)
Preferred Shares (592,048) (152,208)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (8,255,735) (7,190,098)
------------ ------------
Beneficial Value of shares issued to Common Shareholders in reinvestment
Interest of dividends and distributions 785,969 --
Transactions ------------ ------------
</TABLE>
F-11
<PAGE>
(Note 4):
<TABLE>
<S> <C> <C> <C>
Net Assets: Total increase in net assets 1,696,165 3,070,044
Beginning of year 131,070,668 128,000,624
------------ ------------
End of year* $132,766,833 $131,070,668
============ ============
<FN>
*Undistributed investment income--net (Note 1f) $ 1,160,698 $ 830,471
============ ============
See Notes to Financial Statements.
</TABLE>
MuniYield Pennsylvania Fund
October 31, 1998
FINANCIAL INFORMATION (concluded)
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements.
<TABLE>
<CAPTION>
For the Year Ended
October 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 15.86 $ 15.32 $ 15.36 $ 13.86 $ 16.37
Operating -------- -------- -------- -------- --------
Performance: Investment income--net 1.12 1.13 1.15 1.17 1.15
Realized and unrealized gain (loss) on
investments--net .46 .66 (.03) 1.53 (2.41)
-------- -------- -------- -------- --------
Total from investment operations 1.58 1.79 1.12 2.70 (1.26)
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Shareholders:
Investment income--net (.88) (.89) (.91) (.89) (.91)
Realized gain on investments--net (.27) (.09) -- -- (.12)
In excess of realized gain on invest-
ments--net -- -- -- (.05) --
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Shareholders (1.15) (.98) (.91) (.94) (1.03)
-------- -------- -------- -------- --------
Effect of Preferred Share activity:
Dividends and distributions to Preferred
</TABLE>
F-12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Shareholders:
Investment income--net (.18) (.24) (.25) (.25) (.20)
Realized gain on investments--net (.10) (.03) -- -- (.02)
In excess of realized gain on
investments--net -- -- -- (.01) --
-------- -------- -------- -------- --------
Total effect of Preferred Share activity (.28) (.27) (.25) (.26) (.22)
======== ======== ======== ======== ========
Net asset value, end of year $ 16.01 $ 15.86 $ 15.32 $ 15.36 $ 13.86
======== ======== ======== ======== ========
Market price per share, end of year $ 16.50 $14.8125 $ 14.125 $ 13.75 $ 11.00
======== ======== ======== ======== ========
Total Investment Based on market price per share 19.82% 12.15% 9.48% 34.17% (27.82%)
Return:* ======== ======== ======== ======== ========
Based on net asset value per share 8.58% 10.71% 6.30% 18.95% (9.02%)
======== ======== ======== ======== ========
Ratios to Average Expenses .77% .79% .78% .82% .82%
Net Assets:** ======== ======== ======== ======== ========
Investment income--net 4.90% 5.07% 5.14% 5.44% 5.12%
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Shares, end of
Data: year (in thousands) $ 92,767 $ 91,071 $ 88,001 $ 88,226 $ 79,609
======== ======== ======== ======== ========
Preferred Shares outstanding, end of
year (in thousands) $ 40,000 $ 40,000 $ 40,000 $ 40,000 $ 40,000
======== ======== ======== ======== ========
Portfolio turnover 60.52% 70.14% 75.83% 43.59% 18.64%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,319 $ 3,277 $ 3,200 $ 3,206 $ 2,990
======== ======== ======== ======== ========
Dividends Investment income--net $ 655 $ 853 $ 901 $ 902 $ 688
Per Share on ======== ======== ======== ======== ========
Preferred Shares
Outstanding:++
<FN>
*Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
**Do not reflect the effect of dividends to Preferred Shareholders.
++Dividends per share have been adjusted to reflect a two-for-one
stock split that occurred on December 1, 1994.
</TABLE>
F-13
<PAGE>
See Notes to Financial Statements.
MuniYield Pennsylvania Fund
October 31, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Pennsylvania Fund (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund determines and makes
available for publication the net asset value of its Common Shares
on a weekly basis. The Fund's Common Shares are listed on the New
York Stock Exchange under the symbol MPA. The following is a summary
of significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of
options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options
purchased). Securities with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at their fair value as determined in good faith
by or under the direction of the Board of Trustees of the Fund,
including valuations furnished by a pricing service retained by the
Fund, which may utilize a matrix system for valuations. The
procedures of the pricing service and its valuations are reviewed by
the officers of the Fund under the general supervision of the Board
of Trustees.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
F-14
<PAGE>
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
MuniYield Pennsylvania Fund
October 31, 1998
(e) Dividends and distributions--Dividends from net investment
F-15
<PAGE>
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
(f) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of $521
have been reclassified between undistributed net realized capital
gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value
per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Shares.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1998 were $78,090,125 and
$77,069,722, respectively.
Net realized gains for the year ended October 31, 1998 and net
unrealized gains as of October 31, 1998 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $ 3,150,329 $8,342,951
----------- ----------
Total $ 3,150,329 $8,342,951
=========== ==========
F-16
<PAGE>
As of October 31, 1998, net unrealized appreciation for Federal
income tax purposes aggregated $8,342,951, of which $8,362,443
related to appreciated securities and $19,492 related to depreciated
securities. The aggregate cost of investments at October 31, 1998
for Federal income tax purposes was $126,036,032.
4. Beneficial Interest Transactions:
The Fund is authorized to issue an unlimited number of shares of
beneficial interest, including Preferred Shares, par value $.10 per
share, all of which were initially classified as Common Shares. The
Board of Trustees is authorized, however, to reclassify any unissued
shares of beneficial interest without approval of the holders of
Common Shares.
Common Shares
Shares issued and outstanding during the year ended October 31, 1998
increased by 49,322 as a result of dividend reinvestment and during
the year ended October 31, 1997 remained constant.
Preferred Shares
Auction Market Preferred Stock ("AMPS") are Preferred Shares of the
Fund, with a par value of $.05 per share and a liquidation
preference of $25,000 per share, that entitle their holders to
receive cash dividends at an annual rate that may vary for the
successive dividend periods. The yield in effect at October 31, 1998
was 3.23%.
Shares issued and outstanding during the years ended October 31,
1998 and October 31, 1997 remained constant.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the year ended
October 31, 1998, Merrill Lynch, Pierce, Fenner & Smith Inc., an
affiliate of FAM, earned $67,303 as commissions.
5. Subsequent Event:
On November 5, 1998, the Fund's Board of Trustees declared an
ordinary income dividend to holders of Common Shares in the amount
of $.083059 per share, payable on November 27, 1998 to shareholders
of record as of November 20, 1998.
F-17
<PAGE>
Unaudited Financial Statements for MuniYield Pennsylvania Fund for the Six-
Month Period Ended April 30, 1999
F-18
<PAGE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield Pennsylvania Fund's portfolio
holdings in the Schedule of Investments, we have abbreviated the
names of many of the securities according to the list below and at
right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
MuniYield Pennsylvania Fund
April 30, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <S> <C> <S> <C>
</TABLE>
F-19
<PAGE>
<TABLE>
Pennsylvania--100.1%
<S> <S> <C> <S> <C>
Allegheny County, Pennsylvania, Hospital Development Authority
Revenue Bonds, Series A:
AAA Aaa $2,000 (Allegheny General Hospital Project), 6.25% due 9/01/2020 (d) $ 2,020
NR* A2 3,000 (South Hills Health System), 6.50% due 5/01/2014 3,261
BBB- Baa2 2,680 Allegheny County, Pennsylvania, IDA, Environmental Improvement Revenue
Refunding Bonds (USX Corp.), 5.60% due 9/01/2030 2,682
AAA Aaa 5,750 Allegheny County, Pennsylvania, Sanitation Authority, Sewer Revenue Bonds,
RITR, Series 20, 6.37% due 12/01/2024 (g) 6,015
NR* Aaa 2,000 Delaware County, Pennsylvania, University Authority Revenue Bonds
(Villanova University), Series A, 5% due 12/01/2028 (d) 1,943
AAA Aaa 4,500 Delaware Valley, Pennsylvania, Regional Finance Authority, Local Government
Revenue Bonds, Series A, 5.50% due 8/01/2028 (a) 4,829
NR* Aaa 1,000 Lancaster, Pennsylvania, Area Sewer Authority Revenue Bonds, 4.50% due 4/01/2018 (d) 927
AAA Aaa 4,000 Lehigh County, Pennsylvania, General Purpose Authority Revenue Bonds (Saint Lukes
Hospital--Bethlehem), 6.25% due 7/01/2022 (a) 4,332
AAA Aaa 3,000 Lehigh County, Pennsylvania, IDA, PCR, Refunding (Pennsylvania Power and
Light Company Project), Series A, 6.40% due 11/01/2021 (d) 3,287
AAA Aaa 2,570 Lower Providence Township, Pennsylvania, Sewer Authority, Sewer Revenue
Refunding Bonds, 5.25% due 5/01/2022 (d) 2,583
A- A3 1,500 Luzerne County, Pennsylvania, IDA, Exempt Facilities Revenue Bonds
(Pennsylvania Gas and Water Company Project), AMT, Series B, 7.125% due 12/01/2022 1,656
Luzerne County, Pennsylvania, IDA, Exempt Facilities Revenue Refunding
Bonds (Pennsylvania Gas and Water Company Project), AMT, Series A:
A A3 2,500 7.20% due 10/01/2017 2,756
AAA Aaa 2,000 7% due 12/01/2017 (a) 2,280
Montgomery County, Pennsylvania, IDA, PCR, Refunding:
A Baa1 1,800 (Philadelphia Electric Company), AMT, Series A, 7.60% due 4/01/2021 1,927
AAA Aaa 4,400 Series B, 6.70% due 12/01/2021 (d) 4,753
AAA Aaa 2,000 Northeastern, Pennsylvania, Hospital and Education Authority, Health
Care Revenue Bonds (Wyoming Valley Health Care), Series A, 5.25% due 1/01/2026 (a) 1,980
BBB Baa2 4,000 Pennsylvania Economic Development Financing Authority, Wastewater
Treatment Revenue Bonds (Sun Company Inc.--R & M Project), AMT,
Series A, 7.60% due 12/01/2024 4,519
A
AA Aaa 4,000 Pennsylvania HFA, Revenue Refunding Bonds (Rental Housing), 6.50%
</TABLE>
F-20
<PAGE>
<TABLE>
<S> <C> <C>
due 7/01/2023 (e) 4,261
</TABLE>
MuniYield Pennsylvania Fund
April 30, 1999
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Pennsylvania (continued)
<S> <S> <C> <S> <C>
Pennsylvania HFA, S/F Mortgage Revenue Bonds, AMT:
AA+ Aa $2,630 Series 34B, 7% due 4/01/2024 $ 2,737
AA+ Aa2 1,720 Series 60A, 5.85% due 10/01/2027 1,794
AA+ Aa2 1,000 Series 62A, 5.50% due 10/01/2022 1,013
AA+ Aa 3,000 Pennsylvania HFA, S/F Mortgage Revenue Refunding Bonds, AMT,
Series 41B, 6.65% due 4/01/2025 3,206
AAA Aaa 2,000 Pennsylvania Intergovernmental Cooperative Authority, Special Tax Revenue
Refunding Bonds (Philadelphia Funding Program), 5.25% due 6/15/2016 (b) 2,047
A NR* 2,000 Pennsylvania State Finance Authority, Revenue Refunding Bonds
(Municipal Capital Improvements Program), 6.60% due 11/01/2009 2,212
Pennsylvania State, GO:
AAA Aaa 2,850 First Series, 5.125% due 3/15/2011 (a) 2,970
AAA Aaa 2,500 Second Series, 5% due 8/01/2018 (b) 2,488
AAA Aaa 2,000 Pennsylvania State Higher Educational Assistance Agency, Student Loan
Revenue Bonds, AMT, Series C, 7.15% due 9/01/2021 (a) 2,246
AAA Aaa 1,255 Pennsylvania State Higher Educational Facilities Authority, College and
University Revenue Refunding Bonds (Duquesne University), Series A,
6.75% due 4/01/2020 (d) 1,320
AAA Aaa 3,500 Pennsylvania State Higher Educational Facilities Authority Revenue
Bonds (UPMC Health System), Series A, 5% due 8/01/2029 (c) 3,358
A1+ NR* 2,000 Pennsylvania State Higher Educational Facilities Authority Revenue
Refunding Bonds (Carnegie Mellon University), VRDN, Series C, 4.20%
due 11/01/2029 (f) 2,000
Pennsylvania State Turnpike Commission, Oil Franchise Tax Revenue Bonds (a):
AAA Aaa 2,075 Senior Series A, 4.75% due 12/01/2027 1,943
</TABLE>
F-21
<PAGE>
<TABLE>
<S> <S> <C> <S> <C>
AAA Aaa 3,670 Sub-Series B, 4.75% due 12/01/2027 3,436
AA- Aa3 2,500 Pennsylvania State University, Revenue Refunding Bonds, 6.25% due 3/01/2011 2,688
AAA Aaa 1,500 Philadelphia, Pennsylvania, Airport Revenue Bonds (Philadelphia Airport
System), AMT, Series B, 5.40% due 6/15/2027 (b) 1,509
AAA Aaa 1,500 Philadelphia, Pennsylvania, Authority for Industrial Development,
Airport Revenue Bonds (Philadelphia Airport System Project), AMT,
Series A, 5.125% due 7/01/2028 (b) 1,459
AA Aa3 2,000 Philadelphia, Pennsylvania, Authority for Industrial Development,
Industrial and Commercial Revenue Bonds (Girard Estates Facilities
Leasing Project), 5% due 5/15/2027 1,924
AAA Aaa 4,000 Philadelphia, Pennsylvania, Authority for Industrial Development,
Lease Revenue Bonds (City of Philadelphia Project), Series A, 5.375%
due 2/15/2027 (d) 4,087
AAA Aaa 3,700 Philadelphia, Pennsylvania, GO, 5% due 3/15/2028 (c) 3,595
Philadelphia, Pennsylvania, Hospitals and Higher Education Facilities
Authority, Hospital Revenue Bonds (Children's Hospital of Philadelphia
Project),VRDN (f):
A1+ VMIG1++ 1,100 4.20% due 3/01/2027 1,100
A1+ VMIG1++ 3,500 Series A, 4.20% due 3/01/2027 3,500
Philadelphia, Pennsylvania, Hospitals and Higher Education Facilities
Authority, Hospital Revenue Refunding Bonds:
A- NR* 1,000 (Children's Seashore House), Series B, 7% due 8/15/2022 1,085
AAA NR* 3,000 (Presbyterian Medical Center), 6.65% due 12/01/2019 (h) 3,599
Schuylkill County, Pennsylvania, IDA, Resource Recovery
Revenue Refunding Bonds (Northeastern Power Company), VRDN (f):
A1+ NR* 1,000 AMT, Series B, 4.20% due 12/01/2022 1,000
A1+ NR* 300 Series A, 4.10% due 12/01/2022 300
</TABLE>
MuniYield Pennsylvania Fund
April 30, 1999
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C>
Pennsylvania (concluded)
</TABLE>
F-22
<PAGE>
<TABLE>
<S> <S> <C> <S> <C>
A- NR* $2,520 Scranton-Lackawanna, Pennsylvania, Health and Welfare
Authority, Revenue Refunding Bonds (University of Scranton
Project), Series B, 6.50% due 3/01/2015 $ 2,682
NR* Aaa 5,000 Somerset County, Pennsylvania, GO, Series A, 5% due 10/01/2027 (b) 4,859
AA+ Aaa 3,985 Swarthmore Borough Authority, Pennsylvania, College Revenue
Refunding Bonds, 6% due 9/15/2020 4,306
AA Aa3 3,500 Upper Saint Clair Township School District, Pennsylvania, GO,
Refunding, 5.20% due 7/15/2027 3,495
Total Investments (Cost--$123,609)--100.1% 129,969
Liabilities in Excess of Other Assets--(0.1%) (161)
--------
Net Assets--100.0% $129,808
========
</TABLE>
[FN]
(a)AMBAC Insured.
(b)FGIC Insured.
(c)FSA Insured.
(d)MBIA Insured.
(e)FNMA Collateralized.
(f)The interest rate is subject to change periodically
based upon prevailing market rates. The interest
rate shown is the rate in effect at April 30, 1999.
(g)The interest rate is subject to change periodically
and inversely based upon prevailing market rates.
The interest rate shown is the rate in effect at
April 30, 1999.
(h)Escrowed to maturity.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
QUALITY PROFILE
The quality ratings of securities in the
Fund as of April 30, 1999 were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
F-23
<PAGE>
AAA/Aaa 63.5%
AA/Aa 13.0
A/A 12.0
BBB/Baa 5.5
Other++ 6.1
[FN]
++Temporary investments in short-term municipal securities.
MuniYield Pennsylvania Fund
April 30, 1999
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of April 30, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$123,609,119) (Note 1a) $129,968,790
Cash 65,150
Interest receivable 2,067,575
Prepaid expenses and other assets 6,504
------------
Total assets 132,108,019
------------
Liabilities: Payables:
Securities purchased $ 2,058,113
Dividends to shareholders (Note 1e) 150,050
Investment adviser (Note 2) 57,077 2,265,240
------------
Accrued expenses and other liabilities 34,999
------------
Total liabilities 2,300,239
------------
Net Assets: Net assets $129,807,780
Capital: ============
Capital Shares (unlimited number of shares of beneficial
interest authorized) (Note 4):
Preferred Shares, par value $.05 per share (1,600 shares
of AMPS* issued and outstanding at $25,000 per share $ 40,000,000
liquidation preference) Common Shares, par value $.10
per share (5,883,760 shares issued
and outstanding) $ 588,376
Paid-in capital in excess of par 82,247,950
Undistributed investment income--net 1,172,691
</TABLE>
F-24
<PAGE>
<TABLE>
<S> <C> <C>
Accumulated realized capital losses on investments--net (560,908)
Unrealized appreciation on investments--net 6,359,671
------------
Total--Equivalent to $15.26 net asset value per Common Share
(market price--$15.125) 89,807,780
------------
Total capital $129,807,780
============
<FN>
*Auction Market Preferred Shares.
See Notes to Financial Statements.
</TABLE>
MuniYield Pennsylvania Fund
April 30, 1999
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Six Months Ended
April 30, 1999
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 3,629,400
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 326,589
Commission fees (Note 4) 50,546
Professional fees 30,750
Accounting services (Note 2) 28,411
Transfer agent fees 26,709
Printing and shareholder reports 13,678
Trustees' fees and expenses 13,524
Listing fees 8,052
Custodian fees 3,849
Pricing fees 3,496
Other 6,674
------------
Total expenses 512,278
------------
Investment income--net 3,117,122
------------
Realized & Realized gain on investments--net 531,883
Unrealized Gain Change in unrealized appreciation on investments--net (1,983,280)
(Loss) on ------------
</TABLE>
F-25
<PAGE>
<TABLE>
<S> <C>
Investments--Net Net Increase in Net Assets Resulting from Operations $ 1,665,725
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
MuniYield Pennsylvania Fund
April 30, 1999
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: April 30, 1999 Oct. 31, 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 3,117,122 $ 6,418,420
Realized gain on investments--net 531,883 3,150,329
Change in unrealized appreciation on investments--net (1,983,280) (402,818)
------------ ------------
Net increase in net assets resulting from operations 1,665,725 9,165,931
------------ ------------
Dividends & Investment income--net:
Distributions to Common Shares (2,676,473) (5,040,266)
Shareholders Preferred Shares (428,656) (1,048,448)
(Note 1e): Realized gain on investments--net:
Common Shares (2,632,068) (1,574,973)
Preferred Shares (336,480) (592,048)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (6,073,677) (8,255,735)
------------ ------------
Beneficial Value of shares issued to Common Shareholders in reinvestment
Interest of dividends and distributions 1,448,899 785,969
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (2,959,053) 1,696,165
Beginning of period 132,766,833 131,070,668
------------ ------------
End of period* $129,807,780 $132,766,833
============ ============
</TABLE>
F-26
<PAGE>
<TABLE>
<S> <C> <C>
<FN>
*Undistributed investment income--net $ 1,172,691 $ 1,160,698
============ ============
See Notes to Financial Statements.
</TABLE>
MuniYield Pennsylvania Fund
April 30, 1999
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended For the
April 30, Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 16.01 $ 15.86 $ 15.32 $ 15.36 $ 13.86
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .53 1.12 1.13 1.15 1.17
Realized and unrealized gain (loss) on
investments--net (.24) .46 .66 (.03) 1.53
-------- -------- -------- -------- --------
Total from investment operations .29 1.58 1.79 1.12 2.70
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Shareholders:
Investment income--net (.46) (.88) (.89) (.91) (.89)
Realized gain on investments--net (.45) (.27) (.09) -- --
In excess of realized gain on investments--net -- -- -- -- (.05)
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Shareholders (.91) (1.15) (.98) (.91) (.94)
-------- -------- -------- -------- --------
Effect of Preferred Share activity:
Dividends and distributions to Preferred
Shareholders:
Investment income--net (.07) (.18) (.24) (.25) (.25)
Realized gain on investments--net (.06) (.10) (.03) -- --
In excess of realized gain on investments--
net -- -- -- -- (.01)
-------- -------- -------- -------- --------
Total effect of Preferred Share activity (.13) (.28) (.27) (.25) (.26)
-------- -------- -------- -------- --------
</TABLE>
F-27
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, end of period $ 15.26 $ 16.01 $ 15.86 $ 15.32 $ 15.36
======== ======== ======== ======== ========
Market price per share, end of period $ 15.125 $ 16.50 $14.8125 $ 14.125 $ 13.75
======== ======== ======== ======== ========
Total Investment Based on market price per share (2.97%)++ 19.82% 12.15% 9.48% 34.17%
Return:** ======== ======== ======== ======== ========
Based on net asset value per share .89%++ 8.58% 10.71% 6.30% 18.95%
======== ======== ======== ======== ========
Ratios to Average Expenses .78%* .77% .79% .78% .82%
Net Assets:*** ======== ======== ======== ======== ========
Investment income--net 4.77%* 4.90% 5.07% 5.14% 5.44%
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Shares, end of
Data: period (in thousands) $ 89,808 $ 92,767 $ 91,071 $ 88,001 $ 88,226
======== ======== ======== ======== ========
Preferred Shares outstanding, end of
period (in thousands) $ 40,000 $ 40,000 $ 40,000 $ 40,000 $ 40,000
======== ======== ======== ======== ========
Portfolio turnover 16.87% 60.52% 70.14% 75.83% 43.59%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,245 $ 3,319 $ 3,277 $ 3,200 $ 3,206
======== ======== ======== ======== ========
Dividends Investment income--net $ 268 $ 655 $ 853 $ 901 $ 902
Per Share on ======== ======== ======== ======== ========
Preferred Shares
Outstanding:
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Shareholders.
++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
MuniYield Pennsylvania
April 30, 1999
F-28
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Pennsylvania Fund (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund's financial statements are
prepared in accordance with generally accepted accounting principles
which may require the use of management accruals and estimates.
These unaudited financial statements reflect all adjustments which
are, in the opinion of management, necessary to a fair statement of
the results for the interim period presented. All such adjustments
are of a normal recurring nature. The Fund determines and makes
available for publication the net asset value of its Common Shares
on a weekly basis. The Fund's Common Shares are listed on the New
York Stock Exchange under the symbol MPA. The following is a summary
of significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of
options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options
purchased). Securities with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at their fair value as determined in good faith
by or under the direction of the Board of Trustees of the Fund,
including valuations furnished by a pricing service retained by the
Fund, which may utilize a matrix system for valuations. The
procedures of the pricing service and its valuations are reviewed by
the officers of the Fund under the general supervision of the Board
of Trustees.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
F-29
<PAGE>
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
MuniYield Pennsylvania Fund
April 30, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
F-30
<PAGE>
(e) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Shares.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or Trustees of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended April 30, 1999 were $21,163,543 and
$27,228,205, respectively.
Net realized gains for the six months ended April 30, 1999 and net
unrealized gains as of April 30, 1999 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $ 531,883 $ 6,359,671
---------- -----------
Total $ 531,883 $ 6,359,671
========== ===========
As of April 30, 1999, net unrealized appreciation for Federal income
tax purposes aggregated $6,359,671, of which $6,505,665 related to
appreciated securities and $145,994 related to depreciated
securities. The aggregate cost of investments at April 30, 1999 for
Federal income tax purposes was $123,609,119.
4. Beneficial Interest Transactions:
The Fund is authorized to issue an unlimited number of shares of
F-31
<PAGE>
beneficial interest, including Preferred Shares, par value $.10 per
share, all of which were initially classified as Common Shares. The
Board of Trustees is authorized, however, to reclassify any unissued
shares of beneficial interest without approval of the holders of
Common Shares.
Common Shares
Shares issued and outstanding during the six months ended April 30,
1999 and the year ended October 31, 1998 increased by 91,016 and
49,322, respectively, as a result of dividend reinvestment.
Preferred Shares
Auction Market Preferred Shares ("AMPS") are Preferred Shares of the
Fund, with a par value of $.05 per share and a liquidation
preference of $25,000 per share, that entitle their holders to
receive cash dividends at an annual rate that may vary for the
successive dividend periods. The yield in effect at April 30, 1999
was 3.25%.
Shares issued and outstanding during the six months ended April 30,
1999 and the year ended October 31, 1998 remained constant.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the six months ended
April 30, 1999, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
an affiliate of FAM, earned $30,216 as commissions.
5. Subsequent Event:
On May 6, 1999, the Fund's Board of Trustees declared an ordinary
income dividend to holders of Common Shares in the amount of
$.066757 per share, payable on May 27, 1999 to shareholders of
record as of May 21, 1999.
F-32
<PAGE>
Audited Financial Statements for MuniVest Pennsylvania Insured Fund for the
Fiscal Year Ended October 31, 1998
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
MuniVest Pennsylvania Insured Fund:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniVest Pennsylvania Insured Fund
as of October 31, 1998, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-
year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at October 31, 1998 by correspondence with the custodian and broker. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniVest
Pennsylvania Insured Fund as of October 31, 1998, the results of its
operations, the changes in its net assets, and the financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 4, 1998
F-34
<PAGE>
MuniVest Pennsylvania Insured Fund, October 31, 1998
Portfolio Abbreviations
To simplify the listings of MuniVest Pennsylvania Insured Fund's portfolio
holdings in the Schedule of Investments, we have abbreviated the names of many
of the securities according to the
F-35
<PAGE>
list below and at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RITES Residual Interest Tax-Exempt Securities
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Pennsylvania-- BBB- Baa2 $ 1,670 Allegheny County, Pennsylvania, IDA, Environmental Improvement,
101.6% Revenue Refunding Bonds (USX Corp.), 5.60% due 9/01/2030 $ 1,683
AAA Aaa 1,500 Allegheny County, Pennsylvania, Sanitation Authority,
Sewer Revenue Bonds, RITR, Series 20, 7.02% due 12/01/2024 (g) 1,610
AAA Aaa 1,600 Altoona, Pennsylvania, City Authority, Water Revenue Bonds,
Series A, 6.50% due 11/01/2004 (c)(f) 1,845
AAA Aaa 2,000 Beaver County, Pennsylvania, IDA, Exempt Facilities Revenue
Bonds (Shippingport Project), AMT, Series A, 5.375% due
6/01/2028 (b) 2,029
Berks County, Pennsylvania, GO:
AAA Aaa 2,550 Refunding, Series 1995, 5.85% due 11/15/2018 (c) 2,744
NR* Aaa 1,000 UT, 5% due 11/15/2025 (b) 985
AAA Aaa 2,550 Blair County, Pennsylvania, Hospital Authority Revenue Bonds
(Altoona Hospital Project), RITES, 6.375% due 7/01/2013 (b)(g) 2,787
AAA Aaa 1,000 Bucks County, Pennsylvania, IDA, Revenue Refunding Bonds
(Grand View Hospital), Series A, 5.25% due 7/01/2021 (b) 1,005
AAA Aaa 2,500 Butler, Pennsylvania, Refunding (Area School District), UT,
Series B, 4.75% due 10/01/2022 (c) 2,400
BBB+ NR* 1,500 Cumberland County, Pennsylvania, Municipal Authority
Revenue Bonds (Presbyterian Homes Inc. Project), 6% due
12/01/2026 1,572
</TABLE>
F-36
<PAGE>
<TABLE>
<S> <S> <S> <C> <S> <C>
AAA Aaa 2,000 Delaware County, Pennsylvania, IDA, PCR, Refunding
(Philadelphia Electric Company Project), Series A, 7.375%
due 4/01/2021 (b) 2,188
NR* Aaa 2,000 Delaware County, Pennsylvania, University Authority
Revenue Bonds (Villanova University), Series A, 5% due
12/01/2028 (e) 1,969
NR* Aaa 2,000 Erie, Pennsylvania, Sewer Authority Revenue Bonds, Series A,
5% due 6/01/2018 (b) 1,993
AAA Aaa 3,280 Johnstown, Pennsylvania, Refunding, GO, UT, 6.45% due
10/01/2019 (c) 3,663
Lehigh County, Pennsylvania, General Purpose Authority
Revenue Bonds:
NR* Aaa 2,000 (Lehigh Valley Health Network), Series C, 5% due
7/01/2028 (e) 1,946
AAA Aaa 3,000 (Saint Luke's Hospital--Bethlehem), 6.25% due 7/01/2022 (b) 3,275
AAA Aaa 3,000 Lehigh County, Pennsylvania, IDA, PCR, Refunding
(Pennsylvania Power and Light Company Project), Series A,
6.40% due 11/01/2021 (e) 3,315
AAA Aaa 3,000 Luzerne County, Pennsylvania, IDA, Exempt Facilities
Revenue Refunding Bonds (Pennsylvania Gas and Water
Company Project), AMT, Series A, 7% due 12/01/2017 (b) 3,450
AAA Aaa 2,650 McGuffey School District, Pennsylvania, GO, 4.75% due
8/01/2028 (b) 2,548
AAA Aaa 1,000 Northeastern, Pennsylvania, Hospital and Educational
Authority, College Revenue Bonds (Luzerne County Community
College), 6.625% due 2/15/2005 (b)(f) 1,144
BBB Baa2 2,500 Pennsylvania Economic Development Financing Authority,
Wastewater Treatment Revenue Bonds (Sun Company Inc.--
R & M Project), AMT, Series A, 7.60% due 12/01/2024 2,908
Pennsylvania HFA, S/F Mortgage, AMT:
AA+ Aa2 1,000 Refunding, Series 60A, 5.85% due 10/01/2027 1,039
AA+ Aa2 2,500 Series 39B, 6.875% due 10/01/2024 2,628
AAA Aaa 3,000 Pennsylvania State, GO, Second Series, 5% due 8/01/2018 (c) 3,008
AAA Aaa 4,000 Pennsylvania State Higher Educational Assistance Agency,
Student Loan Revenue Bonds, AMT, Series C, 7.15% due
9/01/2021 (b) 4,317
Pennsylvania State Higher Educational Facilities Authority,
</TABLE>
F-37
<PAGE>
<TABLE>
<S> <S> <S> <C> <S> <C>
Revenue Refunding Bonds:
A1+ NR* 700 (Carnegie Mellon University), VRDN, Series B, 3.70% due
11/01/2027 (a) 700
A1+ NR* 200 (Carnegie Mellon University), VRDN, Series C, 3.70%
due 11/01/2029 (a) 200
AAA Aaa 1,100 (University of Pennsylvania--Health Services), Series A,
5.375% due 1/01/2015 (e) 1,148
Pennsylvania State Turnpike Commission, Tax Revenue Bonds
(Oil Franchise)(b):
AAA Aaa 1,300 Senior Series A, 4.75% due 12/01/2027 1,243
AAA Aaa 1,480 Sub-Series B, 4.75% due 12/01/2027 1,415
AAA Aaa 5,125 Philadelphia, Pennsylvania, Authority for Industrial
Development, Lease Revenue Bonds (City of Philadelphia
Project), Series A, 5.375% due 2/15/2027 (e) 5,299
AAA Aaa 1,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds (First),
Series B, 5% due 7/01/2028 (d) 983
Philadelphia, Pennsylvania, Hospitals and Higher Educational
Facilities Authority Revenue Bonds, Series A:
A1+ VMG1++ 1,100 (Children's Hospital Project), VRDN, 3.70% due 3/01/2027 (a) 1,100
AAA Aaa 3,000 (Jefferson Health System), 5.125% due 5/15/2018 (b) 3,004
Philadelphia, Pennsylvania, Water and Wastewater Revenue Bonds:
AAA Aaa 1,000 Refunding, 5% due 6/15/2019 (e) 992
AAA Aaa 2,000 Series A, 5% due 8/01/2017 (b) 1,997
AAA Aaa 4,000 Pittsburgh, Pennsylvania, Water and Sewer Authority, Water
and Sewer System Revenue Bonds, Sub-Series C, 5.05% due
9/01/2025 (d) 3,959
A1+ NR* 1,300 Schuylkill County, Pennsylvania, IDA, Resource Recovery
Revenue Refunding Bonds (Northeastern Power Company), VRDN,
Series A, 3.75% due 12/01/2022 (a) 1,300
AAA Aaa 2,525 Southeastern, Pennsylvania, Transportation Authority, Special
Revenue Bonds, 5.375% due 3/01/2022 (c) 2,615
Total Investments (Cost--$79,052)--101.6% 84,006
Liabilities in Excess of Other Assets--(1.6%) (1,299)
-------
Net Assets--100.0% $82,707
=======
</TABLE>
[FN]
F-38
<PAGE>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at October 31, 1998.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)FSA Insured.
(e)MBIA Insured.
(f)Prerefunded.
(g)The interest rate is subject to change periodically and
inversely based upon prevailing market rates. The interest rate
shown is the rate in effect at October 31, 1998. *Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte &
Touche LLP.
See Notes to Financial Statements.
MuniVest Pennsylvania Insured Fund, October 31, 1998
<TABLE>
<CAPTION>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of October 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$79,051,894) (Note 1a) $ 84,005,941
Cash 59,931
Interest receivable 1,287,174
Prepaid expenses and other assets 7,995
------------
Total assets 85,361,041
------------
Liabilities: Payables:
Securities purchased $ 2,551,043
Investment adviser (Note 2) 36,444 2,587,487
------------
Accrued expenses and other liabilities 66,087
------------
Total liabilities 2,653,574
------------
Net Assets: Net assets $ 82,707,467
============
Capital: Capital Shares (unlimited number of shares authorized) (Note 4):
Preferred Shares, par value $.05 per share (1,100 shares of
</TABLE>
F-39
<PAGE>
<TABLE>
<S> <C> <C> <C>
AMPS* issued and outstanding at $25,000 per share liquidation
preference) $ 27,500,000
Common Shares, par value $.10 per share (4,028,976 shares
issued and outstanding) $ 402,898
Paid-in capital in excess of par 55,851,679
Undistributed investment income--net 303,140
Accumulated realized capital losses on investments--net (Note 5) (6,304,297)
Unrealized appreciation on investments--net 4,954,047
------------
Total--Equivalent to $13.70 net asset value per Common Share
(market price--$13.875) 55,207,467
------------
Total capital $ 82,707,467
============
<FN>
*Auction Market Preferred Shares.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1998
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 4,515,650
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 408,660
Commission fees (Note 4) 69,784
Professional fees 69,484
Accounting services (Note 2) 43,697
Trustees' fees and expenses 23,045
Transfer agent fees 21,206
Printing and shareholder reports 20,243
Listing fees 16,170
Amortization of organization expenses (Note 1e) 9,502
Custodian fees 6,641
Pricing fees 5,987
Other 11,630
------------
Total expenses 706,049
------------
Investment income--net 3,809,601
------------
Realized & Realized gain on investments--net 2,250,971
</TABLE>
F-40
<PAGE>
<TABLE>
<S> <C> <C>
Unrealized Gain Change in unrealized appreciation on investments--net (555,716)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 5,504,856
(Notes 1b, ============
1d & 3):
See Notes to Financial Statements.
</TABLE>
MuniVest Pennsylvania Insured Fund, October 31, 1998
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 3,809,601 $ 3,795,012
Realized gain on investments--net 2,250,971 480,878
Change in unrealized appreciation on investments--net (555,716) 1,891,454
------------ ------------
Net increase in net assets resulting from operations 5,504,856 6,167,344
------------ ------------
Dividends to Investment income--net:
Shareholders Common Shares (2,877,458) (2,840,678)
(Note 1f): Preferred Shares (932,382) (920,337)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (3,809,840) (3,761,015)
------------ ------------
Capital Share Value of shares issued to Common Shareholders in reinvestment
Transactions of dividends 56,450 --
(Note 4): ------------ ------------
Net increase in net assets derived from capital share
transactions 56,450 --
------------ ------------
Net Assets: Total increase in net assets 1,751,466 2,406,329
Beginning of year 80,956,001 78,549,672
------------ ------------
End of year* $ 82,707,467 $ 80,956,001
============ ============
<FN>
*Undistributed investment income--net $ 303,140 $ 303,379
============ ============
</TABLE>
F-41
<PAGE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios have
been derived from information provided in
the financial statements.
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.28 $ 12.68 $ 12.91 $ 11.54 $ 14.70
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .94 .95 .97 1.01 1.05
Realized and unrealized gain (loss) on
investments--net .42 .59 (.23) 1.37 (3.08)
-------- -------- -------- -------- --------
Total from investment operations 1.36 1.54 .74 2.38 (2.03)
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Shareholders:
Investment income--net (.71) (.71) (.73) (.75) (.86)
Realized gain on investments--net -- -- -- -- (.06)
-------- -------- -------- -------- --------
Total dividends and distributions to
Common Shareholders (.71) (.71) (.73) (.75) (.92)
-------- -------- -------- -------- --------
Effect of Preferred Share activity:
Dividends and distributions to Preferred
Shareholders:
Investment income--net (.23) (.23) (.24) (.26) (.20)
Realized gain on investments--net -- -- -- -- (.01)
-------- -------- -------- -------- --------
Total effect of Preferred Share activity (.23) (.23) (.24) (.26) (.21)
-------- -------- -------- -------- --------
Net asset value, end of year $ 13.70 $ 13.28 $ 12.68 $ 12.91 $ 11.54
======== ======== ======== ======== ========
Market price per share, end of year $ 13.875 $ 12.25 $ 11.625 $ 11.875 $ 10.875
======== ======== ======== ======== ========
Total Investment Based on market price per share 19.62% 11.80% 3.98% 16.58% (22.20%)
Return:* ======== ======== ======== ======== ========
Based on net asset value per share 8.95% 11.12% 4.32% 19.44% (15.76%)
======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .86% .88% .90% .83% .51%
Net Assets:** ======== ======== ======== ======== ========
</TABLE>
F-42
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Expenses .86% .88% .90% .95% .86%
======== ======== ======== ======== ========
Investment income--net 4.66% 4.77% 4.91% 5.33% 5.24%
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Shares,
Data: end of year (in thousands) $ 55,207 $ 53,456 $ 51,050 $ 51,867 $ 46,390
======== ======== ======== ======== ========
Preferred Shares outstanding, end
of year (in thousands) $ 27,500 $ 27,500 $ 27,500 $ 27,500 $ 27,500
======== ======== ======== ======== ========
Portfolio turnover 60.37% 61.03% 113.65% 73.19% 93.00%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,008 $ 2,944 $ 2,856 $ 2,886 $ 2,687
======== ======== ======== ======== ========
Dividends Investment income--net $ 848 $ 837 $ 879 $ 966 $ 721
Per Share on ======== ======== ======== ======== ========
Preferred Shares
Outstanding:++
<FN>
*Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
**Do not reflect the effect of dividends to Preferred Shareholders.
++Dividends per share have been adjusted to reflect a two-for-one
stock split that occurred on December 1, 1994.
See Notes to Financial Statements.
</TABLE>
MuniVest Pennsylvania Insured Fund, October 31, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniVest Pennsylvania Insured Fund (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund determines and makes
available for publication the net asset value of its Common Shares
on a weekly basis. The Fund's Common Shares are listed on the New
York Stock Exchange under the symbol MVP. The following is a summary
of significant accounting policies followed by the Fund.
F-43
<PAGE>
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of
options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options
purchased). Securities with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Fund, including
valuations furnished by a pricing service retained by the Fund,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Board of Trustees.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired, or
F-44
<PAGE>
deducted from (or added to) the proceeds of the security sold. When
an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a period not exceeding
five years.
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Shares.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
F-45
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1998 were $47,537,197 and
$47,789,758, respectively.
Net realized gains for the year ended October 31, 1998 and net
unrealized gains as of October 31, 1998 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $ 2,250,971 $ 4,954,047
-------------- -------------
Total $ 2,250,971 $ 4,954,047
============== =============
As of October 31, 1998, net unrealized appreciation for Federal
income tax purposes aggregated $4,954,047, of which $4,954,153
related to appreciated securities and $106 related to depreciated
securities. The aggregate cost of investments at October 31, 1998
for Federal income tax purposes was $79,051,894.
4. Capital Share Transactions:
The Fund is authorized to issue an unlimited number of shares of
beneficial interest, including Preferred Shares, par value $.10 per
share, all of which were initially classified as Common Shares. The
Board of Trustees is authorized, however, to reclassify any unissued
shares of capital without approval of the holders of Common Shares.
Common Shares
Shares issued and outstanding during the year ended October 31, 1998
increased by 4,120 as a result of dividend reinvestment and during
the year ended October 31, 1997 remained constant.
Preferred Shares
Auction Market Preferred Shares ("AMPS") are Preferred Shares
of the Fund, with a par value of $.05 per share and a liquidation
preference of $25,000 per share, that entitle their holders to
receive cash dividends at an annual rate that may vary for the
successive dividend periods. The yield in effect at October 31, 1998
was 2.40%.
Shares issued and outstanding during the years ended October 31,
1998 and October 31, 1997 remained constant.
The Fund pays commissions to certain broker-dealers at the end of
F-46
<PAGE>
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the year ended
October 31, 1998, Merrill Lynch, Pierce, Fenner & Smith Inc., an
affiliate of FAM, earned $40,877 as commissions.
5. Capital Loss Carryforward:
At October 31, 1998, the Fund had a net capital loss carryforward of
approximately $5,878,000, of which $1,807,000 expires in 2002,
$3,117,000 expires in 2003 and $954,000 expires in 2004. This amount
will be available to offset like amounts of any future taxable
gains.
6. Subsequent Event:
On November 5, 1998, the Fund's Board of Trustees declared an
ordinary income dividend to Common Shareholders in the amount of
$.063266 per share, payable on November 27, 1998 to shareholders of
record as of November 20, 1998.
F-47
<PAGE>
Unaudited Financial Statements for MuniVest Pennsylvania Insured Fund for the
Six-Month Period Ended April 30, 1999
F-48
<PAGE>
Portfolio Abbreviations
To simplify the listings of MuniVest Pennsylvania Insured Fund's
portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list below and at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RITES Residual Interest Tax-Exempt Securities
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
<S> <C> <C> <C> <C>
</TABLE>
F-49
<PAGE>
<TABLE>
<CAPTION>
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <S> <C>
Pennsylvania-- BBB- Baa2 $ 1,670 Allegheny County, Pennsylvania, IDA, Environmental Improvement,
98.5% Revenue Refunding Bonds (USX Corp.), 5.60% due 9/01/2030 $ 1,671
AAA Aaa 1,500 Allegheny County, Pennsylvania, Sanitation Authority, Sewer
Revenue Bonds, RITR, Series 20, 6.37% due 12/01/2024 (g) 1,569
AAA NR* 1,600 Altoona, Pennsylvania, City Water Authority, Revenue
Refunding Bonds, Series A, 6.50% due 11/01/2004 (c)(f) 1,829
AAA Aaa 2,550 Berks County, Pennsylvania, GO, Refunding, 5.85% due
11/15/2018 (c) 2,715
AAA Aaa 2,550 Blair County, Pennsylvania, Hospital Authority Revenue Bonds
(Altoona Hospital Project), RITES, 6.375% due 7/01/2013 (b)(g) 2,765
AAA Aaa 2,000 Delaware County, Pennsylvania, IDA, PCR, Refunding
(Philadelphia Electric Company Project), Series A, 7.375%
due 4/01/2021 (b) 2,160
AAA Aaa 4,500 Delaware Valley, Pennsylvania, Regional Finance Authority,
Local Government Revenue Bonds, Series A, 5.50% due
8/01/2028 (b) 4,829
NR* Aaa 2,000 Erie, Pennsylvania, Sewer Authority, Revenue Refunding
Bonds, Series A, 5% due 6/01/2018 (b) 1,978
AAA Aaa 3,280 Johnstown, Pennsylvania, GO, Refunding, 6.45% due 10/01/2019 (c) 3,633
Lehigh County, Pennsylvania, General Purpose Authority
Revenue Bonds:
NR* Aaa 2,000 (Lehigh Valley Health Network), Series C, 5%
due 7/01/2028 (e) 1,920
AAA Aaa 3,000 (Saint Lukes Hospital--Bethlehem), 6.25% due 7/01/2022 (b) 3,249
AAA Aaa 3,000 Lehigh County, Pennsylvania, IDA, PCR, Refunding
(Pennsylvania Power and Light Company Project), Series A,
6.40% due 11/01/2021 (e) 3,287
AAA Aaa 3,000 Luzerne County, Pennsylvania, IDA, Exempt Facilities
Revenue Refunding Bonds (Pennsylvania Gas and Water Company
Project), AMT, Series A, 7% due 12/01/2017 (b) 3,420
AAA Aaa 1,000 Northeastern, Pennsylvania, Hospital and Educational
Authority, College Revenue Bonds (Luzerne County Community
College), 6.625% due 2/15/2005 (b)(f) 1,130
BBB Baa2 2,500 Pennsylvania Economic Development Financing Authority,
Wastewater Treatment Revenue Bonds (Sun Company Inc.--R & M
</TABLE>
F-50
<PAGE>
<TABLE>
<S> <C> <C> <C> <S> <C>
Project), AMT, Series A, 7.60% due 12/01/2024 2,824
AA+ Aa2 1,000 Pennsylvania HFA, S/F Mortgage Revenue Bonds, AMT,
Series 60A, 5.85% due 10/01/2027 1,043
AA+ Aa2 2,500 Pennsylvania HFA, S/F Mortgage Revenue Refunding Bonds,
AMT, Series 39B, 6.875% due 10/01/2024 2,613
AAA Aaa 3,000 Pennsylvania State, GO, Second Series, 5% due 8/01/2018 (c) 2,985
AAA Aaa 4,000 Pennsylvania State Higher Educational Assistance Agency,
Student Loan Revenue Bonds, AMT, Series C, 7.15% due
9/01/2021 (b) 4,493
AAA Aaa 2,000 Pennsylvania State Higher Educational Facilities
Authority Revenue Bonds (UPMC Health System), Series A,
5% due 8/01/2029 (d) 1,919
A1+ NR* 1,600 Pennsylvania State Higher Educational Facilities Authority,
Revenue Refunding Bonds (Carnegie Mellon University), VRDN,
Series A, 4.20% due 11/01/2025 (a) 1,600
Pennsylvania State Turnpike Commission, Oil Franchise
Tax Revenue Bonds (b):
AAA Aaa 1,300 Senior Series A, 4.75% due 12/01/2027 1,217
AAA Aaa 1,480 Sub-Series B, 4.75% due 12/01/2027 1,386
A1+ NR* 300 Philadelphia, Pennsylvania, Authority for IDR (Fox Chase
Cancer Center Project), VRDN, 4.25% due 7/01/2025 (a) 300
AAA Aaa 5,125 Philadelphia, Pennsylvania, Authority for Industrial
Development, Lease Revenue Bonds (City of Philadelphia
Project), Series A, 5.375% due 2/15/2027 (e) 5,236
AAA Aaa 2,675 Philadelphia, Pennsylvania, GO, 5% due 3/15/2028 (d) 2,599
AAA Aaa 1,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds,
First Series B, 5% due 7/01/2028 (d) 972
Philadelphia, Pennsylvania, Hospitals and Higher
Education Facilities Authority, Hospital Revenue Bonds
(Children's Hospital of Philadelphia Project),VRDN (a):
A1+ VMIG1++ 1,100 4.20% due 3/01/2027 1,100
A1+ VMIG1++ 1,000 Series A, 4.20% due 3/01/2027 1,000
AAA Aaa 3,000 Philadelphia, Pennsylvania, Hospitals and Higher
Educational Facilities Authority, Revenue Refunding Bonds
(Jefferson Health System), Series A, 5.125% due 5/15/2018 (b) 2,969
AAA Aaa 2,000 Philadelphia, Pennsylvania, Water and Wastewater Revenue
</TABLE>
F-51
<PAGE>
<TABLE>
<S> <C> <C> <C> <S> <C>
Bonds, Series A, 5% due 8/01/2017 (b) 1,983
AAA Aaa 1,000 Philadelphia, Pennsylvania, Water and Wastewater Revenue
Refunding Bonds, 5% due 6/15/2019 (e) 983
AAA Aaa 2,655 Pittsburgh, Pennsylvania, GO, 5.125% due 9/01/2015 (b) 2,699
A1+ NR* 2,200 Schuylkill County, Pennsylvania, IDA, Resource Recovery
Revenue Refunding Bonds (Northeastern Power Company), VRDN,
Series A, 4.10% due 12/01/2022 (a) 2,200
AAA Aaa 2,525 Southeastern Pennsylvania Transportation Authority,
Special Revenue Bonds, 5.375% due 3/01/2022 (c) 2,580
Total Investments (Cost--$76,924)--98.5% 80,856
Other Assets Less Liabilities--1.5% 1,231
-------
Net Assets--100.0% $82,087
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at April 30, 1999.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)FSA Insured.
(e)MBIA Insured.
(f)Prerefunded.
(g)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at April 30, 1999.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
</TABLE>
See Notes to Financial Statements.
MuniVest Pennsylvania Insured Fund, April 30, 1999
<TABLE>
<CAPTION>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of April 30, 1999
<S> <S> <C> <C>
</TABLE>
F-52
<PAGE>
<TABLE>
<S> <C> <C>
Assets: Investments, at value (identified cost--$76,924,058) (Note 1a) $ 80,856,110
------------
Cash 75,295
Interest receivable 1,255,043
Prepaid expenses and other assets 7,996
------------
Total assets 82,194,444
------------
Liabilities: Payables:
Dividends to shareholders (Note 1e) $ 52,697
Investment adviser (Note 2) 36,079 88,776
------------
Accrued expenses and other liabilities 18,400
------------
Total liabilities 107,176
------------
Net Assets: Net assets $ 82,087,268
============
Capital: Capital Shares (unlimited number of shares authorized) (Note 4):
Preferred Shares, par value $.05 per share (1,100 shares
of AMPS* issued and outstanding at $25,000
per share liquidation preference) $ 27,500,000
Common Shares, par value $.10 per share (4,037,179 shares
issued and outstanding) $ 403,718
Paid-in capital in excess of par 55,962,716
Undistributed investment income--net 295,148
Accumulated realized capital losses on investments--net (Note 5) (6,006,366)
Unrealized appreciation on investments--net 3,932,052
------------
Total--Equivalent to $13.52 net asset value per
Common Share (market price--$13.0625) 54,587,268
------------
Total capital $ 82,087,268
============
<FN>
*Auction Market Preferred Shares.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Six Months Ended April 30, 1999
<S> <S> <C> <C>
</TABLE>
F-53
<PAGE>
<TABLE>
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 2,226,969
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 205,636
Commission fees (Note 4) 33,669
Professional fees 30,941
Accounting services (Note 2) 27,447
Transfer agent fees 16,162
Printing and shareholder reports 12,094
Trustees' fees and expenses 11,224
Listing fees 7,804
Custodian fees 3,542
Pricing fees 3,008
Other 7,598
------------
Total expenses 359,125
------------
Investment income--net 1,867,844
------------
Realized & Realized gain on investments--net 297,931
Unrealized Gain Change in unrealized appreciation on investments--net (1,021,995)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 1,143,780
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
MuniVest Pennsylvania Insured Fund, April 30, 1999
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Six For the
Months Ended Year Ended
April 30, October 31,
Increase (Decrease) in Net Assets: 1999 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 1,867,844 $ 3,809,601
Realized gain on investments--net 297,931 2,250,971
Change in unrealized appreciation on investments--net (1,021,995) (555,716)
------------ ------------
Net increase in net assets resulting from operations 1,143,780 5,504,856
------------ ------------
Dividends to Investment income--net:
Shareholders Common Shares (1,470,475) (2,877,458)
</TABLE>
F-54
<PAGE>
<TABLE>
<S> <S> <C> <C>
(Note 1e): Preferred Shares (405,361) (932,382)
------------ ------------
Net decrease in net assets resulting from dividends
to shareholders (1,875,836) (3,809,840)
------------ ------------
Capital Share Value of shares issued to Common Shareholders in
Transactions reinvestment of dividends 111,857 56,450
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets ( 620,199) 1,751,466
Beginning of period 82,707,467 80,956,001
------------ ------------
End of period* $ 82,087,268 $ 82,707,467
============ ============
<FN>
*Undistributed investment income--net $ 295,148 $ 303,140
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
April 30, For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.70 $ 13.28 $ 12.68 $ 12.91 $ 11.54
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .45 .94 .95 .97 1.01
Realized and unrealized gain (loss)
on investments--net (.17) .42 .59 (.23) 1.37
-------- -------- -------- -------- --------
Total from investment operations .28 1.36 1.54 .74 2.38
-------- -------- -------- -------- --------
Less divdends from investment income--
net to Common Shareholders (.36) (.71) (.71) (.73) (.75)
Effect of Preferred Share activity:
Dividends to Preferred Shareholders:
Investment income--net (.10) (.23) (.23) (.24) (.26)
-------- -------- -------- -------- --------
Net asset value, end of period $ 13.52 $ 13.70 $ 13.28 $ 12.68 $ 12.91
======== ======== ======== ======== ========
Market price per share, end of period $13.0625 $ 13.875 $ 12.25 $ 11.625 $ 11.875
======== ======== ======== ======== ========
</TABLE>
F-55
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
Total Investment Based on market price per share (3.29%)++ 19.62% 11.80% 3.98% 16.58%
Return:** ======== ======== ======== ======== ========
Based on net asset value per share 1.38%++ 8.95% 11.12% 4.32% 19.44%
======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .87%* .86% .88% .90% .83%
Net Assets:*** ======== ======== ======== ======== ========
Expenses .87%* .86% .88% .90% .95%
======== ======== ======== ======== ========
Investment income--net 4.54%* 4.66% 4.77% 4.91% 5.33%
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Shares,
Data: end of period (in thousands) $ 54,587 $ 55,207 $ 53,456 $ 51,050 $ 51,867
======== ======== ======== ======== ========
Preferred Shares outstanding, end of
period (in thousands) $ 27,500 $ 27,500 $ 27,500 $ 27,500 $ 27,500
======== ======== ======== ======== ========
Portfolio turnover 19.64% 60.37% 61.03% 113.65% 73.19%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 2,985 $ 3,008 $ 2,944 $ 2,856 $ 2,886
======== ======== ======== ======== ========
Dividends Investment income--net $ 369 $ 848 $ 837 $ 879 $ 966
Per Share on ======== ======== ======== ======== ========
Preferred Shares
Outstanding:
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Shareholders.
++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
MuniVest Pennsylvania Insured Fund, April 30, 1999
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniVest Pennsylvania Insured Fund (the "Fund") is registered under
F-56
<PAGE>
the Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund's financial statements are
prepared in accordance with generally accepted accounting principles
which may require the use of management accruals and estimates.
These unaudited financial statements reflect all adjustments which
are, in the opinion of management, necessary to a fair statement of
the results for the interim period presented. All such adjustments
are of a normal recurring nature. The Fund determines and makes
available for publication the net asset value of its Common Shares
on a weekly basis. The Fund's Common Shares are listed on the New
York Stock Exchange under the symbol MVP. The following is a summary
of significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of
options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options
purchased). Securities with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Fund, including
valuations furnished by a pricing service retained by the Fund,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Board of Trustees.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
F-57
<PAGE>
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired, or
deducted from (or added to) the proceeds of the security sold. When
an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
F-58
<PAGE>
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Shares.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended April 30, 1999 were $15,375,027 and
$20,704,109, respectively.
Net realized gains for the six months ended April 30, 1999 and net
unrealized gains as of April 30, 1999 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $ 297,931 $ 3,932,052
-------------- ------------
Total $ 297,931 $ 3,932,052
============== =============
As of April 30, 1999, net unrealized appreciation for Federal income
tax purposes aggregated $3,932,052, of which $4,004,277 related to
appreciated securities and $72,225 related to depreciated
securities. The aggregate cost of investments at April 30, 1999 for
Federal income tax purposes was $76,924,058.
4. Capital Shares Transactions:
The Fund is authorized to issue an unlimited number of shares of
beneficial interest, including Preferred Shares, par value $.10 per
share, all of which were initially classified as Common Shares. The
Board of Trustees is authorized, however, to reclassify any unissued
shares of capital without approval of the holders of Common Shares.
Common Shares
Shares issued and outstanding during the six months ended April 30,
1999 and the year ended October 31, 1998 increased by 8,203 and
4,120, respectively, as a result of dividend reinvestment.
Preferred Shares
Auction Market Preferred Shares ("AMPS") are Preferred Shares of the
F-59
<PAGE>
Fund, with a par value of $.05 per share and a liquidation
preference of $25,000 per share, that entitle their holders to
receive cash dividends at an annual rate that may vary for the
successive dividend periods. The yield in effect at April 30, 1999
was 3.50%.
Shares issued and outstanding during the six months ended April 30,
1999 and the year ended October 31, 1998 remained constant.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the six months ended
April 30, 1999, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
an affiliate of FAM, earned $16,699 as commissions.
5. Capital Loss Carryforward:
At October 31, 1998, the Fund had a net capital loss carryforward of
approximately $5,878,000, of which $1,807,000 expires in 2002,
$3,117,000 expires in 2003 and $954,000 expires in 2004. This amount
will be available to offset like amounts of any future taxable
gains.
6. Subsequent Event:
On May 6, 1999, the Fund's Board of Trustees declared an ordinary
income dividend to Common Shareholders in the amount of $.058103 per
share, payable on May 27, 1999 to shareholders of record as of May
21, 1999.
F-60
<PAGE>
Unaudited Financial Statements for MuniHoldings Pennsylvania Insured Fund for
the Period February 26, 1999 (commencement of operations) to March 31, 1999
F-61
<PAGE>
Portfolio Abbreviations
To simplify the listings of MuniHoldings Pennsylvania Insured Fund's
portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list at right.
ACES SM Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
RIB Residual Interest Bonds
VRDN Variable Rate Demand Notes
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Pennsylvania-- NR* VMIG1++ $ 1,400 Allegheny County, Pennsylvania, Hospital Development
103.8% Authority Revenue Bonds (Presbyterian University Hospital),
ACES, Series B-3, 3.15% due 3/01/2018 (f) $ 1,400
AAA Aaa 2,000 Beaver County, Pennsylvania, IDA, Exempt Facilities
Revenue Bonds (Shippingport Project), AMT, Series A, 5.375%
due 6/01/2028 (a) 2,012
AAA Aaa 1,000 Bucks County, Pennsylvania, IDA, Revenue Refunding Bonds
(Grand View Hospital), Series A, 5.25% due 7/01/2021 (a) 995
AAA NR* 1,295 Deer Lakes School District, Pennsylvania, GO, Series A,
5.25% due 1/15/2017 (c) 1,320
AAA NR* 1,100 Delaware County, Pennsylvania, Interboro School District,
5.375% due 8/15/2025 (d) 1,123
NR* Aaa 4,000 Delaware County, Pennsylvania, University Authority Revenue
</TABLE>
F-62
<PAGE>
<TABLE>
<S> <S> <S> <C> <S> <C>
Bonds (Villanova University), Series A, 5% due 12/01/2028 (d) 3,903
AAA Aaa 2,000 Delaware River Port Authority, Pennsylvania and New Jersey,
Revenue Refunding Bonds, Series B, 5.25% due 1/01/2005 (a)(g) 2,126
AAA NR* 1,200 Erie, Pennsylvania, Parking Authority, Parking Facilities
Revenue Refunding Bonds, Series B, 5.125% due 9/01/2020 (d) 1,195
A1+ VMIG1++ 2,400 Geisinger Authority, Pennsylvania, Health System Revenue
Refunding Bonds (Penn State--Geisinger Health), VRDN,
Series B, 2.85% due 8/15/2028 (f) 2,400
AAA Aaa 3,000 Lancaster County, Pennsylvania, Solid Waste Management
Authority, Resource Recovery Revenue Refunding Bonds,
Series B, 5.375% due 12/15/2015 (a) 3,101
AAA Aaa 1,000 Lehigh County, Pennsylvania, General Purpose Authority,
Revenue Refunding Bonds (Saint Francis de Sales College),
Series A, 5% due 12/15/2020 (a) 984
AAA Aaa 2,000 Lower Providence Township, Pennsylvania, Sewer Authority,
Sewer Revenue Refunding Bonds, 5.25% due 5/01/2022 (d) 2,014
AA+ Aa2 4,000 Pennsylvania HFA, Revenue Bonds, RIB, AMT, 8.577% due
4/01/2025 (e) 4,375
AAA Aaa 2,000 Pennsylvania Intergovernmental Co-Op Authority,
Special Tax Revenue Refunding Bonds (Philadelphia Funding
Program), 5.25% due 6/15/2015 (b) 2,054
AAA Aaa 2,500 Pennsylvania State Higher Educational Facilities Authority
Revenue Bonds (UPMC Health System), Series A, 5%
due 8/01/2029 (c) 2,405
A1+ NR* 1,400 Pennsylvania State Higher Educational Facilities Authority,
Revenue Refunding Bonds (Carnegie Mellon University), VRDN,
Series B, 2.85% due 11/01/2027 (f) 1,400
AAA NR* 1,300 Pennsylvania State Public School Building Authority,
School Revenue Refunding Bonds (Pittston Area School District),
Series P, 5% due 7/15/2021 (c) 1,278
AAA Aaa 2,500 Pennsylvania State Turnpike Commission, Oil Franchise Tax
Revenue Bonds, Senior Series A, 4.75% due 12/01/2027 (a) 2,358
AAA Aaa 3,000 Philadelphia, Pennsylvania, Authority for Industrial
Development, Airport Revenue Bonds (Philadelphia Airport
System Project), AMT, Series A, 5.125% due 7/01/2028 (b) 2,931
AAA Aaa 2,500 Philadelphia, Pennsylvania, GO, 5% due 3/15/2028 (c) 2,440
</TABLE>
F-63
<PAGE>
<TABLE>
<S> <S> <S> <C> <S> <C>
AAA Aaa 2,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds,
First Series B, 5% due 7/01/2028 (c) 1,952
AAA Aaa 2,000 Philadelphia, Pennsylvania, School District, GO,
Series B, 5.375% due 4/01/2027 (a) 2,040
AAA Aaa 2,000 Pittsburgh, Pennsylvania, GO, 5.125% due 9/01/2015 (a) 2,031
AAA Aaa 2,000 Pittsburgh, Pennsylvania, Water and Sewer Authority,
Water and Sewer System Revenue Refunding Bonds, First Lien,
Series A, 5% due 9/01/2018 (b) 1,988
A1+ NR* 1,400 Schuylkill County, Pennsylvania, IDA, Resource Recovery
Revenue Refunding Bonds (Northeastern Power Company), VRDN,
AMT, Series B, 3.10% due 12/01/2022 (f) 1,400
AAA Aaa 2,000 Southeastern Pennsylvania Transportation Authority,
Pennsylvania, Special Revenue
Bonds, Series A, 5.25% due 3/01/2017 (b) 2,050
Total Investments (Cost--$53,375)--103.8% 53,275
Variation Margin on Financial Futures Contracts--0.1%** 32
Liabilities in Excess of Other Assets--(3.9%) (1,989)
--------
Net Assets--100.0% $ 51,318
========
<FN>
(a)AMBAC Insured.
(b)FGIC Insured.
(c)FSA Insured.
(d)MBIA Insured.
(e)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at March 31, 1999.
(f)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at March 31, 1999.
(g)All or a portion of security held as collateral in connection
with open financial futures contracts.
*Not Rated.
**Financial futures contracts sold as of March 31, 1999 were as
follows:
(in Thousands)
</TABLE>
F-64
<PAGE>
<TABLE>
<CAPTION>
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
<S> <C> <C> <C> <C>
60 US Treasury Bonds June 1999 $ 7,234
-----------
Total Financial Futures Contracts Sold
(Total Contract Price--$7,218) $ 7,234
===========
++Highest short-term rating by Moody's Investors Service, Inc.
</TABLE>
See Notes to Financial Statements.
QUALITY PROFILE
The quality ratings of securities in the Fund as of March 31, 1999
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 82.4%
AA/Aa 8.5
Other++ 12.9
[FN]
++Temporary investments in short-term municipal securities.
MuniHoldings Pennsylvania Insured Fund, March 31, 1999
<TABLE>
<CAPTION>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of March 31, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$53,374,890)(Note 1a) $ 53,274,926
Cash 585,828
Receivables:
Interest $ 723,996
Investment adviser (Note 2) 32,221
Variation margin (Note 1b) 31,875 788,092
</TABLE>
F-65
<PAGE>
<TABLE>
------------
<S> <C> <C> <C>
Other assets 1,090
------------
Total assets 54,649,936
------------
Liabilities: Payables:
Securities purchased 3,041,485
Offering costs (Note 1e) 260,035
Dividends to shareholders (Note 1f) 12,972 3,314,492
------------
Accrued expenses 17,000
------------
Total liabilities 3,331,492
------------
Net Assets: Net assets $ 51,318,444
============
Capital: Capital Shares (unlimited number of shares of beneficial
interest authorized)(Note 4):
Preferred Shares, par value $.10 per share (820 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) $ 20,500,000
Common Shares, par value $.10 per share (2,081,667 shares
issued and outstanding) $ 208,167
Paid-in capital in excess of par 30,597,662
Undistributed investment income--net 128,517
Unrealized depreciation on investments--net (115,902)
------------
Total--Equivalent to $14.80 net asset value per Common Share
(market price--$16.125) 30,818,444
------------
Total capital $ 51,318,444
============
<FN>
*Auction Market Preferred Shares.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF OPERATIONS
For the Period February 26, 1999++ to March 31, 1999
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 160,653
Income (Note 1d):
</TABLE>
F-66
<PAGE>
<TABLE>
<S> <C> <C>
Expenses: Investment advisory fees (Note 2) $ 17,557
Commission fees (Note 4) 3,434
Professional fees 3,003
Trustees' fees and expenses 2,547
Accounting services (Note 2) 1,706
Transfer agent fees 1,672
Printing and shareholder reports 919
Listing fees 536
Pricing fees 297
Custodian fees 294
Other 501
------------
Total expenses before reimbursement 32,466
Reimbursement of expenses (Note 2) (31,528)
------------
Total expenses after reimbursement 938
------------
Investment income--net 159,715
------------
Unrealized Loss on Unrealized depreciation on investments--net (115,902)
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 43,813
============
<FN>
++Commencement of operations.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period
Feb. 26, 1999++ to
Increase (Decrease) in Net Assets: March 31, 1999
<S> <S> <C>
Operations: Investment income--net $ 159,715
Unrealized depreciation on investments--net (115,902)
------------
Net increase in net assets resulting from operations 43,813
------------
Dividends to Investment income--net to Preferred Shareholders (31,198)
Shareholders ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders (31,198)
------------
</TABLE>
F-67
<PAGE>
<TABLE>
<S> <C> <C>
Beneficial Proceeds from issuance of Common Shares 31,125,000
Interest Proceeds from issuance of Preferred Shares 20,500,000
Transactions Offering costs resulting from the issuance of Common Shares (128,227)
(Notes 1e & 4): Offering and underwriting costs resulting from the issuance of Preferred Shares (290,949)
------------
Net increase in net assets derived from beneficial interest transactions 51,205,824
------------
Net Assets: Total increase in net assets 51,218,439
Beginning of period 100,005
------------
End of period* $ 51,318,444
============
<FN>
*Undistributed investment income--net $ 128,517
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Pennsylvania Insured Fund, March 31, 1999
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Feb. 26, 1999++ to
Increase (Decrease) in Net Asset Value: March 31, 1999
<S> <S> <C>
Per Share Net asset value, beginning of period $ 15.00
Operating ------------
Performance: Investment income--net .07
Unrealized loss on investments--net (.05)
------------
Total from investment operations .02
------------
Capital charge resulting from issuance of Common Shares (.07)
------------
Effect of Preferred Share activity++++:
Dividends to Preferred Shareholders:
Investment income--net (.01)
Capital charge resulting from issuance of Preferred Shares (.14)
------------
Total effect of Preferred Share activity (.15)
------------
Net asset value, end of period $ 14.80
</TABLE>
F-68
<PAGE>
<TABLE>
<S> <C> <C>
============
Market price per share, end of period $ 16.125
============
Total Investment Based on market price per share 7.50%+++
Return:** ============
Based on net asset value per share (1.33%)+++
============
Ratios to Average Expenses, net of reimbursement .03%*
Net Assets:*** ============
Expenses 1.02%*
============
Investment income--net 5.00%*
============
Supplemental Net assets, net of Preferred Shares, end of period (in thousands) $ 30,818
Data: ============
Preferred Shares outstanding, end of period (in thousands) $ 20,500
============
Portfolio turnover 0.00%
============
Leverage: Asset coverage per $1,000 $ 2,503
============
Dividends Investment income--net $ 38
Per Share on ============
Preferred Shares
Outstanding:
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Shareholders.
++Commencement of operations.
++++The Fund's Preferred Shares were issued on March 17, 1999.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
F-69
<PAGE>
1. Significant Accounting Policies:
MuniHoldings Pennsylvania Insured Fund (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified,
closed-end management investment company. The Fund's financial
statements are prepared in accordance with generally accepted
accounting principles which may require the use of management
accruals and estimates. These unaudited financial statements reflect
all adjustments which are, in the opinion of management, necessary
to a fair statement of the results for the interim period presented.
All such adjustments are of a normal recurring nature. Prior to
commencement of operations on February 26, 1999, the Fund had no
operations other than those relating to organizational matters and
the sale of 6,667 shares of Common Shares on January 13, 1999 to
Fund Asset Management, L.P. ("FAM") for $100,005. The Fund
determines and makes available for publication the net asset value
of its Common Shares on a weekly basis. The Fund's Common Shares are
listed on the American Stock Exchange under the symbol MPI. The
following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of
options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options
purchased). Securities with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Fund, including
valuations furnished by a pricing service retained by the Fund,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Board of Trustees.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
F-70
<PAGE>
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase call and put options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
MuniHoldings Pennsylvania Insured Fund, March 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
F-71
<PAGE>
(e) Offering expenses--Direct expenses relating to the public
offering of the Fund's Common and Preferred Shares were charged to
capital at the time of issuance of the shares.
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM.
The general partner of FAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.55% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Shares. For the period February 26, 1999 to
March 31, 1999, FAM earned fees of $17,557, all of which was
voluntarily waived. In addition, FAM also reimbursed the Fund
$13,971 in additional expenses.
During the period February 26, 1999 to March 31, 1999, Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate
of FAM, received underwriting fees of $153,750 in connection with
the issuance of the Fund's Preferred Shares.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases of investments, excluding short-term securities, for the
period February 26, 1999 to March 31, 1999 was $46,776,551.
Net unrealized losses as of March 31, 1999 were as follows:
Unrealized
Losses
Long-term investments $ (99,964)
Financial futures contracts (15,938)
-----------
F-72
<PAGE>
Total $ (115,902)
===========
As of March 31, 1999, net unrealized depreciation for Federal income
tax purposes aggregated $99,964, of which $16,911 related to
appreciated securities and $116,875 related to depreciated
securities. The aggregate cost of investments at March 31, 1999 for
Federal income tax purposes was $53,374,890.
4. Beneficial Interest Transactions:
The Fund is authorized to issue an unlimited number of shares of
beneficial interest, including Preferred Shares, par value $.10 per
share, all of which were initially classified as Common Shares. The
Board of Trustees is authorized, however, to reclassify any unissued
shares of capital without approval of the holders of Common Shares.
Common Shares
Shares issued and outstanding during the period February 26, 1999 to
March 31, 1999 increased by 2,075,000 as a result of the initial
offering.
Preferred Shares
Auction Market Preferred Shares ("AMPS") are Preferred Shares of the
Fund, with a par value of $.10 per share and a liquidation
preference of $25,000 per share, that entitle their holders to
receive cash dividends at an annual rate that may vary for the
successive dividend periods. The yield in effect at March 31, 1999
was 3.30%.
In connection with the offering of AMPS, the Board of Trustees
reclassified 820 shares of unissued beneficial interest as AMPS.
Shares issued and outstanding during the period February 26, 1999 to
March 31, 1999 increased by 820 as a result of the AMPS offering.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the period February
26, 1999 to March 31, 1999, MLPF&S, an affiliate of FAM, earned
$1,000 as commissions.
F-73
<PAGE>
Unaudited Financial Statements for the Combined Fund on a Pro Forma Basis, as
of April 30, 1999
F-74
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND
AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND
APRIL 30, 1999 (Unaudited)
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniYield MuniVest MuniHoldings Pro Forma
Pennsylvania Pennsylvania Pennsylvania for Combined
Pennsylvania--99.4% Fund++ Insured Fund++ Insured Fund ++ Fund++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C>
Allegheny County,
Pennsylvania, Hospital
Development Authority
Revenue Bonds, Series
A:
AAA Aaa $2,000 (Allegheny General
Hospital Project),
6.25% due 9/01/2020(d). $ 2,020 $ -- $ -- $ 2,020
NR* Aa2 1,400 (Presbyterian University
Hospital), ACES, Series
B-3, 4.05% due
3/01/2018(f)........... -- -- 1,400 1,400
NR* A2 3,000 (South Hills Health
System), 6.50% due
5/01/2014.............. 3,261 -- -- 3,261
BBB-- Baa2 4,350 Allegheny County,
Pennsylvania, IDA,
Revenue Refunding Bonds
(Environmental
Improvement--USX
Corporation Project),
5.60% due 9/01/2030.... 2,682 1,671 -- 4,353
NR* Aaa 7,250 Allegheny County,
Pennsylvania,
Sanitation Authority,
Sewer Revenue Bonds,
RITR, Series 20, 6.37%
due 12/01/2024(d)(g)... 6,015 1,569 -- 7,584
AAA NR* 1,600 Altoona, Pennsylvania,
City Water Authority
Revenue Bonds, Series
A, 6.50% due
11/01/2004(b)(i)....... -- 1,829 -- 1,829
AAA Aaa 2,000 Beaver County,
Pennsylvania, IDA,
Exempt Facilities
Revenue Bonds
(Shippingport Project),
AMT, Series A, 5.375%
due 6/01/2028(a)....... -- -- 2,007 2,007
AAA Aaa 2,550 Berks County,
Pennsylvania, GO,
Refunding, 5.85% due
11/15/2018(b).......... -- 2,715 -- 2,715
AAA Aaa 2,550 Blair County,
Pennsylvania, Hospital
Authority Revenue Bonds
(Altoona Hospital
Project), RITES, 6.375%
due 7/01/2013(a)(g).... -- 2,765 -- 2,765
AAA Aaa 1,000 Bucks County,
Pennsylvania, IDA,
Revenue Refunding Bonds
(Grand View Hospital),
Series A, 5.25% due
7/01/2021(a)........... -- -- 991 991
AAA Aaa 1,295 Deer Lakes School
District, Pennsylvania,
GO, Series A, 5.25% due
1/15/2017(c)........... -- -- 1,318 1,318
AAA Aaa 2,000 Delaware County,
Pennsylvania, IDA, PCR,
Refunding (Philadelphia
Electric Company
Project), Series A,
7.375% due
4/01/2021(a)........... -- 2,160 -- 2,160
AAA Aaa 1,100 Delaware County,
Pennsylvania, Interboro
School District, GO,
5.375% due
8/15/2025(d)........... -- -- 1,121 1,121
NR* Aaa 6,000 Delaware County,
Pennsylvania,
University Authority
Revenue Bonds
(Villanova University),
Series A, 5% due
12/01/2028(d).......... 1,943 -- 3,886 5,829
AAA Aaa 4,000 Delaware River Port
Authority, Pennsylvania
and New Jersey Revenue
Refunding Bonds, Series
B, 5.25% due
1/01/2005(a)........... -- -- 4,247 4,247
AAA Aaa 9,000 Delaware Valley,
Pennsylvania, Regional
Finance Authority,
Local Government
Revenue Bonds, Series
A, 5.50% due
8/01/2028(a)........... 4,829 4,829 -- 9,658
AAA Aaa* 1,200 Erie, Pennsylvania,
Parking Authority,
Parking Facilities
Revenue Refunding
Bonds, Series B, 5.125%
due 9/01/2020(d)....... -- -- 1,191 1,191
NR* Aaa 2,000 Erie, Pennsylvania,
Sewer Authority Revenue
Refunding Bonds, Series
A, 5% due 6/01/2018(a). -- 1,978 -- 1,978
AA Aa2 400 Geisinger Authority,
Pennsylvania, Health
System Revenue
Refunding Bonds (Penn
State-Geisinger
Health), VRDN, Series
B, 4.20% due
8/15/2028(f)........... -- -- 400 400
AAA Aaa 3,280 Johnstown, Pennsylvania,
GO, Refunding, 6.45%
due 10/01/2019(b)...... -- 3,633 -- 3,633
NR* Aaa 1,000 Lancaster, Pennsylvania,
Area Sewer Authority
Revenue Bonds, 4.50%
due 4/01/2018(d)....... 927 -- -- 927
AAA Aaa 3,000 Lancaster County,
Pennsylvania, Solid
Waste Management
Authority, Resource
Recovery Revenue
Refunding Bonds, Series
B, 5.375% due
12/15/2015(a).......... -- -- 3,106 3,106
</TABLE>
F-75
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND
AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND
APRIL 30, 1999 (Unaudited)
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniYield MuniVest MuniHoldings Pro Forma
Pennsylvania Pennsylvania Pennsylvania Pennsylvania for Combined
(continued) Fund++ Insured Fund++ Insured Fund ++ Fund++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C>
Lehigh County,
Pennsylvania, General
Purpose Authority
Revenue Bonds:
NR* Aaa $2,000 (Lehigh Valley Health
Network), Series C, 5%
due 7/01/2028(d)....... $ -- $1,920 $ -- $1,920
AAA Aaa 7,000 (Saint Lukes Hospital-
Bethlehem), 6.25% due
7/01/2022(a)........... 4,332 3,249 -- 7,581
AAA Aaa 1,000 Lehigh County,
Pennsylvania, General
Purpose Authority
Revenue Refunding Bonds
(St. Francis de Sales
College), Series A, 5%
due 12/15/2020(a)...... -- -- 979 979
AAA Aaa 6,000 Lehigh County,
Pennsylvania, IDA, PCR,
Refunding (Pennsylvania
Power and Light Company
Project), Series A,
6.40% due
11/01/2021(d).......... 3,287 3,287 -- 6,574
AAA Aaa 4,570 Lower Providence
Township, Pennsylvania,
Sewer Authority, Sewer
Revenue Bonds, 5.25%
due 5/01/2022(d)....... 2,583 -- 2,010 4,593
Luzerne County,
Pennsylvania, IDA,
Exempt Facilities
Revenue Bonds
(Pennsylvania Gas and
Water Company Project),
AMT:
AAA Aaa 3,000 Series A, 7% due
12/01/2017(a)........... -- 3,420 -- 3,420
A- A3 1,500 Series B, 7.125% due
12/01/2022.............. 1,656 -- -- 1,656
Luzerne County,
Pennsylvania, IDA,
Exempt Facilities
Revenue Bonds
(Pennsylvania Gas and
Water Company Project),
AMT, Series A:
AAA Aaa 2,000 7% due 12/01/2017(a).... 2,280 -- -- 2,280
A A3 2,500 7.20% due 10/01/2017.... 2,756 -- -- 2,756
Montgomery County,
Pennsylvania, IDA, PCR,
Refunding (Philadelphia
Electric Company):
A Baa1 1,800 AMT, Series A, 7.60% due 1,927 -- -- 1,927
4/01/2021...............
AAA Aaa 4,400 Series B, 6.70% due 4,753 -- -- 4,753
12/01/2021(d)...........
AAA Aaa 1,195 North Allegheny
Pennsylvania School
District Series D,
5.45% due 5/01/2018.... -- -- 1,235 1,235
Northeastern,
Pennsylvania, Hospital
and Education
Authority, Health Care
Revenue Bonds(a):
AAA Aaa 1,000 (Luzerne County
Community College),
6.625% due
2/15/2005(i)........... -- 1,130 -- 1,130
AAA Aaa 2,000 (Wyoming Valley Health
Care), Series A, 5.25%
due 1/01/2026.......... 1,980 -- -- 1,980
BBB Baa2 6,500 Pennsylvania Economic
Development Financing
Authority, Wastewater
Treatment Revenue Bonds
(Sun Company Inc.--R &
M Project), AMT, Series
A, 7.60% due
12/01/2024............. 4,519 2,824 -- 7,343
AA+ Aa 4,000 Pennsylvania, HFA
Revenue Bonds, RIB,
AMT, 8.668% due
4/01/2025(g)........... -- -- 4,370 4,370
AAA Aaa 4,000 Pennsylvania, HFA
Revenue Refunding Bonds
(Rental Housing), 6.50%
due 7/01/2023(e)....... 4,261 -- -- 4,261
Pennsylvania HFA, S/F
Mortgage Revenue Bonds,
AMT:
AA+ Aa2 2,630 Series 34B, 7% due 2,737 -- -- 2,737
4/01/2024(h)............
AA+ Aa2 2,720 Series 60A, 5.85% due 1,794 1,043 -- 2,837
10/01/2027..............
AA+ Aa2 1,000 Series 62A, 5.50% due 1,013 -- -- 1,013
10/01/2022..............
Pennsylvania HFA, S/F
Mortgage Revenue
Refunding Bonds, AMT:
AA+ Aa 2,500 Series 39B, 6.875% due -- 2,613 -- 2,613
10/01/2024..............
AA+ Aa2 3,000 Series 41B, 6.65% due 3,206 -- -- 3,206
4/01/2025...............
</TABLE>
F-76
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND
AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND
APRIL 30, 1999 (Unaudited)
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniYield MuniVest MuniHoldings Pro Forma
Pennsylvania Pennsylvania Pennsylvania Pennsylvania for Combined
(continued) Fund++ Insured Fund++ Insured Fund ++ Fund++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C>
Pennsylvania
Intergovernmental Co-op
Authority, Special Tax
Revenue Refunding Bonds
(Philadelphia Funding
Program)(b): --
AAA Aaa $2,000 5.25% due 6/15/2015..... $ -- $ -- $ 2,058 $ 2,058
AAA Aaa 2,000 5.25% due 6/15/2016..... 2,047 -- -- 2,047
A NR* 2,000 Pennsylvania State
Finance Authority
Revenue Refunding Bonds
(Municipal Capital
Improvements Program),
6.60% due 11/01/2009... 2,212 -- -- 2,212
Pennsylvania State, GO:
AAA Aaa 2,850 First Series, 5.125% due
3/15/2011(a)........... 2,970 -- -- 2,970
AAA Aaa 5,500 Second Series, 5% due
8/01/2018(b)............ 2,448 2,985 -- 5,473
AAA Aaa 6,000 Pennsylvania State
Higher Educational
Assistance Agency,
Student Loan Revenue
Bonds, AMT, Series C,
7.15% due 9/01/2021(a). 2,246 4,493 -- 6,739
AAA Aaa 1,255 Pennsylvania State
Higher Educational
Facilities Authority,
College and University
Revenue Refunding Bonds
(Duquesne University),
Series A, 6.75% due
4/01/2020(d)........... 1,320 -- -- 1,320
AAA Aaa 8,000 Pennsylvania State
Higher Educational
Facilities Authority
Revenue Bonds (UPMC
Health System), Series
A, 5% due 8/01/2029(c). 3,358 1,919 2,398 7,675
Pennsylvania State
Higher Educational
Facilities Authority
Revenue Refunding
Bonds:
AA- NR* 3,600 (Carnegie Mellon
University), VRDN,
Series C, 4.20% due
11/01/2029(f).......... 2,000 1,600 -- 3,600
AAA Aaa 1,000 (Temple University),
First Series, 5.25% due
4/01/2017.............. -- -- 1,022 1,022
AAA Aaa 1,300 Pennsylvania State
Public School Building
Authority, School
Revenue Refunding Bonds
(Pittson Area School
District), Series P, 5%
due 7/15/2021(c)....... -- -- 1,273 1,273
Pennsylvania State
Turnpike Commission,
Oil Franchise Tax
Revenue Bonds:
AAA Aaa 3,375 Senior Series A, 4.75%
due 12/01/2027(a)....... 1,943 1,217 -- 3,160
AAA Aaa 5,150 Sub-Series B, 4.75% due
12/01/2027(a)........... 3,436 1,386 -- 4,822
AA- Aa3 2,500 Pennsylvania State
University, Revenue
Refunding Bonds, 6.25%
due 3/01/2011.......... 2,688 -- -- 2,688
AAA Aaa 1,500 Philadelphia,
Pennsylvania, Airport
Revenue Bonds
(Philadelphia Airport
System), AMT, Series B,
5.40% due
6/15/2027(b)(d)........ 1,509 -- -- 1,509
AAA Aaa 4,500 Philadelphia,
Pennsylvania, Authority
for Industrial
Development, Airport
Revenue Bonds
(Philadelphia Airport
System Project), AMT,
Series A, 5.125% due
7/01/2028(b)........... 1,459 -- 2,918 4,377
AA Aa3 2,000 Philadelphia,
Pennsylvania, Authority
for Industrial
Development, Industrial
and Commercial Revenue
Bonds (Girard Estates
Facilities Leasing
Project), 5% due
5/15/2027.............. 1,924 -- -- 1,924
AAA Aaa 9,125 Philadelphia,
Pennsylvania, Authority
for Industrial
Development, Lease
Revenue Bonds (City of
Philadelphia Project),
Series A, 5.375% due
2/15/2027(d)........... 4,087 5,236 -- 9,323
A-1+ NR* 300 Philadelphia,
Pennsylvania, Authority
for IDR (Fox Chase
Cancer Center Project),
VRDN, 4.25% due
7/01/2025(f)........... -- 300 -- 300
AAA Aaa 3,000 Philadelphia,
Pennsylvania, Gas Works
Revenue Bonds, First
Series B, 5% due
7/01/2028(c)........... -- 972 1,943 2,915
</TABLE>
F-77
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND
AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND
APRIL 30, 1999 (Unaudited)
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniYield MuniVest MuniHoldings Pro Forma
Pennsylvania Pennsylvania Pennsylvania Pennsylvania for Combined
(continued) Fund++ Insured Fund++ Insured Fund ++ Fund++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C>
AAA Aaa $ 8,875 Philadelphia,
Pennsylvania, GO, 5% due
3/15/2028(c)............ $ 3,595 $ 2,599 $ 2,429 $ 8,623
Philadelphia,
Pennsylvania, Hospitals
and Higher Education
Facilities Authority,
Hospital Revenue Bonds
(Children's Hospital of
Philadelphia Project),
VRDN(f):
AA VMIG1+ 2,200 4.20% due 3/01/2027..... 1,100 1,100 -- 2,200
AA VMIG1+ 4,500 Series A, 4.20% due
3/01/2027............... 3,500 1,000 -- 4,500
Philadelphia,
Pennsylvania, Hospitals
and Higher Education
Facilities Authority,
Hospital Revenue
Refunding Bonds:
A- NR* 1,000 (Children's Seashore
House), Series B, 7%
due 8/15/2022.......... 1,085 -- -- 1,085
AAA Aaa 3,000 (Jefferson Health
System), Series A,
5.125% due
5/15/2018(a)........... -- 2,969 -- 2,969
AAA NR* 3,000 (Presbyterian Medical
Center), 6.65% due
12/01/2019.............. 3,599 -- -- 3,599
AAA Aaa 2,000 Philadelphia,
Pennsylvania, School
District, GO, Series B,
5.375% due
4/01/2027(a)........... -- -- 2,037 2,037
AAA Aaa 2,000 Philadelphia,
Pennsylvania, Water And
Wastewater Revenue
Bonds, Series A, 5% due
8/01/2017(a)........... -- 1,983 -- 1,983
AAA Aaa 1,000 Philadelphia,
Pennsylvania, Water and
Wastewater Revenue
Refunding Bonds, 5% due
6/15/2019(d)........... -- 983 -- 983
AAA Aaa 4,655 Pittsburgh,
Pennsylvania, GO,
5.125% due
9/01/2015(a)........... -- 2,699 2,033 4,732
AAA Aaa 2,000 Pittsburgh,
Pennsylvania, Water &
Sewer Authority, Water
and Sewer System
Revenue Refunding
Bonds, First Lien,
Series A, 5% due
9/01/2018(b)........... -- -- 1,988 1,988
Schuylkill County,
Pennsylvania, IDA,
Resource Recovery
Revenue Refunding Bonds
(Northeastern Power
Company), VRDN(f):
AA+ NR* 2,500 AMT Series B, 4.20% due
12/01/2022.............. 1,000 -- 1,500 2,500
AA+ NR 2,500 Series A, 4.10% due
12/01/2022.............. 300 2,200 -- 2,500
A- NR* 2,520 Scranton-Lackawanna,
Pennsylvania, Health
and Welfare Authority,
Revenue Refunding Bonds
(University of Scranton
Project), Series B,
6.50% due 3/01/2015.... 2,682 -- -- 2,682
NR* Aaa 5,000 Somerset County,
Pennsylvania, GO, Series
A, 5% due 10/01/2027(b). 4,859 -- -- 4,859
AAA Aaa 2,000 Southeastern
Pennsylvania
Transportation
Authority,
Pennsylvania, Special
Tax Revenue Bonds,
Series A, 5.25% due
3/01/2017(b)........... -- -- 2,046 2,046
AAA Aaa 2,525 Southeastern
Pennsylvania
Transportation
Authority, Special
Revenue Bonds, 5.375%
due 3/01/2022(b)....... -- 2,580 -- 2580
AA+ Aaa 3,985 Swarthmore Borough
Authority,
Pennsylvania, College
Revenue Refunding
Bonds, 6% due
9/15/2020.............. 4,306 -- -- 4,306
AA Aa3 3,500 Upper Saint Clair
Township School
District, Pennsylvania,
GO, Refunding, 5.20%
due 7/15/2027.......... 3,495 -- -- 3,495
- ----------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $252,624) -- 99.4%.... 129,969 80,856 51,906 262,731
Other Assets Less Liabilities -- 0.6%............ (161) 1,231 553 1,623
-------- ------- ------- --------
Net Assets -- 100.0% $129,808 $82,087 $52,459 $264,354
======== ======= ======= ========
</TABLE>
F-78
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND
AND MUNIHOLDING PENNSYLVANIA INSURED FUND
APRIL 30, 1999 (Unaudited)
(in Thousands)
<TABLE>
<C> <S>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) FNMA Collateralized.
The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at April 30,
(f) 1999.
(g) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at April 30, 1999.
(h) FHA Insured.
(i) Prerefunded.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service. Inc.
++ Value as discussed in the Combined Notes to Financial Statements.
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield Pennsylvania Fund's portfolio holdings
in the Schedule of Investments, we have abbreviated the names of many of the
securities according to the list below.
<TABLE>
<C> <S>
ACES Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
EDA Economic Development Authority
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITES Residual Interest Tax-Exempt Securities
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
</TABLE>
See Notes to Financial Statements.
F-79
<PAGE>
The following unaudited pro forma Combined Statement of Assets, Liabilities
and Capital for the Combined Fund has been derived from the Statements of
Assets, Liabilities and Capital of the respective Funds at April 30, 1999 and
such information has been adjusted to give effect to the Reorganization as if
the Reorganization had occurred at April 30, 1999. The pro forma Combined
Statement of Assets, Liabilities and Capital is presented for informational
purposes only and does not purport to be indicative of the financial condition
that actually would have resulted if the Reorganization had been consummated at
April 30, 1999. The pro forma Combined Statement of Assets, Liabilities and
Capital should be read in conjunction with the Funds' financial statements and
related notes thereto which are included in the Joint Proxy Statement and
Prospectus.
PRO FORMA COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
FOR MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND,
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
As of April 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Pro Forma
MuniYield MuniVest MuniHoldings for Combined
Pennsylvania Pennsylvania Pennsylvania Adjustments Fund
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments, at value*
(Note 1a).............. $129,968,790 $80,856,110 $51,906,499 $262,731,399
Cash.................... 65,150 75,295 -- 140,445
Receivables:
Interest............... 2,067,575 1,255,043 731,090 4,053,708
Securities sold........ -- -- 100,234 100,234
Investment advisor
(Note 2).............. -- -- 15,090 15,090
Prepaid expenses and
other assets........... 6,504 7,996 18,250 32,750
------------ ----------- ----------- ----------- ------------
Total assets............ 132,108,019 82,194,444 52,771,163 267,073,626
------------ ----------- ----------- ----------- ------------
Liabilities:
Payables:
Securities purchased... 2,058,113 -- -- 2,058,113
Offering costs (Note
1e)................... -- -- 258,770 258,770
Dividends to
shareholders (Note
1f)................... 150,050 52,697 13,169 1,755,441(1) 1,971,357
Investment adviser
(Note 2).............. 57,077 36,079 -- 93,156
Custodian bank (Note
1g)................... -- -- 17,360 17,360
Accrued expenses and
other liabilities...... 34,999 18,400 22,702 76,101
------------ ----------- ----------- ----------- ------------
Total liabilities....... 2,300,239 107,176 312,001 1,755,441 4,474,857
------------ ----------- ----------- ----------- ------------
Net Assets:
Net Assets.............. $129,807,780 $82,087,268 $52,459,162 $(1,755,441) $262,598,769
============ =========== =========== =========== ============
Capital
Capital Shares
(unlimited number of
shares of beneficial
interest authorized)
Preferred Shares, par
value $.10 per share
of AMPS$** issued and
outstanding+ at
$25,000 per share
liquidation
preference............ $ 40,000,000 $27,500,000 $20,500,000 $ 88,000,000
Common Shares par value
$.10 per share issued
and outstanding++..... 588,376 403,718 215,657 (48,734) 1,159,017
Paid-in capital in
excess of par.......... 82,247,950 55,962,716 31,713,672 48,734 169,973,072
Undistributed investment
income--net............ 1,172,691 295,148 287,602 (1,755,441) 0
Undistributed
(accumulated) realized
capital gains (losses)
on investments--net.... (560,908) (6,006,366) (73,711) (6,640,985)
Unrealized appreciation
(depreciation) on
investments--net....... 6,359,671 3,932,052 (184,058) 10,107,665
------------ ----------- ----------- ----------- ------------
Total capital........... $129,807,780 $82,087,268 $52,459,162 $(1,755,441) $262,598,769
============ =========== =========== =========== ============
Net asset value per
share of Common Stock.. $ 15.26 $ 13.52 $ 14.82 $ 15.06
============ =========== =========== =========== ============
- --------
*Identified Cost $123,609,119 $76,924,058 $52,090,557 -- $252,623,734
+ Shares issued and
outstanding 1,600 1,100 820 -- 3,520
++ Shares issued and
outstanding 5,883,760 4,037,179 2,156,567 (487,341) 11,590,165
</TABLE>
** Auction Market Preferred Shares
(1) Assumes the distribution of undistributed investment income.
See Notes to Financial Statements.
F-80
<PAGE>
The following unaudited pro forma Combined Statement of Operations for the
Combined Fund has been derived from the statement of operations of the
respective Funds for the periods indicated through April 30, 1999 and such
information has been adjusted to give effect to the Reorganization as if the
Reorganization had occurred on November 1, 1998. The pro forma Combined
Statement of Operations is presented for informational purposes only and does
not purport to be indicative of the results of operations that actually would
have resulted if the Reorganization had been consummated on November 1, 1998
nor which may result from future operations. The pro forma Combined Statement
of Operations should be read in conjunction with the Funds' financial
statements and related notes thereto which are included in the Joint Proxy
Statement and Prospectus.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND,
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
(Unaudited)
<TABLE>
<CAPTION>
MuniYield MuniVest MuniHoldings
Pennsylvania Pennsylvania Pennsylvania
For the period For the period For the period Pro Forma
November 1, 1998 November 1, 1998 February 26, 1999+ for
to April 30, 1999 to April 30, 1999 to April 30, 1999 Adjustments Combined Fund
----------------- ----------------- ------------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Investment Income (Note
1d):
Interest and amortization
of premium and discount
earned................... $3,629,400 $2,226,969 $388,834 $6,245,203
---------- ---------- -------- ----------
Expenses: 0
Investment advisory fees
(Note 2)................. 326,589 205,636 39,499 571,724
Commission fees........... 50,546 33,669 7,477 91,692
Professional fees......... 30,750 30,941 6,782 (32,993)(1) 35,480
Accounting services (Note
2)....................... 28,411 27,447 3,853 (23,300)(1) 36,411
Transfer agent fees....... 26,709 16,162 3,774 (7,045)(1) 39,600
Trustees' fees and
expenses................. 13,524 11,224 5,751 (16,975)(1) 13,524
Printing and shareholder
reports.................. 13,678 12,094 2,076 27,848
Listing fees.............. 8,052 7,804 1,211 17,067
Custodian fees............ 3,849 3,542 664 8,055
Pricing fees.............. 3,496 3,008 669 7,173
Other..................... 6,674 7,598 1,133 15,405
---------- ---------- -------- ------- ----------
Total expenses before
reimbursement............ 512,278 359,125 72,889 (80,313) 863,979
Reimbursement of expenses
(Note 2)................. -- -- (54,588) -- (54,588)
---------- ---------- -------- ------- ----------
Total expenses after
reimbursement............ 512,278 359,125 18,301 (80,313) 809,391
---------- ---------- -------- ------- ----------
Investment income--net.... 3,117,122 1,867,844 370,533 80,313 5,435,812
---------- ---------- -------- ------- ----------
Realized & Unrealized
Gains(Loss) on
Investments--Net (Notes
1b & 1d)
Realized gain (loss) on
investments--net......... 531,883 297,931 (73,711) 756,103
Change in unrealized
appreciation/depreciation
on investments--net...... (1,983,280) (1,021,995) (184,058) (3,189,333)
---------- ---------- -------- ------- ----------
Net Increase in Net Assets
Resulting from
Operations............... $1,665,725 $1,143,780 $112,764 $80,313 $3,002,581
========== ========== ======== ======= ==========
</TABLE>
- --------
(1) Reflects the anticipated savings of the Reorganization.
(2) These Pro Forma Combined Statements of Operations exclude non-recurring
estimated Reorganization expenses of $340,000, which will be paid by
MuniYield Pennsylvania subsequent to the Reorganization.
+ Commencement of operations.
See Notes to Financial Statements.
F-81
<PAGE>
MUNIYIELD PENNSYLVANIA FUND,
MUNIVEST PENNSYLVANIA INSURED FUND
AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND
COMBINED NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Pennsylvania Fund (the "Fund") is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company. The Fund's financial statements are prepared in accordance with
generally accepted accounting principles which may require the use of
management accruals and estimates. These unaudited financial statements
reflect all adjustments which are, in the opinion of management, necessary to
a fair statement of the results for the interim period presented. All such
adjustments are of a normal recurring nature. The Fund determines and makes
available for publication the net asset value of its Common Shares on a weekly
basis. The Fund's Common Shares are listed on the New York Stock Exchange
under the symbol MPA. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options
traded in the over-the-counter market, valuation is the last asked price
(options written) or the last bid price (options purchased). Securities with
remaining maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations
are not readily available are valued at their fair value as determined in good
faith by or under the direction of the Board of Trustees of the Fund,
including valuations furnished by a pricing service retained by the Fund,
which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Fund
under the general supervision of the Board of Trustees.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt markets. Losses may arise due to changes
in the value of the contract or if the counterparty does not perform under the
contract.
. Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts for the purpose
of hedging the market risk on existing securities or the intended
purchase of securities. Futures contracts are contracts for delayed
delivery of securities at a specific future date and at a specific price
or yield. Upon entering into a contract, the Fund deposits and maintains
as collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund agrees
to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments
are known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed.
. Options -- The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently marked
to market to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an option,
the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
F-82
<PAGE>
MUNIYIELD PENNSYLVANIA FUND,
MUNIVEST PENNSYLVANIA INSURED FUND
AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND
COMBINED NOTES TO FINANCIAL STATEMENTS (Continued)
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Offering expenses -- Direct expenses relating to the public offering of
the Fund's Common and Preferred shares were charged to capital at the time of
issuance of the shares.
(f) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(g) Custodian bank -- The MuniHoldings Pennsylvania Insured Fund recorded an
amount payable to the Custodian bank reflecting an overnight overdraft, which
resulted from timing differences of security transaction settlements.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services,
Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("ML & Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.50% of the Fund's average weekly net
assets, including proceeds from the issuance of Preferred Shares.
For MuniHoldings Pennsylvania Insured Fund, FAM earned fees of $39,499 for
the period February 26, 1999 to April 30, 1999, all of which was waived. In
addition, FAM reimbursed the fund $33,390 in additional expenses.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors
of FAM, PSI, and/or ML & Co.
F-83
<PAGE>
EXHIBIT I
INFORMATION PERTAINING TO EACH FUND
.General Information Pertaining to the Funds
<TABLE>
<CAPTION>
Defined Term Fiscal State of Meeting
Fund Used in Exhibit I Year End Organization Time
- ---- ----------------- -------- ------------ -------
<S> <C> <C> <C> <C>
MuniYield Pennsylvania
Fund................... MuniYield Pennsylvania 10/31 MA 4:15 p.m.
MuniVest Pennsylvania
Insured Fund........... MuniVest Pennsylvania 10/31 MA 2:45 p.m.
MuniHoldings
Pennsylvania Insured
Fund................... MuniHoldings Pennsylvania 9/30 MA 1:45 p.m.
</TABLE>
<TABLE>
<CAPTION>
Capital Shares
Outstanding as of
the Record Date
-------------------
Common
Fund Shares AMPS
- ---- --------- ---------
<S> <C> <C>
MuniYield Pennsylvania...................................... 1,600
MuniVest Pennsylvania....................................... 1,100
MuniHoldings Pennsylvania................................... 820
</TABLE>
.Information Pertaining to Officers and Trustees
<TABLE>
<CAPTION>
Year in Which Each Trustee of MuniYield Pennsylvania Became a Member of the Board
-------------------------------------------------------------------------------------------------
Fund Cecil Crum Glenn Meyer Sunderland Touchton Weiss Zeikel
- ---- ---------- ---------- ---------- ---------- -------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MuniYield Pennsylvania.. 1992 1992 1999 1992 1992 1992 1998 1992
</TABLE>
<TABLE>
<CAPTION>
Year in Which Each Nominee/Trustee of MuniVest
Pennsylvania and MuniHoldings Pennsylvania
Became a Member of the Board
-----------------------------------------------
Fund Bodurtha Glenn London Martin May Perold Zeikel
- ---- -------- ----- ------ ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
MuniVest Pennsylvania........... 1995 1999 1992 1993 1992 1992 1992
MuniHoldings Pennsylvania....... 1998 1999 1998 1998 1998 1998 1998
</TABLE>
Set forth in the table below, with respect to each Fund, are the names of
the nominees elected or to be elected by holders of AMPS, voting separately as
a class, and the names of the nominees elected or to be elected by holders of
Common Shares and AMPS, voting together as a single class.
<TABLE>
<CAPTION>
Trustees/Nominees Trustees/Nominees Elected by Holders
Fund Elected by Holders of AMPS of Shares of Common Shares and AMPS
- ---- ---------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
MuniYield Pennsylvania.. Donald Cecil M. Colyer Crum Terry K. Glenn J. Thomas Touchton
Edward H. Meyer Fred G. Weiss
Jack B. Sunderland Arthur Zeikel
MuniVest Pennsylvania .. James H. Bodurtha Joseph L. May James H. Bodurtha Robert R.Martin
Terry K. Glenn Arthur Zeikel
Herbert I. London
MuniHoldings
Pennsylvania........... Joseph L. May Andre F. Perold James H. Bodurtha Robert R. Martin
Terry K. Glenn Arthur Zeikel
Herbert I. London
</TABLE>
I-1
<PAGE>
Set forth in the table below is information regarding board and committee
meetings held and the aggregate fees and expenses paid by the Fund to non-
affiliated Board members during each Fund's most recently completed fiscal
year.
<TABLE>
<CAPTION>
Board Audit Committee
---------------------------- --------------------------
# # Per Aggregate
Meetings Annual Per Meeting Meetings Annual Meeting Fees and
Fund Held* Fee ($) Fee ($)** Held Fee ($) Fee ($)** Expenses ($)
- ---- -------- ------- ----------- -------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MuniYield Pennsylvania.. 5 2,500 250 4 500 125
MuniVest Pennsylvania... 7 2,500 250 4 500 125 23,045
MuniHoldings
Pennsylvania........... 4 2,500 250 3 500 125
</TABLE>
- --------
* Includes meetings held via teleconferencing equipment.
** The fee is payable for each meeting attended in person. A fee is not paid
for telephonic meetings.
Set forth in the table below is information regarding compensation paid by
the Fund to the non-affiliated Board members for the most recently completed
fiscal year.
<TABLE>
<CAPTION>
Compensation From MuniVest Pennsylvania
and MuniHoldings Pennsylvania ($)*
--------------------------------------------
Fund Bodurtha London Martin May Perold
- ---- ------------------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
MuniVest Pennsylvania.............. 4,500 4,500 4,500 4,500 4,500
MuniHoldings Pennsylvania.......... 4,375 4,375 4,375 4,375 4,375
</TABLE>
<TABLE>
<CAPTION>
Compensation From MuniYield Pennsylvania ($)*
-----------------------------------------------------
Fund Cecil Crum Meyer Sunderland Touchton Weiss
- ---- ------- ------- ------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
MuniYield Pennsylvania.... 4,500 4,500 4,500 4,500 4,500 3,250
</TABLE>
- --------
* No pension or retirement benefits are accrued as part of Fund expenses.
Set forth in the table below is information regarding the aggregate
compensation paid by all registered investment companies advised by FAM and
its affiliate, MLAM ("FAM/MLAM Advised Funds"), including MuniYield
Pennsylvania to the non-affiliated Board members for the year ended December
31, 1998.
<TABLE>
<CAPTION>
Aggregate Compensation
From FAM/MLAM
Advised Funds Paid
Name of Board Member to Board members ($)*
- -------------------- ----------------------
<S> <C>
Donald Cecil............................................. $277,808
M. Colyer Crum........................................... $116,600
Edward H. Meyer.......................................... $214,558
Jack B. Sunderland....................................... $133,600
J. Thomas Touchton....................................... $133,600
Fred G. Weiss............................................ $140,842
</TABLE>
- --------
* The Trustees serve on the boards of MLAM/FAM advised funds as follows: Mr.
Cecil (34 registered investment companies consisting of 34 portfolios); Mr.
Crum (16 registered investment companies consisting of 16 portfolios); Mr.
Meyer (34 registered investment companies consisting of 34 portfolios); Mr.
Sunderland (19 registered investment companies consisting of 31
portfolios); Mr. Touchton (19 registered investment companies consisting of
31 portfolios) and Mr. Weiss (16 registered investment companies consisting
of 16 portfolios);
I-2
<PAGE>
Set forth in the table below is information regarding the aggregate
compensation paid by all FAM/MLAM Advised Funds, including MuniVest
Pennsylvania and MuniHoldings Pennsylvania, to the non-affiliated Board
members for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Aggregate Compensation
From FAM/MLAM Advised Funds
Name of Board Member Paid to Board members ($)(*)
- -------------------- ----------------------------
<S> <C>
James H. Bodurtha................................. $163,500
Herbert I. London................................. $163,500
Robert R. Martin.................................. $163,500
Joseph L. May..................................... $163,500
Andre F. Perold................................... $163,500
</TABLE>
- --------
(*) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (29 registered investment companies consisting of 47 portfolios);
Mr. London (29 registered investment companies consisting of 47
portfolios); Mr. Martin (29 registered investment companies consisting of
47 portfolios); Mr. May (29 registered investment companies consisting of
47 portfolios); and Mr. Perold (29 registered investment companies
consisting of 47 portfolios).
Set forth in the table below is information about the Trustees of MuniYield
Pennsylvania and MuniVest Pennsylvania. Information about the Trustees of
MuniHoldings Pennsylvania is set forth in the Proxy Statement and Prospectus
under the Item 2. Election of Trustees. Unless otherwise noted, the address of
each Trustee is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
<TABLE>
<CAPTION>
Trustee Since
-------------------------
MuniYield MuniVest
Name, Address and Biography Age Pennsylvania Pennsylvania
- ------------------------------------------------- --- ------------ ------------
<S> <C> <C> <C>
James H. Bodurtha................................ 55 -- 1995
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 ............................... 60 -- 1992
2 Washington Square Village, New York, New York
10012. John M. Olin Professor of Humanities at
New York University since 1993 and Professor
thereof since 1980; Dean, Gallatin Division of
New York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair at
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 ................................ 72 -- 1993
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.
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
Trustee Since
-------------------------
MuniYield MuniVest
Name, Address and Biography Age Pennsylvania Pennsylvania
- --------------------------------------------- --- ------------ ------------
<S> <C> <C> <C> <C>
Joseph L. May................................ 70 -- 1992
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.............................. 47 -- 1992
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 of Quantec
Limited since 1991 and TIBCO from 1994 to
1996.
Terry K. Glenn............................... 59 1999 1999
Executive Vice President of MLAM and FAM
since 1983; Executive Vice President and
Director of Princeton Services, Inc.
("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.
Arthur Zeikel................................ 67 1992 1992
300 Woodland Avenue, Westfield, New Jersey
07090
Chairman of FAM and MLAM from 1997 to 1999;
President of FAM and MLAM from 1977 to 1997;
Chairman of Princeton Services from 1997 to
1999, Director thereof from 1993 to 1999 and
President thereof from 1993 to 1997;
Executive Vice President of Merrill Lynch &
Co., Inc. from 1990 to 1999.
Donald Cecil................................. 72 1992 --
1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of
Cumberland Associates (an investment
partnership) since 1982; Member of Institute
of Chartered Financial Analysts Member and
Chairman of Westchester County (N.Y.) Board
of Transportation.
M. Colyer Crum............................... 67 1992 --
104 Westcliff Road, Weston, Massachusetts
02193. Currently James R. Williston
Professor of Investment Management Emeritus
at Harvard Business School; James R.
Williston Professor of Investment Management
at Harvard Business School from 1971 to
1996; Director of Cambridge Bancorp, Copley
Properties, Inc. and Sun Life Assurance
Company of Canada.
Edward H. Meyer.............................. 72 1992 --
777 Third Avenue, New York, New York 10017.
President of Grey Advertising Inc. since
1968, Chief Executive Officer since 1970 and
Chairman of the Board of Directors since
1972; Director of The May Department Stores
Company, Bowne & Co., Inc. (financial
printers), Harman International Industries,
Inc. and Ethan Allen Interiors, Inc.
</TABLE>
I-4
<PAGE>
<TABLE>
<CAPTION>
Trustee Since
-------------------------
MuniYield MuniVest
Name, Address and Biography Age Pennsylvania Pennsylvania
- ------------------------------------------------- --- ------------ ------------
<S> <C> <C> <C>
Jack B. Sunderland............................... 70 1992 --
P.O. Box 7, West Cornwall, Connecticut 06796.
President and Director of American Independent
Oil Company, Inc. (an energy company) since
1987; Member of Council on Foreign Relations
since 1971.
J. Thomas Touchton............................... 60 1992 --
Suite 3405, One Tampa City Center, 201 North
Franklin Street, Tampa, Florida 33062. Managing
Partner of The Witt Touchton Company and its
predecessor, The Witt Co. (a private investment
partnership), since 1972; Trustee Emeritus of
Washington and Lee University; Director of TECO
Energy, Inc. (an electric utility holding
company).
Fred G. Weiss.................................... 58 1998 --
16410 Maddalena Place, Delray Beach, Florida
33446. Managing Director of FGW Associates since
1997; Vice President, Planning Investment, and
Development of Warner Lambert Co. from 1979 to
1997.
</TABLE>
I-5
<PAGE>
Set forth in the table below is information about the officers of each of
the Funds.
<TABLE>
<CAPTION>
Officer Since
--------------------------------------
MuniYield MuniVest MuniHoldings
Name and Biography Age Office Pennsylvania Pennsylvania Pennsylvania
- ------------------ --- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Terry K. Glenn.......... 59 President 1992* 1992* 1998*
Executive Vice
President of MLAM and
FAM since 1983;
Executive Vice
President and Director
of Princeton Services
since 1993; President
of PFD since 1986 and
Director thereof since
1991; President of
Princeton
Administrators, L.P.
since 1988.
Vincent R. Giordano..... 55 Senior Vice 1992 1992 1998
Senior Vice President President
of FAM and MLAM since
1984; Portfolio Manager
of FAM and MLAM since
1977; Senior Vice
President of Princeton
Services since 1993.
Kenneth A. Jacob........ 48 Vice President 1992 1992 1998
First Vice President of
MLAM since 1997; Vice
President of MLAM from
1984 to 1997; Vice
President of FAM since
1984.
Donald C. Burke......... 39 Vice President 1992 1993 1998
Senior Vice President Treasurer 1999 1999 1999
and Treasurer of MLAM
and FAM since 1999;
Senior Vice President
and Treasurer of
Princeton Services
since 1999; Vice
President of PFD since
1999; First Vice
President of MLAM from
1997 to 1999; Vice
President of MLAM from
1990 to 1997; Director
of Taxation of MLAM
since 1990.
Robert A. DiMella, CFA.. 32 Vice President -- -- 1998
Vice President of MLAM
since 1997; Assistant
Vice President of MLAM
from 1995 to 1997;
Assistant Portfolio
Manager of MLAM from
1993 to 1995.
William R. Bock......... 63 Vice President 1997 1997 1995
Vice President of MLAM
since 1989.
Alice A. Pellegrino..... 39 Secretary 1999 1999 1998
Vice President of MLAM
since 1999; Attorney
associated with MLAM
since 1997; Associate
with Kirkpatrick &
Lockhart LLP from 1992
to 1997.
</TABLE>
- --------
* Mr. Glenn was elected President of each Fund in 1999. Prior to that he
served as Executive Vice President of each Fund.
I-6
<PAGE>
EXHIBIT II
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the day of , 1999, by and between MuniYield Pennsylvania Fund, a
Massachusetts business trust ("MuniYield Pennsylvania"), MuniVest Pennsylvania
Insured Fund, a Massachusetts business trust ("MuniVest Pennsylvania") and
MuniHoldings Pennsylvania Insured Fund, a Massachusetts business trust
("MuniHoldings Pennsylvania") (MuniYield Pennsylvania, MuniVest Pennsylvania
and MuniHoldings Pennsylvania are sometimes referred to herein collectively as
the "Funds"; MuniVest Pennsylvania and MuniHoldings Pennsylvania are sometimes
referred to herein collectively as the "Acquired Funds").
PLAN OF REORGANIZATION
The reorganization will comprise the following:
(a) (1) the acquisition by MuniYield Pennsylvania of substantially all of
the assets, and the assumption by MuniYield Pennsylvania of substantially
all of the liabilities of MuniVest Pennsylvania in exchange solely for an
equal aggregate value of newly issued (A) common shares, with a par value
of $0.10 per share ("Common Shares"), of MuniYield Pennsylvania ("MuniYield
Pennsylvania Common Shares") and (B) auction market preferred shares
("AMPS") of MuniYield Pennsylvania, with a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to be designated Series B
("MuniYield Pennsylvania Series B AMPS"), and (2) the subsequent
distribution by MuniVest Pennsylvania to MuniVest Pennsylvania shareholders
of (x) all of the MuniYield Pennsylvania Common Shares received by MuniVest
Pennsylvania in exchange for such shareholders' Common Shares, with a par
value of $0.10 per share, of MuniVest Pennsylvania ("MuniVest Pennsylvania
Common Shares") and (y) all of the MuniYield Pennsylvania Series B AMPS
received by MuniVest Pennsylvania in exchange for such shareholders'
outstanding shares of AMPS shares of MuniVest Pennsylvania, with a
liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) ("MuniVest Pennsylvania AMPS");
(b) (1) the acquisition by MuniYield Pennsylvania of substantially all of
the assets, and the assumption by MuniYield Pennsylvania of substantially
all of the liabilities of MuniHoldings Pennsylvania in exchange solely for
an equal aggregate value of newly issued shares of (A) MuniYield
Pennsylvania Common Shares and (B) MuniYield Pennsylvania Series B AMPS and
(2) the subsequent distribution by MuniHoldings Pennsylvania to
MuniHoldings Pennsylvania shareholders of (x) all of the MuniYield
Pennsylvania Common Shares received by MuniHoldings Pennsylvania in
exchange for such shareholders' Common Shares, with a par value of $0.10
per share, of MuniHoldings Pennsylvania ("MuniHoldings Pennsylvania Common
Shares") and (y) all of the MuniYield Pennsylvania Series B AMPS received
by MuniHoldings Pennsylvania in exchange for such shareholders' shares of
AMPS, of MuniHoldings Pennsylvania, with a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) designated Series A
("MuniHoldings Pennsylvania AMPS");
all upon and subject to the terms hereinafter set forth (collectively, the
"Reorganization").
In the course of the Reorganization, MuniYield Pennsylvania Common Shares,
and MuniYield Pennsylvania Series B AMPS will be distributed to the
shareholders of the Acquired Funds as follows:
(a) (1) each holder of MuniVest Pennsylvania Common Shares will be
entitled to receive a number of MuniYield Pennsylvania Common Shares equal
to the aggregate net asset value of the MuniVest Pennsylvania Common Shares
owned by such shareholder on the Exchange Date; and (2) each holder of
MuniVest Pennsylvania AMPS will be entitled to receive a number of shares
of MuniYield Pennsylvania
II-1
<PAGE>
Series B AMPS equal to the aggregate liquidation preference (and aggregate
value) of the MuniVest Pennsylvania AMPS owned by such shareholder on the
Exchange Date; and
(b) (1) each holder of MuniHoldings Pennsylvania Common Shares will be
entitled to receive a number of shares of MuniYield Pennsylvania Common
Shares equal to the aggregate net asset value of the MuniHoldings
Pennsylvania Common Shares owned by such shareholder on the Exchange Date;
and (2) each holder of MuniHoldings Pennsylvania AMPS will be entitled to
receive a number of shares of MuniYield Pennsylvania Series B AMPS equal to
the aggregate liquidation preference (and aggregate value) of the
MuniHoldings Pennsylvania AMPS owned by such shareholder on the Exchange
Date.
It is intended that the Reorganization described in this Plan shall be a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), and any successor provision.
Prior to the Exchange Date, each Acquired Fund shall declare a dividend or
dividends which, together with all such previous dividends, shall have the
effect of distributing to their respective shareholders all of their
respective net investment company taxable income to and including the Exchange
Date, if any (computed without regard to any deduction for dividends paid),
and all of its net capital gain, if any, realized to and including the
Exchange Date. In this regard and in connection with the Reorganization, the
last dividend period for the MuniVest Pennsylvania AMPS and MuniHoldings
Pennsylvania AMPS prior to the Exchange Date may be shorter than the dividend
period for such AMPS determined as set forth in the applicable Certificate of
Designation.
A Certificate of Designation of MuniYield Pennsylvania, designating the
currently outstanding series of AMPS of MuniYield Pennsylvania as Series A and
establishing the powers, rights and preferences of the MuniYield Pennsylvania
Series B AMPS will have been filed with the Office of the Secretary of State
of the Commonwealth of Massachusetts prior to the Exchange Date.
As promptly as practicable after the consummation of the Reorganization,
each Acquired Fund shall be dissolved in accordance with the laws of the
Commonwealth of Massachusetts and will terminate its registration under the
Investment Company Act of 1940, as amended (the "1940 Act").
AGREEMENT
In order to consummate the Reorganization and in consideration of the
promises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, each of the Funds hereby agrees as follows:
1.Representations and Warranties of MuniYield Pennsylvania.
MuniYield Pennsylvania represents and warrants to, and agrees with, the
Acquired Funds that:
(a) MuniYield Pennsylvania is a Massachusetts business trust duly
organized, validly existing and in good standing in conformity with the
laws of the Commonwealth of Massachusetts, and has the power to own all of
its assets and to carry out this Agreement. MuniYield Pennsylvania has all
necessary Federal, state and local authorizations to carry on its business
as it is now being conducted and to carry out this Agreement.
(b) MuniYield Pennsylvania is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No. 811-
73136), and such registration has not been revoked or rescinded and is in
full force and effect. MuniYield Pennsylvania has elected and qualified for
the special tax treatment afforded regulated investment companies ("RICs")
under Sections 851-855 of the Code at all times since its inception and
intends to continue to so qualify until consummation of the Reorganization
and thereafter.
II-2
<PAGE>
(c) Each of the Acquired Funds has been furnished with MuniYield
Pennsylvania's Annual Report to Shareholders for the fiscal year ended
October 31, 1999, and the audited financial statements appearing therein,
having been examined by Deloitte & Touche LLP, independent public
accountants, fairly present the financial position of MuniYield
Pennsylvania as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(d) An unaudited statement of assets, liabilities and capital of
MuniYield Pennsylvania and an unaudited schedule of investments of
MuniYield Pennsylvania, each as of the Valuation Time (as defined in
Section 5(d) of this Agreement), will be furnished to each of the Acquired
Funds, at or prior to the Exchange Date for the purpose of determining the
number of shares of MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS, to be issued pursuant to Section 6 of this
Agreement; each will fairly present the financial position of MuniYield
Pennsylvania as of the Valuation Time in conformity with generally accepted
accounting principles applied on a consistent basis.
(e) MuniYield Pennsylvania has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Trustees, and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(f) There are no material legal, administrative or other proceedings
pending or, to the knowledge of MuniYield Pennsylvania, threatened against
it which assert liability on the part of MuniYield Pennsylvania or which
materially affect its financial condition or its ability to consummate the
Reorganization. MuniYield Pennsylvania is not charged with or, to the best
of its knowledge, threatened with any violation or investigation of any
possible violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its business.
(g) MuniYield Pennsylvania is not obligated under any provision of its
Declaration of Trust or its by-laws or a party to any contract or other
commitment or obligation, and is not subject to any order or decree which
would be violated by its execution of or performance under this Agreement,
except insofar as the Funds have mutually agreed to amend such contract or
other commitment or obligation to cure any potential violation as a
condition precedent to the Reorganization.
(h) There are no material contracts outstanding to which MuniYield
Pennsylvania is a party that have not been disclosed in the N-14
Registration Statement (as defined in subsection (l) below) or will not
otherwise be disclosed to the Acquired Funds prior to the Valuation Time.
(i) MuniYield Pennsylvania has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since October 31,
1999; and those incurred in connection with the Reorganization. As of the
Valuation Time, MuniYield Pennsylvania will advise each Acquired Fund in
writing of all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or accrued as of such
time.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MuniYield
Pennsylvania of the Reorganization, except such as may be required under
the Securities Act of 1933, as amended (the "1933 Act"), the Securities
Exchange Act of 1934, as amended (the "1934 Act") and the 1940 Act or state
securities laws (which term as used herein shall include the laws of the
District of Columbia and Puerto Rico).
(k) The registration statement filed by MuniYield Pennsylvania on Form N-
14 which includes the joint proxy statement of the Funds with respect to
the transactions contemplated herein and the prospectus of MuniYield
Pennsylvania relating to the MuniYield Pennsylvania Common Shares and
MuniYield Pennsylvania Series B AMPS to be issued pursuant to this
Agreement, (the "Joint Proxy Statement and Prospectus"), and any supplement
or amendment thereto or to the documents therein (as amended or
supplemented, the "N-14 Registration Statement"), on its effective date, at
the time of the shareholders'
II-3
<PAGE>
meetings referred to in Section 8(a) of this Agreement and at the Exchange
Date, insofar as it relates to MuniYield Pennsylvania (i) complied or will
comply in all material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations thereunder and (ii)
did not or will 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; and the Joint Proxy Statement
and Prospectus included therein did not or will not contain any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
representations and warranties in this subsection only shall apply to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by MuniYield
Pennsylvania for use in the N-14 Registration Statement as provided in
Section 8(e) of this Agreement.
(l) MuniYield Pennsylvania is authorized to issue an unlimited number of
common shares of beneficial interest, par value $0.10 per share and
1,000,000 preferred shares of beneficial interest, par value $0.05 per
share, each outstanding share of which is fully paid and nonassessable and
has full voting rights. The Fund has designated 1,600 of the preferred
shares as AMPS.
(m) The MuniYield Pennsylvania Common Shares and MuniYield Pennsylvania
Series B AMPS to be issued to the Acquired Funds pursuant to this Agreement
will have been duly authorized and, when issued and delivered pursuant to
this Agreement, will be legally and validly issued and will be fully paid
and nonassessable and will have full voting rights, and no shareholder of
MuniYield Pennsylvania will have any preemptive right of subscription or
purchase in respect thereof.
(n) At or prior to the Exchange Date, the MuniYield Pennsylvania Common
Shares to be transferred to the Acquired Funds for distribution to the
shareholders of the Acquired Funds on the Exchange Date will be duly
qualified for offering to the public in all states of the United States in
which the sale of shares of the Funds presently are qualified, and there
will be a sufficient number of such shares registered under the 1933 Act
and, as may be necessary, with each pertinent state securities commission
to permit the transfers contemplated by this Agreement to be consummated.
(o) At or prior to the Exchange Date, the shares of MuniYield
Pennsylvania Series B AMPS to be transferred to MuniVest Pennsylvania and
MuniHoldings Pennsylvania on the Exchange Date will be duly qualified for
offering to the public in all states of the United States in which the sale
of AMPS of the Acquired Funds presently are qualified, and there are a
sufficient number of MuniYield Pennsylvania Series B AMPS registered under
the 1933 Act and with each pertinent state securities commission to permit
the transfers contemplated by this Agreement to be consummated.
(p) At or prior to the Exchange Date, MuniYield Pennsylvania will have
obtained any and all regulatory, Trustee and shareholder approvals
necessary to issue the MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS.
2.Representations and Warranties of MuniVest Pennsylvania.
MuniVest Pennsylvania represents and warrants to, and agrees with, MuniYield
Pennsylvania and MuniHoldings Pennsylvania that:
(a) MuniVest Pennsylvania is a Massachusetts business trust, duly
organized, validly existing and in good standing in conformity with the
laws of the Commonwealth of Massachusetts, and has the power to own all of
its assets and to carry out this Agreement. MuniVest Pennsylvania has all
necessary Federal, state and local authorizations to carry on its business
as it is now being conducted and to carry out this Agreement.
(b) MuniVest Pennsylvania is duly registered under the 1940 Act as a non-
diversified, closed-end management investment company (File No. 811-7750),
and such registration has not been revoked or rescinded and is in full
force and effect. MuniVest Pennsylvania has elected and qualified for the
special tax treatment afforded RICs under Sections 851-855 of the Code at
all times since its inception and intends to continue to so qualify through
its taxable year ending upon liquidation.
II-4
<PAGE>
(c) As used in this Agreement, the term "MuniVest Pennsylvania
Investments" shall mean (i) the investments of MuniVest Pennsylvania shown
on the schedule of its investments as of the Valuation Time furnished to
each of MuniYield Pennsylvania and MuniHoldings Pennsylvania; and (ii) all
other assets owned by MuniVest Pennsylvania or liabilities incurred as of
the Valuation Time.
(d) MuniVest Pennsylvania has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Trustees and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(e) Each of MuniVest Pennsylvania and MuniHoldings Pennsylvania has been
furnished with MuniYield Pennsylvania's Annual Report to Shareholders for
the fiscal year ended October 31, 1998, and the audited financial
statements appearing therein, having been examined by Deloitte & Touche
LLP, independent public accountants, fairly present the financial position
of MuniYield Pennsylvania as of the respective dates indicated, in
conformity with generally accepted accounting principles applied on a
consistent basis.
(f) Each of MuniYield Pennsylvania and MuniHoldings Pennsylvania has been
furnished with MuniVest Pennsylvania's Semi-Annual Report to Shareholders
for the six months ended April 30, 1999, and the unaudited financial
statements appearing therein fairly present the financial position of
MuniVest Pennsylvania as of the respective dates indicated, in conformity
with generally accepted accounting principles applied on a consistent
basis.
(g) An unaudited statement of assets, liabilities and capital of MuniVest
Pennsylvania and an unaudited schedule of investments of MuniVest
Pennsylvania, each as of the Valuation Time, will be furnished to each of
MuniYield Pennsylvania and MuniHoldings Pennsylvania at or prior to the
Exchange Date for the purpose of determining the number of shares of
MuniYield Pennsylvania Common Shares and MuniYield Pennsylvania Series B
AMPS to be issued pursuant to Section 6 of this Agreement; each will fairly
present the financial position of MuniVest Pennsylvania as of the Valuation
Time in conformity with generally accepted accounting principles applied on
a consistent basis.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of MuniVest Pennsylvania, threatened against
it which assert liability on the part of MuniVest Pennsylvania or which
materially affect its financial condition or its ability to consummate the
Reorganization. MuniVest Pennsylvania, is not charged with or, to the best
of its knowledge, threatened with any violation or investigation of any
possible violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its business.
(i) There are no material contracts outstanding to which MuniVest
Pennsylvania is a party that have not been disclosed in the N-14
Registration Statement or will not otherwise be disclosed to MuniYield
Pennsylvania and MuniHoldings Pennsylvania prior to the Valuation Time.
(j) MuniVest Pennsylvania is not obligated under any provision of its
Declaration of Trust or its by-laws, nor is it a party to any contract or
other commitment or obligation, and is not subject to any order or decree
which would be violated by its execution of or performance under this
Agreement, except insofar as the Funds have mutually agreed to amend such
contract or other commitment or obligation to cure any potential violation
as a condition precedent to the Reorganization.
(k) MuniVest Pennsylvania has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since October 31,
1998 and those incurred in connection with the Reorganization. As of the
Valuation Time, MuniVest Pennsylvania will advise MuniYield Pennsylvania
and MuniHoldings Pennsylvania in writing of all known liabilities,
contingent or otherwise, whether or not incurred in the ordinary course of
business, existing or accrued as of such time.
II-5
<PAGE>
(l) MuniVest Pennsylvania has filed, or has obtained extensions to file,
all Federal, state and local tax returns which are required to be filed by
it, and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Exchange
Date occurs. All tax liabilities of MuniVest Pennsylvania have been
adequately provided for on its books, and no tax deficiency or liability of
MuniVest Pennsylvania has been asserted and no question with respect
thereto has been raised by the Internal Revenue Service or by any state or
local tax authority for taxes in excess of those already paid, up to and
including the taxable year in which the Exchange Date occurs.
(m) At both the Valuation Time and the Exchange Date, MuniVest
Pennsylvania will have full right, power and authority to sell, assign,
transfer and deliver the MuniVest Pennsylvania Investments. At the Exchange
Date, subject only to the obligation to deliver the MuniVest Pennsylvania
Investments as contemplated by this Agreement, MuniVest Pennsylvania will
have good and marketable title to all of the MuniVest Pennsylvania
Investments, and MuniYield Pennsylvania will acquire all of the MuniVest
Pennsylvania Investments free and clear of any encumbrances, liens or
security interests and without any restrictions upon the transfer thereof
(except those imposed by the Federal or state securities laws and those
imperfections of title or encumbrances as do not materially detract from
the value or use of the MuniVest Pennsylvania Investments or materially
affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MuniVest
Pennsylvania of the Reorganization, except such as may be required under
the 1933 Act, the 1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the time
of the shareholders' meetings referred to in Section 8(a) of this Agreement
and on the Exchange Date, insofar as it relates to MuniVest Pennsylvania
(i) complied or will comply in all material respects with the provisions of
the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and (ii) did not or will 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; and the
Joint Proxy Statement and Prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection shall
apply only to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information
furnished by MuniVest Pennsylvania for use in the N-14 Registration
Statement as provided in Section 8(e) of this Agreement.
(p) MuniVest Pennsylvania is authorized to issue an unlimited number of
shares of beneficial interest, par value $0.10 per share, and 1,000,000
preferred shares of beneficial interest, par value of $0.05 per share; each
outstanding share of which is fully paid and nonassessable and has full
voting rights. The Fund has designated 1,100 of the preferred shares as
AMPS.
(q) All of the issued and outstanding MuniVest Pennsylvania Common Shares
and MuniVest Pennsylvania AMPS were offered for sale and sold in conformity
with all applicable Federal and state securities laws.
(r) The books and records of MuniVest Pennsylvania made available to
MuniYield Pennsylvania, New York Fund, and MuniHoldings Pennsylvania and/or
their counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of MuniVest
Pennsylvania.
(s) MuniVest Pennsylvania will not sell or otherwise dispose of any of
the shares of MuniYield Pennsylvania Common Shares or MuniYield
Pennsylvania Series B AMPS to be received in the Reorganization, except in
distribution to the shareholders of MuniVest Pennsylvania, as provided in
Section 5 of this Agreement.
II-6
<PAGE>
3.Representations and Warranties of MuniHoldings Pennsylvania.
MuniHoldings Pennsylvania represents and warrants to, and agrees with,
MuniYield Pennsylvania and MuniVest Pennsylvania that:
(a) MuniHoldings Pennsylvania is a Massachusetts business trust, duly
organized, validly existing and in good standing in conformity with the
laws of the Commonwealth of Massachusetts, and has the power to own all of
its assets and to carry out this Agreement. MuniHoldings Pennsylvania has
all necessary Federal, state and local authorizations to carry on its
business as it is now being conducted and to carry out this Agreement.
(b) MuniHoldings Pennsylvania is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No. 811-
09133), and such registration has not been revoked or rescinded and is in
full force and effect. MuniHoldings Pennsylvania has elected and qualified
for the special tax treatment afforded RICs under Sections 851-855 of the
Code at all times since its inception, and intends to continue to so
qualify through its taxable year ending upon liquidation.
(c) As used in this Agreement, the term "MuniHoldings Pennsylvania
Investments" shall mean (i) the investments of MuniHoldings Pennsylvania
shown on the schedule of its investments as of the Valuation Time furnished
to each of MuniYield Pennsylvania and MuniVest Pennsylvania; and (ii) all
other assets owned by MuniHoldings Pennsylvania or liabilities incurred as
of the Valuation Time. The MuniHoldings Pennsylvania Investments together
with the MuniVest Pennsylvania Investments may sometimes be referred to
herein collectively as the "Acquired Fund Investments".
(d) MuniHoldings Pennsylvania has full power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery
and performance of this Agreement has been duly authorized by all necessary
action of its Board of Trustees and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(e) Each of MuniYield Pennsylvania and MuniVest Pennsylvania has been
furnished with MuniHoldings Pennsylvania's Semi-Annual Report to
Shareholders for the period ended March 31, 1999, and the unaudited
financial statements appearing therein fairly present the financial
position of MuniHoldings Pennsylvania as of the respective dates indicated,
in conformity with generally accepted accounting principles applied on a
consistent basis.
(f) An unaudited statement of assets, liabilities and capital of
MuniHoldings Pennsylvania and an unaudited schedule of investments of
MuniHoldings Pennsylvania, each as of the Valuation Time, will be furnished
to each of MuniYield Pennsylvania and MuniVest Pennsylvania at or prior to
the Exchange Date for the purpose of determining the number of shares of
MuniYield Pennsylvania Common Shares and MuniYield Pennsylvania Series B
AMPS to be issued to MuniHoldings Pennsylvania pursuant to Section 6 of
this Agreement; each will fairly present the financial position of
MuniHoldings Pennsylvania as of the Valuation Time in conformity with
generally accepted accounting principles applied on a consistent basis.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of MuniHoldings Pennsylvania, threatened
against it which assert liability on the part of MuniHoldings Pennsylvania
or which materially affect its financial condition or its ability to
consummate the Reorganization. MuniHoldings Pennsylvania, is not charged
with or, to the best of its knowledge, threatened with any violation or
investigation of any possible violation of any provisions of any Federal,
state or local law or regulation or administrative ruling relating to any
aspect of its business.
(h) There are no material contracts outstanding to which MuniHoldings
Pennsylvania is a party that have not been disclosed in the N-14
Registration Statement or will not otherwise be disclosed to MuniYield
Pennsylvania and MuniVest Pennsylvania prior to the Valuation Time.
(i) MuniHoldings Pennsylvania is not obligated under any provision of its
Declaration of Trust or by-laws, nor is it a party to any contract or other
commitment or obligation, and is not subject to any order or
II-7
<PAGE>
decree which would be violated by its execution of or performance under
this Agreement, except insofar as the Funds have mutually agreed to amend
such contract or other commitment or obligation to cure any potential
violation as a condition precedent to the Reorganization.
(j) MuniHoldings Pennsylvania has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its statements
of assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since September
30, 1999 and those incurred in connection with the Reorganization. As of
the Valuation Time, MuniHoldings Pennsylvania will advise MuniYield
Pennsylvania and MuniVest Pennsylvania in writing of all known liabilities,
contingent or otherwise, whether or not incurred in the ordinary course of
business, existing or accrued as of such time.
(k) MuniHoldings Pennsylvania has filed, or has obtained extensions to
file, all Federal, state and local tax returns which are required to be
filed by it, and has paid or has obtained extensions to pay, all Federal,
state and local taxes shown on said returns to be due and owing and all
assessments received by it, up to and including the taxable year in which
the Exchange Date occurs. All tax liabilities of MuniHoldings Pennsylvania
have been adequately provided for on its books, and no tax deficiency or
liability of MuniHoldings Pennsylvania has been asserted and no question
with respect thereto has been raised by the Internal Revenue Service or by
any state or local tax authority for taxes in excess of those already paid,
up to and including the taxable year in which the Exchange Date occurs.
(l) At both the Valuation Time and the Exchange Date, MuniHoldings
Pennsylvania will have full right, power and authority to sell, assign,
transfer and deliver the MuniHoldings Pennsylvania Investments. At the
Exchange Date, subject only to the obligation to deliver the MuniHoldings
Pennsylvania Investments as contemplated by this Agreement, MuniHoldings
Pennsylvania will have good and marketable title to all of the MuniHoldings
Pennsylvania Investments, and MuniYield Pennsylvania will acquire all of
the MuniHoldings Pennsylvania Investments free and clear of any
encumbrances, liens or security interests and without any restrictions upon
the transfer thereof (except those imposed by the Federal or state
securities laws and those imperfections of title or encumbrances as do not
materially detract from the value or use of the MuniHoldings Pennsylvania
Investments or materially affect title thereto).
(m) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MuniHoldings
Pennsylvania of the Reorganization, except such as may be required under
the 1933 Act, the 1934 Act, the 1940 Act or state securities laws.
(n) The N-14 Registration Statement, on its effective date, at the time
of the shareholders' meetings referred to in Section 8(a) of this Agreement
and on the Exchange Date, insofar as it relates to MuniHoldings
Pennsylvania (i) complied or will comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder, and (ii) did not or will 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; and the Joint Proxy Statement and Prospectus included therein
did not or will not contain any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
subsection shall apply only to statements in or omissions from the N-14
Registration Statement made in reliance upon and in conformity with
information furnished by MuniHoldings Pennsylvania for use in the N-14
Registration Statement as provided in Section 8(e) of this Agreement.
(o) MuniHoldings Pennsylvania is authorized to issue an unlimited number
of common shares of beneficial interest, par value $0.10 per share, and
1,000,000 preferred shares of beneficial interest, par value of $0.10 per
share; each outstanding share of which is fully paid and nonassessable and
has full voting rights. The Fund has designated 820 of the preferred shares
as AMPS, Series A.
(p) All of the issued and outstanding shares of MuniHoldings Pennsylvania
Common Shares and MuniHoldings Pennsylvania AMPS were offered for sale and
sold in conformity with all applicable Federal and state securities laws.
II-8
<PAGE>
(q) The books and records of MuniHoldings Pennsylvania made available to
MuniYield Pennsylvania and MuniVest Pennsylvania and/or their counsel are
substantially true and correct and contain no material misstatements or
omissions with respect to the operations of MuniHoldings Pennsylvania.
(r) MuniHoldings Pennsylvania will not sell or otherwise dispose of any
of the shares of MuniYield Pennsylvania Common Shares or MuniYield
Pennsylvania Series B AMPS to be received in the Reorganization, except in
distribution to the shareholders of MuniHoldings Pennsylvania, as provided
in Section 5 of this Agreement.
4.The Reorganization.
(a) Subject to receiving the requisite approvals of the shareholders of each
of the Funds, and to the other terms and conditions contained herein, (i)
MuniVest Pennsylvania agrees to convey, transfer and deliver to MuniYield
Pennsylvania and MuniYield Pennsylvania agrees to acquire from MuniVest
Pennsylvania on the Exchange Date, all of the MuniVest Pennsylvania
Investments (including interest accrued as of the Valuation Time on debt
instruments) and assume substantially all of the liabilities of MuniVest
Pennsylvania in exchange solely for that number of shares of MuniYield
Pennsylvania Common Shares and MuniYield Pennsylvania Series B AMPS provided
in Section 6 of this Agreement; (ii) MuniHoldings Pennsylvania agrees to
convey, transfer and deliver to MuniYield Pennsylvania and MuniYield
Pennsylvania agrees to acquire from MuniHoldings Pennsylvania on the Exchange
Date, all of the MuniHoldings Pennsylvania Investments (including interest
accrued as of the Valuation Time on debt instruments) and assume substantially
all of the liabilities of MuniHoldings Pennsylvania in exchange solely for
that number of shares of MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS provided in Section 6 of this Agreement and (iii)
MuniYield Pennsylvania agrees to change its investment policies to provide
that the Fund, under normal circumstances, will invest at least 80% of its
assets 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, as well as to change the Fund's name to "MuniYield
Pennsylvania Insured Fund."
Pursuant to this Agreement, as soon as practicable after the Exchange Date
(i) MuniVest Pennsylvania will distribute all shares of MuniYield Pennsylvania
Common Shares and MuniYield Pennsylvania Series B AMPS received by it to its
shareholders in exchange for their shares of MuniVest Pennsylvania Common
Shares and MuniVest Pennsylvania AMPS and (ii) MuniHoldings Pennsylvania will
distribute all shares of MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS received by it to its shareholders in exchange for
their shares of MuniHoldings Pennsylvania Common Shares and MuniHoldings
Pennsylvania AMPS. Such distributions shall be accomplished by the opening of
shareholder accounts on the shares ledger records of MuniYield Pennsylvania in
the amounts due the shareholders of each Acquired Fund based on their
respective holdings in such Acquired Fund as of the Valuation Time.
(b) Prior to the Exchange Date, each Acquired Fund shall declare a dividend
or dividends which, together with all such previous dividends, shall have the
effect of distributing to their respective shareholders all of their
respective net investment company taxable income to and including the Exchange
Date, if any (computed without regard to any deduction for dividends paid),
and all of its net capital gain, if any, realized to and including the
Exchange Date. In this regard and in connection with the Reorganization, the
last dividend period for the MuniVest Pennsylvania AMPS and the MuniHoldings
Pennsylvania AMPS prior to the Exchange Date may be shorter than the dividend
period for such AMPS determined as set forth in the applicable Certificate of
Designation.
(c) Each of the Acquired Funds will pay or cause to be paid to MuniYield
Pennsylvania any interest such Acquired Fund receives on or after the Exchange
Date with respect to any of the Acquired Fund Investments transferred to
MuniYield Pennsylvania hereunder.
(d) The Valuation Time shall be 4:00 p.m., Eastern time, on February ,
2000, or such earlier or later day and time as may be mutually agreed upon in
writing (the "Valuation Time").
II-9
<PAGE>
(e) Recourse for liabilities assumed from each Acquired Fund by MuniYield
Pennsylvania in the Reorganization will be limited to the net assets of each
such fund acquired by MuniYield Pennsylvania. The known liabilities of the
Acquired Funds, as of the Valuation Time, shall be confirmed in writing to
MuniYield Pennsylvania pursuant to Sections 2(j), 3(j) and 4(j) of this
Agreement.
(f) The Acquired Funds will each be dissolved following the Exchange Date by
filing separate Certificate of Termination with the Commonwealth of
Massachusetts.
(g) MuniYield Pennsylvania will file with the Commonwealth of Massachusetts
a Certificate of Designation designating the currently outstanding series of
AMPS of MuniYield Pennsylvania as Series A and establishing the powers, rights
and preferences of the MuniYield Pennsylvania Series B AMPS prior to the
closing of the Reorganization.
(h) As promptly as practicable after the liquidation of each of the Acquired
Funds pursuant to the Reorganization, each Acquired Fund shall terminate its
respective registration under the 1940 Act.
5. Issuance and Valuation of MuniYield Pennsylvania Common Shares and
MuniYield Pennsylvania Series B AMPS in the Reorganization.
Full shares of MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS of an aggregate net asset value or liquidation
preference, as the case may be, equal (to the nearest one then thousandth of
one cent) to the value of the assets of MuniVest Pennsylvania acquired in the
Reorganization determined as hereinafter provided, reduced by the amount of
liabilities of MuniVest Pennsylvania assumed by MuniYield Pennsylvania in the
Reorganization, shall be issued by MuniYield Pennsylvania to MuniVest
Pennsylvania in exchange for such assets of MuniVest Pennsylvania, plus cash
in lieu of fractional shares. MuniYield Pennsylvania will issue to MuniVest
Pennsylvania (a) a number of MuniYield Pennsylvania Common Shares, the
aggregate net asset value of which will equal the aggregate net asset value of
the shares of MuniVest Pennsylvania Common Shares, determined as set forth
below, and (b) a number of shares of MuniYield Pennsylvania Series B AMPS, the
aggregate liquidation preference and value of which will equal the aggregate
liquidation preference and value of the MuniVest Pennsylvania AMPS, determined
as set forth below.
Full shares of MuniYield Pennsylvania Common Shares and MuniYield
Pennsylvania Series B AMPS of an aggregate net asset value or liquidation
preference, as the case may be, equal (to the nearest one ten thousandth of
one cent) to the value of the assets of MuniHoldings Pennsylvania acquired in
the Reorganization determined as hereinafter provided, reduced by the amount
of liabilities of MuniHoldings Pennsylvania assumed by MuniYield Pennsylvania
to MuniHoldings Pennsylvania in the Reorganization, shall be issued by
MuniYield Pennsylvania in exchange for such assets of MuniHoldings
Pennsylvania, plus cash in lieu of fractional shares. MuniYield Pennsylvania
will issue to MuniHoldings Pennsylvania (a) a number of MuniYield Pennsylvania
Common Shares, the aggregate net asset value of which will equal the aggregate
net asset value of the shares of MuniHoldings Pennsylvania Common Shares,
determined as set forth below, and (b) a number of shares of MuniYield
Pennsylvania Series B AMPS, the aggregate liquidation preference and value of
which will equal the aggregate liquidation preference and value of the
MuniHoldings Pennsylvania AMPS, determined as set forth below.
The net asset value of each of the Funds and the liquidation preference and
value of the AMPS of each of the Funds shall be determined as of the Valuation
Time in accordance with the procedures described in (i) the prospectus of
MuniYield Pennsylvania, dated September 11, 1992, relating to the MuniYield
Pennsylvania Common Shares and (ii) the prospectus of MuniYield Pennsylvania,
dated November 23, 1992, relating to the MuniYield Pennsylvania AMPS, and no
formula will be used to adjust the net asset value so determined of any Fund
to take into account differences in realized and unrealized gains and losses.
Values in all cases shall be determined as of the Valuation Time. The value of
the Acquired Fund Investments to be transferred to MuniYield Pennsylvania
shall be determined by MuniYield Pennsylvania pursuant to the procedures
utilized by MuniYield Pennsylvania in valuing its own assets and determining
its own liabilities for purposes of the Reorganization.
II-10
<PAGE>
Such valuation and determination shall be made by MuniYield Pennsylvania in
cooperation with the Acquired Funds and shall be confirmed in writing by
MuniYield Pennsylvania to the Acquired Funds. The net asset value per share of
the MuniYield Pennsylvania Common Shares and the liquidation preference and
value per share of the MuniYield Pennsylvania Series B AMPS shall be
determined in accordance with such procedures and MuniYield Pennsylvania shall
certify the computations involved. For purposes of determining the net asset
value of Common Shares of each Fund, 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 shares of AMPS of that Fund is divided by
the total number of shares of Common Shares of that Fund outstanding at such
time.
MuniYield Pennsylvania shall issue to MuniVest Pennsylvania separate
certificates or share deposit receipts for the MuniYield Pennsylvania Common
Shares and the MuniYield Pennsylvania Series B AMPS, each registered in the
name of MuniVest Pennsylvania. MuniVest Pennsylvania then shall distribute the
MuniYield Pennsylvania Common Shares and the MuniYield Pennsylvania Series B
AMPS to the holders of MuniVest Pennsylvania Common Shares and MuniVest
Pennsylvania AMPS by redelivering the certificates or share deposit receipts
evidencing ownership of (i) the MuniYield Pennsylvania Common Shares to The
Bank of New York, as the transfer agent and registrar for the MuniYield
Pennsylvania Common Shares for distribution to the holders of MuniVest
Pennsylvania Common Shares on the basis of such holder's proportionate
interest in the aggregate net asset value of the Common Shares of MuniVest
Pennsylvania and (ii) the MuniYield Pennsylvania Series B AMPS to The Bank of
New York, as the transfer agent and registrar for the MuniYield Pennsylvania
Series B AMPS for distribution to the holders of MuniVest Pennsylvania AMPS on
the basis of such holder's proportionate interest in the aggregate liquidation
preference and value of the AMPS of MuniVest Pennsylvania. With respect to any
MuniVest Pennsylvania shareholder holding certificates evidencing ownership of
either MuniVest Pennsylvania Common Shares or MuniVest Pennsylvania AMPS as of
the Exchange Date, and subject to MuniYield Pennsylvania being informed
thereof in writing by MuniVest Pennsylvania, MuniYield Pennsylvania will not
permit such shareholder to receive new certificates evidencing ownership of
the MuniYield Pennsylvania Common Shares or MuniYield Pennsylvania Series B
AMPS, exchange MuniYield Pennsylvania Common Shares or MuniYield Pennsylvania
Series B AMPS credited to such shareholder's account for shares of other
investment companies managed by Merrill Lynch Asset Management, L.P. ("MLAM")
or any of its affiliates, or pledge or redeem such MuniYield Pennsylvania
Common Shares or MuniYield Pennsylvania Series B AMPS, in any case, until
notified by MuniVest Pennsylvania or its agent that such shareholder has
surrendered his or her outstanding certificates evidencing ownership of
MuniVest Pennsylvania Common Shares or MuniVest Pennsylvania AMPS or, in the
event of lost certificates, posted adequate bond. MuniVest Pennsylvania, at
its own expense, will request its shareholders to surrender their outstanding
certificates evidencing ownership of MuniVest Pennsylvania Common Shares or
MuniVest Pennsylvania AMPS, as the case may be, or post adequate bond
therefor.
MuniYield Pennsylvania shall issue to MuniHoldings Pennsylvania separate
certificates or share deposit receipts for the MuniYield Pennsylvania Common
Shares and the MuniYield Pennsylvania Series B AMPS, each registered in the
name of MuniHoldings Pennsylvania. MuniHoldings Pennsylvania then shall
distribute the MuniYield Pennsylvania Common Shares and the MuniYield
Pennsylvania Series B AMPS to the holders of MuniHoldings Pennsylvania Common
Shares and MuniHoldings Pennsylvania AMPS by redelivering the certificates or
share deposit receipts evidencing ownership of (i) the MuniYield Pennsylvania
Common Shares to The Bank of New York, as the transfer agent and registrar for
the MuniYield Pennsylvania Common Shares for distribution to the holders of
MuniHoldings Pennsylvania Common Shares on the basis of such holder's
proportionate interest in the aggregate net asset value of the Common Shares
of MuniHoldings Pennsylvania and (ii) the MuniYield Pennsylvania Series B AMPS
to The Bank of New York, as the transfer agent and registrar for the MuniYield
Pennsylvania Series B AMPS for distribution to the holders of MuniHoldings
Pennsylvania AMPS on the basis of such holder's proportionate interest in the
aggregate liquidation preference and value of the AMPS of MuniHoldings
Pennsylvania. With respect to any MuniHoldings Pennsylvania shareholder
holding certificates evidencing ownership of either MuniHoldings Pennsylvania
Common Shares or MuniHoldings Pennsylvania AMPS as of the Exchange Date, and
subject to MuniYield Pennsylvania being informed thereof in
II-11
<PAGE>
writing by MuniHoldings Pennsylvania, MuniYield Pennsylvania will not permit
such shareholder to receive new certificates evidencing ownership of MuniYield
Pennsylvania Common Shares or MuniYield Pennsylvania Series B AMPS, exchange
MuniYield Pennsylvania Common Shares or MuniYield Pennsylvania Series B AMPS
credited to such shareholder's account for shares of other investment
companies managed by MLAM or any of its affiliates, or pledge or redeem such
MuniYield Pennsylvania Common Shares or MuniYield Pennsylvania Series B AMPS,
in any case, until notified by MuniHoldings Pennsylvania or its agent that
such shareholder has surrendered his or her outstanding certificates
evidencing ownership of MuniHoldings Pennsylvania Common Shares or
MuniHoldings Pennsylvania AMPS or, in the event of lost certificates, posted
adequate bond. MuniHoldings Pennsylvania, at its own expense, will request its
shareholders to surrender their outstanding certificates evidencing ownership
of MuniHoldings Pennsylvania Common Shares or MuniHoldings Pennsylvania AMPS,
as the case may be, or post adequate bond therefor.
Dividends payable to holders of record of shares of MuniYield Pennsylvania
Common Shares or MuniYield Pennsylvania Series B AMPS, as the case may be, as
of any date after the Exchange Date and prior to the exchange of certificates
by any shareholder of an Acquired Fund shall be payable to such shareholder
without interest; however, such dividends shall not be paid unless and until
such shareholder surrenders the certificates representing Common Shares or
AMPS of the Acquired Funds, as the case may be, for exchange.
No fractional shares of MuniYield Pennsylvania Common Shares will be issued
to holders of MuniVest Pennsylvania Common Shares or MuniHoldings Pennsylvania
Common Shares. In lieu thereof, MuniYield Pennsylvania's transfer agent, The
Bank of New York, will aggregate all fractional shares of MuniYield
Pennsylvania Common Shares and sell the resulting full shares on the New York
Shares Exchange at the current market price for shares of MuniYield
Pennsylvania Common Shares for the account of all holders of fractional
interests, and each such holder will receive such holder's pro rata share of
the proceeds of such sale upon surrender of such holder's certificates
representing MuniVest Pennsylvania Common Shares or MuniHoldings Pennsylvania
Common Shares.
6.Payment of Expenses.
(a) With respect to expenses incurred in connection with the Reorganization,
(i) each Fund shall pay all expenses incurred that are attributable solely to
such Fund and the conduct of its business, and (ii) MuniYield Pennsylvania
shall pay, subsequent to the Exchange Date and pro rata according to each
Fund's net assets on the Exchange Date, all expenses incurred in connection
with the Reorganization, including, but not limited to, all costs related to
the preparation and distribution of the N-14 Registration Statement. Such fees
and expenses shall include the cost of preparing and filing a ruling request
with the Internal Revenue Service, legal and accounting fees, printing costs,
filing fees, shares exchange fees, rating agency fees, portfolio transfer
taxes (if any) and any similar expenses incurred in connection with the
Reorganization.
(b) If for any reason the Reorganization is not consummated, no party shall
be liable to any other party for any damages resulting therefrom, including,
without limitation, consequential damages.
7. Covenants of the Funds.
(a) MuniYield Pennsylvania and MuniVest Pennsylvania agree to call a special
meeting of the shareholders of each fund and MuniHoldings Pennsylvania agrees
to call an annual meeting of its shareholders as soon as is practicable after
the effective date of the N-14 Registration Statement for the purpose of
considering the Reorganization as described in this Agreement.
(b) Each Fund covenants to operate its business as presently conducted
between the date hereof and the Exchange Date.
II-12
<PAGE>
(c) Each Acquired Fund agrees that following the consummation of the
Reorganization, it will terminate in accordance with the laws of the
Commonwealth of Massachusetts and any other applicable law, it will not make
any distributions of MuniYield Pennsylvania Common Shares or MuniYield
Pennsylvania Series B AMPS, as applicable other than to its respective
shareholders and without first paying or adequately providing for the payment
of all of its respective liabilities not assumed by MuniYield Pennsylvania, if
any, and on and after the Exchange Date it shall not conduct any business
except in connection with its termination.
(d) Each Acquired Fund undertakes that if the Reorganization is consummated,
it will file an application pursuant to Section 8(f) of the 1940 Act for an
order declaring that such Acquired Fund has ceased to be a registered
investment company.
(e) MuniYield Pennsylvania will file the N-14 Registration Statement with
the Securities and Exchange Commission (the "Commission") and will use its
best efforts to provide that the N-14 Registration Statement becomes effective
as promptly as practicable. Each Fund agrees to cooperate fully with the
others, and each will furnish to the others the information relating to itself
to be set forth in the N-14 Registration Statement as required by the 1933
Act, the 1934 Act, the 1940 Act, and the rules and regulations thereunder and
the state securities laws.
(f) MuniYield Pennsylvania has no plan or intention to sell or otherwise
dispose of the Acquired Fund Investments, except for dispositions made in the
ordinary course of business.
(g) Each of the Funds agrees that by the Exchange Date all of its Federal
and other tax returns and reports required to be filed on or before such date
shall have been filed and all taxes shown as due on said returns either have
been paid or adequate liability reserves have been provided for the payment of
such taxes. In connection with this covenant, the Funds agree to cooperate
with each other in filing any tax return, amended return or claim for refund,
determining a liability for taxes or a right to a refund of taxes or
participating in or conducting any audit or other proceeding in respect of
taxes. MuniYield Pennsylvania agrees to retain for a period of ten (10) years
following the Exchange Date all returns, schedules and work papers and all
material records or other documents relating to tax matters of the Acquired
Funds for each of such Fund's taxable period first ending after the Exchange
Date and for all prior taxable periods. Any information obtained under this
subsection shall be kept confidential except as otherwise may be necessary in
connection with the filing of returns or claims for refund or in conducting an
audit or other proceeding. After the Exchange Date, each of the Acquired Funds
shall prepare, or cause its agents to prepare, any Federal, state or local tax
returns, including any Forms 1099, required to be filed by such fund with
respect to its final taxable year ending with its complete liquidation and for
any prior periods or taxable years and further shall cause such tax returns
and Forms 1099 to be duly filed with the appropriate taxing authorities.
Notwithstanding the aforementioned provisions of this subsection, any expenses
incurred by the Acquired Funds (other than for payment of taxes) in connection
with the preparation and filing of said tax returns and Forms 1099 after the
Exchange Date shall be borne by each such Fund to the extent such expenses
have been accrued by such Fund in the ordinary course without regard to the
Reorganization; any excess expenses shall be borne by Fund Asset Management,
L.P. ("FAM") at the time such tax returns and Forms 1099 are prepared.
(h) The Funds each agree to mail to its respective shareholders of record
entitled to vote at each special or annual meeting of shareholders at which
action is to be considered regarding this Agreement, in sufficient time to
comply with requirements as to notice thereof, a combined proxy statement and
prospectus which complies in all material respects with the applicable
provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act,
and the rules and regulations, respectively, thereunder.
(i) Following the consummation of the Reorganization, MuniYield Pennsylvania
will stay in existence and continue its business as a non-diversified, closed-
end management investment company registered under the 1940 Act.
II-13
<PAGE>
8.Exchange Date.
(a) Delivery of the assets of the Acquired Funds to be transferred, together
with any other Acquired Fund Investments, and the shares of MuniYield
Pennsylvania Common Shares and MuniYield Pennsylvania Series B AMPS to be
issued as provided in this Agreement, shall be made at the offices of Brown &
Wood LLP, One World Trade Center, New York, New York 10048, at 10:00 a.m. on
the next full business day following the Valuation Time, or at such other
place, time and date agreed to by the Funds, the date and time upon which such
delivery is to take place being referred to herein as the "Exchange Date." To
the extent that any Acquired Fund Investments, for any reason, are not
transferable on the Exchange Date, the applicable Acquired Fund shall cause
such Acquired Fund Investments to be transferred to MuniYield Pennsylvania's
account with The Bank of New York at the earliest practicable date thereafter.
(b) Each of the Acquired Funds will deliver to MuniYield Pennsylvania on the
Exchange Date confirmations or other adequate evidence as to the tax basis of
each of their respective Acquired Fund Investments delivered to MuniYield
Pennsylvania hereunder, certified by Deloitte & Touche LLP.
(c) As soon as practicable after the close of business on the Exchange Date,
each of the Acquired Funds shall deliver to MuniYield Pennsylvania a list of
the names and addresses of all of the shareholders of record of such Acquired
Fund on the Exchange Date and the number of Common Shares and AMPS of such
Acquired Fund owned by each such shareholder, certified to the best of their
knowledge and belief by the applicable transfer agent for such Acquired Fund
or by its President.
9.Conditions of the Acquired Funds.
The obligations of each Acquired Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of two-thirds of the
members of the Board of Trustees of each of the Funds and by the
affirmative vote of (i) the holders of (a) a majority of the MuniYield
Pennsylvania Common Shares and MuniYield Pennsylvania AMPS, voting together
as a single class, and (b) a majority of the MuniYield Pennsylvania AMPS,
voting separately as a class, in each case issued and outstanding and
entitled to vote thereon; (ii) the holders of (a) a majority of the
MuniVest Pennsylvania Common Shares and MuniVest Pennsylvania AMPS, voting
together as a single class, and (b) a majority of the MuniVest Pennsylvania
AMPS, voting separately as a class, in each case issued and outstanding and
entitled to vote thereon; (iii) the holders of (a) a majority of the
MuniHoldings Pennsylvania Common Shares and MuniHoldings Pennsylvania AMPS,
voting together as a single class, and (b) a majority of the MuniHoldings
Pennsylvania AMPS, voting separately as a class, in each case issued and
outstanding and entitled to vote thereon; and further that each Fund shall
have delivered to each other Fund a copy of the resolution approving this
Agreement adopted by such Fund's Board of Trustees, and (iv) a certificate
setting forth the vote of such Fund's shareholders obtained at its special
or annual meeting, each certified by the Secretary of the appropriate Fund.
(b) That each Acquired Fund shall have received from MuniYield
Pennsylvania and from each other Acquired Fund a statement of assets,
liabilities and capital, with values determined as provided in Section 6 of
this Agreement, together with a schedule of such fund's investments, all as
of the Valuation Time, certified on the Fund's behalf by its President (or
any Vice President) and its Treasurer, and a certificate signed by the
Fund's President (or any Vice President) and its Treasurer, dated as of the
Exchange Date, certifying that as of the Valuation Time and as of the
Exchange Date there has been no material adverse change in the financial
position of the Fund since the date of such Fund's most recent Annual or
Semi-Annual Report as applicable, other than changes in its portfolio
securities since that date or changes in the market value of its portfolio
securities.
(c) That MuniYield Pennsylvania shall have furnished to the Acquired
Funds a certificate signed by MuniYield Pennsylvania's President (or any
Vice President) and its Treasurer, dated as of the Exchange
II-14
<PAGE>
Date, certifying that, as of the Valuation Time and as of the Exchange Date
all representations and warranties of MuniYield Pennsylvania made in this
Agreement are true and correct in all material respects with the same
effect as if made at and as of such dates, and that MuniYield Pennsylvania
has complied with all of the agreements and satisfied all of the conditions
on its part to be performed or satisfied at or prior to each of such dates.
(d) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(e) That the Acquired Funds shall have received an opinion or opinions of
Brown & Wood LLP, as counsel to the Funds, in form and substance
satisfactory to the Acquired Funds and dated the Exchange Date, to the
effect that (i) each of the Funds is a Massachusetts business trust duly
organized, validly existing and in good standing in conformity with the
laws of the Commonwealth or Massachusetts; (ii) the MuniYield Pennsylvania
Common Shares and MuniYield Pennsylvania Series B AMPS to be issued
pursuant to this Agreement are duly authorized and, upon delivery, will be
validly issued and outstanding and fully paid and nonassessable by
MuniYield Pennsylvania, and no shareholder of MuniYield Pennsylvania has
any preemptive right to subscription or purchase in respect thereof
(pursuant to the Declaration of Trust or the by-laws of MuniYield
Pennsylvania or the Massachusetts law, or to the best of such counsel's
knowledge, otherwise); (iii) this Agreement has been duly authorized,
executed and delivered by each of the Funds, and represents a valid and
binding contract, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization or
other similar laws pertaining to the enforcement of creditors' rights
generally and court decisions with respect thereto; provided, such counsel
shall express no opinion with respect to the application of equitable
principles in any proceeding, whether at law or in equity; (iv) the
execution and delivery of this Agreement does not, and the consummation of
the Reorganization will not, violate any material provisions of
Massachusetts law or the Declaration of Trust, the by-laws or any agreement
(known to such counsel) to which any Fund is a party or by which any Fund
is bound, except insofar as the parties have agreed to amend such provision
as a condition precedent to the Reorganization; (v) each of the Acquired
Funds has the power to sell, assign, transfer and deliver the assets
transferred by it hereunder and, upon consummation of the Reorganization in
accordance with the terms of this Agreement, each of the Acquired Funds
will have duly transferred such assets and liabilities in accordance with
this Agreement; (vi) to the best of such counsel's knowledge, no consent,
approval, authorization or order of any United States federal court,
Massachusetts state court or governmental authority is required for the
consummation by the Funds of the Reorganization, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act and the
published rules and regulations of the Commission thereunder and under
Maryland law and such as may be required under state securities laws; (vii)
the N-14 Registration Statement has become effective under the 1933 Act, no
stop order suspending the effectiveness of the N-14 Registration Statement
has been issued and no proceedings for that purpose have been instituted or
are pending or contemplated under the 1933 Act, and the N-14 Registration
Statement, and each amendment or supplement thereto, as of their respective
effective dates, appear on their face to be appropriately responsive in all
material respects to the requirements of the 1933 Act, the 1934 Act and the
1940 Act and the published rules and regulations of the Commission
thereunder; (viii) the descriptions in the N-14 Registration Statement of
statutes, legal and governmental proceedings and contracts and other
documents are accurate and fairly present the information required to be
shown; (ix) the information in the Joint Proxy Statement and Prospectus
under "Comparison of the Funds--Tax Rules Applicable to the Funds and their
Shareholders" and "Agreement and Plan of Reorganization--Tax Consequences
of the Reorganization," (other than information related to Massachusetts
law or legal conclusions involving matters of Massachusetts law as to which
we express no opinion) to the extent that it constitutes matters of law,
summaries of legal matters or legal conclusions, has been reviewed by such
counsel and is correct in all material respects as of the date of the Joint
Proxy Statement and Prospectus; (x) such counsel does not know of any
statutes, legal or governmental proceedings or contracts or other documents
related to the Reorganization of a character required to be described in
the N-14 Registration Statement which are not described therein or, if
required to be filed, filed as required; (xi) no Fund, to the knowledge of
such counsel, is required to qualify to do business as a foreign
corporation in any jurisdiction
II-15
<PAGE>
except as may be required by state securities laws, and except where each
has so qualified or the failure so to qualify would not have a material
adverse effect on such Fund or its respective shareholders; (xii) such
counsel does not have actual knowledge of any material suit, action or
legal or administrative proceeding pending or threatened against any of the
Funds, the unfavorable outcome of which would materially and adversely
affect such Fund; (xiii) all corporate actions required to be taken by the
Funds to authorize this Agreement and to effect the Reorganization have
been duly authorized by all necessary corporate actions on the part of such
Fund; and (xiv) such opinion is solely for the benefit of the Funds and
their Trustees and officers. Such opinion also shall state that (x) while
such counsel cannot make any representation as to the accuracy or
completeness of statements of fact in the N-14 Registration Statement or
any amendment or supplement thereto, nothing has come to their attention
that would lead them to believe that, on the respective effective dates of
the N-14 Registration Statement and any amendment or supplement thereto,
(1) the N-14 Registration Statement or any amendment or supplement thereto
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; and (2) the prospectus included in the
N-14 Registration Statement contained any untrue statement of a material
fact or omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (3) such counsel does not express any opinion or belief as
to the financial statements or other financial or statistical data relating
to any Fund contained or incorporated by reference in the N-14 Registration
Statement. In giving the opinion set forth above, Brown & Wood LLP may
state that it is relying on certificates of officers of a Fund with regard
to matters of fact and certain certificates and written statements of
governmental officials with respect to the good standing of a Fund.
(f) That each Acquired Fund shall have received either (a) a private
letter ruling from the Internal Revenue Service or (b) an opinion of Brown
& Wood LLP, to the effect that for Federal income tax purposes (i) the
transfer by such Acquired Fund of substantially all of its assets to
MuniYield Pennsylvania in exchange solely for shares of MuniYield
Pennsylvania Common Shares and MuniYield Pennsylvania Series B AMPS as
provided in this Agreement will constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Code, and the respective Funds will
each be deemed to be a "party" to a reorganization within the meaning of
Section 368(b); (ii) in accordance with Section 361(a) of the Code, no gain
or loss will be recognized to an Acquired Fund as a result of the asset
transfer solely in exchange for shares of MuniYield Pennsylvania Common
Shares and MuniYield Pennsylvania Series B AMPS, as the case may be, or on
the distribution of the MuniYield Pennsylvania shares to shareholders of
the respective Acquired Fund under Section 361(c)(1); (iii) under Section
1032 of the Code, no gain or loss will be recognized to MuniYield
Pennsylvania on the receipt of assets of an Acquired Fund in exchange for
its shares; (iv) in accordance with Section 354(a)(1) of the Code, no gain
or loss will be recognized to the shareholders of an Acquired Fund on the
receipt of Corresponding Shares of MuniYield Pennsylvania in exchange for
their shares of the Acquired Fund (except to the extent that common
shareholders receive cash representing an interest in fractional shares of
MuniYield Pennsylvania Common Shares in the Reorganization); (v) in
accordance with Section 362(b) of the Code, the tax basis of and Acquired
Fund's assets in the hands of MuniYield Pennsylvania will be the same as
the tax basis of such assets in the hands of the Acquired Fund immediately
prior to the consummation of the Reorganization; (vi) in accordance with
Section 358 of the Code, immediately after the Reorganization, the tax
basis of the shares of MuniYield Pennsylvania received by the shareholders
of an Acquired Fund in the Reorganization will be equal, in the aggregate,
to the tax basis of the shares of the Acquired Fund surrendered in
exchange; (vii) in accordance with Section 1223 of the Code, a
shareholder's holding period for the shares of MuniYield Pennsylvania will
be determined by including the period for which such shareholder held the
Acquired Fund shares exchanged therefor, provided that such shares were
held as a capital asset; (viii) in accordance with Section 1223 of the
Code, MuniYield Pennsylvania's holding period with respect to an Acquired
Fund's assets transferred will include the period for which such assets
were held by the Acquired Fund; (ix) the payment of cash to common
shareholders of an Acquired Fund in lieu of fractional shares of MuniYield
Pennsylvania Common Shares will be treated as though the fractional shares
were distributed as part of the Reorganization and then redeemed, with the
result that such shareholders will have short- or long-term capital gain or
loss to the
II-16
<PAGE>
extent that the cash distribution differs from the shareholder's basis
allocable to the MuniYield Pennsylvania fractional shares; and (x) the
taxable year of each Acquired Fund will end on the effective date of the
Reorganization and pursuant to Section 381(a) of the Code and regulations
thereunder, MuniYield Pennsylvania will succeed to and take into account
certain tax attributes of each Acquired Fund, such as earnings and profits,
capital loss carryovers and method of accounting.
(g) That all proceedings taken by each of the Funds and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to the others.
(h) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of MuniYield Pennsylvania, be
contemplated by the Commission.
(i) That Acquired Funds shall have received from Deloitte & Touche LLP a
letter dated as of the effective date of the N-14 Registration Statement
and a similar letter dated within five days prior to the Exchange Date, in
form and substance satisfactory to them, to the effect that (i) they are
independent public accountants with respect to MuniYield Pennsylvania
within the meaning of the 1933 Act and the applicable published rules and
regulations thereunder; (ii) in their opinion, the financial statements and
supplementary information of MuniYield Pennsylvania included or
incorporated by reference in the N-14 Registration Statement and reported
on by them comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the published rules and
regulations thereunder; and (iii) on the basis of limited procedures agreed
upon by the Funds and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a
reading of any unaudited interim financial statements and unaudited
supplementary information of MuniYield Pennsylvania included in the N-14
Registration Statement, and inquiries of certain officials of MuniYield
Pennsylvania responsible for financial and accounting matters, nothing came
to their attention that caused them to believe that (a) such unaudited
financial statements and related unaudited supplementary information do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations
thereunder, (b) such unaudited financial statements are not fairly
presented in conformity with generally accepted accounting principles,
applied on a basis substantially consistent with that of the audited
financial statements, or (c) such unaudited supplementary information is
not fairly stated in all material respects in relation to the unaudited
financial statements taken as a whole; and (iv) on the basis of limited
procedures agreed upon by the Funds and described in such letter (but not
an examination in accordance with generally accepted auditing standards),
the information relating to MuniYield Pennsylvania appearing in the N-14
Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records
of MuniYield Pennsylvania or from schedules prepared by officials of
MuniYield Pennsylvania having responsibility for financial and reporting
matters and such information is in agreement with such records, schedules
or computations made therefrom.
(j) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of MuniYield Pennsylvania
or would prohibit the Reorganization.
(k) That the Acquired Funds shall have received from the Commission such
orders or interpretations as Brown & Wood LLP, as their counsel, deems
reasonably necessary or desirable under the 1933 Act and the 1940 Act in
connection with the Reorganization, provided, that such counsel shall have
requested such orders as promptly as practicable, and all such orders shall
be in full force and effect.
10.MuniYield Pennsylvania Conditions.
The obligations of MuniYield Pennsylvania hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the Board of Trustees and the shareholders of
each of the Funds as set forth in Section 10(a); and that
II-17
<PAGE>
each of the Acquired Funds shall have delivered to MuniYield Pennsylvania a
copy of the resolution approving this Agreement adopted by such Acquired
Fund's Board of Trustees, and a certificate setting forth the vote of the
shareholders of such Acquired Fund obtained, each certified by its
Secretary.
(b) That each Acquired Fund shall have furnished to MuniYield
Pennsylvania a statement of its assets, liabilities and capital, with
values determined as provided in Section 6 of this Agreement, together with
a schedule of investments with their respective dates of acquisition and
tax costs, all as of the Valuation Time, certified on such Fund's behalf by
its President (or any Vice President) and its Treasurer, and a certificate
signed by such Fund's President (or any Vice President) and its Treasurer,
dated as of the Exchange Date, certifying that as of the Valuation Time and
as of the Exchange Date there has been no material adverse change in the
financial position of the Acquired Fund since the date of such Fund's most
recent Annual Report or Semi-Annual Report, as applicable, other than
changes in the Acquired Fund Investments since that date or changes in the
market value of the Acquired Fund Investments.
(c) That each Acquired Fund shall have furnished to MuniYield
Pennsylvania a certificate signed by such Fund's President (or any Vice
President) and its Treasurer, dated the Exchange Date, certifying that as
of the Valuation Time and as of the Exchange Date all representations and
warranties of the Acquired Fund made in this Agreement are true and correct
in all material respects with the same effect as if made at and as of such
dates and the Acquired Fund has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied at
or prior to such dates.
(d) That each Acquired Fund shall have delivered to MuniYield
Pennsylvania a letter from Deloitte & Touche LLP, dated the Exchange Date,
stating that such firm has performed a limited review of the Federal, state
and local income tax returns of the Acquired Fund for the period
ended (which returns originally were prepared and filed by the Acquired
Fund), and that based on such limited review, nothing came to their
attention which caused them to believe that such returns did not properly
reflect, in all material respects, the Federal, state and local income
taxes of the Acquired Fund for the period covered thereby; and that for the
period from , to and including the Exchange Date and for any taxable
year of the Acquired Fund ending upon the liquidation of that Acquired
Fund, such firm has performed a limited review to ascertain the amount of
applicable Federal, state and local taxes, and has determined that either
such amount has been paid or reserves have been established for payment of
such taxes, this review to be based on unaudited financial data; and that
based on such limited review, nothing has come to their attention which
caused them to believe that the taxes paid or reserves set aside for
payment of such taxes were not adequate in all material respects for the
satisfaction of Federal, state and local taxes for the period from , to
and including the Exchange Date and for any taxable year of that Acquired
Fund, ending upon the liquidation of such fund or that such fund would not
qualify as a regulated investment company for Federal income tax purposes
for the tax years in question.
(e) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(f) That MuniYield Pennsylvania shall have received an opinion of Brown &
Wood LLP, as counsel to the Funds, in form and substance satisfactory to
MuniYield Pennsylvania and dated the Exchange Date, with respect to the
matters specified in Section 10(e) of this Agreement and such other matters
as MuniYield Pennsylvania reasonably may deem necessary or desirable.
(g) That MuniYield Pennsylvania shall have received a private letter
ruling from the Internal Revenue Service or an opinion of Brown & Wood LLP
with respect to the matters specified in Section 10(f) of this Agreement.
(h) That MuniYield Pennsylvania shall have received from Deloitte &
Touche LLP a letter dated as of the effective date of the N-14 Registration
Statement and a similar letter dated within five days prior to the Exchange
Date, in form and substance satisfactory to MuniYield Pennsylvania, to the
effect that (i) they are independent public accountants with respect to
such Fund within the meaning of the 1933 Act and the applicable published
rules and regulations thereunder; (ii) in their opinion, the financial
statements and supplementary information of such Fund included or
incorporated by reference in the N-14 Registration
II-18
<PAGE>
Statement and reported on by them comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and
the published rules and regulations thereunder; (iii) on the basis of
limited procedures agreed upon by the Funds and described in such letter
(but not an examination in accordance with generally accepted auditing
standards) consisting of a reading of any unaudited interim financial
statements and unaudited supplementary information of the Acquired Fund
included in the N-14 Registration Statement, and inquiries of certain
officials of the Acquired Fund responsible for financial and accounting
matters, nothing came to their attention that caused them to believe that
(a) such unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules
and regulations thereunder, (b) such unaudited financial statements are not
fairly presented in conformity with generally accepted accounting
principles, applied on a basis substantially consistent with that of the
audited financial statements, or (c) such unaudited supplementary
information is not fairly stated in all material respects in relation to
the unaudited financial statements taken as a whole; and (iv) on the basis
of limited procedures agreed upon by the Funds and described in such letter
(but not an examination in accordance with generally accepted auditing
standards), the information relating to the Acquired Fund appearing in the
N-14 Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records
of the Acquired Fund or from schedules prepared by officials of the
Acquired Fund having responsibility for financial and reporting matters and
such information is in agreement with such records, schedules or
computations made therefrom.
(i) That the Acquired Fund Investments to be transferred to MuniYield
Pennsylvania shall not include any assets or liabilities which MuniYield
Pennsylvania, by reason of limitations in the Declaration of Trust or
otherwise, may not properly acquire or assume.
(j) That the N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of any Acquired Fund, be
contemplated by the Commission.
(k) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of any Acquired Fund or
would prohibit the Reorganization.
(l) That MuniYield Pennsylvania shall have received from the Commission
such orders or interpretations as Brown & Wood LLP, as counsel to MuniYield
Pennsylvania, deems reasonably necessary or desirable under the 1933 Act
and the 1940 Act in connection with the Reorganization, provided, that such
counsel shall have requested such orders as promptly as practicable, and
all such orders shall be in full force and effect.
(m) That all proceedings taken by each Acquired Fund and its respective
counsel in connection with the Reorganization and all documents incidental
thereto shall be satisfactory in form and substance to MuniYield
Pennsylvania.
(n) That prior to the Exchange Date, each of the Acquired Funds shall
have declared a dividend or dividends which, together with all such
previous dividends, shall have the effect of distributing to its
shareholders all of its net investment company taxable income for the
period to and including the Exchange Date, if any (computed without regard
to any deduction for dividends paid), and all of its net capital gain, if
any, realized to and including the Exchange Date. In this regard, the last
dividend period for the MuniVest Pennsylvania AMPS and the MuniHoldings
Pennsylvania AMPS may be shorter than the dividend period for such AMPS
determined as set forth in the applicable Certificate of Designation.
II-19
<PAGE>
11.Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at any time
(whether before or after adoption thereof by the shareholders of the Funds)
prior to the Exchange Date, or the Exchange Date may be postponed, (i) by
mutual consent of the Boards of Trustees of the Funds, (ii) by the Board of
Trustees of any Acquired Fund if any condition of such Acquired Fund's
obligations set forth in Section 10 of this Agreement has not been fulfilled
or waived by such Board; or (iii) by the Board of Trustees of MuniYield
Pennsylvania if any condition of MuniYield Pennsylvania's obligations set
forth in Section 11 of this Agreement have not been fulfilled or waived by
such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by August , 2000, this Agreement automatically shall terminate on
that date, unless a later date is mutually agreed to by the Boards of Trustees
of the Funds.
(c) In the event of termination of this Agreement pursuant to the provisions
hereof, the same shall become void and have no further effect, and there shall
not be any liability on the part of any Fund or persons who are their
Trustees, trustees, officers, agents or shareholders in respect of this
Agreement.
(d) At any time prior to the Exchange Date, any of the terms or conditions
of this Agreement may be waived by the Board of Trustees of any Fund
(whichever is entitled to the benefit thereof), if, in the judgment of such
Board after consultation with its counsel, such action or waiver will not have
a material adverse effect on the benefits intended under this Agreement to the
shareholders of their respective fund, on behalf of which such action is
taken. In addition, the Boards of Trustees of the Funds have delegated to FAM
the ability to make non-material changes to the transaction if it deems it to
be in the best interests of the Funds to do so.
(e) The respective representations and warranties contained in Sections 1,
2, 3 and 4 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and no Fund nor any of its officers,
Trustees, trustees, agents or shareholders shall have any liability with
respect to such representations or warranties after the Exchange Date. This
provision shall not protect any officer, Trustee, trustee, agent or
shareholder of any Fund against any liability to the entity for which that
officer, Trustee, trustee, agent or shareholder so acts or to its
shareholders, to which that officer, Trustee, trustee, agent or shareholder
otherwise would be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this Agreement
shall be issued prior to the Exchange Date and shall impose any terms or
conditions which are determined by action of the Boards of Trustees of the
Funds to be acceptable, such terms and conditions shall be binding as if a
part of this Agreement without further vote or approval of the shareholders of
the Funds unless such terms and conditions shall result in a change in the
method of computing the number of shares of MuniYield Pennsylvania Common
Shares and MuniYield Pennsylvania Series B AMPS to be issued to the Acquired
Funds, as applicable, in which event, unless such terms and conditions shall
have been included in the proxy solicitation materials furnished to the
shareholders of the Funds prior to the meetings at which the Reorganization
shall have been approved, this Agreement shall not be consummated and shall
terminate unless the Funds promptly shall call a special meeting of
shareholders at which such conditions so imposed shall be submitted for
approval.
12.Indemnification.
(a) Each Acquired Fund hereby severally agrees to indemnify and hold
MuniYield Pennsylvania harmless from all loss, liability and expenses
(including reasonable counsel fees and expenses in connection with the contest
of any claim) which MuniYield Pennsylvania may incur or sustain by reason of
the fact that (i) MuniYield Pennsylvania shall be required to pay any
corporate obligation of such Acquired Fund, whether consisting of tax
deficiencies or otherwise, based upon a claim or claims against such Acquired
Fund which were
II-20
<PAGE>
omitted or not fairly reflected in the financial statements to be delivered to
MuniYield Pennsylvania in connection with the Reorganization; (ii) any
representations or warranties made by such Acquired Fund in this Agreement
should prove to be false or erroneous in any material respect; (iii) any
covenant of such Acquired Fund has been breached in any material respect; or
(iv) any claim is made alleging that (a) the N-14 Registration Statement
included any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein attributable to such Fund not misleading or (b) the Joint
Proxy Statement and Prospectus delivered to the shareholders of the Funds and
forming a part of the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact necessary
to make the statements therein attributable to such Fund, in the light of the
circumstances under which they were made, not misleading, except with respect
to (iv)(a) and (b) herein insofar as such claim is based on written
information furnished to the Acquired Funds by MuniYield Pennsylvania.
(b) MuniYield Pennsylvania hereby agrees to indemnify and hold each Acquired
Fund harmless from all loss, liability and expenses (including reasonable
counsel fees and expenses in connection with the contest of any claim) which
such Acquired Fund may incur or sustain by reason of the fact that (i) any
representations or warranties made by MuniYield Pennsylvania in this Agreement
should prove false or erroneous in any material respect, (ii) any covenant of
MuniYield Pennsylvania has been breached in any material respect, or (iii) any
claim is made alleging that (a) the N-14 Registration Statement included any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein, not
misleading or (b) the Joint Proxy Statement and Prospectus delivered to
shareholders of the Funds and forming a part of the N-14 Registration
Statement included any untrue statement of a material fact or omitted to state
any material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except with
respect to (iii)(a) and (b) herein insofar as such claim is based on written
information furnished to MuniYield Pennsylvania by the Acquired Fund seeking
indemnification.
(c) In the event that any claim is made against MuniYield Pennsylvania in
respect of which indemnity may be sought by MuniYield Pennsylvania from an
Acquired Fund under Section 13(a) of this Agreement, or in the event that any
claim is made against an Acquired Fund in respect of which indemnity may be
sought by an Acquired Fund from MuniYield Pennsylvania under Section 13(b) of
this Agreement, then the party seeking indemnification (the "Indemnified
Party"), with reasonable promptness and before payment of such claim, shall
give written notice of such claim to the other party (the "Indemnifying
Party"). If no objection as to the validity of the claim is made in writing to
the Indemnified Party by the Indemnifying Party within thirty (30) days after
the giving of notice hereunder, then the Indemnified Party may pay such claim
and shall be entitled to reimbursement therefor, pursuant to this Agreement.
If, prior to the termination of such thirty-day period, objection in writing
as to the validity of such claim is made to the Indemnified Party, the
Indemnified Party shall withhold payment thereof until the validity of such
claim is established (i) to the satisfaction of the Indemnifying Party, or
(ii) by a final determination of a court of competent jurisdiction, whereupon
the Indemnified Party may pay such claim and shall be entitled to
reimbursement thereof, pursuant to this Agreement, or (iii) with respect to
any tax claims, within seven (7) calendar days following the earlier of (A) an
agreement between MuniYield Pennsylvania and the Acquired Fund seeking
indemnification that an indemnity amount is payable, (B) an assessment of a
tax by a taxing authority, or (C) a "determination" as defined in Section
1313(a) of the Code. For purposes of this Section 13, the term "assessment"
shall have the same meaning as used in Chapter 63 of the Code and Treasury
Regulations thereunder, or any comparable provision under the laws of the
appropriate taxing authority. In the event of any objection by the
Indemnifying Party, the Indemnifying Party promptly shall investigate the
claim, and if it is not satisfied with the validity thereof, the Indemnifying
Party shall conduct the defense against such claim. All costs and expenses
incurred by the Indemnifying Party in connection with such investigation and
defense of such claim shall be borne by it. These indemnification provisions
are in addition to, and not in limitation of, any other rights the parties may
have under applicable law.
II-21
<PAGE>
13.Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the
issuance of any shares to any person who at the time of the Reorganization is,
to its knowledge, an affiliate of a party to the Reorganization pursuant to
Rule 145(c), MuniYield Pennsylvania will cause to be affixed upon the
certificate(s) issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES
ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO
MUNIYIELD PENNSYLVANIA FUND, (OR ITS STATUTORY SUCCESSOR), OR ITS PRINCIPAL
UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT
REQUIRED.
and, further, that stop transfer instructions will be issued to MuniYield
Pennsylvania's transfer agent with respect to such shares. Each Acquired Fund
will provide MuniYield Pennsylvania on the Exchange Date with the name of any
shareholder of an Acquired Fund who is to the knowledge of such Acquired Fund
an affiliate of that Acquired Fund on such date.
(b) All covenants, agreements, representations and warranties made under
this Agreement and any certificates delivered pursuant to this Agreement shall
be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any provision of
this Agreement shall be in writing and shall be made by hand delivery, prepaid
certified mail or overnight service, addressed to any Fund, at 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, Attn: Terry K. Glenn, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes
the only understanding with respect to the Reorganization, may not be changed
except by a letter of agreement signed by each party and shall be governed by
and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said state.
(e) It is expressly agreed that the obligations of the Funds hereunder shall
not be binding upon any of their respective Trustees, shareholders, nominees,
officers, agents, or employees personally, but shall bind only the trust
property of the respective Funds as provided in such Fund's Declaration of
Trust. The execution and delivery of this Agreement have been authorized by
the Trustees of each Fund and signed by authorized officers of each Fund,
acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officers shall be deemed to have been made by
any of them individually or to impose liability on any of them personally, but
shall bind only the trust property of each Fund, as provided in such Fund's
Declaration of Trust.
II-22
<PAGE>
This Agreement may be executed in any number of counterparts, each of which,
when executed and delivered, shall be deemed to be an original but all such
counterparts together shall constitute but one instrument.
MuniYield Pennsylvania Fund
By___________________________________
Attest:
MuniVest Pennsylvania Insured Fund
By___________________________________
Attest:
MuniHoldings Pennsylvania Insured
Fund
By___________________________________
Attest:
II-23
<PAGE>
EXHIBIT III
ECONOMIC AND OTHER 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 five-year period ending with fiscal year 1998 was a time of economic
growth with modest growth rates at the beginning of the period and faster
increases during the most recent years. Throughout the period, inflation has
remained relatively low, helping to restrain expenditure growth. Favorable
economic conditions have helped total revenues and other sources rise at an
annual average of 4.2% rate during the five-year period. The growth rate for
taxes of 4.3% almost matched the total revenue rate. Expenditures and other
uses during the fiscal 1994 through fiscal 1998 period rose at a 3.8% average
rate, led by a 10.2% average increase for protection of person and property
costs.
On a generally accepted accountable principles ("GAAP") basis, revenues and
other sources from fiscal 1994 through fiscal 1998 increased by an average 5%
annually. Expenditures and other uses during this period rose at an average
annual rate of 5%.
The fund balance at June 30, 1998 (determined on a "Generally Accepted
Accounting Principles" basis) totaled $1,958.9 million, a $594 million
increase over the $1,364.9 million balance at June 30, 1997.
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 were $188.7 million representing the normal 15% of
the ending unappropriated balance, plus an additional $100 million authorized
by the General Assembly when it enacted the fiscal 1998 budget.
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 is 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.
III-1
<PAGE>
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 by slightly lower expenditures than budgeted
were responsible for the increase. Transfers to the Tax Stabilization Reserve
Fund for fiscal 1998 operations 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 exceeds $668
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.
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-
undesignated balance (when computed) for the 1998 fiscal year.
For GAAP purposes, assets increased $705.1 million and liabilities rose by
$111.1 million during the fiscal year. These changes contributed to a $310.3
million dollar rise in the undesignated-unreserved balance for June 30, 1998
to $497.6 million, the highest level achieved since audited GAAP reporting was
instituted in 1994. Fiscal 1998 total revenues and other sources rose 4.3%.
Expenditures and other uses during fiscal 1998 rose by 4.5%.
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. The estimate was reduced by a net $2.4 million in
III-2
<PAGE>
November 1998 due to passage of tax legislation. 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 1.6% over actual Commonwealth revenues for fiscal 1998.
Tax reductions included in the enacted 1999 fiscal year budget totaled an
estimated $241.0 million for fiscal 1999. 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 $631 million, a $26.2 million
increase over the budget as enacted. 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 $279.0 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% ($713.2 million) above the
appropriations enacted for fiscal 1998 (including supplemental
appropriations).
In May 1999, along with the adoption of the fiscal 2000 budget, supplemental
fiscal 1999 appropriations totaling $357.8 million were enacted. With these
additional amounts, total appropriations for fiscal 1999 represent a 6.2%
increase over fiscal 1998 appropriations. An anticipated $180 million of
appropriation lapses and anticipated additional revenue provide the funding
for the additional appropriations.
Reserves for tax refunds for fiscal 1999 total $631.0 million, a $26.2
million increase over the budget as enacted. Reserves for tax refunds for
fiscal 1999 are $279.0 million below the reserve established for fiscal 1998.
According to the Pennsylvania Department of Revenue "Monthly Revenue Report"
for June, 1999, General Fund collections were $1,819.6 million for the month
of June, 1999, which is $145.9 million, or 8.7%, above the official estimate.
Fiscal year 1998-99 collections were $19,226.7 million, and exceeded the
official estimate by $773.0 million, or 4.2%.
The General Fund budget for the 1999-2000 fiscal year was approved by the
General Assembly in May 1999. The adopted budget includes estimated spending
of $19,103.8 million and estimated revenues (net of estimated tax refunds and
enacted tax changes) of $18,718.5 million. Funds to cover the $342.1 million
difference between estimated revenues and projected spending will be obtained
from a draw down of the projected fiscal 1999 year-end balance. The level of
proposed spending represents an increase of 3.8% over revised spending
authorized for fiscal 1999 of $18,360.3 million. Enacted tax changes effective
for fiscal 2000 total a net reduction of $380.2 million for the General Fund.
The estimate of Commonwealth revenues for fiscal year 1999 is based on an
economic forecast for real gross domestic product to grow at a 1.4% rate from
the second quarter of 1999 to the second quarter of 2000. Growth of real gross
domestic product is expected to be restrained by a slowing of the rate of
consumer spending
III-3
<PAGE>
to a level consistent with personal income gains and by smaller gains in
business investment in response to falling capacity utilization and profits.
Slowing economic growth is expected to cause the unemployment rate to rise
through the fiscal year but inflation is expected to remain moderate. Trends
for the Pennsylvania economy are expected to maintain their close association
with national economic trends. Personal income growth is anticipated to remain
slightly below that of the U.S. while the Pennsylvania unemployment rate is
anticipated to be very close to the national rate.
Commonwealth revenues (excluding the estimated cost of the enacted tax
reductions) are projected to increase by 3.1% over revised fiscal 1999
estimates. Appropriations from Commonwealth funds are budgeted to increase by
3.8% over revised fiscal 1999 appropriations.
According to the Pennsylvania Department of Revenue "Monthly Revenue Report"
for July, 1999, General Fund collections for July, 1999 were $1,318.9 million,
which is $10.7 million, or 0.8%, above the official estimate.
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 1998 increased at an annual rate of 0.75%. This compares to a 0.29%
rate for the Middle Atlantic region and a 1.72% rate for the United States as
a whole during the period 1989 through 1998. For the five years ended with
1998, employment in the Commonwealth has increased 7.0%. The growth in
employment during this period is higher than the 2.7% growth in the Middle
Atlantic region. The unemployment rate in Pennsylvania for April, 1999 stood
at a seasonably adjusted rate of 4.4%. The seasonably adjusted national
unemployment rate for April, 1999 was 4.3%. In addition, the June 25, 1999
edition of "Economic Observations" which is published by the Pennsylvania
Department of Revenue reported that the seasonally adjusted Commonwealth
unemployment rate for May, 1999 dropped to 3.8%, the lowest rate in nearly 30
years.
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, 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, leases
real 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 payable by 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
III-4
<PAGE>
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 organizations 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. 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.
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.
According to PICA, it has issued $2,371.7 million 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, 1998
shows a surplus of approximately $169.2 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 $1,054.3 million in
Special Revenue bonds outstanding as of April 15, 1999.
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 remain open.
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:
Dom Giordano v. Tom Ridge, Governor, et al.
On February 12, 1999, Dom Giordano, filed in the Commonwealth Court a
petition for review requesting the Commonwealth Court declare that Chapter 5
(relating to sports facilities financing) of the Capital Facilities Debt
Enabling Act ("the Act") violates the Pennsylvania Constitution, and seeking
an order enjoining any action under Chapter 5 of the Act. Named as respondents
are the Commonwealth, the Governor, the Attorney General and the Cities of
Philadelphia and Pittsburgh. Mr. Giordano also filed an application for
special relief in the form of a preliminary injunction which was denied by the
Commonwealth Court. The denial of the preliminary injunction was appealed to
the Supreme Court of Pennsylvania which denied the request for an injunction
pending appeal, and directed the filing of briefs for consideration of the
merits of the appeal. The appeal remains pending before the Supreme Court. The
respondents have filed in Commonwealth Court preliminary objections in the
nature of demurrer, and have asked the Commonwealth Court to dismiss the
action with prejudice. Oral arguments on the respondents' preliminary
objections were held on May 19, 1999.
III-5
<PAGE>
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. As a result, the District Court has 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 district
court has preliminarily approved the settlement. Recently, the remaining
parties, including the Commonwealth, have agreed to settle the claims made
against them. The Commonwealth has agreed to pay $100,000 to settle
plaintiffs' $1.4 million claim for attorneys' fees and to take other actions
in exchange for a full and final release and dismissal of the case against the
Commonwealth parties. The settlement was approved by the District Court on
February 1, 1999.
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 an action in mandamus seeking to compel the
Commonwealth to comply with the Supreme Court's decision in County of
Allegheny. The Court in Pennsylvania State Association of County Commissioners
v. Commonwealth of Pennsylvania 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. The Court has not acted on the petition. 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 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.
III-6
<PAGE>
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.
On November 25, 1998, the First Judicial District Governing Board filed with
the Supreme Court a renewed motion for entry of an order providing emergency
relief. In their renewed motion, the Bonavitacola plaintiffs asked the court
to order the City of Philadelphia to provide funds to the First Judicial
District's courts sufficient to maintain necessary judicial operations through
the end of the fiscal year.
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
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.
III-7
<PAGE>
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 in effect proceeded
forward on behalf of the other banks. Their appeals raise the issues that were
advanced by Fidelity, although not brought to resolution by the Pennsylvania
Supreme Court. By decision dated January 8, 1998, a panel of the Commonwealth
Court issued an order ruling in favor of the Commonwealth, finding no
constitutional violation. Royal Bank filed exceptions which were denied by the
Commonwealth Court on July 30, 1998. Royal Bank appealed to the Pennsylvania
Supreme Court, and on May 25, 1999, the Supreme Court affirmed the order of
the Commonwealth Court.
Pennsylvania Association of Rural and Small Schools (PARSS) v. Ridge
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 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 Commonwealth Court to declare
Pennsylvania's public school funding system to be unconstitutional. 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. On
September 2, 1998, the Supreme Court granted petitioners' application and
directed the filing of briefs. The respondents asked the Supreme Court to
clarify its assumption of jurisdiction. Specifically, the respondents have
asked the Court to state expressly that it will consider only the issue of
justiciability, as requested in the petitioners' application and not other
issues presented in petitioners' motion for post-trial relief pending in the
Commonwealth Court. The Supreme Court denied the respondents' motion and,
therefore, the parties have addressed in their brief all the issues presented
in the petitioners' motion for post-trial relief. The Supreme Court has
indicated that it will not hear oral arguments in the case but will decide the
petitioners' motion based on the briefs alone.
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 additional 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
III-8
<PAGE>
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 conclude the
proceedings within 60 days and to file with the Supreme Court findings of
fact, conclusions of law and a final opinion.
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
III-9
<PAGE>
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 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. The Court has indicated that it will
decide the case based on the briefs and that there will be no oral argument.
Powell v. Ridge
On March 9, 1998, several residents of the City of Philadelphia on behalf of
themselves and their school-aged children, along with the School District of
Philadelphia, the Philadelphia Superintendent of Schools, the chairman of the
Philadelphia Board of Education, the City of Philadelphia, the Mayor of
Philadelphia, and several membership organizations interested in the
Philadelphia public schools, brought suit in the United States District Court
for the Eastern District of Pennsylvania against the Governor, the Secretary
of Education, the chairman of the State Board of Education, and the State
Treasurer. The plaintiffs claimed that the defendants are violating a
regulation of the U.S. Department of Education promulgated under Title VI of
the Civil Rights Act of 1964 in that the Commonwealth's system for funding
public schools has the effect of discriminating on the basis of race. The
plaintiffs asked the court to declare the funding system to be illegal, to
enjoin the defendants from violating the regulation in the future, to award
counsel fees and costs, and to grant such other relief as the court might find
just and proper.
The Philadelphia Federation of Teachers intervened on the side of the
plaintiffs, while several leaders of the Pennsylvania General Assembly
intervened on the side of the defendants. In addition, the U.S. Department of
Justice intervened to defend against a claim made by the legislator
intervenors that a statute waiving states' immunity under the Eleventh
Amendment to the U.S. Constitution for Title VI claims is unconstitutional.
On November 18, 1998, the district court granted in part and denied in part
various motions by the parties. However, because the court found ultimately
that the plaintiffs had failed to state a claim under the Title VI regulation
at issue or under 42 U.S.C.(S)1983, the court dismissed the action in its
entirety with prejudice. An appeal has been filed and fully briefed and the
parties are awaiting scheduling of oral arguments.
Rite Aid of Pennsylvania, Inc. v. Houstoun
On March 24, 1997, Rite Aid of Pennsylvania, Inc. (Rite Aid) filed in the
U.S. District Court for the Eastern District of Pennsylvania a civil action
against the Secretary of Public Welfare (Secretary). In its complaint, Rite
III-10
<PAGE>
Aid alleged that in promulgating regulations on October 1, 1995 governing
payment rates for prescription drugs and related services provided to
recipients of benefits under the Pennsylvania Medical Assistance Program
(Medicaid), the Secretary violated various provisions of Title XIX of the
Social Security Act (commonly known as the Medicaid Act) and regulations of
the U.S. Department of Health and Human Services, as well as provisions of
state law and federal constitutional due process.
On November 3, 1997, the district court granted in part and denied in part
the parties' cross-motions for judgment on the pleadings. The court granted
judgement in favor of the Secretary on Rite Aid's federal due process claim
and Rite Aid's claim that the Secretary had violated a federal regulation (42
CFR (S)447.205) requiring public notice 60 days prior to revising the
reimbursement rates. However, the court denied the Secretary's motion for
judgment on the pleadings regarding Rite Aid's procedural claim under 42
U.S.C. (S)1396(a)(30)(A). The court also granted judgment on the pleadings in
favor of Rite Aid on its claim that the Secretary violated a federal
regulation (42 CFR (S)447.205(c)(4)) requiring the Secretary to identify a
local agency where the proposed reimbursement changes were available for
public view.
After allowing the Pennsylvania Pharmacists Association (PPA) to intervene
as a plaintiff, the district court on May 8, 1998 granted a motion filed by
Rite Aid and PPA to limit its review of the Secretary's compliance with 42
U.S.C. (S)1396(a)(30)(A) "to the information before [the Secretary] at the
time [she] made [her] decision to lower" the reimbursement rates.
On August 31, 1998, the district court granted the motions of Rite Aid and
PPA for summary judgment and denied the cross-motion of the Secretary. The
court declared that the pharmacy reimbursement rates made effective after
October 1, 1995, were adopted by the Secretary in violation of section
1396(a)(30)(A) of the Medicaid Act and enjoined the Secretary from using those
rates to reimburse for any prescription drugs and related services provided to
Medicaid recipients on and after October 1, 1998. The court held that the
Secretary acted arbitrarily and capriciously by failing to consider whether
the revised rates were consistent with the statutory standards of efficiency,
economy, and quality of care.
The Secretary timely appealed the district court's orders, and Rite Aid and
PPA filed cross-appeals. The Secretary filed motions to stay the district
court's injunction order pending appeal. However, the district court denied
the motion on September 18, 1998, and the court of appeals denied the
application for stay on October 26, 1998. However, the court of appeals did
grant the Secretary's motion for expedited appeal.
On March 22, 1999, the U.S. Court of Appeals for the Third Circuit reversed
the district courts' order and remanded the case for further proceedings. The
Court of Appeals held that the Secretary had not violated the Medicaid Act in
adopting rates in 1995, but the court remanded the case to allow the
plaintiffs to pursue any claim which they might have that the rates
substantially do not satisfy the statutory standard prescribed by 42 U.S.C.
(S)1396(a)(30)(A). On April 5, 1999 the plaintiffs filed an application for
rehearing.
As of June 1, 1999, Pennsylvania general obligation bonds were rated 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.
III-11
<PAGE>
EXHIBIT IV
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER
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 can be visualized and 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 some time 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 a 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: These 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,
Al, Baa1, Ba1 and B1.
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."
IV-1
<PAGE>
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 capacity will often be evidenced by 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 with 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, will 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 the requirement for 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 assessment 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 issuer 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 other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-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 of the obligor to meet its financial commitment on the
obligation is extremely strong.
IV-2
<PAGE>
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, B, CCC, CC, C-Debt rated "BB," "B," "CCC," "CC", and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest degree of speculation. While such
debt will likely have some quality and protective 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."
A-3-Issues carrying this designation have 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.
c-The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered
bonds if the long-term credit rating of the issuer is below an investment-
grade level and/or the issuer's bonds are deemed taxable.
p-The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the
debt being rated and indicates that payment of the debt service
requirements is largely or entirely dependent upon the successful, timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of or the risk of default upon failure of such completion. The
investor should exercise his own judgment with respect to such likelihood
and risk.
IV-3
<PAGE>
Continuance of the ratings is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r-The "r" highlights derivative, hybrid, and certain other obligations
that Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit
no volatility or variability in total return.
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 such 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.
Bonds that have 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
IV-4
<PAGE>
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 an 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.
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 three to 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.
IV-5
<PAGE>
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, DD, D-Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis 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.
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:
<TABLE>
<C> <S>
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-l+".
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-l" 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.
</TABLE>
IV-6
<PAGE>
<TABLE>
<C> <S>
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.
</TABLE>
IV-7
<PAGE>
EXHIBIT V
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 its 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 premium, 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 Fund will seek to utilize insurance companies that 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").
There can be no assurance, however, that insurance from insurance carriers
meeting these criteria will be at all times available.
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.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. 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
liquidity are all at very secure levels and are unlikely to be affected by
potential adverse underwriting, investment or cyclical events. 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.
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
V-1
<PAGE>
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.
V-2
<PAGE>
EXHIBIT VI
SECTIONS 86 THROUGH 98 OF CHAPTER 156B
OF THE MASSACHUSETTS GENERAL LAWS
(THE MASSACHUSETTS BUSINESS CORPORATION LAW)
(S) 86. Sections applicable to appraisal; prerequisites
If a corporation proposes to take a corporate action as to which any section
of this chapter provides that a stockholder who objects to such action shall
have the right to demand payment for his shares and an appraisal thereof,
sections eighty-seven to ninety-eight, inclusive, shall apply except as
otherwise specifically provided in any section of this chapter. Except as
provided in sections eighty-two and eighty-three, no stockholder shall have
such right unless (1) he files with the corporation before taking the vote of
the shareholders on such corporate action, written objection to the proposed
action stating that he intends to demand payment for his shares if the action
is taken and (2) his shares are not voted in favor of the proposed action.
(S) 87. Statement of rights of objecting stockholders in notice of meeting;
form
The notice of the meeting of stockholders at which the approval of such
proposed action to be considered shall contain a statement of the rights of
objecting stockholders. The giving of such notice shall not be deemed to
create any rights in any stockholder receiving the same to demand payment for
his stock, and the directors may authorize the inclusion in any such notice of
a statement of opinion by the management as to the existence or non-existence
of the right of stockholders to demand payment for their stock on account of
the proposed corporate action. The notice may be in such form as the directors
or officers calling the meeting deem advisable, but the following form of
notice shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting
and effected by the corporation, any stockholder (1) who files with the
corporation before the taking of the vote on the approval of such action,
written objection to the proposed action stating that he intends to demand
payment for his shares if the action is taken and (2) whose shares are not
voted in favor of such action has or may have the right to demand in
writing from the corporation (or, in the case of a consolidation or merger,
the name of the resulting or surviving corporation shall be inserted),
within twenty days after the date of mailing to him of notice in writing
that the corporate action has become effective, payment for his shares and
an appraisal of the value thereof. Such corporation and any such
stockholder shall in such cases have the rights and duties and shall follow
the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of
the General Laws of Massachusetts."
(S) 88. Notice of effectiveness of action objected to
The corporation taking such action, or in the case of a merger or
consolidation the surviving or resulting corporation, shall, within ten days
after the date on which such corporate action became effective, notify each
stockholder who filed a written objection meeting the requirements of section
eighty-six and whose shares were not voted in favor of the approval of such
action, that the action approved at the meeting of the corporation of which he
is a stockholder has become effective. The giving of such notice shall not be
deemed to create any rights in any stockholder receiving the same to demand
payment for his stock. The notice shall be sent by registered or certified
mail, addressed to the stockholder at his last known address as it appears in
the records of the corporation.
(S) 89. Demand for payment; time for payment
If within twenty days after the date of mailing of a notice under subsection
(e) of section eighty-two, subsection (f) of section eighty-three, or section
eighty-eight, any stockholder to whom the corporation was required to give
such notice shall demand in writing from the corporation taking such action,
or in the case of a consolidation or merger from the resulting or surviving
corporation, payment for his stock, the corporation upon
VI-1
<PAGE>
which such demand is made shall pay to him the fair value of his stock within
thirty days after the expiration of the period during which such demand may be
made.
(S) 90. Demand for determination of value; bill in equity; venue
If during the period of thirty days provided for in section eighty-nine the
corporation upon which such demand is made and any such objecting stockholder
fail to agree as to the value of such stock, such corporation or any such
stockholder may within four months after the expiration of such thirty-day
period demand a determination of the value of the stock of all such objecting
stockholders by a bill in equity filed in the superior court in the county
where the corporation in which such objecting stockholder held stock had or
has its principal office in the commonwealth.
(S) 91. Parties to suit to determine value; service
If the bill is filed by the corporation, it shall name as parties respondent
all stockholders who have demanded payment for their shares and with whom the
corporation has not reached agreement as to the value thereof. If the bill is
filed by a stockholder, he shall bring the bill in his own behalf and in
behalf of all other stockholders who have demanded payment for their shares
and with whom the corporation has not reached agreement as to the value
thereof, and service of the bill shall be made upon the corporation by
subpoena with a copy of the bill annexed. The corporation shall file with its
answer a duly verified list of all such other stockholders, and such
stockholders shall thereupon be deemed to have been added as parties to the
bill. The corporation shall give notice in such form and returnable on such
date as the court shall order to each stockholder party to the bill by
registered or certified mail, addressed to the last known address of such
stockholder as shown in the records of the corporation, and the court may
order such additional notice by publication or otherwise as it deems
advisable. Each stockholder who makes demand as provided in section eighty-
nine shall be deemed to have consented to the provisions of this section
relating to notice, and the giving of notice by the corporation to any such
stockholder in compliance with the order of the court shall be sufficient
service of process on him. Failure to give notice to any stockholder making
demand shall not invalidate the proceedings as to other stockholders to whom
notice was properly given, and the court may at any time before the entry of a
final decree make supplementary orders of notice.
(S) 92. Decree determining value and ordering payment; valuation date
After hearing the court shall enter a decree determining the fair value of
the stock of those stockholders who have become entitled to the valuation of
and payment for their shares, and shall order the corporation to make payment
of such value, together with interest, if any, as hereinafter provided to the
stockholders entitled thereto upon the transfer by them to the corporation of
the certificates representing such stock if certificated or, if
uncertificated, upon receipt of the instruction transferring such stock to the
corporation. For this purpose, the value of the shares shall be determined as
of the day preceding the date of the vote approving the proposed corporate
action and shall be exclusive of any element of value arising from the
expectation or accomplishment of the proposed corporate action.
(S) 93. Reference to special master
The court in its discretion may refer the bill or any question arising
thereunder to a special master to hear the parties, make findings and report
the same to the court, all in accordance with the usual practice in suits in
equity in the superior court.
(S) 94. Notation on stock certificates of pendency of bill
On motion the court may order stockholder parties to the bill to submit
their certificates of stock to the corporation for the notation thereon of the
pendency of the bill and may order the corporation to note such pendency in
its records with respect to any uncertificated shares held by such stockholder
parties, and may on motion dismiss the bill as to any stockholder who fails to
comply with such order.
VI-2
<PAGE>
(S) 95. Costs; interest
The costs of the bill, including the reasonable compensation and expenses of
any master appointed by the court, but exclusive of fees of counsel or of
experts retained by any party, shall be determined by the court and taxed upon
the parties to the bill, or any of them, in such manner as appears to be
equitable, except that all costs of giving notice to stockholders as provided
in this chapter shall be paid by the corporation. Interest shall be paid upon
any award from the date of the vote approving the proposed corporate action,
and the court may on application of any interested party determine the amount
of interest to be paid in the case of any stockholder.
(S) 96. Dividends and voting rights after demand for payment
Any stockholder who has demanded payment for his stock as provided in this
chapter shall not thereafter be entitled to notice of any meeting of
stockholders or to vote such stock for any purpose and shall not be entitled
to the payment of dividends or other distribution on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the date of the vote, approving the proposed corporate
action) unless:
1) A bill shall not be filed within the time provided in section ninety;
2) A bill, if filed, shall be dismissed as to such stockholder; or
3) Such stockholder shall with the written approval of the corporation,
or in the case of a consolidation or merger, the resulting or surviving
corporation, deliver to it a written withdrawal of his objections to and an
acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
(S) 97. Status of shares paid for
The shares of the corporation paid for by the corporation pursuant to the
provisions of this chapter shall have the status of treasury stock, or in the
case of a consolidation or merger the shares or the securities of the
resulting or surviving corporation into which the shares of such objecting
stockholder would have been converted had he not objected to such
consolidation or merger shall have the status of treasury stock or securities.
(S) 98. Exclusive remedy; exception
The enforcement by a stockholder of his right to receive payment for his
shares in the manner provided in this chapter shall be an exclusive remedy
except that this chapter shall not exclude in the right of such stockholder to
bring or maintain an appropriate proceeding to obtain relief on the ground
that such corporate action will be or is illegal or fraudulent as to him.
VI-3
<PAGE>
[Proxy Card Front]
COMMON SHARES
MUNIYIELD PENNSYLVANIA FUND
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and
Alice A. Pellegrino as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the Common Shares of MuniYield
Pennsylvania Fund (the "Fund") held of record by the undersigned on October
20, 1999 at a Special Meeting of Shareholders of the Fund to be held on
December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned shareholder. If no direction is made, this
proxy will be voted "FOR" item 1.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniVest Pennsylvania Insured Fund and
MuniHoldings Pennsylvania Insured Fund.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name
by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
<PAGE>
[Proxy Card Front]
AUCTION MARKET
PREFERRED SHARES
MUNIYIELD PENNSYLVANIA FUND
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all the Auction Market Preferred Shares of MuniYield
Pennsylvania Fund (the "Fund") held of record by the undersigned on October 20,
1999 at a Special Meeting of Shareholders of the Fund to be held on December 15,
1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned shareholder. If no direction is made, this proxy
will be voted "FOR" item 1.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniVest Pennsylvania Insured Fund and
MuniHoldings Pennsylvania Insured Fund.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed Auction Market Preferred Shares, in the same proportion as
votes cast by holders of Auction Market Preferred Shares, who have
responded to this proxy solicitation.
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name
by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
<PAGE>
[Proxy Card Front]
COMMON SHARES
MUNIVEST PENNSYLVANIA INSURED FUND
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and
Alice A. Pellegrino as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the Common Shares of MuniVest
Pennsylvania Insured Fund (the "Fund") held of record by the undersigned on
October 20, 1999 at a Special Meeting of Shareholders of the Fund to be
held on December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned shareholder. If no direction is made, this
proxy will be voted "FOR" item 1.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniYield Pennsylvania Fund and
MuniHoldings Pennsylvania Insured Fund.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name
by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
<PAGE>
[Proxy Card Front]
AUCTION MARKET
PREFERRED SHARES
MUNIVEST PENNSYLVANIA INSURED FUND
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all the Auction Market Preferred Shares of MuniVest
Pennsylvania Insured Fund (the "Fund") held of record by the undersigned on
October 20, 1999 at a Special Meeting of Shareholders of the Fund to be held on
December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned shareholder. If no direction is made, this proxy
will be voted "FOR" item 1.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniYield Pennsylvania Fund and
MuniHoldings Pennsylvania Insured Fund.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed Auction Market Preferred Shares, in the same proportion as
votes cast by holders of Auction Market Preferred Shares, who have
responded to this proxy solicitation.
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name
by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
<PAGE>
[Proxy Card Front]
COMMON SHARES
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and
Alice A. Pellegrino as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the Common Shares of MuniHoldings
Pennsylvania Insured Fund (the "Fund") held of record by the undersigned on
October 20, 1999 at the Annual Meeting of Shareholders of the Fund to be
held on December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned shareholder. If no direction is made, this
proxy will be voted "FOR" items 1, 2 and 3.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniYield Pennsylvania Fund and MuniVest
Pennsylvania Insured Fund.
FOR [_] AGAINST [_] ABSTAIN [_]
2. ELECTION OF TRUSTEES
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) [_] to vote for all nominees
listed below [_]
(Instruction: to withold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James H. Bodurtha, Terry K. Glenn, Herbert I. London, Robert R. Martin,
Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name
by authorized persons.
<PAGE>
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
<PAGE>
[Proxy Card Front]
AUCTION MARKET
PREFERRED SHARES
MUNIHOLDINGS PENNSYLVANIA INSURED FUND
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all the Auction Market Preferred Shares of MuniHoldings
Pennsylvania Insured Fund (the "Fund") held of record by the undersigned on
October 20, 1999 at the Annual Meeting of Shareholders of the Fund to be held on
December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned shareholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniYield Pennsylvania Fund and MuniVest
Pennsylvania Insured Fund.
FOR [_] AGAINST [_] ABSTAIN [_]
2. ELECTION OF TRUSTEES
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) [_] to vote for all nominees
listed below [_]
(Instruction: to withold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.) James H.
Bodurtha, Terry K. Glenn, Herbert I. London, Robert R. Martin, Joseph L.
May, Andre F. Perold, Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed Auction Market Preferred Shares, in the same proportion as
votes cast by holders of Auction Market Preferred Shares, who have
responded to this proxy solicitation.
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as
<PAGE>
executor, administrator, trustee or guardian, please give
full title as such. If a corporation, please sign in full
corporate name by president or other authorized officer. If
a partnership, please sign in partnership name by authorized
persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
<PAGE>
PART C
OTHER INFORMATION
Item 15. Indemnification.
Section 5.3 of the Registrant's Declaration of Trust, Article VI of the
Registrant's By-Laws and the Investment Advisory Agreement filed as Exhibit 6
provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be provided to directors, 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 director, 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 seven of the Purchase Agreement, a form of
which is filed as Exhibit 7(a) hereto, for provisions relating to the
indemnification of the Underwriter.
Item 16. Exhibits.
<TABLE>
<C> <S>
1(a) --Declaration of Trust of the Registrant, dated August 24, 1992.*
(b) --Form of Certificate of Designation creating AMPS.*
(c) --Form of Amendment to Certificate of Designation.
(d) --Form of Certificate of Designation creating series B AMPS.
2 --By-Laws of the Registrant.*
3 --Not Applicable.
4 --Form of Agreement and Plan of Reorganization among the Registrant and
MuniVest Pennsylvania Insured Fund and MuniHoldings Pennsylvania
Insured Fund (included in Exhibit II to the Proxy Statement and
Prospectus contained in this Registration Statement).
5(a) --Copies of instruments defining the rights of shareholders, including
the relevant portions of the Declaration of Trust and the By-Laws of
the Registrant.(d)
(b) --Specimen certificate for the Common Shares of the Registrant.*
(c) --Form of specimen certificate for the AMPS of the Registrant.*
6 --Form of Investment Advisory Agreement between Registrant and Fund
Asset Management, L.P.(a)
7(a) --Form of Purchase Agreement for the Common Shares.*
(b) --Form of Purchase Agreement for the AMPS.*
(c) --Form of Merrill Lynch Standard Dealer Agreement.*
8 --Not applicable.
9 --Custodian Agreement between the Registrant and State Street Bank and
Trust Company.*
10 --Form of Dividend Reinvestment Plan.*
11 --Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.*
12 --Private Letter Ruling from the Internal Revenue Service.*
13(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement between the Registrant and State Street Bank and
Trust Company.*
(b) --Form of Auction Agent Agreement between the Registrant and IBJ
Whitehall Bank & Trust Company.*
(c) --Form of Broker-Dealer Agreement.*
(d) --Form of Letter of Representations.*
14(a) --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
(b) --Consent of Deloitte & Touche LLP, independent auditors for MuniVest
Pennsylvania.
</TABLE>
C-1
<PAGE>
<TABLE>
<C> <S>
15 --Not applicable.
16 --Power of Attorney (Included on the signature page of this Registration
Statement).
</TABLE>
- --------
* To be filed by amendment.
(d) Reference is made to Article V (section 3.4), Article VI (sections 1, 2,
4, 5 and 7), Article VIII, Article IX, and Article X of the Registrant's
Declaration of Trust 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.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public reoffering of
the securities registered through use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
as amended, the reoffering prospectus will contain information called for by
the applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by other items of the
applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the offering of
securities at that time shall be deemed to be the initial bona fide offering
of them.
(3) The Registrant undertakes to file, by post-effective amendment, a copy
of the Internal Revenue Service private letter ruling applied for or an
opinion of counsel as to certain tax matters, within a reasonable time after
receipt of such ruling or opinion.
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the Township of Plainsboro and
State of New Jersey, on the 4th day of October, 1999.
MuniYield Pennsylvania Fund
(Registrant)
/s/ Terry K. Glenn
By: _________________________________
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K. Glenn,
Donald C. Burke and Alice A. Pellegrino, or any of them, as attorney-in-fact,
to sign on his behalf, individually and in each capacity stated below, any
amendments to this Registration Statement (including post-effective
amendments) and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn President and Trustee October 4, 1999
______________________________________ (Principal Executive
(Terry K. Glenn) Officer)
/s/ Donald C. Burke Treasurer (Principal October 4, 1999
______________________________________ Financial and Accounting
(Donald C. Burke) Officer)
/s/ Donald Cecil Trustee October 4, 1999
______________________________________
(Donald C. Cecil)
/s/ M. Colyer Crum Trustee October 4, 1999
______________________________________
(M. Colyer Crum)
/s/ Edward H. Meyer Trustee October 4, 1999
______________________________________
(Edward H. Meyer)
/s/ Jack B. Sunderland Trustee October 4, 1999
______________________________________
(Jack B. Sunderland)
/s/ J. Thomas Touchton Trustee October 4, 1999
______________________________________
(J. Thomas Touchton)
/s/ Fred G. Weiss Trustee October 4, 1999
______________________________________
(Fred G. Weiss)
/s/ Arthur Zeikel Trustee October 4, 1999
______________________________________
(Arthur Zeikel)
</TABLE>
C-3
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C> <C>
1(c) --Form of Amendment to Certificate of Designation.
(d) --Form of Certificate of Designation creating Series B AMPS.
14(a) --Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
(b) --Consent of Deloitte & Touche LLP, independent auditors for MuniVest
Pennsylvania Insured Fund.
</TABLE>
1
<PAGE>
Exhibit 1 (c)
MUNIYIELD PENNSYLVANIA INSURED FUND
AMENDMENT TO
CERTIFICATE OF DESIGNATION
DATED NOVEMBER 23, 1992,
AS AMENDED NOVEMBER 30, 1994,
ESTABLISHING POWERS, QUALIFICATIONS, RIGHTS AND
PREFERENCES OF THE AUCTION MARKET PREFERRED SHARES
("AMPS(R)")
The undersigned hereby certifies that she is the Secretary of MuniYield
Pennsylvania Insured Fund (the "Trust"), an unincorporated business trust
organized and existing under the laws of the Commonwealth of Massachusetts, and
that this Amendment to the Certificate of Designation dated November 23, 1992,
as amended November 30, 1994 (the "Certificate"), has been adopted by the Board
of trustees of the Trust in a manner provided in the Trust's Declaration of
Trust.
VOTED: WHEREAS the Board of Trustees of MuniYield Pennsylvania Insured
Fund (the "Trust") is expressly empowered pursuant to Section 6.1 of
the Trust's Declaration of Trust to authorize the issuance of
preferred shares of the Trust in one or more series, with such
preferences, powers, restrictions, limitations or qualifications as
determined by the Board of Trustees and as set forth in the resolution
or resolutions providing for the issuance of such preferred shares;
WHEREAS, pursuant to the Certificate the Board of Trustees did
thereby authorize the issuance of a series of 1,600 preferred shares,
par value $0.05 per share, liquidation preference $25,000 per share
plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) designated Auction Market
Preferred Shares;
WHEREAS, the Board of Trustees has determined that it is in the
best interests of the Trust to adopt an investment policy whereby
under normal circumstances at least 80% of the Trust'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;
WHEREAS, the Board of Trustees has amended the Trust's
Declaration of Trust to change the name of the Trust from "MuniYield
Pennsylvania Fund" to "MuniYield Pennsylvania Insured Fund";
_________________________
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
WHEREAS, the Board of Trustees contemplates the issuance of an
additional series of Auction Market Preferred Shares;
NOW THEREFORE, the Board of Trustees does hereby amend the
Certificate of Designation, having determined that such amendments do
not adversely affect the rights of any Shareholder of the Trust with
respect to which the amendments are applicable pursuant to Section
10.3(a) of the Declaration of Trust, as follows:
1. The first paragraph under Designation is deleted in its
entirety and replaced by the following:
A series of 1600 shares of preferred shares, par value $.05 per
share, liquidation preference $25,000 per share plus an amount equal
to accumulated but unpaid dividends (whether or not earned or
declared) thereon, is hereby designated "Auction Market Preferred
Shares, Series A" and shall consist of 800 shares initially authorized
for issuance pursuant to the Certificate of Designation dated November
23, 1992 (which, at the time of such authorization, had a par value of
$.10 per share, and a liquidation preference of $50,000 per share,
plus an amount equal to accumulated but unpaid dividends whether or
not earned or declared thereon) and an additional 800 shares caused by
the division of each such initially issued share into two Auction
Market Preferred Shares, Series A (sometimes referred to herein as
"AMPS"); have an Applicable Rate and Dividend Payment Dates as set
forth herein; and have such other preferences, voting powers,
limitations as to dividends, qualifications and terms and conditions
of redemption as are set forth in this Certificate of Designation. The
Action Market Preferred Shares, Series A shall constitute a separate
series of preferred shares of the Trust, and each Auction Market
Preferred Share, Series A shall be identical.
2. The definition of "AMPS" in Section 1(a) is deleted in its
entirety and replaced with the following:
"AMPS" means the Auction Market Preferred Shares, Series A.
3. The definition of "AMPS Basic Maintenance Amount" in Section
1(a) is deleted in its entirety and replaced with the following:
"AMPS Basic Maintenance Amount," as of any Valuation Date, means
the dollar amount equal to (i) the sum of (A) the product of the
number of AMPS and Other AMPS Outstanding on such Valuation Date
multiplied by the sum of (a) $25,000 and (b) any applicable redemption
premium attributable to the designation of a Premium Call Period; (B)
the aggregate amount of cash dividends (whether or not earned or
declared) that will have accumulated for each share of AMPS and Other
AMPS Outstanding, in each case, to (but not including)
2
<PAGE>
the end of the current Dividend Period that follows such Valuation
Date in the event the then current Dividend Period will end within 49
calendar days of such Valuation Date or through the 49th day after
such Valuation Date in the event the then current Dividend Period will
not end within 49 calendar days of such Valuation Date; (C) in the
event the then current Dividend Period will end within 49 calendar
days of such Valuation Date, the aggregate amount of cash dividends
that would accumulate at the Maximum Applicable Rate applicable to a
Dividend Period of 28 or fewer days on any AMPS and Other AMPS
Outstanding from the end of such Dividend Period through the 49th day
after such Valuation Date, multiplied by the larger of the Moody's
Volatility Factor and the S&P Volatility Factor, determined from time
to time by Moody's and S&P, respectively (except that if such
Valuation Date occurs during a Non-Payment Period, the cash dividend
for purposes of calculation would accumulate at the then current Non-
Payment Period Rate); (D) the amount of anticipated expenses of the
Trust for the 90 days subsequent to such Valuation Date (including any
premiums payable with respect to a Policy); (E) the amount of the
Trust's Maximum Potential Additional Dividend Liability as of such
Valuation Date; and (F) any current liabilities as of such Valuation
Date to the extent not reflected in any of (i)(A) through (i)(E)
(including, without limitation, and immediately upon determination,
any amounts due and payable by the Trust pursuant to repurchase
agreements and any amounts payable for Pennsylvania Municipal Bonds or
Municipal Bonds purchased as of such Valuation Date) less (ii) either
(A) the Discounted Value of any of the Trust's assets, or (B) the face
value of any of the Trust's assets if such assets mature prior to or
on the date of redemption of AMPS or payment of a liability and are
either securities issued or guaranteed by the United States Government
or Deposit Securities, in both cases irrevocably deposited by the
Trust for the payment of the amount needed to redeem AMPS subject to
redemption or to satisfy any of (i)(B) through (i)(F). For Moody's and
S&P, the Trust shall include as a liability an amount calculated semi-
annually equal to 150% of the estimated cost of obtaining other
insurance guaranteeing the timely payment of interest on a Moody's
Eligible Asset or S&P Eligible Asset and principal thereof to maturity
with respect to Moody's Eligible Assets and S&P Eligible Assets that
(i) are covered by a Policy which provides the Trust with the option
to obtain such other insurance and (ii) are discounted by a Moody's
Discount Factor or an S&P Discount Factor determined, as the case may
be, by reference to the insurance claims-paying ability rating of the
issuer of such Policy.
4. The following definition is added to Section 1(a):
"Fitch" means Fitch IBCA, Inc. or its successors.
5. The following definition is added to Section 1(a):
3
<PAGE>
"Inverse Floaters" means trust certificates or other instruments
evidencing interests in one or more Pennsylvania Municipal Bonds that
qualify as S&P Eligible Assets (and are not part of a private
placement of Pennsylvania Municipal Bonds and satisfy the issues and
original issue size or ratings requirements of clause (vi) of the
definition of S&P Eligible Assets. The interest rates on which are
adjusted at short term intervals on a basis that is inverse to the
simultaneous readjustment of the interest rates on corresponding
floating rate trust certificates or other instruments issued by the
same issuer, provided that the ratio of the aggregate dollar amount of
floating rate instruments to inverse floating rate instruments issued
by the same issuer does not exceed one to one at their time of
original issuance unless the floating rate instruments have only one
reset remaining until maturity.
6. The definition of "Moody's Discount Factor" in Section 1(a)
is deleted in its entirety and replaced with the following:
"Moody's Discount Factor" means, for purposes of determining the
Discounted Value of any Pennsylvania Municipal Bond or Municipal Bond
which constitutes a Moody's Eligible Asset, the percentage determined
by reference to (a)(i) the rating by Moody's or S&P on such Bond or
(ii) in the event the Moody's Eligible Asset is insured under a Policy
and the terms of the Policy permit the Trust, at its option, to obtain
other insurance guaranteeing the timely payment of interest on such
Moody's Eligible Asset and principal thereof to maturity, the Moody's
insurance claims-paying ability rating of the issuer of the Policy or
(iii) in the event the Moody's Eligible Asset is insured under an
insurance policy which guarantees the timely payment of interest on
such Moody's Eligible Asset and principal thereof to maturity, the
Moody's insurance claims-paying ability rating of the issuer of the
insurance policy (provided that for purposes of clauses (ii) and (iii)
if the insurance claims-paying ability of an issuer of a Policy or
insurance policy is not rated by Moody's but is rated by S&P, such
issuer shall be deemed to have a Moody's insurance claims-paying
ability rating which is two full categories lower than the S&P
insurance claims-paying ability rating) and (b) the Moody's Exposure
Period, in accordance with the table set forth below:
<TABLE>
<CAPTION>
Rating Category
--------------------------------------------
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG-1*** SP-1+***
----------------------- ----- ---- ---- ----- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less.............................. 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven weeks..................... 154 164 173 205 235 137 149
9 weeks or less but
greater than eight weeks..................... 158 169 179 209 242 138 150
</TABLE>
- ---------------
* Moody's rating.
** Pennsylvania Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
*** Pennsylvania Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or
P-1 or, if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not mature
or have a demand feature at par exercisable within the
4
<PAGE>
Moody's Exposure Period and which do not have a long-term rating. For the
purposes of the definition of Moody's Eligible Assets, these securities will
have an assumed rating of "A" by Moody's.
; provided, however, in the event a Moody's Discount Factor applicable
to a Moody's Eligible Asset is determined by reference to an insurance
claims-paying ability rating in accordance with clause (a)(ii) or
(a)(iii), such Moody's Discount Factor shall be increased by an amount
equal to 50% of the difference between (a) the percentage set forth in
the foregoing table under the applicable rating category and (b) the
percentage set forth in the foregoing table under the rating category
which is one category lower than the applicable rating category.
Notwithstanding the foregoing, (i) a 102% Moody's Discount
Factor will be applied to short-term Pennsylvania Municipal Bonds and
short-term Municipal Bonds, so long as such Pennsylvania Municipal
Bonds and Municipal Bonds are rated at least MIG-1, VMIG-1 or P-1 by
Moody's and mature or have a demand feature at par exercisable within
the Moody's Exposure Period, and the Moody's Discount Factor for such
Bonds will be 125% if such Bonds are not rated by Moody's but are
rated A-1+ or SP-1+ or AA by S&P and mature or have a demand feature
at par exercisable within the Moody's Exposure Period, and (ii) no
Moody's Discount Factor will be applied to cash or to Receivables for
Pennsylvania Municipal Bonds or Municipal Bonds Sold. "Receivables for
Pennsylvania Municipal Bonds or Municipal Bonds Sold," for purposes of
calculating Moody's Eligible Assets as of any Valuation Date, means no
more than the aggregate of the following: (i) the book value of
receivables for Pennsylvania Municipal Bonds or Municipal Bonds sold
as of or prior to such Valuation Date if such receivables are due
within five Business Days of such Valuation Date, and if the trades
which generated such receivables are (x) settled through clearing
house firms with respect to which the Trust has received prior written
authorization from Moody's or (y) with counterparties having a Moody's
long-term debt rating of at least Baa3; and (ii) the Moody's
Discounted Value of Pennsylvania Municipal Bonds or Municipal Bonds
sold as of or prior to such Valuation Date which generated
receivables, if such receivables are due within five Business Days of
such Valuation Date but do not comply with either of conditions (x) or
(y) of the preceding clause (i).
7. The following definition is added to Section 1(a):
"Policy" means an insurance policy purchased by the Trust which
guarantees the payment of principal and interest on specified
Pennsylvania Municipal Bonds or Municipal Bonds during the period in
which such Pennsylvania Municipal Bonds or Municipal Bonds are owned
by the Trust; provided, however, that, as long as the AMPS are rated
by Moody's and S&P, the Trust will not obtain any Policy unless
Moody's and S&P advise the Trust in
5
<PAGE>
writing that the purchase of such Policy will not adversely affect
their then-current rating on the AMPS.
8. The definition of "S&P Discount Factor" in Section 1(a) is
deleted in its entirety and replaced with the following:
"S&P Discount Factor" means, for purposes of determining the
Discounted Value of any Pennsylvania Municipal Bond which constitutes
an S&P Eligible Asset, the percentage determined by reference to
(a)(i) the rating by S&P, Moody's or Fitch on such Bond or (ii) in the
event the Pennsylvania Municipal Bond is insured under a Policy and
the terms of the Policy permit the Trust, at its option, to obtain
other permanent insurance guaranteeing the timely payment of interest
on such Pennsylvania Municipal Bond and principal thereof to maturity,
the S&P insurance claims-paying ability rating of the issuer of the
Policy or (iii) in the event the Pennsylvania Municipal Bond is
insured under an insurance policy which guarantees the timely payment
of interest on such Pennsylvania Municipal Bond and principal thereof
to maturity, the S&P insurance claims-paying ability rating of the
issuer of the insurance policy and (b) the S&P Exposure Period, in
accordance with the tables set forth below:
<TABLE>
<CAPTION>
For Pennsylvania Municipal Bonds:
---------------------------------
Rating Category
----------------------------------
S&P Exposure Period AAA* AA* A* BBB*
------------------- ----------------------------------
<S> <C> <C> <C> <C>
45 Business Days................... 210% 215% 230% 270%
25 Business Days................... 190 195 210 250
10 Business Days................... 175 180 195 235
7 Business Days................... 170 175 190 230
3 Business Days................... 150 155 170 210
</TABLE>
______________
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Pennsylvania Municipal Bonds will be 115%, so long as such
Pennsylvania Municipal Bonds are rated A-1+ or SP-1+ by S&P and mature
or have a demand feature exercisable in 30 days or less, or 120% so
long as such Pennsylvania Municipal Bonds are rated A-1 or SP-1 by S&P
and mature or have a demand feature exercisable in 30 days or less, or
125% if such Pennsylvania Municipal Bonds are not rated by S&P but are
rated VMIG-1, P-1 or MIG-1 by Moody's or F-1 + by Fitch; provided,
however, such short-term Pennsylvania Municipal Bonds rated by Moody's
or Fitch but not rated by S&P having a demand feature exercisable in
30 days or less must be backed by a letter of credit, liquidity
facility or guarantee from a bank or other financial institution
having a short-term rating of at least A-1+ from S&P; and further
provided that such short-term Pennsylvania Municipal Bonds rated by
Moody's or Fitch but not rated by S&P may comprise no more than 50% of
short-term Pennsylvania Municipal Bonds
6
<PAGE>
that qualify as S&P Eligible Assets, (ii) the S&P Discount Factor for
Receivables for Pennsylvania Municipal Bonds Sold that are due in more
than five Business Days from such Valuation Date will be the S&P
Discount Factor applicable to the Pennsylvania Municipal Bonds sold,
and (iii) no S&P Discount Factor will be applied to cash or to
Receivables for Pennsylvania Municipal Bonds Sold if such receivables
are due within five Business Days of such Valuation Date. "Receivables
for Pennsylvania Municipal Bonds Sold," for purposes of calculating
S&P Eligible Assets as of any Valuation Date, means the book value of
receivables for Pennsylvania Municipal Bonds sold as of or prior to
such Valuation Date. The Trust may adopt S&P Discount Factors for
Municipal Bonds other than Pennsylvania Municipal Bonds provided that
S&P advises the Trust in writing that such action will not adversely
affect its then current rating on the AMPS. For purposes of the
foregoing, Anticipation Notes rated SP-1 or, if not rated by S&P,
rated VMIG-1 by Moody's or F-1 + by Fitch, which do not mature or have
a demand feature exercisable in 30 days and which do not have a long-
term rating, shall be considered to be short-term Pennsylvania
Municipal Bonds.
9. The definition of "S&P Eligible Asset" in Section 1(a) is
deleted in its entirety and replaced with the following:
"S&P Eligible Asset" means cash, Receivables for Pennsylvania
Municipal Bonds Sold or a Pennsylvania Municipal Bond that (i) is
interest bearing and pays interest at least semi-annually; (ii) is
payable with respect to principal and interest in United States
Dollars; (iii) is publicly rated BBB or higher by S&P or, except in
the case of Anticipation Notes that are grant anticipation notes or
bond anticipation notes which must be rated by S&P to be included in
S&P Eligible Assets, if not rated by S&P but rated by Moody's or
Fitch, is rated at least A by Moody's or Fitch (provided that such
Moody's-rated or Fitch-rated Pennsylvania Municipal Bonds will be
included in S&P Eligible Assets only to the extent the Market Value of
such Pennsylvania Municipal Bonds does not exceed 50% of the aggregate
Market Value of the S&P Eligible Assets; and further provided that,
for purposes of determining the S&P Discount Factor applicable to any
such Moody's-rated or Fitch-rated Pennsylvania Municipal Bond, such
Pennsylvania Municipal Bond will be deemed to have an S&P rating which
is one full rating category lower than its Moody's rating or Fitch
rating); (iv) is not subject to a covered call or covered put option
written by the Trust; (v) except for Inverse Floaters, is not part of
a private placement of Pennsylvania Municipal Bonds; and (vi) except
for Inverse Floaters, is part of an issue of Pennsylvania Municipal
Bonds with an original issue size of at least $10 million or, if of an
issue with an original issue size below $10 million (but in no event
below $5 million), is either (a) issued by an issuer with a total of
at least $25 million of securities outstanding or (b) rated at least A
by S&P with all such Pennsylvania Municipal Bonds not constituting
more than 20% of the aggregate Market Value of S&P Eligible Assets.
Notwithstanding the foregoing:
7
<PAGE>
(1) Pennsylvania Municipal Bonds of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only
to the extent the Market Value of such Pennsylvania Municipal Bonds
does not exceed 10% of the aggregate Market Value of the S&P Eligible
Assets, provided that 2% is added to the applicable S&P Discount
Factor for every 1% by which the Market Value of such Pennsylvania
Municipal Bonds exceeds 5% of the aggregate Market Value of the S&P
Eligible Assets;
(2) Pennsylvania Municipal Bonds of any one issue type category
(as described below) will be considered S&P Eligible Assets only to
the extent the Market Value of such Bonds does not exceed 25% of the
aggregate Market Value of S&P Eligible Assets, except that
Pennsylvania Municipal Bonds falling within the utility issue type
category will be broken down into three sub-categories (as described
below) and such Pennsylvania Municipal Bonds will be considered S&P
Eligible Assets to the extent the Market Value of such Bonds in each
such sub-category does not exceed 25% of the aggregate Market Value of
S&P Eligible Assets and the Market Value of such Bonds in all three
sub-categories combined does not exceed 60% of the aggregate Market
Value of S&P Eligible Assets, except that Pennsylvania Municipal Bonds
falling within the transportation issue type category will be broken
down into two sub-categories (as described below) and such
Pennsylvania Municipal Bonds will be considered S&P Eligible Assets to
the extent the Market Value of such Bonds in both sub-categories
combined (as described below) does not exceed 40% of the aggregate
Market Value of S&P Eligible Assets and except that Pennsylvania
Municipal Bonds falling within the general obligation issue type
category will be considered S&P Eligible Assets to the extent the
Market Value of such Bonds does not exceed 50% of the aggregate Market
Value of S&P Eligible Assets. For purposes of the issue type category
requirement described above, Pennsylvania Municipal Bonds will be
classified within one of the following categories: health care issues,
housing issues, educational facilities issues, student loan issues,
transportation issues, industrial development bond issues, utility
issues, general obligation issues, lease obligations, escrowed bonds
and other issues not falling within one of the aforementioned
categories. The general obligation issue type category includes any
issuer that is directly or indirectly guaranteed by the Commonwealth
of Pennsylvania or its political subdivisions. Utility issuers are
included in the general obligation issue type category if the issuer
is directly or indirectly guaranteed by the Commonwealth of
Pennsylvania or its political subdivisions. For purposes of the issue
type category requirement described above, Pennsylvania Municipal
Bonds in the utility issue type category will be classified within one
of the three following sub-categories: (i) electric, gas and
combination issues (if the combination issue includes an electric
issue), (ii) water and sewer utilities and combination issues (if the
combination issue does not include an electric issue), and (iii)
irrigation, resource recovery, solid waste and other utilities,
provided that Pennsylvania Municipal Bonds included in this sub-
category (iii) must be rated by S&P in order to be included in S&P
Eligible Assets. For purposes of the issue type category requirement
described above,
8
<PAGE>
Pennsylvania Municipal Bonds in the transportation issue type category
will be classified within one of the two following sub-categories: (i)
streets and highways, toll roads, bridges and tunnels, airports and
multi-purpose port authorities (multiple revenue streams generated by
toll roads, airports, real estate, bridges), (ii) mass transit,
parking, seaports and others. Exposure to transportation sub-category
(i) is limited to 25% of the aggregate Market Value of S&P Eligible
Assets, provided, however, exposure to transportation sub-category (i)
can exceed the 25% limit to the extent that exposure to transportation
sub-category (ii) is reduced, for a total exposure up to and not
exceeding 40% of the aggregate Market Value of S&P Eligible Assets for
the transportation issue type category; and
(3) Pennsylvania Municipal Bonds which are escrow bonds or
defeased bonds may compose up to 100% of the aggregate Market Value of
S&P Eligible Assets if such Bonds initially are assigned a rating by
S&P in accordance with S&P's legal defeasance criteria or rerated by
S&P as economic defeased escrow bonds and assigned an AAA rating.
Pennsylvania Municipal Bonds may be rated as escrow bonds by another
nationally recognized rating agency or rerated as an escrow bond and
assigned the equivalent of an S&P AAA rating, provided that such
equivalent rated Bonds are limited to 50% of the aggregate Market
Value of S&P Eligible Assets and are deemed to have an AA S&P rating
for purposes of determining the S&P Discount Factor applicable to such
Pennsylvania Municipal Bonds. The limitations on Pennsylvania
Municipal Bonds of any one issuer in clause (1) above are not
applicable to escrow bonds, however, economically defeased bonds that
are either initially rated or rerated by S&P or another nationally
recognized rating agency and assigned the same rating level as the
issuer of the Bonds will remain in its original issue type category
set forth in clause (2) above. Pennsylvania Municipal Bonds that are
legally defeased and secured by securities issued or guaranteed by the
United States Government are not required to meet the minimum issuance
size requirement set forth above.
The Trust may include Municipal Bonds other than Pennsylvania
Municipal Bonds as S&P Eligible Assets pursuant to guidelines and
restrictions to be established by S&P provided that S&P advises the
Trust in writing that such action will not adversely affect its then
current rating on the AMPS.
10. Section 1(b) is amended by adding the term "Inverse
Floating" between the terms "Initial Margin" and "Market Value."
9
<PAGE>
Deleted the ________ day of ________________, 2000
______________________________
Alice A. Pelligrino
Secretary
10
<PAGE>
EXHIBIT 1(d)
MUNIYIELD PENNSYLVANIA INSURED FUND
CERTIFICATE OF DESIGNATION DATED _____________, 2000
ESTABLISHING POWERS, QUALIFICATIONS, RIGHTS
AND PREFERENCES OF ONE SERIES OF AUCTION MARKET
PREFERRED SHARES ("AMPS(R)")
WHEREAS the Board of Trustees of MuniYield Pennsylvania Insured Fund (the
"Trust") is expressly empowered pursuant to Section 6.1 of the Trust's
Declaration of Trust to authorize the issuance of preferred shares of the Trust
in one or more series, with such preferences, powers, restrictions, limitations
or qualifications as determined by the Board of Trustees and as set forth in the
resolution or resolutions providing for the issuance of such preferred shares.
AND WHEREAS the Board of Trustees has determined that it is in the best
interests of the Trust to issue one series of such preferred shares.
NOW THEREFORE, the Board of Trustees does hereby authorize the issuance of
one series of preferred shares, par value $0.05 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared), to be designated Auction
Market Preferred Shares, Series B.
The preferences, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption, of the preferred shares
are as follows:
DESIGNATION
A series of 1,920 preferred shares, par value $.05 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) thereon, is hereby designated
"Auction Market Preferred Shares, Series B." Each Auction Market Preferred
Share, Series A (sometimes referred to herein as "AMPS") shall
- -------------------------
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
be issued on a date to be determined by the Board of Trustees of the Trust or
pursuant to their delegated authority; have an Initial Dividend Rate and an
Initial Dividend Payment Date as shall be determined in advance of the issuance
thereof by the Board of Trustees of the Trust or pursuant to their delegated
authority; and have such other preferences, voting powers, limitations as to
dividends, qualifications and terms and conditions of redemption as are set
forth in this Certificate of Designation. The Auction Market Preferred Shares,
Series B shall constitute a separate series of preferred shares of the Trust,
and each Auction Market Preferred Share, Series B shall be identical.
1. Definitions. (a) Unless the context or use indicates another or
------------
different meaning or intent, in this Certificate of Designation the following
terms have the following meanings, whether used in the singular or plural:
"`AA" Composite Commercial Paper Rate," on any date of determination, means
(i) the Interest Equivalent of the rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the
equivalent of such rating by another nationally recognized rating agency, as
such rate is made available on a discount basis or otherwise by the Federal
Reserve Bank of New York for the Business Day immediately preceding such date,
or (ii) in the event that the Federal Reserve Bank of New York does not make
available such a rate, then the arithmetic average of the Interest Equivalent of
the rate on commercial paper placed on behalf of such issuers, as quoted on a
discount basis or otherwise by Merrill Lynch, Pierce, Fenner & Smith
Incorporated or its successors that are Commercial Paper Dealers, to the Auction
Agent for the close of business on the Business Day immediately preceding such
date. If one of the Commercial Paper Dealers does not quote a rate required to
determine the "AA" Composite Commercial Paper Rate, the "AA" Composite
Commercial
2
<PAGE>
Paper Rate will be determined on the basis of the quotation or quotations
furnished by any Substitute Commercial Paper Dealer or Substitute Commercial
Paper Dealers selected by the Trust to provide such rate or rates not being
supplied by the Commercial Paper Dealer. If the number of Dividend Period days
shall be (i) 7 or more but fewer than 49 days, such rate shall be the Interest
Equivalent of the 30-day rate on such commercial paper; (ii) 49 or more but
fewer than 70 days, such rate shall be the Interest Equivalent of the 60-day
rate on such commercial paper; (iii) 70 or more days but fewer than 85 days,
such rate shall be the arithmetic average of the Interest Equivalent on the 60-
day and 90-day rates on such commercial paper; (iv) 85 or more days but fewer
than 99 days, such rate shall be the Interest Equivalent of the 90-day rate on
such commercial paper; (v) 99 or more days but fewer than 120 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 90-day and
120-day rates on such commercial paper; (vi) 120 or more days but fewer than 141
days, such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate on
such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c) of
this Certificate of Designation.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of this
Certificate of Designation.
"Adviser" means the Trust's investment adviser which initially shall be
Fund Asset Management, L.P.
3
<PAGE>
"Affiliate" means any Person, other than Merrill Lynch, Pierce, Fenner &
Smith Incorporated or its successors, known to the Auction Agent to be
controlled by, in control of, or under common control with, the Trust.
"Agent Member" means a member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more AMPS or a Potential Beneficial
Owner.
"AMPS" means the Auction Market Preferred Shares, Series B.
"AMPS Basic Maintenance Amount," as of any Valuation Date, means the dollar
amount equal to (i) the sum of (A) the product of the number of AMPS and Other
AMPS Outstanding on such Valuation Date multiplied by the sum of (a) $25,000 and
(b) any applicable redemption premium attributable to the designation of a
Premium Call Period; (B) the aggregate amount of cash dividends (whether or not
earned or declared) that will have accumulated for each share of AMPS and Other
AMPS Outstanding, in each case, to (but not including) the end of the current
Dividend Period that follows such Valuation Date in the event the then current
Dividend Period will end within 49 calendar days of such Valuation Date or
through the 49th day after such Valuation Date in the event the then current
Dividend Period will not end within 49 calendar days of such Valuation Date; (C)
in the event the then current Dividend Period will end within 49 calendar days
of such Valuation Date, the aggregate amount of cash dividends that would
accumulate at the Maximum Applicable Rate applicable to a Dividend Period of 28
or fewer days on any AMPS and Other AMPS Outstanding from the end of such
Dividend Period through the 49th day after such Valuation Date, multiplied by
the larger of the Moody's Volatility Factor and the S&P Volatility Factor,
determined from time to time by Moody's and S&P, respectively (except that if
such Valuation Date occurs during a Non-Payment Period, the cash dividend for
purposes of calculation would accumulate at the then current Non-Payment Period
Rate); (D) the
4
<PAGE>
amount of anticipated expenses of the Trust for the 90 days subsequent to such
Valuation Date (including any premiums payable with respect to a Policy); (E)
the amount of the Trust's Maximum Potential Additional Dividend Liability as of
such Valuation Date; and (F) any current liabilities as of such Valuation Date
to the extent not reflected in any of (i)(A) through (i)(E) (including, without
limitation, and immediately upon determination, any amounts due and payable by
the Trust pursuant to repurchase agreements and any amounts payable for
Pennsylvania Municipal Bonds or Municipal Bonds purchased as of such Valuation
Date) less (ii) either (A) the Discounted Value of any of the Trust's assets, or
(B) the face value of any of the Trust's assets if such assets mature prior to
or on the date of redemption of AMPS or payment of a liability and are either
securities issued or guaranteed by the United States Government or Deposit
Securities, in both cases irrevocably deposited by the Trust for the payment of
the amount needed to redeem AMPS subject to redemption or to satisfy any of
(i)(B) through (i)(F). For Moody's and S&P, the Trust shall include as a
liability an amount calculated semi-annually equal to 150% of the estimated cost
of obtaining other insurance guaranteeing the timely payment of interest on a
Moody's Eligible Asset or S&P Eligible Asset and principal thereof to maturity
with respect to Moody's Eligible Assets and S&P Eligible Assets that (i) are
covered by a Policy which provides the Trust with the option to obtain such
other insurance and (ii) are discounted by a Moody's Discount Factor or an S&P
Discount Factor determined, as the case may be, by reference to the insurance
claims-paying ability rating of the issuer of such Policy.
"AMPS Basic Maintenance Cure Date," with respect to the failure by the
Trust to satisfy the AMPS Basic Maintenance Amount (as required by paragraph
7(a) of this Certificate of
5
<PAGE>
Designation) as of a given Valuation Date, means the sixth Business Day
following such Valuation Date.
"AMPS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any Vice President of the
Trust which sets forth, as of the related Valuation Date, the assets of the
Trust, the Market Value and the Discounted Value thereof (seriatim and in
aggregate), and the AMPS Basic Maintenance Amount.
"Anticipation Notes" shall mean the following Pennsylvania Municipal Bonds:
revenue anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in paragraph 10(a)(vii)
of this Certificate of Designation.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the AMPS or Other AMPS, as the case may be, for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Whitehall Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Trustees of the Trust or a duly authorized
committee thereof enters into an agreement with the Trust to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the AMPS and Other AMPS.
"Auction Procedures" means the procedures for conducting Auctions set forth
in paragraph 10 of this Certificate of Designation.
6
<PAGE>
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of AMPS or a Broker-Dealer that holds AMPS for its own account.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in paragraph 10 of this
Certificate of Designation, that has been selected by the Trust and has entered
into a Broker-Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and
a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of this Certificate of Designation.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York are authorized or obligated by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the Trust may
from time to time appoint, or, in lieu of any thereof, their respective
affiliates or successors.
"Common Shares" means the common shares of beneficial interest, par value
$.10 per share, of the Trust.
"Date of Original Issue" means, with respect to any share of AMPS or Other
AMPS, the date on which the Trust originally issues such share.
7
<PAGE>
"Declaration" means the Declaration of Trust, as amended and supplemented
(including this Certificate of Designation), of the Trust on file with the
office of the Secretary of State of the Commonwealth of Massachusetts.
"Deposit Securities" means cash and Pennsylvania Municipal Bonds and
Municipal Bonds rated at least A2 (having a remaining maturity of 12 months or
less), P-1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12
months or less), A-1+ or SP-1+ by S&P.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par and
the quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor.
"Dividend Payment Date," with respect to AMPS, has the meaning set forth in
paragraph 2(b)(i) of this Certificate of Designation and, with respect to Other
AMPS, has the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend
Period and any Special Dividend Period.
"Existing Holder" means a Broker-Dealer or any such other Person as may be
permitted by the Trust that is listed as the holder of record of AMPS in the
Share Books.
"Fitch" means Fitch IBCA, Inc. or its successors.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of this
Certificate of Designation.
"Holder" means a Person identified as a holder of record of AMPS in the
Share Register.
8
<PAGE>
"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Trust, an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date as
determined by the Board of Trustees of the Trust with respect to the AMPS or
Other AMPS, as the case may be.
"Initial Dividend Period," with respect to the AMPS, has the meaning set
forth in paragraph 2(c)(i) of this Certificate of Designation and, with respect
to Other AMPS, has the equivalent meaning.
"Initial Dividend Rate," with respect to the AMPS, means the rate per annum
applicable to the Initial Dividend Period for such AMPS and, with respect to
Other AMPS, has the equivalent meaning.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"Inverse Floaters" means trust certificates or other instruments evidencing
interests in one or more Pennsylvania Municipal Bonds that qualify as S&P
Eligible Assets (and are not part of a private placement of Pennsylvania
Municipal and satisfy the issuer and original issue size or ratings requirements
of clause (vi) of the definition of S&P Eligible Assets) the interest rates on
which are adjusted at short term intervals on a basis that is inverse to the
simultaneous readjustment of the interest rates on corresponding floating rate
trust certificates or other
9
<PAGE>
instruments issued by the same issuer, provided that the ratio of the aggregate
dollar amount of floating rate instruments to inverse floating rate instruments
issued by the same issuer does not exceed one to one at their time of original
issuance unless the floating rate instruments have only one reset remaining
until maturity.
"Long Term Dividend Period" means a Special Dividend Period consisting of a
specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of AMPS plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption and excluding Additional Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Trust shall be the market value thereof
determined by the Pricing Service. Market Value of any asset shall include any
interest accrued thereon. The Pricing Service shall value portfolio securities
at the quoted bid prices or the mean between the quoted bid and asked price or
the yield equivalent when quotations are not readily available. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. In the event the
Pricing Service is unable to value a security, the security shall be valued at
the lower of two dealer bids obtained by the Trust from dealers who are members
of the National
10
<PAGE>
Association of Securities Dealers, Inc. and who make a market in the security,
at least one of which shall be in writing. Futures contracts and options are
valued at closing prices for such instruments established by the exchange or
board of trade 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.
"Maximum Applicable Rate," with respect to AMPS, has the meaning set forth
in paragraph 10(a)(vii) of this Certificate of Designation and, with respect to
Other AMPS, has the equivalent meaning.
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due if
the Trust were to make Retroactive Taxable Allocations, with respect to any
fiscal year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Trust, as of
the end of the calendar month immediately preceding such Valuation Date and
assuming such Additional Dividends are fully taxable.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any Pennsylvania Municipal Bond or Municipal Bond which constitutes a
Moody's Eligible Asset, the percentage determined by reference to (a)(i) the
rating by Moody's or S&P on such Bond or (ii) in the event the Moody's Eligible
Asset is insured under a Policy and the terms of the Policy permit the Trust, at
its option, to obtain other insurance guaranteeing the timely payment of
interest on such Moody's Eligible Asset and principal thereof to maturity, the
Moody's insurance claims-paying ability rating of the issuer of the Policy or
(iii) in the event the Moody's Eligible Asset is insured under an insurance
policy which guarantees the timely
11
<PAGE>
payment of interest on such Moody's Eligible Asset and principal thereof to
maturity, the Moody's insurance claims-paying ability rating of the issuer of
the insurance policy (provided that for purposes of clauses (ii) and (iii) if
the insurance claims-paying ability of an issuer of a Policy or insurance policy
is not rated by Moody's but is rated by S&P, such issuer shall be deemed to have
a Moody's insurance claims-paying ability rating which is two full categories
lower than the S&P insurance claims-paying ability rating) and (b) the Moody's
Exposure Period, in accordance with the table set forth below:
<TABLE>
<CAPTION>
Rating Category
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG-1*** SP-1+***
----------------------- ---- --- -- ---- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less................... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven weeks........... 154 164 173 205 235 137 149
9 weeks or less but
greater than eight weeks.......... 158 169 179 209 242 138 150
</TABLE>
- ---------------
* Moody's rating.
** Pennsylvania Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
*** Pennsylvania Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-
1 or, if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not
mature or have a demand feature at par exercisable within the Moody's
Exposure Period and which do not have a long-term rating. For the purposes
of the definition of Moody's Eligible Assets, these securities will have
an assumed rating of "A" by Moody's.
Notwithstanding the foregoing, (i) a 102% Moody's Discount Factor
will be applied to short-term Pennsylvania Municipal Bonds and short-term
Municipal Bonds, so long as such Pennsylvania Municipal Bonds and Municipal
Bonds are rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a
demand feature at par exercisable within the Moody's Exposure Period, and the
Moody's Discount Factor for such Bonds will be 125% if such Bonds are not rated
by Moody's but are rated A-1+ or SP-1+ or AA by S&P and mature or have a demand
feature at par exercisable within the Moody's Exposure Period, and (ii) no
Moody's Discount Factor will be applied to cash or to Receivables for
Pennsylvania Municipal Bonds or Municipal Bonds Sold. "Receivables for
Pennsylvania Municipal Bonds or Municipal Bonds Sold," for purposes of
calculating Moody's Eligible Assets as of any Valuation Date, means no
12
<PAGE>
more than the aggregate of the following: (i) the book value of receivables for
Pennsylvania Municipal Bonds or Municipal Bonds sold as of or prior to such
Valuation Date if such receivables are due within five Business Days of such
Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Trust has
received prior written authorization from Moody's or (y) with counterparties
having a Moody's long-term debt rating of at least Baa3; and (ii) the Moody's
Discounted Value of Pennsylvania Municipal Bonds or Municipal Bonds sold as of
or prior to such Valuation Date which generated receivables, if such receivables
are due within five Business Days of such Valuation Date but do not comply with
either of conditions (x) or (y) of the preceding clause (i).
"Moody's Eligible Asset" means cash, Receivables for Pennsylvania Municipal
Bonds or Municipal Bonds Sold, a Pennsylvania Municipal Bond or a Municipal Bond
that (i) pays interest in cash, (ii) is publicly rated Baa or higher by Moody's
or, if not rated by Moody's but rated by S&P, is rated at least BBB by S&P
(provided that, for purposes of determining the Moody's Discount Factor
applicable to any such S&P-rated Pennsylvania Municipal Bond or S&P-rated
Municipal Bond, such Pennsylvania Municipal Bond or Municipal Bond (excluding
any short-term Pennsylvania Municipal Bond or Municipal Bond) will be deemed to
have a Moody's rating which is one full rating category lower than its S&P
rating), (iii) does not have its Moody's rating suspended by Moody's; and (iv)
is part of an issue of Pennsylvania Municipal Bonds or Municipal Bonds of at
least $10,000,000. In addition, Pennsylvania Municipal Bonds and Municipal
Bonds in the Trust's portfolio must be within the following diversification
requirements in order to be included within Moody's Eligible Assets:
13
<PAGE>
<TABLE>
<CAPTION>
Minimum Maximum Maximum Maximum Maximum
Issue Size Underlying Issue Type County State or Territory
Rating ($ Millions) Obligor (%) (1) Concentration (%) (1) (3) Concentration (%) (1) (4) Concentration (1) (5)
- ------ ------------ --------------- ------------------------- ------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Aaa............... 10 100 100 100 100
Aa................ 10 20 60 60 60
A................. 10 10 40 40 40
Baa............... 10 6 20 20 20
Other(2).......... 10 4 12 12 12
</TABLE>
_________________________
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) Pennsylvania Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to Pennsylvania Municipal Bonds. Territorial bonds (other
than those issued by Puerto Rico and counted collectively) are each limited
to 10% of Moody's Eligible Assets. For diversification purposes, Puerto
Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described above, any
Pennsylvania Municipal Bond or Municipal Bond backed by the guaranty, letter of
credit or insurance issued by a third party will be deemed to be issued by such
third party if the issuance of such third party credit is the sole determinant
of the rating on such Bond. For purposes of the issue type concentration
requirement described above, Pennsylvania Municipal Bonds and Municipal Bonds
will be classified within one of the following categories: health care issues
(teaching and non-teaching hospitals, public and private), housing issues
(single- and multi-family), educational facilities issues (public and private
schools), student loan issues, resource recovery issues, transportation issues
(mass transit, airport and highway bonds), industrial revenue/pollution control
bond issues, utility issues (including water, sewer and electricity), general
obligation issues, lease obligations/certificates of participation, escrowed
bonds and other issues ("Other Issues") not falling within one of the
aforementioned categories (includes special obligations to crossover, excise and
sales tax revenue, recreation revenue, special assessment and telephone revenue
bonds). In no event shall (a) more than 10% of Moody's Eligible Assets consist
of student loan issues, (b) more than 10% of Moody's Eligible Assets consist of
resource recovery issues or (c) more than 10% of Moody's Eligible Assets consist
of Other Issues.
14
<PAGE>
When the Trust sells a Pennsylvania Municipal Bond or Municipal Bond and
agrees to repurchase it at a future date, the Discounted Value of such Bond will
constitute a Moody's Eligible Asset and the amount the Trust is required to pay
upon repurchase of such Bond will count as a liability for purposes of
calculating the AMPS Basic Maintenance Amount. For so long as the AMPS are rated
by Moody's, the Corporation will not enter into any such reverse repurchase
agreements unless it has received written confirmation from Moody's that such
transactions would not impair the rating then assigned the AMPS by Moody's.
When the Trust purchases a Pennsylvania Municipal Bond or Municipal Bond and
agrees to sell it at a future date to another party, cash receivable by the
Trust thereby will constitute a Moody's Eligible Asset if the long-term debt of
such other party is rated at least A2 by Moody's and such agreement has a term
of 30 days or less; otherwise the Discounted Value of such Bond will constitute
a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward Commitment
or (iv) irrevocably deposited by the Trust for the payment of dividends or
redemption.
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and shall initially be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth in paragraph 8(b)
of this Certificate of Designation.
15
<PAGE>
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
% Change in Moody's Volatility
Marginal Tax Factor
Rate
------------ ------------------
Less than 5% 292%
Greater than 5% but less than 10% 313%
Greater than 10% but less than 15% 338%
Greater than 15% but less than 20% 364%
Greater than 20% but less than 25% 396%
Greater than 25% but less than 30% 432%
Greater than 30% but less than 35% 472%
Greater than 35% but less than 40% 520%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean
such other potential dividend rate increase factor as Moody's advises the Trust
in writing is applicable.
"Municipal Bonds" means "Municipal Bonds" as defined in the Trust's
Registration Statement on Form N-14 (File No. 333-_______) relating to the AMPS
on file with the Securities and Exchange Commission, as such Registration
Statement may be amended from time to time, as well as short-term municipal
obligations and Inverse Floaters.
"Municipal Index" has the meaning set forth in paragraph 8(a) of this
Certificate of Designation.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act AMPS Asset Coverage" means asset coverage, as defined in section
18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Trust which are shares of beneficial interest, including all
outstanding AMPS and Other AMPS (or such other asset coverage as may in the
future be specified in or under the 1940 Act as the minimum asset
16
<PAGE>
coverage for senior securities which are stock of a closed-end investment
company as a condition of paying dividends on its common stock).
"1940 Act Cure Date," with respect to the failure by the Trust to maintain
the 1940 Act AMPS Asset Coverage (as required by paragraph 6 of this Certificate
of Designation) as of the last Business Day of each month, means the last
Business Day of the following month.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."
"Non-Payment Period" means, with respect to the AMPS, any period commencing
on and including the day on which the Trust shall fail to (i) declare, prior to
the close of business on the second Business Day preceding any Dividend Payment
Date, for payment on or (to the extent permitted by paragraph 2(c)(i) of this
Certificate of Designation) within three Business Days after such Dividend
Payment Date to the Holders as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date, the full amount of any
dividend on AMPS payable on such Dividend Payment Date or (ii) deposit,
irrevocably in trust, in same-day funds, with the Auction Agent by 12:00 noon,
New York City time, (A) on such Dividend Payment Date the full amount of any
cash dividend on such shares payable (if declared) on such Dividend Payment Date
or (B) on any redemption date for any AMPS called for redemption, the Mandatory
Redemption Price per share of such AMPS or, in the case of an optional
redemption, the Optional Redemption Price per share, and ending on and including
the Business Day on which, by 12:00 noon, New York City time, all unpaid cash
dividends and unpaid redemption prices shall have been so deposited or shall
have otherwise been made available to Holders in same-day funds; provided that,
a Non-Payment Period shall not end unless the Trust shall have given at least
five days' but no more than 30 days' written notice of such deposit or
availability
17
<PAGE>
to the Auction Agent, all Existing Holders (at their addresses appearing in the
Share Books) and the Securities Depository. Notwithstanding the foregoing, the
failure by the Trust to deposit funds as provided for by clauses (ii)(A) or
(ii)(B) above within three Business Days after any Dividend Payment Date or
redemption date, as the case may be, in each case to the extent contemplated by
paragraph 2(c)(i) of this Certificate of Designation, shall not constitute a
"Non-Payment Period."
"Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Trust has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend pursuant to paragraph 2(f) hereof that net capital gains or other
taxable income will be included in such dividend on AMPS), provided that the
Board of Trustees of the Trust shall have the authority to adjust, modify, alter
or change from time to time the initial Non-Payment Period Rate if the Board of
Trustees of the Trust determines and Moody's and S&P (and any Substitute Rating
Agency in lieu of Moody's or S&P in the event either of such parties shall not
rate the AMPS) advise the Trust in writing that such adjustment, modification,
alteration or change will not adversely affect their then-current ratings on the
AMPS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of this Certificate of Designation.
"Notice of Redemption" means any notice with respect to the redemption of
AMPS pursuant to paragraph 4 of this Certificate of Designation.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii) of
this Certificate of Designation.
18
<PAGE>
"Notice of Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of this Certificate of Designation.
"Optional Redemption Price" means $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption and excluding Additional Dividends plus any applicable
redemption premium attributable to the designation of a Premium Call Period.
"Other AMPS" means the auction rate preferred shares of the Trust, other
than the AMPS.
"Outstanding" means, as of any date (i) with respect to AMPS, AMPS
theretofore issued by the Trust except, without duplication, (A) any AMPS
theretofore cancelled or delivered to the Auction Agent for cancellation, or
redeemed by the Trust, or as to which a Notice of Redemption shall have been
given and Deposit Securities shall have been deposited in trust or segregated by
the Trust pursuant to paragraph 4(c) and (B) any AMPS as to which the Trust or
any Affiliate thereof shall be a Beneficial Owner, provided that AMPS held by an
Affiliate shall be deemed outstanding for purposes of calculating the AMPS Basic
Maintenance Amount and (ii) with respect to other Preferred Shares, has the
equivalent meaning.
"Parity Shares" means the AMPS and each other outstanding series of
Preferred Shares the holders of which, together with the holders of the AMPS,
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to the
full respective preferential amounts to which they are entitled, without
preference or priority one over the other.
19
<PAGE>
"Pennsylvania Municipal Bonds" means Municipal Bonds issued by or on behalf
of the Commonwealth of Pennsylvania, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of bond counsel to the issuer, is exempt from Federal and
Pennsylvania income taxes, and includes Inverse Floaters.
"Person" means and includes an individual, a partnership, a corporation, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Policy" means an insurance policy purchased by the Trust which guarantees
the payment of principal and interest on specified Pennsylvania Municipal Bonds
or Municipal Bonds during the period in which such Pennsylvania Municipal Bonds
or Municipal Bonds are owned by the Trust; provided, however, that, as long as
the AMPS are rated by Moody's and S&P, the Trust will not obtain any Policy
unless Moody's and S&P advise the Trust in writing that the purchase of such
Policy will not adversely affect their then-current rating on the AMPS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of AMPS but that wishes to purchase
such shares, or that is a Beneficial Owner that wishes to purchase additional
AMPS.
"Potential Holder" means any Broker-Dealer or any such other Person as may
be permitted by the Trust, including any Existing Holder, who may be interested
in acquiring AMPS (or, in the case of an Existing Holder, additional AMPS).
"Preferred Shares" means the preferred shares of beneficial interest of the
Trust, and includes AMPS and Other AMPS.
20
<PAGE>
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."
"Pricing Service" means J.J. Kenny or any pricing service designated by the
Board of Trustees of the Trust provided the Trust obtains written assurance from
S&P and Moody's that such designation will not impair the rating then assigned
by S&P and Moody's to the AMPS.
"Quarterly Valuation Date" means the twenty-fifth day of the last month of
each fiscal quarter of the Trust (or, if such day is not a Business Day, the
next succeeding Business Day) in each fiscal year of the Trust, commencing
_____________, 2000.
"Receivables for Pennsylvania Municipal Bonds Sold" has the meaning set
forth under the definition of S&P Discount Factor.
"Receivables for Pennsylvania Municipal Bonds or Municipal Bonds Sold" has
the meaning set forth under the definition of Moody's Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial
Paper Rate, (iii) with respect to any Short Term Dividend Period having 183 or
more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and (iv)
with respect to any Long Term Dividend Period, the applicable U.S. Treasury Note
Rate.
"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of this Certificate of Designation.
21
<PAGE>
"Response" has the meaning set forth in paragraph 2(c)(iii) of this
Certificate of Designation.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of this Certificate of Designation.
"Right," with respect to the AMPS, has the meaning set forth in paragraph
2(e) of this Certificate of Designation and, with respect to Other AMPS, has the
equivalent meaning.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. or its successors.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any Pennsylvania Municipal Bond which constitutes an S&P Eligible
Asset, the percentage determined by reference to (a)(i) the rating by S&P,
Moody's or Fitch on such Bond or (ii) in the event the Pennsylvania Municipal
Bond is insured under a Policy and the terms of the Policy permit the Trust, at
its option, to obtain other permanent insurance guaranteeing the timely payment
of interest on such Pennsylvania Municipal Bond and principal thereof to
maturity, the S&P insurance claims-paying ability rating of the issuer of the
Policy or (iii) in the event the Pennsylvania Municipal Bond is insured under an
insurance policy which guarantees the timely payment of interest on such
Pennsylvania Municipal Bond and principal thereof to maturity, the S&P insurance
claims-paying ability rating of the issuer of the insurance policy and (b) the
S&P Exposure Period, in accordance with the tables set forth below:
22
<PAGE>
<TABLE>
<CAPTION>
For Pennsylvania Municipal Bonds:
- --------------------------------
Rating Category
-----------------------------------------------------------------------
S&P Exposure Period AAA* AA* A* BBB*
- ------------------- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
45 Business Days............................... 210% 215% 230% 270%
25 Business Days............................... 190 195 210 250
10 Business Days............................... 175 180 195 235
7 Business Days............................... 170 175 190 230
3 Business Days............................... 150 155 170 210
</TABLE>
______________
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Pennsylvania Municipal Bonds will be 115%, so long as such Pennsylvania
Municipal Bonds are rated A-1+ or SP-1+ by S&P and mature or have a demand
feature exercisable in 30 days or less, or 120% so long as such Pennsylvania
Municipal Bonds are rated A-1 or SP-1 by S&P and mature or have a demand feature
exercisable in 30 days or less, or 125% if such Pennsylvania Municipal Bonds are
not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's or F-1 + by
Fitch; provided, however, such short-term Pennsylvania Municipal Bonds rated by
Moody's or Fitch but not rated by S&P having a demand feature exercisable in 30
days or less must be backed by a letter of credit, liquidity facility or
guarantee from a bank or other financial institution having a short-term rating
of at least A-1+ from S&P; and further provided that such short-term
Pennsylvania Municipal Bonds rated by Moody's or Fitch but not rated by S&P may
comprise no more than 50% of short-term Pennsylvania Municipal Bonds that
qualify as S&P Eligible Assets, (ii) the S&P Discount Factor for Receivables for
Pennsylvania Municipal Bonds Sold that are due in more than five Business Days
from such Valuation Date will be the S&P Discount Factor applicable to the
Pennsylvania Municipal Bonds sold, and (iii) no S&P Discount Factor will be
applied to cash or to Receivables for Pennsylvania Municipal Bonds Sold if such
23
<PAGE>
receivables are due within five Business Days of such Valuation Date.
"Receivables for Pennsylvania Municipal Bonds Sold," for purposes of calculating
S&P Eligible Assets as of any Valuation Date, means the book value of
receivables for Pennsylvania Municipal Bonds sold as of or prior to such
Valuation Date. The Trust may adopt S&P Discount Factors for Municipal Bonds
other than Pennsylvania Municipal Bonds provided that S&P advises the Trust in
writing that such action will not adversely affect its then current rating on
the AMPS. For purposes of the foregoing, Anticipation Notes rated SP-1 or, if
not rated by S&P, rated VMIG-1 by Moody's or F-1 + by Fitch, which do not mature
or have a demand feature exercisable in 30 days and which do not have a long-
term rating, shall be considered to be short-term Pennsylvania Municipal Bonds.
"S&P Eligible Asset" means cash, Receivables for Pennsylvania Municipal
Bonds Sold or a Pennsylvania Municipal Bond that (i) is interest bearing and
pays interest at least semi-annually; (ii) is payable with respect to principal
and interest in United States Dollars; (iii) is publicly rated BBB or higher by
S&P or, except in the case of Anticipation Notes that are grant anticipation
notes or bond anticipation notes which must be rated by S&P to be included in
S&P Eligible Assets, if not rated by S&P but rated by Moody's or Fitch, is rated
at least A by Moody's or Fitch (provided that such Moody's-rated or Fitch-rated
Pennsylvania Municipal Bonds will be included in S&P Eligible Assets only to the
extent the Market Value of such Pennsylvania Municipal Bonds does not exceed 50%
of the aggregate Market Value of the S&P Eligible Assets; and further provided
that, for purposes of determining the S&P Discount Factor applicable to any such
Moody's-rated or Fitch-rated Pennsylvania Municipal Bond, such Pennsylvania
Municipal Bond will be deemed to have an S&P rating which is one full rating
category lower than its Moody's rating or Fitch rating); (iv) is not subject to
a covered call or
24
<PAGE>
covered put option written by the Trust; (v) except for Inverse Floaters, is not
part of a private placement of Pennsylvania Municipal Bonds; and (vi) except for
Inverse Floaters, is part of an issue of Pennsylvania Municipal Bonds with an
original issue size of at least $10 million or, if of an issue with an original
issue size below $10 million (but in no event below $5 million), is either (a)
issued by an issuer with a total of at least $25 million of securities
outstanding or (b) rated at least A by S&P with all such Pennsylvania Municipal
Bonds not constituting more than 20% of the aggregate Market Value of S&P
Eligible Assets. Notwithstanding the foregoing:
(1) Pennsylvania Municipal Bonds of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only to
the extent the Market Value of such Pennsylvania Municipal Bonds does not
exceed 10% of the aggregate Market Value of the S&P Eligible Assets,
provided that 2% is added to the applicable S&P Discount Factor for every
1% by which the Market Value of such Pennsylvania Municipal Bonds exceeds
5% of the aggregate Market Value of the S&P Eligible Assets;
(2) Pennsylvania Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the extent
the Market Value of such Bonds does not exceed 25% of the aggregate Market
Value of S&P Eligible Assets, except that Pennsylvania Municipal Bonds
falling within the utility issue type category will be broken down into
three sub-categories (as described below) and such Pennsylvania Municipal
Bonds will be considered S&P Eligible Assets to the extent the Market Value
of such Bonds in each such sub-category does not exceed 25% of the
aggregate Market Value of S&P Eligible Assets and the Market Value of such
Bonds in all three sub-categories combined does not exceed 60% of the
aggregate Market Value of S&P Eligible Assets, except that Pennsylvania
Municipal Bonds falling within the
25
<PAGE>
transportation issue type category will be broken down into two sub-
categories (as described below) and such Pennsylvania Municipal Bonds will
be considered S&P Eligible Assets to the extent the Market Value of such
Bonds in both sub-categories combined (as described below) does not exceed
40% of the aggregate Market Value of S&P Eligible Assets and except that
Pennsylvania Municipal Bonds falling within the general obligation issue
type category will be considered S&P Eligible Assets to the extent the
Market Value of such Bonds does not exceed 50% of the aggregate Market
Value of S&P Eligible Assets. For purposes of the issue type category
requirement described above, Pennsylvania Municipal Bonds will be
classified within one of the following categories: health care issues,
housing issues, educational facilities issues, student loan issues,
transportation issues, industrial development bond issues, utility issues,
general obligation issues, lease obligations, escrowed bonds and other
issues not falling within one of the aforementioned categories. The general
obligation issue type category includes any issuer that is directly or
indirectly guaranteed by the Commonwealth of Pennsylvania or its political
subdivisions. Utility issuers are included in the general obligation issue
type category if the issuer is directly or indirectly guaranteed by the
Commonwealth of Pennsylvania or its political subdivisions. For purposes of
the issue type category requirement described above, Pennsylvania Municipal
Bonds in the utility issue type category will be classified within one of
the three following sub-categories: (i) electric, gas and combination
issues (if the combination issue includes an electric issue), (ii) water
and sewer utilities and combination issues (if the combination issue does
not include an electric issue), and (iii) irrigation, resource recovery,
solid waste and other utilities, provided that Pennsylvania
26
<PAGE>
Municipal Bonds included in this sub-category (iii) must be rated by S&P in
order to be included in S&P Eligible Assets. For purposes of the issue type
category requirement described above, Pennsylvania Municipal Bonds in the
transportation issue type category will be classified within one of the two
following sub-categories: (i) streets and highways, toll roads, bridges and
tunnels, airports and multi-purpose port authorities (multiple revenue
streams generated by toll roads, airports, real estate, bridges), (ii) mass
transit, parking, seaports and others. Exposure to transportation sub-
category (i) is limited to 25% of the aggregate Market Value of S&P
Eligible Assets, provided, however, exposure to transportation sub-category
(i) can exceed the 25% limit to the extent that exposure to transportation
sub-category (ii) is reduced, for a total exposure up to and not exceeding
40% of the aggregate Market Value of S&P Eligible Assets for the
transportation issue type category; and
(3) Pennsylvania Municipal Bonds which are escrow bonds or defeased
bonds may compose up to 100% of the aggregate Market Value of S&P Eligible
Assets if such Bonds initially are assigned a rating by S&P in accordance
with S&P's legal defeasance criteria or rerated by S&P as economic defeased
escrow bonds and assigned an AAA rating. Pennsylvania Municipal Bonds may
be rated as escrow bonds by another nationally recognized rating agency or
rerated as an escrow bond and assigned the equivalent of an S&P AAA rating,
provided that such equivalent rated Bonds are limited to 50% of the
aggregate Market Value of S&P Eligible Assets and are deemed to have an AA
S&P rating for purposes of determining the S&P Discount Factor applicable
to such Pennsylvania Municipal Bonds. The limitations on Pennsylvania
Municipal Bonds of any one issuer in clause (1) above are not applicable to
escrow bonds, however,
27
<PAGE>
economically defeased bonds that are either initially rated or rerated by
S&P or another nationally recognized rating agency and assigned the same
rating level as the issuer of the Bonds will remain in its original issue
type category set forth in clause (2) above. Pennsylvania Municipal Bonds
that are legally defeased and secured by securities issued or guaranteed by
the United States Government are not required to meet the minimum issuance
size requirement set forth above.
The Trust may include Municipal Bonds other than Pennsylvania Municipal
Bonds as S&P Eligible Assets pursuant to guidelines and restrictions to be
established by S&P provided that S&P advises the Trust in writing that such
action will not adversely affect its then current rating on the AMPS.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance Cure
Date, that the Trust has under this Certificate of Designation to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the AMPS Basic Maintenance Amount (as described in
paragraph 7(a) of this Certificate of Designation).
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a) of
this Certificate of Designation.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Trust in writing is applicable.
"Securities Depository" means The Depository Trust Company or any successor
company or other entities elected by the Trust as securities depository for the
AMPS that agrees
28
<PAGE>
to follow the procedures required to be followed by such securities depository
in connection with the AMPS.
"Service" means the United States Internal Revenue Service.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Share Books" means the books maintained by the Auction Agent setting forth
at all times a current list, as determined by the Auction Agent, of Existing
Holders of the AMPS.
"Share Register" means the register of Holders maintained on behalf of the
Trust by the Auction Agent in its capacity as transfer agent and registrar for
the AMPS.
"Short Term Dividend Period" means a Special Dividend Period consisting of
a specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364 or (ii) a specified period of one whole year
or more but not greater than five years (in each case subject to adjustment as
provided in paragraph 2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Trustees of the Trust, after consultation with the
Auction Agent and the Broker-Dealers, during which the AMPS subject to such
Dividend Period
29
<PAGE>
shall not be subject to redemption at the option of the Trust and (ii) a period
(a "Premium Call Period"), consisting of a number of whole years and determined
by the Board of Trustees of the Trust, after consultation with the Auction Agent
and the Broker-Dealers, during each year of which the AMPS subject to such
Dividend Period shall be redeemable at the Trust's option at a price per share
equal to $25,000 plus accumulated but unpaid dividends plus a premium expressed
as a percentage of $25,000, as determined by the Board of Trustees of the Trust
after consultation with the Auction Agent and the Broker-Dealers.
"Subsequent Dividend Period," with respect to AMPS, has the meaning set
forth in paragraph 2(c)(i) of this Certificate of Designation and, with respect
to Other AMPS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Trust may from time to time appoint or, in lieu
of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its affiliates and successors,
after consultation with the Trust, to act as the substitute rating agency or
substitute rating agencies, as the case may be, to determine the credit ratings
of the AMPS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30-day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., New York City
time, on such date by Kenny Information Systems Inc. or any successor thereto,
based upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Code of "high
grade" component issuers selected by Kenny Information Systems Inc. or any such
successor from time to time in
30
<PAGE>
its discretion, which component issuers shall include, without limitation,
issuers of general obligation bonds but shall exclude any bonds the interest on
which constitutes an item of tax preference under Section 57(a)(5) of the Code,
or successor provisions, for purposes of the "alternative minimum tax," divided
by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal); provided,
however, that if the Kenny Index is not made so available by 8:30 A.M., New York
City time, on such date by Kenny Information Systems Inc. or any successor, the
Taxable Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient
of (A) the per annum rate expressed on an interest equivalent basis equal to the
most recent Kenny Index so made available for any preceding Business Day,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal). The
Trust may not utilize a successor index to the Kenny Index unless Moody's and
S&P provide the Trust with written confirmation that the use of such successor
index will not adversely affect the then-current respective Moody's and S&P
ratings of the AMPS.
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of this
Certificate of Designation.
"Trust" means MuniYield Pennsylvania Insured Fund, a Massachusetts business
trust.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate"
on any date means the Interest Equivalent of the yield as calculated by
reference to the arithmetic average of the bid
31
<PAGE>
price quotations of the actively traded Treasury Bill with a maturity most
nearly comparable to the length of the related Dividend Period, as determined by
bid price quotations as of any time on the Business Day immediately preceding
such date, obtained from at least three recognized primary U.S. Government
securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate"
on any date means the yield as calculated by reference to the arithmetic average
of the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether the Trust is
maintaining the AMPS Basic Maintenance Amount, each Business Day commencing with
the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Trust, the amount of cash or securities paid to or
received from a broker (subsequent to the Initial Margin payment) from time to
time as the price of such futures contract fluctuates.
32
<PAGE>
(b) The foregoing definitions of Accountant's Confirmation, AMPS Basic
Maintenance Amount, AMPS Basic Maintenance Cure Date, AMPS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Inverse Floaters, Market Value, Maximum Potential Additional Dividend
Liability, Moody's Discount Factor, Moody's Eligible Asset, Moody's Exposure
Period, Moody's Hedging Transactions, Moody's Volatility Factor, S&P Discount
Factor, S&P Eligible Asset, S&P Exposure Period, S&P Hedging Transactions, S&P
Volatility Factor, Valuation Date and Variation Margin have been determined by
the Board of Trustees of the Trust in order to obtain a "aaa" rating from
Moody's and a AAA rating from S&P on the AMPS on their Date of Original Issue;
and the Board of Trustees of the Trust shall have the authority, without
shareholder approval, to amend, alter or repeal from time to time the foregoing
definitions and the restrictions and guidelines set forth thereunder if Moody's
and S&P or any Substitute Rating Agency advises the Trust in writing that such
amendment, alteration or repeal will not adversely affect their then current
ratings on the AMPS.
2. Dividends. (a) The Holders shall be entitled to receive, when, as and
----------
if declared by the Board of Trustees of the Trust, out of funds legally
available therefor, cumulative dividends each consisting of (i) cash at the
Applicable Rate, (ii) a Right to receive cash as set forth in paragraph 2(e)
below, and (iii) any additional amounts as set forth in paragraph 2(f) below,
and no more, payable on the respective dates set forth below. Dividends on the
AMPS so declared and payable shall be paid (i) in preference to and in priority
over any dividends declared and payable on the Common Shares, and (ii) to the
extent permitted under the Code and to the extent available, out of net tax-
exempt income earned on the Trust's investments. To the extent permitted under
the Code, dividends on AMPS will be designated as exempt-interest dividends.
33
<PAGE>
For the purposes of this section, the term "net tax-exempt income" shall exclude
capital gains of the Trust.
(b) (i) Cash dividends on AMPS shall accumulate from the Date of
Original Issue and shall be payable, when, as and if declared by the Board of
Trustees, out of funds legally available therefor, commencing on the Initial
Dividend Payment Date with respect to the AMPS. Following the Initial Dividend
Payment Date for the AMPS, dividends on the AMPS will be payable, at the option
of the Trust, either (i) with respect to any 7-Day Dividend Period and any Short
Term Dividend Period of 35 or fewer days, on the day next succeeding the last
day thereof or (ii) with respect to any Short Term Dividend Period of more than
35 days and with respect to any Long Term Dividend Period, monthly on the first
Business Day of each calendar month during such Short Term Dividend Period or
Long Term Dividend Period and on the day next succeeding the last day thereof
(each such date referred to in clause (i) or (ii) being herein referred to as a
"Normal Dividend Payment Date"), except that if such Normal Dividend Payment
Date is not a Business Day, then the Dividend Payment Date shall be the first
Business Day next succeeding such Normal Dividend Payment Date. Although any
particular Dividend Payment Date may not occur on the originally scheduled date
because of the exceptions discussed above, the next succeeding Dividend Payment
Date, subject to such exceptions, will occur on the next following originally
scheduled date. If for any reason a Dividend Payment Date cannot be fixed as
described above, then the Board of Trustees shall fix the Dividend Payment Date.
The Board of Trustees by resolution prior to authorization of a dividend by the
Board of Trustees may change a Dividend Payment Date if such change does not
adversely affect the contract rights of the Holders of AMPS set forth in the
Declaration. The Initial Dividend Period, 7-Day Dividend Periods and Special
Dividend Periods are hereinafter
34
<PAGE>
sometimes referred to as Dividend Periods. Each dividend payment date determined
as provided above is hereinafter referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the
Share Register as of 12:00 noon, New York City time, on the Business Day
preceding the Dividend Payment Date. Dividends in arrears for any past Dividend
Period may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the Holders as they appear on the Share Register on a
date, not exceeding 15 days prior to the payment date therefor, as may be fixed
by the Board of Trustees of the Trust.
(c) (i) During the period from and including the Date of Original Issue
to but excluding the Initial Dividend Payment Date (the "Initial Dividend
Period"), the Applicable Rate shall be the Initial Dividend Rate. Commencing on
the Initial Dividend Payment Date for the AMPS, the Applicable Rate for each
subsequent dividend period (hereinafter referred to as a "Subsequent Dividend
Period"), which Subsequent Dividend Period shall commence on and include a
Dividend Payment Date and shall end on and include the calendar day prior to the
next Dividend Payment Date (or last Dividend Payment Date in a Dividend Period
if there is more than one Dividend Payment Date), shall be equal to the rate per
annum that results from implementation of the Auction Procedures.
The Applicable Rate for each Dividend Period commencing during a Non-
Payment Period shall be equal to the Non-Payment Period Rate; and each Dividend
Period, commencing after the first day of, and during, a Non-Payment Period
shall be a 7-Day Dividend Period. Except in the case of the willful failure of
the Trust to pay a dividend on a Dividend Payment Date or to redeem any AMPS on
the date set for such redemption, any amount of any dividend due on any Dividend
Payment Date (if, prior to the close of business on the second Business Day
35
<PAGE>
preceding such Dividend Payment Date, the Trust has declared such dividend
payable on such Dividend Payment Date to the Holders of such AMPS as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date) or redemption price with respect to any AMPS not paid to such Holders when
due may be paid to such Holders in the same form of funds by 12:00 noon, New
York City time, on any of the first three Business Days after such Dividend
Payment Date or due date, as the case may be, provided that, such amount is
accompanied by a late charge calculated for such period of non-payment at the
Non-Payment Period Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 365. In the case of a
willful failure of the Trust to pay a dividend on a Dividend Payment Date or to
redeem any AMPS on the date set for such redemption, the preceding sentence
shall not apply and the Applicable Rate for the Dividend Period commencing
during the Non-Payment Period resulting from such failure shall be the Non-
Payment Period Rate. For the purposes of the foregoing, payment to a person in
same-day funds on any Business Day at any time shall be considered equivalent to
payment to such person in New York Clearing House (next-day) funds at the same
time on the preceding Business Day, and any payment made after 12:00 noon, New
York City time, on any Business Day shall be considered to have been made
instead in the same form of funds and to the same person before 12:00 noon, New
York City time, on the next Business Day.
(ii) The amount of cash dividends per share of AMPS payable (if
declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period and
each Dividend Payment Date of each Short Term Dividend Period shall be computed
by multiplying the Applicable Rate for such Dividend Period by a fraction, the
numerator of which will be the number of days in such Dividend Period or part
thereof that such share was outstanding and the denominator of which
36
<PAGE>
will be 365, multiplying the amount so obtained by $25,000, and rounding the
amount so obtained to the nearest cent. During any Long Term Dividend Period,
the amount of cash dividends per share of AMPS payable (if declared) on any
Dividend Payment Date shall be computed by multiplying the Applicable Rate for
such Dividend Period by a fraction, the numerator of which will be such number
of days in such part of such Dividend Period that such share was outstanding and
for which dividends are payable on such Dividend Payment Date and the
denominator of which will be 360, multiplying the amount so obtained by $25,000,
and rounding the amount so obtained to the nearest cent.
(iii) With respect to each Dividend Period that is a Special Dividend
Period, the Trust may, at its sole option and to the extent permitted by law, by
telephonic and written notice (a "Request for Special Dividend Period") to the
Auction Agent and to each Broker-Dealer, request that the next succeeding
Dividend Period for the AMPS be a number of days (other than seven), evenly
divisible by seven, and not fewer than seven nor more than 364 in the case of a
Short Term Dividend Period or one whole year or more but not greater than five
years in the case of a Long Term Dividend Period, specified in such notice,
provided that the Trust may not give a Request for Special Dividend Period of
greater than 28 days (and any such request shall be null and void) unless, for
any Auction occurring after the initial Auction, Sufficient Clearing Bids were
made in the last occurring Auction and unless full cumulative dividends, any
amounts due with respect to redemptions, and any Additional Dividends payable
prior to such date have been paid in full. Such Request for Special Dividend
Period, in the case of a Short Term Dividend Period, shall be given on or prior
to the second Business Day but not more than seven Business Days prior to an
Auction Date for the AMPS and, in the case of a Long Term Dividend Period, shall
be given on or prior to the second Business Day but not more than 28 days prior
to an
37
<PAGE>
Auction Date for the AMPS. Upon receiving such Request for Special Dividend
Period, the Broker-Dealer(s) shall jointly determine whether, given the factors
set forth below, it is advisable that the Trust issue a Notice of Special
Dividend Period for the AMPS as contemplated by such Request for Special
Dividend Period and the Optional Redemption Price of the AMPS during such
Special Dividend Period and the Specific Redemption Provisions and shall give
the Trust and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In making such determination the Broker-Dealer(s) will consider (1)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (2) existing market supply and demand for short-term and
long-term securities, (3) existing yield curves for short-term and long-term
securities comparable to the AMPS, (4) industry and financial conditions which
may affect the AMPS, (5) the investment objective of the Trust, and (6) the
Dividend Periods and dividend rates at which current and potential beneficial
holders of the AMPS would remain or become beneficial holders. If the Broker-
Dealer(s) shall not give the Trust and the Auction Agent a Response by such
second Business Day or if the Response states that given the factors set forth
above it is not advisable that the Trust give a Notice of Special Dividend
Period for the AMPS, the Trust may not give a Notice of Special Dividend Period
in respect of such Request for Special Dividend Period. In the event the
Response indicates that it is advisable that the Trust give a Notice of Special
Dividend Period for the AMPS, the Trust may by no later than the second Business
Day prior to such Auction Date give a notice (a "Notice of Special Dividend
Period") to the Auction Agent, the Securities Depository and each Broker-Dealer
which notice will specify (i) the duration of the Special Dividend Period, (ii)
the Optional Redemption Price as specified in the related Response and (iii) the
Specific Redemption Provisions, if any, as specified in the related
38
<PAGE>
Response. The Trust also shall provide a copy of such Notice of Special Dividend
Period to Moody's and S&P. The Trust shall not give a Notice of Special Dividend
Period and, if the Trust has given a Notice of Special Dividend Period, the
Trust is required to give telephonic and written notice of its revocation (a
"Notice of Revocation") to the Auction Agent, each Broker-Dealer, and the
Securities Depository on or prior to the Business Day prior to the relevant
Auction Date if (x) either the 1940 Act AMPS Asset Coverage is not satisfied or
the Trust shall fail to maintain S&P Eligible Assets and Moody's Eligible Assets
each with an aggregate Discounted Value at least equal to the AMPS Basic
Maintenance Amount, in each case on each of the two Valuation Dates immediately
preceding the Business Day prior to the relevant Auction Date on an actual basis
and on a pro forma basis giving effect to the proposed Special Dividend Period
(using as a pro forma dividend rate with respect to such Special Dividend Period
the dividend rate which the Broker-Dealers shall advise the Trust is an
approximately equal rate for securities similar to the AMPS with an equal
dividend period), provided that, in calculating the aggregate Discounted Value
of Moody's Eligible Assets for this purpose, the Moody's Exposure Period shall
be deemed to be one week longer, (y) sufficient funds for the payment of
dividends payable on the immediately succeeding Dividend Payment Date have not
been irrevocably deposited with the Auction Agent by the close of business on
the third Business Day preceding the related Auction Date or (z) the Broker-
Dealer(s) jointly advise the Trust that after consideration of the factors
listed above they have concluded that it is advisable to give a Notice of
Revocation. The Trust also shall provide a copy of such Notice of Revocation to
Moody's and S&P. If the Trust is prohibited from giving a Notice of Special
Dividend Period as a result of any of the factors enumerated in clause (x), (y)
or (z) above or if the Trust gives a Notice of Revocation with respect to a
Notice of Special Dividend Period for the AMPS, the next
39
<PAGE>
succeeding Dividend Period will be a 7-Day Dividend Period. In addition, in the
event Sufficient Clearing Bids are not made in the applicable Auction or such
Auction is not held for any reason, such next succeeding Dividend Period will be
a 7-Day Dividend Period and the Trust may not again give a Notice of Special
Dividend Period for the AMPS (and any such attempted notice shall be null and
void) until Sufficient Clearing Bids have been made in an Auction with respect
to a 7-Day Dividend Period.
(d) (i) Holders shall not be entitled to any dividends, whether payable
in cash, property or shares, in excess of full cumulative dividends and
applicable late charges, as herein provided, on the AMPS (except for Additional
Dividends as provided in paragraph 2(e) hereof and additional payments as
provided in paragraph 2(f) hereof). Except for the late charge payable pursuant
to paragraph 2(c)(i) hereof, no interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment on the AMPS that may be in
arrears.
(ii) For so long as any share of AMPS is Outstanding, the Trust shall
not declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or options, warrants
or rights to subscribe for or purchase, Common Shares or other shares of
beneficial interest, if any, ranking junior to the AMPS as to dividends or upon
liquidation) in respect of the Common Shares or any other shares of the Trust
ranking junior to or on a parity with the AMPS as to dividends or upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any shares of the Common Shares or any other such junior shares of
beneficial interest (except by conversion into or exchange for shares of the
Trust ranking junior to the AMPS as to dividends and upon liquidation) or any
other such Parity Shares (except by conversion into or exchange for shares of
the Trust ranking junior to or on a parity with the AMPS as to dividends and
upon liquidation), unless (A) immediately after such
40
<PAGE>
transaction, the Trust shall have S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount and the Trust shall maintain the 1940 Act AMPS Asset
Coverage, (B) full cumulative dividends on AMPS and shares of Other AMPS due on
or prior to the date of the transaction have been declared and paid or shall
have been declared and sufficient funds for the payment thereof deposited with
the Auction-Agent, (C) any Additional Dividend required to be paid under
paragraph 2(e) below on or before the date of such declaration or payment has
been paid and (D) the Trust has redeemed the full number of AMPS required to be
redeemed by any provision for mandatory redemption contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate,
(ii) an uncertificated right (a "Right") to receive an Additional Dividend (as
defined below), and (iii) any additional amounts as set forth in paragraph 2(f)
below. Each Right shall thereafter be independent of the AMPS on which the
dividend was paid. The Trust shall cause to be maintained a record of each Right
received by the respective Holders. A Right may not be transferred other than by
operation of law. If the Trust retroactively allocates any net capital gains or
other income subject to regular Federal income taxes to AMPS without having
given advance notice thereof to the Auction Agent as described in paragraph 2(f)
hereof solely by reason of the fact that such allocation is made as a result of
the redemption of all or a portion of the outstanding AMPS or the liquidation of
the Trust (the amount of such allocation referred to herein as a "Retroactive
Taxable Allocation"), the Trust will, within 90 days (and generally within 60
days) after the end of the Trust's fiscal year for which a Retroactive Taxable
Allocation is made, provide notice thereof to the Auction Agent and to each
holder of a Right applicable to such AMPS (initially Cede & Co. as nominee of
The Depository Trust Company) during such fiscal year at such
41
<PAGE>
holder's address as the same appears or last appeared on the Share Books of the
Trust. The Trust will, within 30 days after such notice is given to the Auction
Agent, pay to the Auction Agent (who will then distribute to such holders of
Rights), out of funds legally available therefor, an amount equal to the
aggregate Additional Dividend with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of
AMPS of an amount which, when taken together with the aggregate amount of
Retroactive Taxable Allocations made to such holder with respect to the fiscal
year in question, would cause such holder's dividends in dollars (after Federal
and Pennsylvania income tax consequences) from the aggregate of both the
Retroactive Taxable Allocations and the Additional Dividend to be equal to the
dollar amount of the dividends which would have been received by such holder if
the amount of the aggregate Retroactive Taxable Allocations would have been
excludable from the gross income of such holder. Such Additional Dividend shall
be calculated (i) without consideration being given to the time value of money;
(ii) assuming that no holder of AMPS is subject to the Federal alternative
minimum tax with respect to dividends received from the Trust; and (iii)
assuming that each Retroactive Taxable Allocation would be taxable in the hands
of each holder of AMPS at the greater of: (x) the maximum combined marginal
regular Federal and Pennsylvania individual income tax rate applicable to
ordinary income or capital gains depending on the taxable character of the
distribution (including any surtax); or (y) the maximum combined marginal
regular Federal and Pennsylvania corporate income tax rate applicable to
ordinary income or capital gains depending on the taxable character of the
distribution (taking into account in both (x) and (y) the Federal income tax
deductibility of state taxes paid or incurred but not any phase out of, or
provision limiting, personal exemptions, itemized
42
<PAGE>
deductions, or the benefit of lower tax brackets and assuming the taxability of
Federally tax-exempt dividends for corporations for Pennsylvania income tax
purposes).
(f) Except as provided below, whenever the Trust intends to include any
net capital gains or other income subject to regular Federal income taxes in any
dividend on AMPS, the Trust will notify the Auction Agent of the amount to be so
included at least five Business Days prior to the Auction Date on which the
Applicable Rate for such dividend is to be established. The Trust may also
include such income in a dividend on AMPS without giving advance notice thereof
if it increases the dividend by an additional amount calculated as if such
income was a Retroactive Taxable Allocation and the additional amount was an
Additional Dividend, provided that the Trust will notify the Auction Agent of
the additional amounts to be included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date.
(g) No fractional AMPS shall be issued.
3. Liquidation Rights. Upon any liquidation, dissolution or
------------------
winding up of the Trust, whether voluntary or involuntary, the Holders shall be
entitled to receive, out of the assets of the Trust available for distribution
to shareholders, before any distribution or payment is made upon any Common
Shares or any other shares of beneficial interest ranking junior in right of
payment upon liquidation to the AMPS, the sum of $25,000 per share plus
accumulated but unpaid dividends (whether or not earned or declared) thereon to
the date of distribution, and after such payment the Holders will be entitled to
no other payments other than Additional Dividends as provided in paragraph 2(e)
hereof. If upon any liquidation, dissolution or winding up of the Trust, the
amounts payable with respect to the AMPS and any other Outstanding class or
series of Preferred Shares of the Trust ranking on a parity with the AMPS as to
payment upon liquidation are not paid in full, the Holders and the holders of
such other class or series will share
43
<PAGE>
ratably in any such distribution of assets in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the Holders
will not be entitled to any further participation in any distribution of assets
by the Trust except for any Additional Dividends. A consolidation, merger or
statutory share exchange of the Trust with or into any other corporation or
entity or a sale, whether for cash, shares of stock, securities or properties,
of all or substantially all or any part of the assets of the Trust shall not be
deemed or construed to be a liquidation, dissolution or winding up of the Trust.
4. Redemption. (a) Shares of AMPS shall be redeemable by the
----------
Trust as provided below:
(i) To the extent permitted under the 1940 Act and Massachusetts law,
upon giving a Notice of Redemption, the Trust at its option may redeem
AMPS, in whole or in part, out of funds legally available therefor, at the
Optional Redemption Price per share, on any Dividend Payment Date; provided
that no share of AMPS may be redeemed at the option of the Trust during (A)
the Initial Dividend Period with respect to a series of shares or (B) a
Non-Call Period to which such share is subject. In addition, holders of
AMPS which are redeemed shall be entitled to receive Additional Dividends
to the extent provided herein. The Trust may not give a Notice of
Redemption relating to an optional redemption as described in this
paragraph 4(a)(i) unless, at the time of giving such Notice of Redemption,
the Trust has available Deposit Securities with maturity or tender dates
not later than the day preceding the applicable redemption date and having
a value not less than the amount due to Holders by reason of the redemption
of their AMPS on such redemption date.
44
<PAGE>
(ii) The Trust shall redeem, out of funds legally available therefor,
at the Mandatory Redemption Price per share, AMPS to the extent permitted
under the 1940 Act, on a date fixed by the Board of Trustees, if the Trust
fails to maintain S&P Eligible Assets and Moody's Eligible Assets each with
an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount as provided in paragraph 7(a) or to satisfy the 1940 Act
AMPS Asset Coverage as provided in paragraph 6 and such failure is not
cured on or before the AMPS Basic Maintenance Cure Date or the 1940 Act
Cure Date (herein collectively referred to as a "Cure Date"), as the case
may be. In addition, holders of AMPS so redeemed shall be entitled to
receive Additional Dividends to the extent provided herein. The number of
AMPS to be redeemed shall be equal to the lesser of (i) the minimum number
of AMPS the redemption of which, if deemed to have occurred immediately
prior to the opening of business on the Cure Date, together with all shares
of other Preferred Shares subject to redemption or retirement, would result
in the Trust having S&P Eligible Assets and Moody's Eligible Assets each
with an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount or satisfaction of the 1940 Act AMPS Asset Coverage, as
the case may be, on such Cure Date (provided that, if there is no such
minimum number of AMPS and of other Preferred Shares the redemption of
which would have such result, all AMPS and other Preferred Shares then
Outstanding shall be redeemed), and (ii) the maximum number of AMPS,
together with all other Preferred Shares subject to redemption or
retirement, that can be redeemed out of funds expected to be legally
available therefor on such redemption date. In determining the number of
AMPS required to be redeemed in accordance with the foregoing, the Trust
shall allocate the number required to be redeemed which would
45
<PAGE>
result in the Trust having S&P Eligible Assets and Moody's Eligible Assets
each with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount or satisfaction of the 1940 Act AMPS Asset
Coverage, as the case may be, pro rata among AMPS, Other AMPS and other
Preferred Shares subject to redemption pursuant to provisions similar to
those contained in this paragraph 4(a)(ii); provided that, AMPS which may
not be redeemed at the option of the Trust due to the designation of a Non-
Call Period applicable to such shares (A) will be subject to mandatory
redemption only to the extent that other shares are not available to
satisfy the number of shares required to be redeemed and (B) will be
selected for redemption in an ascending order of outstanding number of days
in the Non-Call Period (with shares with the lowest number of days to be
redeemed first) and by lot in the event of shares having an equal number of
days in such Non-Call Period. The Trust shall effect such redemption on a
Business Day which is not later than 35 days after such Cure Date, except
that if the Trust does not have funds legally available for the redemption
of all of the required number of AMPS and other Preferred Shares which are
subject to mandatory redemption or the Trust otherwise is unable to effect
such redemption on or prior to 35 days after such Cure Date, the Trust
shall redeem those AMPS which it is unable to redeem on the earliest
practicable date on which it is able to effect such redemption out of funds
legally available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no AMPS may
be redeemed pursuant to paragraph 4(a)(i) of this Certificate of Designation (i)
unless all dividends in arrears on all remaining outstanding Parity Shares shall
have been or are being contemporaneously paid or declared and set apart for
payment and (ii) if redemption thereof would result in the Trust's
46
<PAGE>
failure to maintain Moody's Eligible Assets or S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount. In the event that less than all the outstanding AMPS are to be redeemed
and there is more than one Holder, the AMPS to be redeemed shall be selected by
lot or such other method as the Trust shall deem fair and equitable.
(c) Whenever AMPS are to be redeemed, the Trust, not less than 17 nor
more than 30 days prior to the date fixed for redemption, shall mail a notice
("Notice of Redemption") by first-class mail, postage prepaid, to each Holder of
AMPS to be redeemed and to the Auction Agent. The Trust shall cause the Notice
of Redemption to also be published in the eastern and national editions of The
---
Wall Street Journal. The Notice of Redemption shall set forth (i) the
- -------------------
redemption date, (ii) the amount of the redemption price, (iii) the aggregate
number of AMPS to be redeemed, (iv) the place or places where AMPS are to be
surrendered for payment of the redemption price, (v) a statement that dividends
on the shares to be redeemed shall cease to accumulate on such redemption date
(except that holders may be entitled to Additional Dividends) and (vi) the
provision of this Certificate of Designation pursuant to which such shares are
being redeemed. No defect in the Notice of Redemption or in the mailing or
publication thereof shall affect the validity of the redemption proceedings,
except as required by applicable law.
If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Trust shall have deposited in trust with the
Auction Agent, or segregated in an account at the Trust's custodian bank for the
benefit of the Auction Agent, Deposit Securities (with a right of substitution)
having an aggregate Discounted Value (utilizing in the case of S&P an S&P
Exposure Period of 22 Business Days) equal to the redemption payment for the
AMPS
47
<PAGE>
as to which such Notice of Redemption has been given with irrevocable
instructions and authority to pay the redemption price to the Holders of such
shares, then upon the date of such deposit or, if no such deposit is made, then
upon such date fixed for redemption (unless the Trust shall default in making
the redemption payment), all rights of the Holders of such shares as
shareholders of the Trust by reason of the ownership of such shares will cease
and terminate (except their right to receive the redemption price in respect
thereof and any Additional Dividends, but without interest), and such shares
shall no longer be deemed outstanding. The Trust shall be entitled to receive,
from time to time, from the Auction Agent the interest, if any, on such Deposit
Securities deposited with it and the Holders of any shares so redeemed shall
have no claim to any of such interest. In case the Holder of any shares so
called for redemption shall not claim the redemption payment for his shares
within one year after the date of redemption, the Auction Agent shall, upon
demand, pay over to the Trust such amount remaining on deposit and the Auction
Agent shall thereupon be relieved of all responsibility to the Holder of such
shares called for redemption and such Holder thereafter shall look only to the
Trust for the redemption payment.
5. Voting Rights. (a) General. Except as otherwise provided in the
------------- -------
Declaration or By-Laws, each Holder of AMPS shall be entitled to one vote for
each share held on each matter submitted to a vote of shareholders of the Trust,
and the holders of outstanding Preferred Shares, including AMPS, and of Common
Shares vote together as a single class; provided that, at any meeting of the
shareholders of the Trust held for the election of trustees, the holders of
outstanding Preferred Shares, including AMPS, shall be entitled, as a class, to
the exclusion of the holders of all other securities and classes of shares of
beneficial interest of the Trust, to elect two trustees of the Trust. Subject
to paragraph 5(b) hereof, the holders of outstanding shares of
48
<PAGE>
beneficial interest of the Trust, including the holders of outstanding Preferred
Shares, including AMPS, voting as a single class, shall elect the balance of the
trustees.
(b) Right to Elect Majority of Board of Trustees. During any period
--------------------------------------------
in which any one or more of the conditions described below shall exist (such
period being referred to herein as a "Voting Period"), the number of trustees
constituting the Board of Trustees shall be automatically increased by the
smallest number that, when added to the two trustees elected exclusively by the
holders of Preferred Shares, would constitute a majority of the Board of
Trustees as so increased by such smallest number; and the holders of Preferred
Shares shall be entitled, voting separately as one class (to the exclusion of
the holders of all other securities and classes of shares of beneficial interest
of the Trust), to elect such smallest number of additional trustees, together
with the two trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding AMPS equal to at least two full
years' dividends shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the Auction Agent for the
payment of such accumulated dividends; or
(ii) if at any time holders of any other Preferred Shares are entitled
to elect a majority of the trustees of the Trust under the 1940 Act.
Upon the termination of a Voting Period, the voting rights described in
this paragraph 5(b) shall cease, subject always, however, to the reverting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this paragraph 5(b).
49
<PAGE>
(c) Right to Vote with Respect to Certain Other Matters. So long as
---------------------------------------------------
any AMPS are outstanding, the Trust shall not, without the affirmative vote of
the holders of a majority of the Preferred Shares Outstanding at the time,
voting separately as one class: (i) authorize, create or issue any class or
series of shares ranking prior to the AMPS or any other 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 Declaration,
whether by merger, consolidation or otherwise, so as to adversely affect any of
the contract rights expressly set forth in the Declaration of holders of AMPS or
any other Preferred Shares. To the extent permitted under the 1940 Act, the
Trust shall not approve any of the actions set forth in clause (i) or (ii) which
adversely affects the contract rights expressly set forth in the Declaration of
a Holder of shares of a series of AMPS differently than those of a Holder of
shares of any other series of AMPS without the affirmative vote of the holders
of at least a majority of the AMPS of each series adversely affected and
outstanding at such time (each such adversely affected series voting separately
as a class). The Trust shall notify Moody's and S&P ten Business Days prior to
any such vote described in clause (i) or (ii). Unless a higher percentage is
provided for under the Declaration, the affirmative vote of the holders of a
majority of the outstanding Preferred Shares, including AMPS, voting together as
a single class, will be required to approve any plan of reorganization
(including bankruptcy proceedings) adversely affecting such shares or any action
requiring a vote of security holders under Section 13(a) of the 1940 Act. The
class vote of holders of Preferred Shares, including AMPS, described above will
in each case be in addition to a separate vote of the requisite percentage of
shares of beneficial interest and Preferred Shares, including AMPS, voting
together as a single class necessary to authorize the action in question.
(d) Voting Procedures.
------------------
50
<PAGE>
(i) As soon as practicable after the accrual of any right of the holders
of Preferred Shares to elect additional trustees as described in paragraph 5(b)
above, the Trust shall call a special meeting of such holders and instruct the
Auction Agent to mail a notice of such special meeting to such holders, such
meeting to be held not less than 10 nor more than 20 days after the date of
mailing of such notice. If the Trust fails to send such notice to the Auction
Agent or if the Trust does not call such a special meeting, it may be called by
any such holder on like notice. The record date for determining the holders
entitled to notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such notice is
mailed. At any such special meeting and at each meeting held during a Voting
Period, such Holders, voting together as a class (to the exclusion of the
holders of all other securities and classes of shares of beneficial interest of
the Trust), shall be entitled to elect the number of trustees prescribed in
paragraph 5(b) above. At any such meeting or adjournment thereof in the absence
of a quorum, a majority of such holders present in person or by proxy shall have
the power to adjourn the meeting without notice, other than by an announcement
at the meeting, to a date not more than 120 days after the original record date.
(ii) For purposes of determining any rights of the Holders to vote on
any matter or the number of shares required to constitute a quorum, whether such
right is created by this Certificate of Designation, by the other provisions of
the Declaration, by statute or otherwise, a share of AMPS which is not
Outstanding shall not be counted.
(iii) The terms of office of all persons who are trustees of the Trust
at the time of a special meeting of Holders and holders of other Preferred
Shares to elect trustees shall continue, notwithstanding the election at such
meeting by the Holders and such other holders of the number of trustees that
they are entitled to elect, and the persons so elected by the Holders and
51
<PAGE>
such other holders, together with the two incumbent trustees elected by the
Holders and such other holders of Preferred Shares and the remaining incumbent
trustees elected by the holders of the Common Shares and Preferred Shares, shall
constitute the duly elected trustees of the Trust.
(iv) Simultaneously with the expiration of a Voting Period, the terms
of office of the additional trustees elected by the Holders and holders of other
Preferred Shares pursuant to paragraph 5(b) above shall terminate, the remaining
trustees shall constitute the trustees of the Trust and the voting rights of the
Holders and such other holders to elect additional trustees pursuant to
paragraph 5(b) above shall cease, subject to the provisions of the last sentence
of paragraph 5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders
----------------
of AMPS shall not have any rights or preferences other than those specifically
set forth herein. The Holders of AMPS shall have no preemptive rights or rights
to cumulative voting. In the event that the Trust fails to pay any dividends on
the AMPS, the exclusive remedy of the Holders shall be the right to vote for
trustees pursuant to the provisions of this paragraph 5.
(f) Notification to S&P and Moody's. In the event a vote of Holders
-------------------------------
of AMPS is required pursuant to the provisions of Section 13(a) of the 1940 Act,
the Trust shall, not later than ten Business Days prior to the date on which
such vote is to be taken, notify S&P and Moody's that such vote is to be taken
and the nature of the action with respect to which such vote is to be taken and,
not later than ten Business Days after the date on which such vote is taken,
notify S&P and Moody's of the result of such vote.
6. 1940 Act AMPS Asset Coverage. The Trust shall maintain, as of
----------------------------
the last Business Day of each month in which any AMPS is outstanding, the 1940
Act AMPS Asset Coverage.
52
<PAGE>
7. AMPS Basic Maintenance Amount. (a) The Trust shall maintain,
-----------------------------
on each Valuation Date, and shall verify to its satisfaction that it is
maintaining on such Valuation Date, (i) S&P Eligible Assets having an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount and
(ii) Moody's Eligible Assets having an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount. Upon any failure to maintain the
required Discounted Value, the Trust will use its best efforts to alter the
composition of its portfolio to reattain a Discounted Value at least equal to
the AMPS Basic Maintenance Amount on or prior to the AMPS Basic Maintenance Cure
Date.
(b) On or before 5:00 p.m., New York City time, on the third Business
Day after a Valuation Date on which the Trust fails to satisfy the AMPS Basic
Maintenance Amount, the Trust shall complete and deliver to the Auction Agent,
and Moody's and S&P, as the case may be, a complete AMPS Basic Maintenance
Report as of the date of such failure, which will be deemed to have been
delivered to the Auction Agent if the Auction Agent receives a copy or telecopy,
telex or other electronic transcription thereof and on the same day the Trust
mails to the Auction Agent for delivery on the next Business Day the complete
AMPS Basic Maintenance Report. The Trust will deliver an AMPS Basic Maintenance
Report to the Auction Agent and Moody's and S&P, as the case may be, on or
before 5:00 p.m., New York City time, on the third Business Day after a
Valuation Date on which the Trust cures its failure to maintain Moody's Eligible
Assets or S&P Eligible Assets, as the case may be, with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or on which the
Trust fails to maintain Moody's Eligible Assets or S&P Eligible Assets, as the
case may be, with an aggregate Discounted Value which exceeds the AMPS Basic
Maintenance Amount by 5% or more. The Trust will also deliver an AMPS Basic
Maintenance Report to the Auction Agent, Moody's and
53
<PAGE>
S&P as of each Quarterly Valuation Date on or before the third Business Day
after such date. Additionally, on or before 5:00 p.m., New York City time, on
the third Business Day after the first day of a Special Dividend Period, the
Trust will deliver an AMPS Basic Maintenance Report to S&P and the Auction
Agent. The Trust shall also provide Moody's and S&P with an AMPS Basic
Maintenance Report when specifically requested by either Moody's or S&P. A
failure by the Trust to deliver an AMPS Basic Maintenance Report under this
paragraph 7(b) shall be deemed to be delivery of an AMPS Basic Maintenance
Report indicating the Discounted Value for S&P Eligible Assets and Moody's
Eligible Assets of the Trust is less than the AMPS Basic Maintenance Amount, as
of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of an AMPS
Basic Maintenance Report in accordance with paragraph 7(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Auction Agent, S&P and Moody's (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other AMPS Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Trust during the quarter ending on such Quarterly Valuation Date), (ii)
that, in such Report (and in such randomly selected Report), the Trust correctly
determined the assets of the Trust which constitute S&P Eligible Assets or
Moody's Eligible Assets, as the case may be, at such Quarterly Valuation Date in
accordance with this Certificate of Designation, (iii) that, in such Report (and
in such randomly selected Report), the Trust determined whether the Trust had,
at such Quarterly Valuation Date (and at the Valuation Date addressed in such
randomly selected Report) in accordance with this Certificate of Designation,
S&P Eligible Assets of an aggregate Discounted Value at least equal to the AMPS
Basic Maintenance Amount and Moody's Eligible Assets of an aggregate Discounted
Value at least equal to the AMPS Basic Maintenance
54
<PAGE>
Amount, (iv) with respect to the S&P ratings on Pennsylvania Municipal Bonds or
Municipal Bonds, the issuer name, issue size and coupon rate listed in such
Report, that the Independent Accountant has requested that S&P verify such
information and the Independent Accountant shall provide a listing in its letter
of any differences, (v) with respect to the Moody's ratings on Pennsylvania
Municipal Bonds or Municipal Bonds, the issuer name, issue size and coupon rate
listed in such Report, that such information has been verified by Moody's (in
the event such information is not verified by Moody's, the Independent
Accountant will inquire of Moody's what such information is, and provide a
listing in its letter of any differences), (vi) with respect to the bid or mean
price (or such alternative permissible factor used in calculating the Market
Value) provided by the custodian of the Trust's assets to the Trust for purposes
of valuing securities in the Trust's portfolio, the Independent Accountant has
traced the price used in such Report to the bid or mean price listed in such
Report as provided to the Trust and verified that such information agrees (in
the event such information does not agree, the Independent Accountant will
provide a listing in its letter of such differences) and (vii) with respect to
such confirmation to Moody's, that the Trust has satisfied the requirements of
paragraph 8(b) of this Certificate of Designation (such confirmation is herein
called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery to the Auction
Agent, S&P and Moody's of an AMPS Basic Maintenance Report in accordance with
paragraph 7(b) above relating to any Valuation Date on which the Trust failed to
maintain S&P Eligible Assets with an aggregate Discounted Value and Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount, and relating to the AMPS Basic Maintenance Cure
Date with respect to such failure, the Independent Accountant will provide to
55
<PAGE>
the Auction Agent, S&P and Moody's an Accountant's Confirmation as to such AMPS
Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the AMPS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets or Moody's
Eligible Assets, as the case may be, of the Trust was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Trust, and the Trust shall accordingly amend and deliver the AMPS Basic
Maintenance Report to the Auction Agent, S&P and Moody's promptly following
receipt by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business
Day after the Date of Original Issue of the AMPS, the Trust will complete and
deliver to S&P and Moody's an AMPS Basic Maintenance Report as of the close of
business on such Date of Original Issue. Within five Business Days of such Date
of Original Issue, the Independent Accountant will confirm in writing to S&P and
Moody's (i) the mathematical accuracy of the calculations reflected in such
Report and (ii) that the aggregate Discounted Value of S&P Eligible Assets and
the aggregate Discounted Value of Moody's Eligible Assets reflected thereon
equals or exceeds the AMPS Basic Maintenance Amount reflected thereon. Also, on
or before 5:00 p.m., New York City time, on the first Business Day after Common
Shares are repurchased by the Trust, the Trust will complete and deliver to S&P
and Moody's an AMPS Basic Maintenance Report as of the close of business on such
date that Common Shares are repurchased.
56
<PAGE>
(g) For so long as AMPS are rated by Moody's, in managing the Trust's
portfolio, the Adviser will not alter the composition of the Trust's portfolio
if, in the reasonable belief of the Adviser, the effect of any such alteration
would be to cause the Trust to have Moody's Eligible Assets with an aggregate
Discounted Value, as of the immediately preceding Valuation Date, less than the
AMPS Basic Maintenance Amount as of such Valuation Date; provided, however, that
in the event that, as of the immediately preceding Valuation Date, the aggregate
Discounted Value of Moody's Eligible Assets exceeded the AMPS Basic Maintenance
Amount by five percent or less, the Adviser will not alter the composition of
the Trust's portfolio in a manner reasonably expected to reduce the aggregate
Discounted Value of Moody's Eligible Assets unless the Trust shall have
confirmed that, after giving effect to such alteration, the aggregate Discounted
Value of Moody's Eligible Assets would exceed the AMPS Basic Maintenance Amount.
8. Certain Other Restrictions and Requirements. (a) For so long as
--------------------------------------------
any AMPS are rated by S&P, the Trust will not purchase or sell futures
contracts, write, purchase or sell options on futures contracts or write put
options (except covered put options) or call options (except covered call
options) on portfolio securities unless it receives written confirmation from
S&P that engaging in such transactions will not impair the ratings then assigned
to the AMPS by S&P, except that the Trust may purchase or sell futures contracts
based on the Bond Buyer Municipal Bond Index (the "Municipal Index") or United
States Treasury Bonds or Notes ("Treasury Bonds") and write, purchase or sell
put and call options on such contracts (collectively, "S&P Hedging
Transactions"), subject to the following limitations:
(i) the Trust will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions which terminate a
futures contract or option
57
<PAGE>
held by the Trust by the Trust's taking an opposite position thereto
("Closing Transactions")), which would cause the Trust at the time of
such transaction to own or have sold the least of (A) more than 1,000
outstanding futures contracts based on the Municipal Index, (B)
outstanding futures contracts based on the Municipal Index exceeding in
number 25% of the quotient of the Market Value of the Trust's total
assets divided by $1,000 or (C) outstanding futures contracts based on
the Municipal Index exceeding in number 10% of the average number of
daily traded futures contracts based on the Municipal Index in the 30
days preceding the time of effecting such transaction as reported by The
---
Wall Street Journal;
-------------------
(ii) the Trust will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would
cause the Trust at the time of such transaction to own or have sold the
lesser of (A) outstanding futures contracts based on Treasury Bonds
exceeding in number 50% of the quotient of the Market Value of the
Trust's total assets divided by $100,000 ($200,000 in the case of the
two-year United States Treasury Note) or (B) outstanding futures
contracts based on Treasury Bonds exceeding in number 10% of the average
number of daily traded futures contracts based on Treasury Bonds in the
30 days preceding the time of effecting such transaction as reported by
The Wall Street Journal;
-----------------------
(iii) the Trust will engage in Closing Transactions to close
out any outstanding futures contract which the Trust owns or has sold or
any outstanding option thereon owned by the Trust in the event (A) the
Trust does not have S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance
58
<PAGE>
Amount on two consecutive Valuation Dates and (B) the Trust is required
to pay Variation Margin on the second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close
out any outstanding futures contract or option thereon in the month
prior to the delivery month under the terms of such futures contract or
option thereon unless the Trust holds the securities deliverable under
such terms; and
(v) when the Trust writes a futures contract or option thereon,
it will either maintain an amount of cash, cash equivalents or high
grade (rated A or better by S&P), fixed-income securities in a
segregated account with the Trust's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held
in the account of or on behalf of the Trust's broker with respect to
such futures contract or option equals the Market Value of the futures
contract or option, or, in the event the Trust writes a futures contract
or option thereon which requires delivery of an underlying security, it
shall hold such underlying security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible Assets
with a Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate Discounted
Value of S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Trust plus (ii)
25% of the aggregate settlement value, as marked to market, of any outstanding
futures contracts based on Treasury Bonds which contracts are owned by the
Trust.
59
<PAGE>
(b) For so long as any AMPS are rated by Moody's, the Trust will not
buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write
call options (except covered call options) on portfolio securities unless
it receives written confirmation from Moody's that engaging in such
transactions would not impair the ratings then assigned to the AMPS by
Moody's, except that the Trust may purchase or sell exchange-traded futures
contracts based on the Municipal Index or Treasury Bonds and purchase,
write or sell exchange-traded put options on such futures contracts and
purchase, write or sell exchange-traded call options on such futures
contracts (collectively, "Moody's Hedging Transactions"), subject to the
following limitations:
(i) the Trust will not engage in any Moody's Hedging
Transaction based on the Municipal Index (other than Closing
Transactions) which would cause the Trust at the time of such
transaction to own or have sold (A) outstanding futures contracts based
on the Municipal Index exceeding in number 10% of the average number of
daily traded futures contracts based on the Municipal Index in the 30
days preceding the time of effecting such transaction as reported by The
---
Wall Street Journal or (B) outstanding futures contracts based on
-------------------
the Municipal Index having a Market Value exceeding 50% of the Market
Value of all Municipal Bonds constituting Moody's Eligible Assets owned
by the Trust (other than Moody's Eligible Assets already subject to a
Moody's Hedging Transaction);
(ii) the Trust will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions)
which would cause the Trust at the time of such transaction to own or
have sold (A) outstanding futures contracts based on Treasury Bonds
having an aggregate
60
<PAGE>
Market Value exceeding 20% of the aggregate Market Value of Moody's
Eligible Assets owned by the Trust and rated Aa by Moody's (or, if not
rated by Moody's but rated by S&P, rated AAA by S&P) or (B) outstanding
futures contracts based on Treasury Bonds having an aggregate Market
Value exceeding 40% of the aggregate Market Value of all Municipal Bonds
constituting Moody's Eligible Assets owned by the Trust (other than
Moody's Eligible Assets already subject to a Moody's Hedging
Transaction) and rated Baa or A by Moody's (or, if not rated by Moody's
but rated by S&P, rated A or AA by S&P) (for purposes of the foregoing
clauses (i) and (ii), the Trust shall be deemed to own the number of
futures contracts that underlie any outstanding options written by the
Trust);
(iii) the Trust will engage in Closing Transactions to close
out any outstanding futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
--------
Street Journal is less than 5,000;
----------------------
(iv) the Trust will engage in a Closing Transaction to close
out any outstanding futures contract by no later than the fifth Business
Day of the month in which such contract expires and will engage in a
Closing Transaction to close out any outstanding option on a futures
contract by no later than the first Business Day of the month in which
such option expires;
(v) the Trust will engage in Moody's Hedging Transactions only
with respect to futures contracts or options thereon having the next
settlement date or the settlement date immediately thereafter;
(vi) the Trust will not engage in options and futures
transactions for leveraging or speculative purposes and will not write
any call options or sell any futures contracts
61
<PAGE>
for the purpose of hedging the anticipated purchase of an asset prior to
completion of such purchase; and
(vii) the Trust will not enter into an option or futures
transaction unless, after giving effect thereto, the Trust would
continue to have Moody's Eligible Assets with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets which the
Trust is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows: (i) assets subject to call options
written by the Trust which are either exchange-traded and "readily reversible"
or which expire within 49 days after the date as of which such valuation is made
shall be valued at the lesser of (a) Discounted Value and (b) the exercise price
of the call option written by the Trust; (ii) assets subject to call options
written by the Trust not meeting the requirements of clause (i) of this sentence
shall have no value; (iii) assets subject to put options written by the Trust
shall be valued at the lesser of (A) the exercise price and (B) the Discounted
Value of the subject security; (iv) futures contracts shall be valued at the
lesser of (A) settlement price and (B) the Discounted Value of the subject
security, provided that, if a contract matures within 49 days after the date as
of which such valuation is made, where the Trust is the seller the contract may
be valued at the settlement price and where the Trust is the buyer the contract
may be valued at the Discounted Value of the subject securities; and (v) where
delivery may be made to the Trust with any security of a class of securities,
the Trust shall assume that it will take delivery of the security with the
lowest Discounted Value.
62
<PAGE>
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the following amounts shall be subtracted from the aggregate
Discounted Value of the Moody's Eligible Assets held by the Trust: (i) 10% of
the exercise price of a written call option; (ii) the exercise price of any
written put option; (iii) where the Trust is the seller under a futures
contract, 10% of the settlement price of the futures contract; (iv) where the
Trust is the purchaser under a futures contract, the settlement price of assets
purchased under such futures contract; (v) the settlement price of the
underlying futures contract if the Trust writes put options on a futures
contract; and (vi) 105% of the Market Value of the underlying futures contracts
if the Trust writes call options on a futures contract and does not own the
underlying contract.
(c) For so long as any AMPS are rated by Moody's, the Trust will not
enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that constitute
Moody's Hedging Transactions that are permitted under paragraph 8(b) of this
Certificate of Designation), except that the Trust may enter into such contracts
to purchase newly-issued securities on the date such securities are issued
("Forward Commitments"), subject to the following limitations:
(i) the Trust will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income securities
rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of
the Forward Commitment with a Market Value that equals or exceeds the
amount of the Trust's obligations under any Forward Commitments to which
it is from time to time a party or long-term fixed income securities
with a Discounted Value that equals or exceeds the amount of the Trust's
obligations under any Forward Commitment to which it is from time to
time a party; and
63
<PAGE>
(ii) the Trust will not enter into a Forward Commitment unless,
after giving effect thereto, the Trust would continue to have Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater
than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which the
Trust is a party and of all securities deliverable to the Trust pursuant to such
Forward Commitments shall be zero.
(d) For so long as AMPS are rated by S&P or Moody's, the Trust will
not, unless it has received written confirmation from S&P and/or Moody's, as the
case may be, that such action would not impair the ratings then assigned to AMPS
by S&P and/or Moody's, as the case may be, (i) borrow money except for the
purpose of clearing transactions in portfolio securities (which borrowings shall
under any circumstances be limited to the lesser of $10 million and an amount
equal to 5% of the Market Value of the Trust's assets at the time of such
borrowings and which borrowings shall be repaid within 60 days and not be
extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets and S&P Eligible Assets to be less than the AMPS Basic
Maintenance Amount), (ii) engage in short sales of securities, (iii) lend any
securities, (iv) issue any class or series of shares ranking prior to or on a
parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the Trust,
(v) reissue any AMPS previously purchased or redeemed by the Trust, (vi) merge
or consolidate into or with any other corporation or entity, (vii) change the
Pricing Service or (viii) engage in reverse repurchase agreements.
64
<PAGE>
(e) For so long as AMPS are rated by Moody's, the Trust agrees to provide
Moody's with the following, unless the Trust has received written confirmation
from Moody's that the provision of such information is no longer required and
that the current rating then assigned to the AMPS by Moody's would not be
impaired: a notification letter at least 30 days prior to any material change
in the Declaration; a copy of the AMPS Basic Maintenance Report prepared by the
Trust in accordance with this Certificate of Designation; and a notice upon the
occurrence of any of the following events: (i) any failure by the Trust to
declare or pay any dividends on the AMPS or successfully remarket the AMPS; (ii)
any mandatory or optional redemption of the AMPS effected by the Trust; (iii)
any assumption of control of the Board of Trustees of the Trust by the holders
of the AMPS; (iv) a general unavailability of dealer quotes on the assets of the
Trust; (v) any material auditor discrepancies on valuations; (vi) the dividend
rate on the AMPS equals or exceeds 95% of the Aaa Composite Commercial Paper
Rate; (vii) the occurrence of any Special Dividend Period; (viii) any change in
the Maximum Applicable Rate or the Reference Rate; (ix) the acquisition by any
person of beneficial ownership of more than 5% of the Trust's voting shares of
beneficial interest (inclusive of Common Shares and Preferred Shares); (x) the
occurrence of any change in Internal Revenue Service rules with respect to the
payment of Additional Dividends; (xi) any change in the Pricing Service employed
by the Trust; (xii) any change in the Investment Adviser; (xiii) any increase of
greater than 40% to the maximum marginal Federal income tax rate applicable to
individuals or corporations; and (xiv) the maximum marginal Federal income tax
rate applicable to individuals or corporations is increased to a rate in excess
of 50%.
9. Notice. All notices or communications, unless otherwise
------
specified in the By-Laws of the Trust or this Certificate of Designation, shall
be sufficiently given if in writing and delivered
65
<PAGE>
in person or mailed by first-class mail, postage prepaid. Notice shall be deemed
given on the earlier of the date received or the date seven days after which
such notice is mailed.
10. Auction Procedures.
-------------------
(a) Certain definitions. As used in this paragraph 10, the
-------------------
following terms shall have the following meanings, unless the context otherwise
requires:
(i) "AMPS" means the AMPS being auctioned pursuant to this
paragraph 10.
(ii) "Auction Date" means the first Business Day preceding the
first day of a Dividend Period.
(iii) "Available AMPS" has the meaning specified in paragraph
10(d)(i) below.
(iv) "Bid" has the meaning specified in paragraph 10(b)(i)
below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i)
below.
(vi) "Hold Order" has the meaning specified in paragraph
10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be
the Applicable Percentage of the Reference Rate. The Applicable Percentage will
be determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both shall
not make such rating available, the equivalent of either or both of such ratings
by a Substitute Rating Agency or two Substitute Rating Agencies or, in the event
that only one such rating shall be available, such rating) and (ii) whether the
Trust has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend pursuant to paragraph 2(f)
hereof that net capital gains or other taxable income will be included in such
dividend on AMPS as follows:
66
<PAGE>
<TABLE>
<CAPTION>
Applicable Applicable
Percentage of Percentage of
Credit Ratings Reference Reference
- ------------------------------------------------------- Rate - Rate -
Moody's S&P No Notification Notification
- ------------------------------------------------------- ------------------------- -----------------------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
The Trust shall take all reasonable action necessary to enable S&P and
Moody's to provide a rating for the AMPS. If either S&P or Moody's shall not
make such a rating available, or neither S&P nor Moody's shall make such a
rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates and successors, after consultation with the Trust, shall select a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating Agency
or Substitute Rating Agencies, as the case may be.
(viii) "Order" has the meaning specified in paragraph 10(b)(i)
below.
(ix) "Sell Order" has the meaning specified in paragraph
10(b)(i) below.
(x) "Submission Deadline" means 1:00 P.M., New York City
time, on any Auction Date or such other time on any Auction Date as may be
specified by the Auction Agent from time to time as the time by which each
Broker-Dealer must submit to the Auction Agent in writing all Orders
obtained by it for the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in paragraph
10(d)(i) below.
(xii) "Submitted Hold Order" has the meaning specified in
paragraph 10(d)(i) below.
67
<PAGE>
(xiii) "Submitted Order" has the meaning specified in
paragraph 10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in
paragraph 10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in
paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in
paragraph 10(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
------------------------------------------------------------------
Holders and Potential Holders.
- -----------------------------
(i) Unless otherwise permitted by the Trust, Beneficial Owners
and Potential Beneficial Owners may only participate in Auctions through
their Broker-Dealers. Broker-Dealers will submit the Orders of their
respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves as Existing Holders in
respect of shares subject to Orders submitted or deemed submitted to them
by Beneficial Owners and as Potential Holders in respect of shares subject
to Orders submitted to them by Potential Beneficial Owners. A Broker-Dealer
may also hold AMPS in its own account as a Beneficial Owner. A Broker-
Dealer may thus submit Orders to the Auction Agent as a Beneficial Owner or
a Potential Beneficial Owner and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of both itself and its
customers. On or prior to the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information
as to:
68
<PAGE>
(1) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to continue
to hold without regard to the Applicable Rate for the next succeeding
Dividend Period;
(2) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to continue
to hold, provided that the Applicable Rate for the next succeeding
Dividend Period shall not be less than the rate per annum specified by
such Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next succeeding Dividend
Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners
that shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the
number of Outstanding shares, if any, of AMPS which each such Potential
Beneficial Owner offers to purchase, provided that the Applicable Rate for
the next succeeding Dividend Period shall not be less than the rate per
annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a Broker-
Dealer acting for its own account to the Auction Agent, of information referred
to in clause (A) or (B) of this paragraph 10(b)(i) is hereinafter referred to as
an "Order" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order, including a Broker-Dealer acting in such capacity for its own account,
is hereinafter referred to as a "Bidder"; an Order containing the information
69
<PAGE>
referred to in clause (A)(1) of this paragraph 10(b)(i) is hereinafter referred
to as a "Hold Order"; an Order containing the information referred to in clause
(A)(2) or (B) of this paragraph 10(b)(i) is hereinafter referred to as a "Bid";
and an Order containing the information referred to in clause (A)(3) of this
paragraph 10(b)(i) is hereinafter referred to as a "Sell Order." Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be its customers or itself, all discussion herein
relating to the consequences of an Auction for Existing Holders and Potential
Holders also applies to the underlying beneficial ownership interests
represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding AMPS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be less
than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding AMPS to be
determined as set forth in paragraph 10(e)(i)(D) if the Applicable
Rate determined on such Auction Date shall be equal to the rate per
annum specified therein; or
(3) a lesser number of Outstanding AMPS to be determined as
set forth in paragraph 10(e)(ii)(C) if such specified rate per
annum shall be higher than the Maximum Applicable Rate and
Sufficient Clearing Bids do not exist.
70
<PAGE>
(B) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of Outstanding AMPS specified in such Sell
Order; or
(2) such number or a lesser number of Outstanding AMPS to be
determined as set forth in paragraph 10(e)(ii)(C) if Sufficient
Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable
offer to purchase:
(1) the number of Outstanding AMPS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be
higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding AMPS to be
determined as set forth in paragraph 10(e)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to
the rate per annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
-------------------------------------------------------
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Trust) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a
71
<PAGE>
Potential Holder in respect of shares subject to Orders submitted to it by
Potential Beneficial Owners, and specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(B) the aggregate number of Outstanding AMPS that are the subject of
such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of AMPS subject to
any Hold Order placed by such Existing Holder;
(2) the number of Outstanding shares, if any, of AMPS subject to
any Bid placed by such Existing Holder and the rate per annum
specified in such Bid; and
(3) the number of Outstanding shares, if any, of AMPS subject to
any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than
three figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding AMPS held by
an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case
of an Auction relating to a
72
<PAGE>
Dividend Period which is not a Special Dividend Period of 28 days or more)
and a Sell Order (in the case of an Auction relating to a Special Dividend
Period of 28 days or more) to have been submitted on behalf of such Existing
Holder covering the number of Outstanding AMPS held by such Existing Holder
and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in
the aggregate more than the number of Outstanding AMPS held by such Existing
Holder are submitted to the Auction Agent, such Order shall be considered
valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of Outstanding AMPS held by
such Existing Holder; provided that if more than one Hold Order is submitted
on behalf of such Existing Holder and the number of AMPS subject to such Hold
Orders exceeds the number of Outstanding AMPS held by such Existing Holder,
the number of AMPS subject to each of such Hold Orders shall be reduced pro
rata so that such Hold Orders, in the aggregate, will cover exactly the
number of Outstanding AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per annum
if more than one Bid is submitted on behalf of such Existing Holder, up to
and including the excess of the number of Outstanding AMPS held by such
Existing Holder over the number of AMPS subject to any Hold Order referred to
in paragraph 10(c)(iv)(A) above (and if more than one Bid submitted on behalf
of such Existing Holder specifies the same rate per annum
73
<PAGE>
and together they cover more than the remaining number of shares that can be
the subject of valid Bids after application of paragraph 10(c)(iv)(A) above
and of the foregoing portion of this paragraph 10(c)(iv)(B) to any Bid or
Bids specifying a lower rate or rates per annum, the number of shares subject
to each of such Bids shall be reduced pro rata so that such Bids, in the
aggregate, cover exactly such remaining number of shares); and the number of
shares, if any, subject to Bids not valid under this paragraph 10(c)(iv)(B)
shall be treated as the subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding AMPS held by such Existing Holder over
the number of AMPS subject to Hold Orders referred to in paragraph
10(c)(iv)(A) and Bids referred to in paragraph 10(c)(iv)(B); provided that if
more than one Sell Order is submitted on behalf of any Existing Holder and
the number of AMPS subject to such Sell Orders is greater than such excess,
the number of AMPS subject to each of such Sell Orders shall be reduced pro
rata so that such Sell Orders, in the aggregate, cover exactly the number of
AMPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate per annum
and number of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date shall be
irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
---------------------------------------------------------------
Applicable Rate.
---------------
74
<PAGE>
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it
by the Broker-Dealers (each such Order as submitted or deemed submitted by
a Broker-Dealer being hereinafter referred to individually as a "Submitted
Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may
be, or as a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding AMPS over the number
of Outstanding AMPS that are the subject of Submitted Hold Orders (such
excess being hereinafter referred to as the "Available AMPS");
(B) from the Submitted Orders whether the number of Outstanding AMPS
that are the subject of Submitted Bids by Potential Holders specifying one
or more rates per annum equal to or lower than the Maximum Applicable Rate
exceeds or is equal to the sum of:
(1) the number of Outstanding AMPS that are the subject of
Submitted Bids by Existing Holders specifying one or more rates per
annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding AMPS that are subject to Submitted
Sell Orders (if such excess or such equality exists (other than
because the number of Outstanding AMPS in clause (1) above and this
clause (2) are each zero because all of the Outstanding AMPS are the
subject of Submitted Hold Orders), such Submitted Bids by Potential
Holders being hereinafter referred to collectively as "Sufficient
Clearing Bids"); and
75
<PAGE>
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the
Winning Bid Rate and all other Submitted Bids from Existing Holders
specifying lower rates per annum were rejected, thus entitling such
Existing Holders to continue to hold the AMPS that are the subject of
such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders
specifying lower rates per annum were accepted, thus entitling the
Potential Holders to purchase the AMPS that are the subject of such
Submitted Bids, would result in the number of shares subject to all
Submitted Bids specifying the Winning Bid Rate or a lower rate per
annum being at least equal to the Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations
pursuant to paragraph 10(d)(i), the Auction Agent shall advise the Trust of
the Maximum Applicable Rate and, based on such determinations, the
Applicable Rate for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the Outstanding AMPS are the subject of Submitted Hold Orders), that the
Applicable Rate for the next succeeding Dividend Period shall be equal to
the Maximum Applicable Rate; or
76
<PAGE>
(C) if all of the Outstanding AMPS are the subject of Submitted Hold
Orders, that the Dividend Period next succeeding the Auction shall
automatically be the same length as the immediately preceding Dividend
Period and the Applicable Rate for the next succeeding Dividend Period
shall be equal to 40% of the Reference Rate (or 60% of such rate if the
Trust has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend pursuant to paragraph
2(f) hereof that net capital gains or other taxable income will be included
in such dividend on AMPS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
--------------------------------------------------------------------
and Allocation of Shares. Based on the determinations made pursuant to
- ------------------------
accepted or rejected and the Auction Agent shall take such other action as
set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids
and Submitted Sell Orders shall be accepted or rejected in the following
order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying any rate
per annum that is higher than the Winning Bid Rate shall be accepted, thus
requiring each such Existing Holder to sell the Outstanding AMPS that are
the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such
77
<PAGE>
Existing Holder to continue to hold the Outstanding AMPS that are the
subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding AMPS that are the subject of such Submitted Bid, unless the
number of Outstanding AMPS subject to all such Submitted Bids shall be
greater than the number of Outstanding AMPS ("Remaining Shares") equal to
the excess of the Available AMPS over the number of Outstanding AMPS
subject to Submitted Bids described in paragraph 10(e)(i)(B) and paragraph
10(e)(i)(C), in which event the Submitted Bids of each such Existing Holder
shall be accepted, and each such Existing Holder shall be required to sell
Outstanding AMPS, but only in an amount equal to the difference between (1)
the number of Outstanding AMPS then held by such Existing Holder subject to
such Submitted Bid and (2) the number of AMPS obtained by multiplying (x)
the number of Remaining Shares by (y) a fraction the numerator of which
shall be the number of Outstanding AMPS held by such Existing Holder
subject to such Submitted Bid and the denominator of which shall be the sum
of the number of Outstanding AMPS subject to such Submitted Bids made by
all such Existing Holders that specified a rate per annum equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted but
only in an amount equal to the number of Outstanding AMPS obtained by
multiplying (x) the difference
78
<PAGE>
between the Available AMPS and the number of Outstanding AMPS subject to
Submitted Bids described in paragraph 10(e)(i)(B), paragraph 10(e)(i)(C)
and paragraph 10(e)(i)(D) by (y) a fraction the numerator of which shall be
the number of Outstanding AMPS subject to such Submitted Bid and the
denominator of which shall be the sum of the number of Outstanding AMPS
subject to such Submitted Bids made by all such Potential Holders that
specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because
all of the Outstanding AMPS are subject to Submitted Hold Orders), subject
to the provisions of paragraph 10(e)(iii), Submitted Orders shall be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
Outstanding AMPS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
accepted, thus requiring such Potential Holder to purchase the Outstanding
AMPS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted and
the Submitted Sell Orders of each Existing Holder shall be accepted, in
both cases only in an amount equal to the difference between (1) the number
of Outstanding AMPS then held by such Existing Holder subject to such
Submitted Bid or Submitted Sell Order and (2) the
79
<PAGE>
number of AMPS obtained by multiplying (x) the difference between the
Available AMPS and the aggregate number of Outstanding AMPS subject to
Submitted Bids described in paragraph 10(e)(ii)(A) and paragraph
10(e)(ii)(B) by (y) a fraction the numerator of which shall be the number
of Outstanding AMPS held by such Existing Holder subject to such Submitted
Bid or Submitted Sell Order and the denominator of which shall be the
number of Outstanding AMPS subject to all such Submitted Bids and Submitted
Sell Orders.
(iii) If, as a result of the procedures described in paragraph
10(e)(i) or paragraph 10(e)(ii), any Existing Holder would be entitled or
required to sell, or any Potential Holder would be entitled or required to
purchase, a fraction of a share of AMPS on any Auction Date, the Auction
Agent shall, in such manner as in its sole discretion it shall determine,
round up or down the number of AMPS to be purchased or sold by any Existing
Holder or Potential Holder on such Auction Date so that each Outstanding
share of AMPS purchased or sold by each Existing Holder or Potential Holder
on such Auction Date shall be a whole share of AMPS.
(iv) If, as a result of the procedures described in paragraph
10(e)(i), any Potential Holder would be entitled or required to purchase
less than a whole share of AMPS on any Auction Date, the Auction Agent
shall, in such manner as in its sole discretion it shall determine,
allocate AMPS for purchase among Potential Holders so that only whole AMPS
are purchased on such Auction Date by any Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing
any AMPS on such Auction Date.
80
<PAGE>
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of Outstanding AMPS to be purchased and the aggregate number of the
Outstanding AMPS to be sold by such Potential Holders and Existing Holders
and, to the extent that such aggregate number of Outstanding shares to be
purchased and such aggregate number of Outstanding shares to be sold
differ, the Auction Agent shall determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer shall
deliver, or from which other Broker-Dealer or Broker-Dealers acting for one
or more sellers such Broker-Dealer shall receive, as the case may be,
Outstanding AMPS.
(f) Miscellaneous. The Trust may interpret the provisions of this
-------------
paragraph 10 to resolve any inconsistency or ambiguity, remedy any formal
defect or make any other change or modification that does not substantially
adversely affect the rights of Beneficial Owners of AMPS. A Beneficial
Owner or an Existing Holder (A) may sell, transfer or otherwise dispose of
AMPS only pursuant to a Bid or Sell Order in accordance with the procedures
described in this paragraph 10 or to or through a Broker-Dealer, provided
that in the case of all transfers other than pursuant to Auctions such
Beneficial Owner or Existing Holder, its Broker-Dealer, if applicable, or
its Agent Member advises the Auction Agent of such transfer and (B) except
as otherwise required by law, shall have the ownership of the AMPS held by
it maintained in book entry form by the Securities Depository in the
account of its Agent Member, which in turn will maintain records of such
Beneficial Owner's beneficial ownership. Neither the Trust nor any
Affiliate shall submit an Order in any Auction. Any Beneficial Owner that
is an Affiliate shall not sell, transfer or otherwise dispose of AMPS to
any Person other than the Trust. All of the
81
<PAGE>
Outstanding AMPS of a series shall be represented by a single certificate
registered in the name of the nominee of the Securities Depository unless
otherwise required by law or unless there is no Securities Depository. If
there is no Securities Depository, at the Trust's option and upon its
receipt of such documents as it deems appropriate, any AMPS may be
registered in the Share Register in the name of the Beneficial Owner
thereof and such Beneficial Owner thereupon will be entitled to receive
certificates therefor and required to deliver certificates therefor upon
transfer or exchange thereof.
11. Securities Depository; Share Certificates. (a) If there is a
-----------------------------------------
Securities Depository, one certificate for all of the AMPS shall be issued to
the Securities Depository and registered in the name of the Securities
Depository or its nominee. Additional certificates may be issued as necessary to
represent AMPS. All such certificates shall bear a legend to the effect that
such certificates are issued subject to the provisions restricting the transfer
of AMPS contained in this Certificate of Designation. Unless the Trust shall
have elected, during a Non-Payment Period, to waive this requirement, the Trust
will also issue stop-transfer instructions to the Auction Agent for the AMPS.
Except as provided in paragraph (b) below, the Securities Depository or its
nominee will be the Holder, and no Beneficial Owner shall receive certificates
representing its ownership interest in such shares.
(b) If the Applicable Rate applicable to all AMPS of a series shall be
the Non-Payment Period Rate or there is no Securities Depository, the Trust may
at its option issue one or more new certificates with respect to such shares
(without the legend referred to in paragraph 11(a)) registered in the names of
the Beneficial Owners or their nominees and rescind the stop-transfer
instructions referred to in paragraph 11(a) with respect to such shares.
82
<PAGE>
12. Personal Liability. The Declaration of Trust establishing
------------------
MuniYield Pennsylvania Insured Fund, dated August 24, 1992, a copy of which,
together with all amendments thereto, is on file in the office of the Secretary
of the Commonwealth of Massachusetts, provides that the name "MuniYield
Pennsylvania Insured Fund" refers to the trustees under the Declaration
collectively as trustees, but not as individuals or personally; and no trustee,
shareholder, officer, employee or agent of the Trust shall be held to any
personal liability, nor shall resort be had to their private property for the
satisfaction of any obligation or claim or otherwise in connection with the
affairs of the Trust, but the "Trust Property" only shall be liable.
83
<PAGE>
MUNIYIELD PENNSYLVANIA INSURED FUND
CERTIFICATE
The undersigned hereby certifies that she is the Secretary of MuniYield
Pennsylvania Insured Fund, an unincorporated business trust organized and
existing under the laws of The Commonwealth of Massachusetts (the "Trust"), that
annexed hereto is the Certificate of Designation dated ________________, 2000,
establishing the powers, qualifications, rights and preferences of the Auction
Market Preferred Shares, Series B of the Trust, which Certificate has been
adopted by the Board of Trustees of the Trust in a manner provided in the
Trust's Declaration of Trust.
Dated this _____ day of _____________, 2000.
---------------------
Alice A. Pellegrino
Secretary
<PAGE>
EXHIBIT 14(a)
INDEPENDENT AUDITORS' CONSENT
MuniYield Pennsylvania Fund:
We consent to the use in this Registration Statement on Form N-14 of our report
dated December 7, 1998 appearing in the Proxy Statement and Prospectus, which is
a part of such Registration Statement, and to the reference to us under the
captions "Comparison of the Funds - Financial Highlights" and "Experts" also
appearing in such Proxy Statement and Prospectus.
Deloitte & Touche LLP
Princeton, New Jersey
September 30, 1999
<PAGE>
EXHIBIT 14(b)
INDEPENDENT AUDITORS' CONSENT
MuniVest Pennsylvania Insured Fund:
We consent to the use in this Registration Statement on Form N-14 of our report
dated December 4, 1998 appearing in the Proxy Statement and Prospectus, which is
a part of such Registration Statement, and to the reference to us under the
captions "Comparison of the Funds - Financial Highlights" and "Experts" also
appearing in such Proxy Statement and Prospectus.
Deloitte & Touche LLP
Princeton, New Jersey
September 30, 1999
