-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BTNYEfm0vEtu8tbNpfBf8fU8+8FRQEvpO1Ss4YG/zAw+roEP4qxe2rLE5akiVNCI Sqm1wGKtHBevBtL+++6iCA== 0000950130-99-006298.txt : 19991111 0000950130-99-006298.hdr.sgml : 19991111 ACCESSION NUMBER: 0000950130-99-006298 CONFORMED SUBMISSION TYPE: N-14 8C/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19991110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUNIYIELD PENNSYLVANIA FUND CENTRAL INDEX KEY: 0000891038 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 223199516 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-14 8C/A SEC ACT: SEC FILE NUMBER: 333-88395 FILM NUMBER: 99745536 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08543-9011 BUSINESS PHONE: 6092822800 MAIL ADDRESS: STREET 1: PO BOX 9011 STREET 2: C/O MERRILL LYNCH ASSET MANAGEMENT CITY: PRINCETON STATE: NJ ZIP: 08543-9011 N-14 8C/A 1 MUNIYIELD PENNSYLVANIA FUND As filed with the Securities and Exchange Commission on November 10, 1999 Securities Act File No. 333-88395 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. 1 [X] 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. Michael J. Hennewinkel, Esq. Brown & Wood LLP Merrill Lynch Asset Management, L.P. One World Trade Center 800 Scudders Mill Road New York, NY 10048-0557 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 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Proposed Proposed Maximum Maximum Offerintg Aggregate Amount of Title of Securities Amount Being Price Per Offering Registration Being Registered Registered(1) Unit(1) Price(1) Fee(3) - ------------------------------------------------------------------------------------ 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
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the filing fee. (2) Represents the liquidation preference of a preferred share after the reorganization. (3) $37,103 previously 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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") (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 and termination of each of MuniVest Pennsylvania and MuniHoldings Pennsylvania and the termination of their respective registration under the Investment Company Act of 1940; and 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. 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: November 10, 1999 2 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) ---------------- 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. ---------------- 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 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. The date of this Proxy Statement and Prospectus is November 10, 1999. The common shares of beneficial interest ("Common Shares") 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 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 in the case of 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 AMEX, 980 Washingtonian 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 (i) 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 and (ii) designate the currently outstanding series of AMPS of MuniYield Pennsylvania as Series A AMPS. The Acquired Funds will distribute the MuniYield Pennsylvania Common Shares and MuniYield Pennsylvania Series B AMPS 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. As part of the Reorganization, the Fund will amend 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 change the Fund's name to "MuniYield Pennsylvania Insured Fund." In the Reorganization, MuniYield Pennsylvania will issue Common Shares and auction market preferred shares ("AMPS") 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 AMPS of an Acquired Fund will receive MuniYield Pennsylvania Series B AMPS. 2 TABLE OF CONTENTS
Page ---- INTRODUCTION.............................................................. 5 ITEM 1. THE REORGANIZATION................................................ 6 SUMMARY................................................................. 6 RISK FACTORS AND SPECIAL CONSIDERATIONS................................. 16 Pennsylvania Municipal Bonds.......................................... 16 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......................................... 58 Surrender and Exchange of Share Certificates.......................... 59 Tax Consequences of the Reorganization................................ 60 Appraisal Rights...................................................... 61 Capitalization........................................................ 62
3
Page ----- 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
4 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 12, 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, 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, Series A, 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, Series A, 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, Series A, 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 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:
MuniYield MuniVest MuniHoldings Pennsylvania Pennsylvania Pennsylvania - ------------------------------------------------------------------------------------ Common Common Common Item Shares AMPS Shares AMPS Shares AMPS - ------------------------------------------------------------------------------------ 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
- -------- (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 MuniVest Pennsylvania Common Shares 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 MuniHoldings Pennsylvania Common Shares 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 At meetings of the Boards of Trustees of each of the Funds, the Board of Trustees of MuniVest Pennsylvania and MuniHoldings Pennsylvania voted unanimously to approve the Reorganization and the Board of Trustees of MuniYield Pennsylvania approved the Reorganization by the affirmative vote of all of the Trustees present at the meeting, representing more than two-thirds of the total number of Trustees. 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 October 21, 1999, approximately 58.5%), 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 and the effect on MuniYield Pennsylvania shareholders of the change in investment policy. It is not anticipated 7 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. 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 Pro Forma MuniYield Pennsylvania as of June 30, 1999 (Unaudited) (a)
Actual -------------------------------------- Pro Forma MuniYield MuniVest MuniHoldings MuniYield Pennsylvania Pennsylvania Pennsylvania Pennsylvania ------------ ------------ ------------ ------------ 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 Expenses(e)... 1.16% 1.33% 1.71% 1.10% ==== ==== ==== ====
- -------- (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 annual operating expenses for pro forma MuniYield Pennsylvania are projections for a 12-month period. (e) Based on net assets of each Fund and pro forma MuniYield Pennsylvania, 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 pro forma MuniYield Pennsylvania, and 0.55% for MuniHoldings Pennsylvania and the Total Annual Expenses would be 0.79%, 0.87%, 1.02%, and 0.72%. 8 Example: Cumulative Expenses Paid on Common Shares for the Periods Indicated:
1 3 5 10 Year Years Years Years ---- ----- ----- ----- 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 Pro Forma MuniYield Pennsylvania*.................... $11 $35 $61 $134
- -------- * 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 Pennsylvania.................. MuniYield Pennsylvania was organized as a 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. The Fund intends to invest primarily in long-term Pennsylvania Municipal Bonds and other long-term municipal obligations exempt from Federal income tax but not Pennsylvania personal income taxes ("Municipal Bonds") with a maturity of more than ten years. The weighted average maturity of the Fund's portfolio was 22.92 years as of September 30, 1999. The average maturity of the Fund's 9 portfolio securities, and therefore the Fund's portfolio as a whole, will vary based upon the assessment of Fund Asset Management, L.P. ("FAM"), the Fund's investment adviser, of economic and market conditions. See "Comparison of the Funds--Investment Objectives and Policies." MuniYield Pennsylvania has outstanding Common Shares and one series of AMPS ("MuniYield Pennsylvania AMPS"). As of September 30, 1999, MuniYield Pennsylvania had net assets of $122,409,730. Business of MuniVest Pennsylvania.................. MuniVest Pennsylvania was organized as a 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 personal 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. The Fund intends to invest primarily in long-term Pennsylvania Municipal Bonds and Municipal Bonds with a maturity of more than ten years. The weighted average maturity of the Fund's portfolio was 21.63 years as of September 30, 1999. The average maturity of the Fund's portfolio securities, and therefore the Fund's portfolio as a whole, will vary based upon FAM's assessment of economic and market conditions. See "Comparison of the Funds--Investment Objectives and Policies." MuniVest Pennsylvania has outstanding Common Shares and one series of AMPS ("MuniVest Pennsylvania AMPS.") As of September 30, 1999, MuniVest Pennsylvania had net assets of $77,247,018. 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. The Fund intends to invest primarily in 10 long-term Pennsylvania Municipal Bonds and Municipal Bonds with a maturity of more than ten years. The weighted average maturity of the Fund's portfolio was 22.48 years as of September 30, 1999. The average maturity of the Fund's portfolio securities, and therefore the Fund's portfolio as a whole, will vary based upon FAM's assessment of economic and market conditions. See "Comparison of the Funds--Investment Objectives and Policies." MuniHoldings Pennsylvania has outstanding Common Shares and one series of AMPS, designated Series A ("MuniHoldings Pennsylvania AMPS"). As of September 30, 1999, MuniHoldings Pennsylvania had net assets of $48,681,903. Comparison of the Funds........ Investment Objectives and Policies. The Funds have substantially similar investment objectives and policies. All three Funds seek to provide shareholders (including holders of AMPS) with current income exempt from Federal 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 September 30, 1999, (i) the net asset value per share of MuniYield Pennsylvania Common Shares was $13.99 and the market price per share was $12.5625; (ii) the net asset value per share of MuniVest Pennsylvania Common Shares was $12.31 and the market price per share was $11.6875; and (iii) the net asset value per share of MuniHoldings Pennsylvania Common Shares was $12.98 and the market price per share was $12.00. 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 Shares." 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 11 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.
Dividend Auction Date Fund Series Rate ------------ ------------ ------ -------- October 18, 1999.............. MuniYield * 3.35% Pennsylvania October 27, 1999.............. MuniVest * 3.35% Pennsylvania October 25, 1999.............. MuniHoldings A 2.99% Pennsylvania
-------- * No series designation. Advisory Fees. The investment adviser for each of the Funds is Fund Asset Management, L.P. ("FAM"). The principal business address of FAM is 800 Scudders Mill Road, Plainsboro, New Jersey 08536. FAM was organized as an investment adviser in 1977 and offers investment advisory services to more than 50 registered investment companies. The Asset Management Group of Merrill Lynch & Co., Inc. ("ML & Co.") (which includes FAM) acts as investment adviser for over 100 other registered investment companies and also offers 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 12 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 Bank of New York and State Street Bank and Trust Company each receives a fee for these services. 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 agency 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 was 1.16%, based on net assets of approximately $86.3 million excluding AMPS, and 0.79%, based on net assets of approximately $126.3 million including AMPS; the overall annualized operating expense ratio for MuniVest Pennsylvania was 1.33%, based on net assets of approximately $52.2 million excluding AMPS, and 0.87%, based on net assets of approximately $79.7 million including AMPS; and the overall annualized operating expense ratio for MuniHoldings Pennsylvania was 1.71%, based on net assets of approximately $30.1 million excluding AMPS, and 1.02%, based on 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 pro forma MuniYield Pennsylvania would have been 1.10%, based on net assets of approximately $168.6 million excluding AMPS, and 0.72%, based on 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 13 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 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. See "Exhibit IV--Ratings of Municipal Bonds and Commercial Paper." 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 14 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 Shares." 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. Outstanding Securities of MuniYield Pennsylvania, MuniVest Pennsylvania and MuniHoldings Pennsylvania as of September 30, 1999
Amount Outstanding Amount Held By Exclusive of Amount Amount Fund for its Shown in Title of Class Authorized Own Account Previous Column -------------- ---------- -------------- ------------------- MuniYield Pennsylvania Common Shares.................. Unlimited -0- 5,891,406 AMPS........................... 1,000,000 -0- 1,600 MuniVest Pennsylvania Common Shares.................. Unlimited -0- 4,041,184 AMPS........................... 1,000,000 -0- 1,100 MuniHoldings Pennsylvania Common Shares.................. Unlimited -0- 2,170,570 AMPS........................... 1,000,000 -0- 820
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." 15 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 apply equally to all three Funds and will also apply 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 and at least 80% of its portfolio in Pennsylvania Municipal Bonds and other 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." 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 a 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. 16 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 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 17 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 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 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.
Six Months Ended For The Year Ended October 31, For the Period April 30, --------------------------------------------------- October 30, 1992+ 1999 1998 1997 1996 1995 1994 1993 to October 31, 1992 --------- ------ -------- ------- ------ ------ ------- ------------------- 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 $16.37 $ 14.13 $14.18 ------- ------ -------- ------- ------ ------ ------- ------ Investment income--net.. .53 1.12 1.13 1.15 1.17 1.15 1.12 -- Realized and unrealized gain (loss) on investments--net....... (.24) .46 .66 (.03) 1.53 (2.41) 2.30 -- ------- ------ -------- ------- ------ ------ ------- ------ Total from investment operations............. .29 1.58 1.79 1.12 2.70 (1.26) 3.42 -- ------- ------ -------- ------- ------ ------ ------- ------ Less dividends and distributions to holders of Common Shares: Investment income-- net................... (.46) (.88) (.89) (.91) (.89) (.91) (.85) -- Realized gain on investments--net...... (.45) (.27) (.09) -- -- (.12) -- -- In excess of realized gain on investments-- net................... -- -- -- -- (.05) -- -- -- ------- ------ -------- ------- ------ ------ ------- ------ Total dividends and distributions to holders of Common Shares................. (.91) (1.15) (.98) (.91) (.94) (1.03) (.85) -- ------- ------ -------- ------- ------ ------ ------- ------ Capital charge resulting from issuance of Common Shares................. -- -- -- -- -- -- -- (.05) ------- ------ -------- ------- ------ ------ ------- ------ Effect of Preferred Share activity++: Dividends and distributions to holders of Preferred Shares: Investment income-- net................... (.07) (.18) (.24) (.25) (.25) (.20) (.18) -- Realized gain on investments--net...... (.06) (.10) (.03) -- -- (.02) -- -- In excess of realized gain on investments-- net................... -- -- -- -- (.01) -- -- -- Capital charge resulting from issuance of Preferred Shares................ -- -- -- -- -- -- (.15) -- ------- ------ -------- ------- ------ ------ ------- ------ Total effect of Preferred Share activity............... (.13) (.28) (.27) (.25) (.26) (.22) (.33) -- ------- ------ -------- ------- ------ ------ ------- ------ Net asset value, end of period................. $ 15.26 $16.01 $ 15.86 $ 15.32 $15.36 $13.86 $ 16.37 $14.13 ======= ====== ======== ======= ====== ====== ======= ====== Market price per share, end of period.......... $15.125 $16.50 $14.8125 $14.125 $13.75 $11.00 $16.375 $15.00 ======= ====== ======== ======= ====== ====== ======= ====== Total Investment Return:** Based on market price per share.............. (2.97%)# 19.82% 12.15% 9.48% 34.17% (27.82%) 15.30% .00%# ======= ====== ======== ======= ====== ====== ======= ====== Based on net asset value per share.............. .89%# 8.58% 10.71% 6.30% 18.95% (9.02%) 22.36% (.35%)# ======= ====== ======== ======= ====== ====== ======= ====== Ratios to Average Net Assets:*** Expenses, net of reimbursement.......... .78%* .77% .79% .78% .82% .82% .64% -- ======= ====== ======== ======= ====== ====== ======= ====== Expenses................ .78%* .77% .79% .78% .82% .82% .78% -- ======= ====== ======== ======= ====== ====== ======= ====== Investment income--net.. 4.77%* 4.90% 5.07% 5.14% 5.44% 5.12% 5.20% -- ======= ====== ======== ======= ====== ====== ======= ======
(footnotes on following page) 19 MuniYield Pennsylvania (continued)
For the Six Period Months October 30, Ended For The Year Ended October 31, 1992+ to April 30, ---------------------------------------------------- October 31, 1999 1998 1997 1996 1995 1994 1993 1992 --------- ------- ------- ------- ------- ------- ------- ----------- Supplemental Data: Net assets, net of Preferred Shares, end of period (in thousands)............. $89,808 $92,767 $91,071 $88,001 $88,226 $79,609 $92,654 $78,315 ======= ======= ======= ======= ======= ======= ======= ======= Preferred Shares outstanding, end of period (in thousands).. $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 -- ======= ======= ======= ======= ======= ======= ======= ======= Portfolio turnover...... 16.87% 60.52% 70.14% 75.83% 43.59% 18.64% 14.03% -- ======= ======= ======= ======= ======= ======= ======= ======= Dividends Per Share on Preferred Shares Outstanding:+++ Investment income--net.. $ 268 $ 655 $ 853 $ 901 $ 902 $ 688 $ 644 -- ======= ======= ======= ======= ======= ======= ======= ======= Leverage: Asset coverage per $1,000................. $ 3,245 $ 3,319 $ 3,277 $ 3,200 $ 3,206 $ 2,990 $ 3,316 -- ======= ======= ======= ======= ======= ======= ======= =======
- -------- * 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 charges. *** Do not reflect the effect of dividends to holders of Preferred Shares. # Aggregate total investment return. + Commencement of operations. ++ The Fund's Preferred Shares were issued on November 30, 1992. +++ Dividends per share have been adjusted to reflect a two-for-one stock split that occurred on December 1, 1994. 20 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.
For the Six Period Months July 30, Ended For The Year Ended October 31, 1993+ to April 30, ------------------------------------------ October 31, 1999 1998 1997 1996 1995 1994 1993 --------- ------- ------ ------- ------- ------- ----------- 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 $ 14.70 $14.18 -------- ------- ------ ------- ------- ------- ------ Investment income--net.. .45 .94 .95 .97 1.01 1.05 .25 Realized and unrealized gain (loss) on investments--net....... (.17) .42 .59 (.23) 1.37 (3.08) .64 -------- ------- ------ ------- ------- ------- ------ Total from investment operations............. .28 1.36 1.54 .74 2.38 (2.03) .89 -------- ------- ------ ------- ------- ------- ------ Less dividends and distributions to holders of Common Shares: Investment income--net. (.36) (.71) (.71) (.73) (.75) (.86) (.13) Realized gain on investments--net...... -- -- -- -- -- (.06) -- -------- ------- ------ ------- ------- ------- ------ Total dividends and distributions to holders of Common Shares................. (.36) (.71) (.71) (.73) (.75) (.92) (.13) -------- ------- ------ ------- ------- ------- ------ Capital charge resulting from issuance of Common Shares................. -- -- -- -- -- -- (.05) -------- ------- ------ ------- ------- ------- ------ Effect of Preferred Share activity++: Dividends and distributions to holders of Preferred Shares: Investment income-- net.................. (.10) (.23) (.23) (.24) (.26) (.20) (.03) Realized gain on investments--net..... -- -- -- -- -- (.01) -- Capital charge resulting from issuance of Preferred Shares....... -- -- -- -- -- -- (.16) -------- ------- ------ ------- ------- ------- ------ Total effect of Preferred Share activity............... (.10) (.23) (.23) (.24) (.26) (.21) (.19) -------- ------- ------ ------- ------- ------- ------ Net asset value, end of period................. $ 13.52 $ 13.70 $13.28 $ 12.68 $ 12.91 $ 11.54 $14.70 ======== ======= ====== ======= ======= ======= ====== Market price per share, end of period.......... $13.0625 $13.875 $12.25 $11.625 $11.875 $10.875 $15.00 ======== ======= ====== ======= ======= ======= ====== Total Investment Return:** Based on market price per share.............. (3.29%)# 19.62% 11.80% 3.98% 16.58% (22.20%) 92%# ======== ======= ====== ======= ======= ======= ====== Based on net asset value per share.............. 1.38%# 8.95% 11.12% 4.32% 19.44% (15.76%) 4.62%# ======== ======= ====== ======= ======= ======= ======
(footnotes on following page) 21 MuniVest Pennsylvania (continued)
For the Six Period Months July 30, Ended For The Year Ended October 31, 1993+ to April 30, ------------------------------------------- October 31, 1999 1998 1997 1996 1995 1994 1993 --------- ------- ------- ------- ------- ------- ----------- Ratios to Average Net Assets:*** Expenses, net of reimbursement.......... .87%* .86% .88% .90% .83% .51% .90%* ======= ======= ======= ======= ======= ======= ======= Expenses................ .87%* .86% .88% .90% .95% .86% .90%* ======= ======= ======= ======= ======= ======= ======= Investment income--net.. 4.54%* 4.66% 4.77% 4.91% 5.33% 5.24% 5.27%* ======= ======= ======= ======= ======= ======= ======= Supplemental Data: Net assets, net of Preferred Shares, end of period (in thousands)......... $54,587 $55,207 $53,456 $51,050 $51,867 $46,390 $57,869 ======= ======= ======= ======= ======= ======= ======= Preferred Shares outstanding, end of period (in thousands).. $27,500 $27,500 $27,500 $27,500 $27,500 $27,500 $27,500 ======= ======= ======= ======= ======= ======= ======= Portfolio turnover...... 19.64% 60.37% 61.03% 113.65% 73.19% 93.00% 22.31% ======= ======= ======= ======= ======= ======= ======= Dividends Per Share on Preferred Shares Outstanding+++: Investment income--net.. $ 369 $ 848 $ 837 $ 879 $ 966 $ 721 $ 119 ======= ======= ======= ======= ======= ======= ======= Leverage: Asset coverage per $1,000................. $ 2,985 $ 3,008 $ 2,944 $ 2,856 $ 2,886 $ 2,687 $ 3,104 ======= ======= ======= ======= ======= ======= =======
- -------- * 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 charges. *** Do not reflect the effect of dividends to holders of Preferred Shares. # Aggregate total investment return. + Commencement of operations. ++ The Fund's Preferred Shares were issued on September 2, 1993. +++ Dividends per share have been adjusted to reflect a two-for-one stock split that occurred on December 1, 1994. 22 MuniHoldings Pennsylvania The financial information in the table below is unaudited and has been provided by FAM. The following per share data and ratios have been derived from information provided in the financial statements of the Fund.
For the Period February 26, 1999+ to March 31, 1999 --------------------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.................... $ 15.00 ------- 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 ======= Market price per share, end of period................... $16.125 ======= Total Investment Return:** Based on market price per share......................... 7.50%# ======= Based on net asset value per share...................... (1.33%)# ======= Ratios to Average Net Assets*** Expenses, net of reimbursement.......................... .03%* ======= Expenses................................................ 1.02%* ======= Investment income--net.................................. 5.00%* ======= Supplemental Data: Net assets, net of Preferred Shares, end of period (in thousands)............................................. $30,818 ======= Preferred Shares outstanding, end of period (in thousands)............................................. $20,500 ======= Portfolio turnover...................................... 0.00% ======= Dividends Per Share on Preferred Shares Outstanding: Investment income--net.................................. $ 38 ======= Leverage: Asset coverage per $1,000............................... $ 2,503 =======
- -------- * 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 charges. *** Do not reflect the effect of dividends to holders of Preferred Shares. + Commencement of operations. ++ The Fund's Preferred Shares were issued on March 17, 1999. # Aggregate total investment return. 23 Per Share Data for Common Shares* Traded on the New York Stock Exchange (unaudited) MuniYield Pennsylvania
Premium (Discount) to Net Market Price Net Asset Asset Value ($)** Value ($) (%) --------------- ----------- ------------- Quarter Ended* High Low High Low High Low -------------- ------- ------- ----- ----- ----- ------ 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) October 31, 1999 .................... 13.8125 12.00 14.56 13.44 (3.27) (11.60)
MuniVest Pennsylvania
Premium (Discount) to Net Market Price Net Asset Asset Value ($)** Value ($) (%) --------------- ----------- ------------- Quarter Ended* High Low High Low High Low -------------- ------- ------- ----- ----- ----- ------ 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) October 31, 1999 .................... 12.50 10.75 12.85 11.75 (2.48) (6.27)
Per Share Data for Common Shares* Traded on the American Stock Exchange (unaudited) MuniHoldings Pennsylvania
Premium (Discount) to Net Market Price Net Asset Asset Value ($)** Value ($) (%) ------------- ----------- ----------- Quarter Ended* High Low High Low High Low -------------- ------ ------ ----- ----- ----- ----- 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) October 31, 1999......................... 13.875 10.875 13.80 12.15 2.43 (8.49)
- -------- * 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 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 15% 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 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. For purposes of a Fund's investment objective and policies, Non-Municipal Tax- Exempt Securities that pay interest that is exempt from Federal income taxes and Pennsylvania personal income taxes will be considered "Pennsylvania Municipal Bonds" and Non-Municipal Tax-Exempt Securities that pay interest that is exempt from Federal income taxes will be considered "Municipal Bonds". The Pennsylvania Municipal Bonds and Municipal Bonds in which the Funds invest will be rated at the date of purchase in the four highest rating categories of S&P, Moody's or Fitch or, if unrated, will be 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 25 investment grade rating categories are SP-1 through SP-2 for S&P, MIG-1 through MIG-3 for Moody's and F-1+ through F-3 for Fitch. In the case of tax- exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moody's and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 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. See "Risk Factors and Special Considerations--Leverage." 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 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 58.5% of the portfolio of MuniYield Pennsylvania is comprised of insured Pennsylvania Municipal Bonds and Municipal Bonds. 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 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 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 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. Pennsylvania's outstanding general obligation bonds are currently rated Aa3 by Moody's, AA by Fitch and AA by S&P. 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 29 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 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. See Exhibit III--"Economic and Other Conditions in Pennsylvania," and Exhibit IV--"Ratings of Municipal Bonds and Commercial Paper." 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 30 believes that indexed and 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 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 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 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, for the Common Shares and AMPS voting together as a single class, "majority" means the lesser of (i) 67% of the shares of each class of capital shares represented at a meeting at which more than 50% of the outstanding shares of each class of capital shares are represented or (ii) more than 50% of the outstanding shares of each class of capital shares, but for the AMPS voting separately as a single class, "majority" means more than 50% of the outstanding AMPS.) 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 companies that invest in real estate or interests therein and the Fund may purchase and sell financial futures contracts and options thereon. 34 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. For purposes of restriction (9), the exception for states, municipalities and their political subdivisions applies only to tax exempt securities issued by such entities. An additional investment restriction adopted by each 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 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%, respectively, 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%, respectively, of the Fund's portfolio. 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 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.
Number of Value S&P* Moody's* Issues (in thousands) Percent ---- -------- --------- -------------- ------- 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% === ======== =====
- -------- * 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.
Number of Value S&P* Moody's* Issues (in thousands) Percent ---- -------- --------- -------------- ------- 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% === ======= =====
- -------- * 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 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 August 31, 1999.
Number of Value S&P* Moody's* Issues (in thousands) Percent ---- -------- --------- -------------- ------- AAA Aaa 20 $39,985 88.6% AA Aa 2 $ 5,129 11.4% --- ------- ----- 22 $45,114 100.0% === ======= =====
- -------- * 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 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:
Six Months YearEnded Ended October 31, April 30, 1999 -------------- (unaudited) 1998 1997 -------------- ------ ------ MuniYield Pennsylvania..................... 16.87% 60.52% 70.14% MuniVest Pennsylvania...................... 19.64% 60.37% 61.03%
Period February 26, 1999+ to March 31, 1999 (unaudited) --------------- MuniHoldings Pennsylvania.................................. 0.00%
- -------- + 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 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 November 4, 1992. As of September 30, 1999, the net asset value per MuniYield Pennsylvania Common Share was $13.99 and the market price per share was $12.5625. The MuniVest Pennsylvania Common Shares commenced trading on the NYSE on August 16, 1993. As of September 30, 1999, the net asset value per MuniVest Pennsylvania Common Share was $12.31 and the market price per share was $11.6875. The MuniHoldings Pennsylvania Common Shares commenced trading on the AMEX on March 8, 1999. As of September 30, 1999, the net asset value per MuniHoldings Pennsylvania Common Share was $12.98 and the market price per share was $12.00. 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 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.
Dividend Auction Date Fund Series Rate ------------ ---- ------ -------- October 18, 1999................. MuniYield Pennsylvania * 3.35% October 27, 1999................. MuniVest Pennsylvania * 3.35% October 25, 1999................. MuniHoldings Pennsylvania A 2.99%
- -------- *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 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 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 nine persons, seven 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 registered investment companies and offers services to individuals and institutional accounts. As of September 1999, the Asset Management Group had a total of approximately $514 billion in investment company and other portfolio assets under management (approximately $38.5 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. FAM was organized as an investment adviser in 1977 and offers investment advisory services to more than 50 registered investment companies. 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 agreements, MuniYield Pennsylvania and MuniVest Pennsylvania currently pay FAM, 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 0.55% of the Fund's average weekly net assets. After the Reorganization, the combined fund will pay FAM a monthly fee at the annual rate of .50% of the combined 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 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 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. 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. 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, (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, (iii) approve any plan of reorganization adversely affecting such AMPS or (iv) take any action to change a Fund's investment policies requiring a vote of shareholders under Section 13(a) of the Investment Company Act. 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 relating to their Common Shares are identical. Each Fund intends to distribute all or a portion of its net investment income monthly to holders of a Fund's Common Shares. Monthly distributions to holders of a Fund's Common Shares normally consist of all or a portion of its net investment income remaining after the payment of dividends (and any Additional Distribution) on the Fund's 45 AMPS. A Fund may at times pay out less than the entire amount of net investment income earned in any particular period and may at times pay out such accumulated undistributed income in addition to net investment income earned in other periods in order to permit the Fund to maintain a more stable level of dividends to holders of Common Shares. As a result, the dividend paid by a Fund to holders of its Common Shares for any particular period may be more or less than the amount of net investment income earned by the Fund during such period. For Federal tax purposes, the Fund is required to distribute substantially all of its net investment income for each year. All net realized capital gains, if any, are distributed pro rata at least annually to holders of a Fund's Common Shares and AMPS. While any of a Fund's 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, including any Additional Distribution, 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. If a Fund's ability to make distributions on its Common Shares is limited, such limitation could under certain circumstances, impair the ability of the Fund to maintain its qualification for taxation as a regulated investment company which would have adverse tax consequences for 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 Federal 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. 46 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. 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- 47 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 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 48 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. Class D shares pay an ongoing account maintenance fee. 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. 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 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 the interest on which is excludable from gross income for Federal income tax purposes ("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 PABs or IDBs if any, held by a Fund. 49 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. 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") 50 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. 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- 51 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 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. The Funds may invest in instruments the return on which includes nontraditional features such as indexed principal or interest payments ("nontraditional instruments"). These instruments may be subject to special tax rules under which a Fund may be required to accrue and distribute income before amounts due under the obligations are paid. In addition, it is possible that all or a portion of the interest payments on such nontraditional instruments could be recharacterized as taxable ordinary income. If at any time when 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. 52 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 a question 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 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 53 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. 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 become 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, and will 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 each Acquired Fund, 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 Series A 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 54 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 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 MuniVest Pennsylvania and MuniHoldings Pennsylvania voted unanimously to approve the Reorganization and the Board of Trustees of MuniYield Pennsylvania approved the Reorganization by the affirmative vote of all the Trustees present at the meeting, representing more than two-thirds of the total number of Trustees. 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 55 (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. 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. 56 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 Series A 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 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 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 Termination. 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, 57 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 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 herein above and (ii) involves minimal costs (including relatively minor legal, accounting and administrative costs). MuniYield Pennsylvania's Board also considered the possible risks and costs to MuniYield Pennsylvania of becoming an insured fund and concluded that based on current portfolio holdings and market conditions the risks were minimal. 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 and pro forma MuniYield Pennsylvania based on net assets both excluding and including assets attributable to AMPS as of June 30, 1999:
Total annualized Net assets, Total annualized Net assets, operating excluding operating including expense ratio AMPS expense ratio AMPS Fund excluding AMPS (in millions) including AMPS (in millions) ---- ---------------- ------------- ---------------- ------------- 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 1.02% $ 50.6 Pro Forma MuniYield Pennsylvania(1)........ 1.10% $168.6 0.72% $256.6
- -------- (1) Assumes Reorganization had taken place on June 30, 1999. 58 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 $.02 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 six months to 3 1/2 years after the Exchange Date due to a decrease in the operating expense ratio. 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.
If prior to the Reorganization you held: After the Reorganization, you will hold: - ---------------------------------------- ---------------------------------------- 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
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 distributable with respect to the Common Shares of the Acquired Fund held before the 59 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 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 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 of an Acquired Fund are presented to MuniYield Pennsylvania, they will be canceled and exchanged for certificates representing Common Shares of MuniYield Pennsylvania, as applicable, and cash in lieu of fractional Common Shares of MuniYield Pennsylvania, if any, distributable with respect to such Common Shares 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 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. 60 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 will only 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 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 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. 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. 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 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 capitalization of pro forma MuniYield Pennsylvania as adjusted to give effect to the Reorganization. Pro Forma Capitalization of MuniYield Pennsylvania, MuniVest Pennsylvania, MuniHoldings Pennsylvania and Pro Forma MuniYield Pennsylvania as of April 30, 1999 (unaudited)
Pro Forma MuniYield Pennsylvania MuniYield MuniVest MuniHoldings Pro Forma As Pennsylvania Pennsylvania Pennsylvania Adjustment adjusted(a) ------------ ------------ ------------ ---------- ------------ Net Assets: Net Assets Attributable to Common Shares........ $89,807,780 $54,587,268 $31,959,162 (2,095,441) $174,258,769 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 (487,341) 11,590,165(b) AMPS Series A............ 1,600 1,100 820 (1,920) 1,600 Series B............ -- -- -- 1,920 1,920(b) Net Asset Value Per Share: Common Shares......... $ 15.26 $ 13.52 $ 14.82 -- $ 15.04(c) AMPS.................. $ 25,000 $ 25,000 $ 25,000 -- $ 25,000
- -------- (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 and accrual of Reorganization expenses of $340,000. 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, designated Series B, consisting of 1,920 shares in exchange for the net assets of each of MuniVest Pennsylvania and MuniHoldings Pennsylvania. The estimated 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 net of Reorganization-related expenses and distribution of undistributed net investment income of $1,172,691 for MuniYield Pennsylvania, $295,148 for MuniVest Pennsylvania and $287,602 for MuniHoldings Pennsylvania. 62 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:
Principal Occupation During Past Name and Address Age Five Years and Public Directorships(1) ---------------- --- -------------------------------------- Joseph L. May(1)(2)................. 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.
Andre F. Perold(1)(2)................ 47 Professor, Harvard Business School Harvard Business School since 1989 and Associate Professor Morgan Hall from 1983 to 1989; Trustee, The Common Soldiers Field Fund since 1989; Director, Quantec Boston, Massachusetts 02163 Limited from 1991 to 1999; Director, TIBCO from 1994 to 1996; Director, Genbel Securities Limited and Genbel Bank since 1999.
(footnotes on following page) 63 To be Elected by Holders of MuniHoldings Pennsylvania Common Shares and MuniHoldings Pennsylvania AMPS, Voting Together as a Single Class:
Principal Occupation During Past Name and Address Age Five Years and Public Directorships(1) ---------------- --- -------------------------------------- Terry K. Glenn(1)*.................. 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)............. 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; Director, Gilder Group LLC and related companies since 1999. Herbert I. London(1)(2)............. 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).............. 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)*................... 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.
- -------- (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 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 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 Audit Committee also reviews and nominates candidates to serve as non-interested Board members. The non-interested Board members have retained independent legal counsel to assist them in connection with these duties. 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. 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 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 Deloitte & Touche LLP ("D&T") as the independent auditors to audit the financial statements of the Fund for the Fund's current fiscal year. 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. 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 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 D&T are expected to be present at the Meeting 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 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 for Trustee of MuniHoldings Pennsylvania or the Trustees of MuniYield Pennsylvania or MuniVest Pennsylvania held shares of the Funds except as set forth in the table below:
Nominee Fund and Class of Shares No. of Shares Held* ------- --------------------------------------- ------------------- Terry K. Glenn..... MuniVest Pennsylvania Common Shares 25,518 MuniHoldings Pennsylvania Common Shares 13,724
- -------- * These holdings represent less than 1% of the Common Shares outstanding of the relevant Fund. As of the Record Date, the Trustees and officers of MuniYield Pennsylvania as a group (12 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 (12 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 67 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 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 Shareholder Communications Corporation, 17 State Street, New York, New York 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 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 offices of the American Stock Exchange, 980 Washingtonian Boulevard, Gaithersburg, Maryland 20878 in the case of MuniHoldings Pennsylvania. 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 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 six-year period then ended and for the period October 30, 1992 to October 31, 1992 for MuniYield Pennsylvania and 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 and for the period July 30, 1993 to October 31, 1993 for MuniVest Pennsylvania included in this Proxy Statement and Prospectus have been so included in reliance on the reports of Deloitte & Touche LLP ("D&T"), independent auditors, given on 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 MuniHoldings Pennsylvania intends to present a proposal at the 2000 Annual Meeting of Shareholders of the Fund, anticipated to be held in December 2000, 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 July 14, 2000. 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 INDEX TO FINANCIAL STATEMENTS Page ---- Audited Financial Statements for MuniYield Pennsylvania Fund for the Fiscal Year Ended October 31, 1998 ................................ F-2 Unaudited Financial Statements for MuniYield Pennsylvania Fund for the Six-Month Period Ended April 30, 1999 ............................. F-13 Audited Financial Statements for MuniVest Pennsylvania Insured Fund for the Fiscal Year Ended October 31, 1998 ........................ F-24 Unaudited Financial Statements for MuniVest Pennsylvania Insured Fund for the Six-Month Period Ended April 30, 1999 ..................... F-35 Unaudited Financial Statements for MuniHoldings Pennsylvania Insured Fund for the Period February 26, 1999 to March 31, 1999 ........... F-45 Unaudited Financial Statements for Pro Forma MuniYield Pennsylvania Fund as of April 30, 1999 ......................................... F-53 F-1 Audited Financial Statements for MuniYield Pennsylvania Fund for the Fiscal Year Ended October 31, 1998 F-2 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 and financial highlights. 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 MuniYield Pennsylvania Fund October 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS (in Thousands) - --------------------------------------------------------------------------------
S&P Moody's Face Value Ratings Ratings Amount Issue (Note 1a) - ---------------------------------------------------------------------------------------------------------------------------------- Pennsylvania -- 101.2% - ---------------------------------------------------------------------------------------------------------------------------------- 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, 6,172 Series 20, 7.02% due 12/01/2024 (d)(h) - ---------------------------------------------------------------------------------------------------------------------------------- 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 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 - ----------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 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 PCR Pollution Control Revenue Bonds RITR Residual Interest Trust Receipts S/F Single-Family UT Unlimited Tax VRDN Variable Rate Demand Notes F-4 MuniYield Pennsylvania Fund October 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS (continued) (in Thousands) - --------------------------------------------------------------------------------
S&P Moody's Face Value Ratings Ratings Amount Issue (Note 1a) - ---------------------------------------------------------------------------------------------------------------------------------- Pennsylvania (continued) - ---------------------------------------------------------------------------------------------------------------------------------- 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 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 - ----------------------------------------------------------------------------------------------------------------------------------
F-5 MuniYield Pennsylvania Fund October 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS (concluded) (in Thousands) - --------------------------------------------------------------------------------
S&P Moody's Face Value Ratings Ratings Amount Issue (Note 1a) - ---------------------------------------------------------------------------------------------------------------------------------- Pennsylvania (concluded) - ---------------------------------------------------------------------------------------------------------------------------------- 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 ======== - ----------------------------------------------------------------------------------------------------------------------------------
(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 - -------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- + Temporary investments in short-term municipal securities. F-6 MuniYield Pennsylvania Fund October 31, 1998 - -------------------------------------------------------------------------------- Financial Information - --------------------------------------------------------------------------------
Statement of Assets, Liabilities and Capital as of October 31, 1998 - ------------------------------------------------------------------------------------------------------------------ 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): 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 ============ - ------------------------------------------------------------------------------------------------------------------
* Auction Market Preferred Shares. See Notes to Financial Statements. F-7 MuniYield Pennsylvania Fund October 31, 1998 - -------------------------------------------------------------------------------- FINANCIAL INFORMATION (continued) - -------------------------------------------------------------------------------- Statement of Operations - --------------------------------------------------------------------------------
For the Year Ended October 31, 1998 - ----------------------------------------------------------------------------------------------------- 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 ---------- 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 Increase in Net Assets Resulting from Operations ... $9,165,931 Net (Notes 1b, ========== 1d & 3): - -----------------------------------------------------------------------------------------------------
See Notes to Financial Statements. F-8 MuniYield Pennsylvania Fund October 31, 1998 - -------------------------------------------------------------------------------- FINANCIAL INFORMATION (continued) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the Year Ended October 31, ------------------------------ Increase (Decrease) in Net Assets: 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- 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 Interest Value of shares issued to Common Shareholders in reinvestment of dividends Transactions and distributions ........................................................ 785,969 -- (Note 4): ------------- ------------- - -------------------------------------------------------------------------------------------------------------------------------- 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 ============= ============= - -------------------------------------------------------------------------------------------------------------------------------- *Undistributed investment income--net (Note 1f) ........................... $ 1,160,698 $ 830,471 ============= ============= - --------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. F-9 MuniYield Pennsylvania Fund October 31, 1998 - -------------------------------------------------------------------------------- FINANCIAL INFORMATION (concluded) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Financial Highlights - --------------------------------------------------------------------------------
The following per share data and ratios have been derived For the Year Ended from information provided in the financial statements. October 31, --------------------------------------------------- Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- 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 investments--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 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:+ - ---------------------------------------------------------------------------------------------------------------------------------
* 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. F-10 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 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. F-11 MuniYield Pennsylvania Fund October 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (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. (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 ========== ========== - -------------------------------------------------------------------------------- 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-12 Unaudited Financial Statements for MuniYield Pennsylvania Fund for the Six-Month Period Ended April 30, 1999 F-13 MuniYield Pennsylvania Fund April 30, 1999 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS (in Thousands) - --------------------------------------------------------------------------------
S&P Moody's Face Value Ratings Ratings Amount Issue (Note 1a) - ---------------------------------------------------------------------------------------------------------------------------------- Pennsylvania -- 100.1% - ---------------------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------------------- AAA Aaa 4,000 Pennsylvania HFA, Revenue Refunding Bonds (Rental Housing), 6.50% due 7/01/2023 (e) 4,261 - ----------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 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 F-14 MuniYield Pennsylvania Fund April 30, 1999 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS (continued) (in Thousands) - --------------------------------------------------------------------------------
S&P Moody's Face Value Ratings Ratings Amount Issue (Note 1a) - ---------------------------------------------------------------------------------------------------------------------------------- Pennsylvania (continued) - ---------------------------------------------------------------------------------------------------------------------------------- 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 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 - ----------------------------------------------------------------------------------------------------------------------------------
F-15 MuniYield Pennsylvania Fund April 30, 1999 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS (concluded) (in Thousands) - --------------------------------------------------------------------------------
S&P Moody's Face Value Ratings Ratings Amount Issue (Note 1a) - ---------------------------------------------------------------------------------------------------------------------------------- Pennsylvania (concluded) - ---------------------------------------------------------------------------------------------------------------------------------- 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 ======== - ----------------------------------------------------------------------------------------------------------------------------------
(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 - ---------------------------------------------------------------------------- AAA/Aaa 63.5% - ---------------------------------------------------------------------------- AA/Aa 13.0 - ---------------------------------------------------------------------------- A/A 12.0 - ---------------------------------------------------------------------------- BBB/Baa 5.5 - ---------------------------------------------------------------------------- Other+ 6.1 - ---------------------------------------------------------------------------- + Temporary investments in short-term municipal securities. F-16 MuniYield Pennsylvania Fund April 30, 1999 - -------------------------------------------------------------------------------- FINANCIAL INFORMATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Statement of Assets, Liabilities and Capital as of April 30, 1999 - -------------------------------------------------------------------------------- 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 liquidation preference) $ 40,000,000 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 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 ============ - ------------------------------------------------------------------------------------------------------------------
* Auction Market Preferred Shares. See Notes to Financial Statements. F-17 MuniYield Pennsylvania Fund April 30, 1999 - -------------------------------------------------------------------------------- FINANCIAL INFORMATION (continued) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Statement of Operations - --------------------------------------------------------------------------------
For the Six Months Ended April 30, 1999 - ------------------------------------------------------------------------------------------------------- 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 ---------- Investments -- Net Increase in Net Assets Resulting from Operations ... $1,665,725 Net (Notes 1b, ========== 1d & 3): - -------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. F-18 MuniYield Pennsylvania Fund April 30, 1999 - -------------------------------------------------------------------------------- FINANCIAL INFORMATION (continued) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------------------- 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 Interest Value of shares issued to Common Shareholders in reinvestment of dividends Transactions and distributions ........................................................ 1,448,899 785,969 (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 ============= ============= - -------------------------------------------------------------------------------------------------------------------------------- *Undistributed investment income--net ..................................... $ 1,172,691 $ 1,160,698 ============= ============= - --------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. F-19 MuniYield Pennsylvania Fund April 30, 1999 - -------------------------------------------------------------------------------- FINANCIAL INFORMATION (concluded) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Financial Highlights - --------------------------------------------------------------------------------
For the Six For the The following per share data and ratios have been derived Months Ended Year Ended October 31, from information provided in the financial statements. April 30, -------------------------------------------- Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- 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 . -- -- -- -- -- ------- ------- -------- -------- -------- 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) ------- ------- -------- -------- -------- 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: - ----------------------------------------------------------------------------------------------------------------------------------
* 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. F-20 MuniYield Pennsylvania Fund April 30, 1999 - -------------------------------------------------------------------------------- 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). 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. F-21 MuniYield Pennsylvania Fund April 30, 1999 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (concluded) - -------------------------------------------------------------------------------- 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 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 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-22 [This page is intentionally left blank.] F-23 Audited Financial Statements for MuniVest Pennsylvania Insured Fund for the Fiscal Year Ended October 31, 1998 F-24 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-25 MuniVest Pennsylvania Insured Fund, October 31, 1998 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS (in Thousands) - --------------------------------------------------------------------------------
S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) ==================================================================================================================================== 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 ------------------------------------------------------------------------------------------------------------------ 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 ------------------------------------------------------------------------------------------------------------------
F-26 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, 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 ======= ====================================================================================================================================
(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 ues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements. ================================================================================ 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 F-27 MuniVest Pennsylvania Insured Fund, October 31, 1998 - -------------------------------------------------------------------------------- STATEMENT OF ASSETS, LIABILITIES AND CAPITAL - --------------------------------------------------------------------------------
As of October 31, 1998 ============================================================================================================================ 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 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 ============ ============================================================================================================================
* Auction Market Preferred Shares. See Notes to Financial Statements. F-28 - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- For the Year Ended October 31, 1998 =========================================================================================================== Investment Interest and amortization of premium and Income (Note 1d): discount earned ...................................... $ 4,515,650 =========================================================================================================== 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 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. F-29 MuniVest Pennsylvania Insured Fund, October 31, 1998 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
For the Year Ended October 31, ---------------------------- Increase (Decrease) in Net Assets: 1998 1997 ========================================================================================================================= 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 of dividends 56,450 -- Transactions ------------ ------------ (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 ============ ============ ========================================================================================================================= *Undistributed investment income -- net .................................. $ 303,140 $ 303,379 ============ ============ =========================================================================================================================
- -------------------------------------------------------------------------------- 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 ======================================================================================================================== 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:
See Notes to Financial Statements. F-30 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:** ======= ======= ======= ======= ======= 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:+ ========================================================================================================================
* 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. F-31 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. (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. o Financial futures contracts -- The Fund may purchase or sell financial futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. o Options -- The Fund is authorized to write covered call options and purchase put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired, or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. (c) Income taxes -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute sub stantially 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-32 (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. 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 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-33 [This page is intentionally left blank.] F-34 Unaudited Financial Statements for MuniVest Pennsylvania Insured Fund for the Six-Month Period Ended April 30, 1999 F-35 MuniVest Pennsylvania Insured Fund, April 30, 1999 - -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS (in Thousands) - --------------------------------------------------------------------------------
S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) ==================================================================================================================================== Pennsylvania -- BBB- Baa2 $ 1,670 Allegheny County, Pennsylvania, IDA, Environmental Improvement, 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 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 ------------------------------------------------------------------------------------------------------------------
F-36 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 Bonds, Series A, 5% due 8/01/2017 (b) 1,983 ------------------------------------------------------------------------------------------------------------------ AAA Aaa 1,000 Philadelphia, Pennsylvania, Water and Wastewater Revenue Refunding onds, 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 ======= ====================================================================================================================================
(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. See Notes to Financial Statements. ================================================================================ Portfolio To simplify the listings of MuniVest Pennsylvania Insured Abbreviations 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 IDR Industrial Development Revenue Bonds PCR Pollution Control Revenue Bonds RITES Residual Interest Tax-Exempt Securities RITR Residual Interest Trust Receipts S/F Single-Family VRDN Variable Rate Demand Notes F-37 MuniVest Pennsylvania Insured Fund, April 30, 1999 - -------------------------------------------------------------------------------- STATEMENT OF ASSETS, LIABILITIES AND CAPITAL - -------------------------------------------------------------------------------- As of April 30, 1999
================================================================================================================ 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 ============ ================================================================================================================
* Auction Market Preferred Shares. See Notes to Financial Statements. F-38 - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- For the Six Months Ended April 30, 1999 ========================================================================================================== 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. F-39 MuniVest Pennsylvania Insured Fund, April 30, 1999
For the Six For the Months Ended Year Ended April 30, October 31, Increase (Decrease) in Net Assets: 1999 1998 ========================================================================================================================= 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) (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 reinvestment of dividends 111,857 56,450 Transactions ------------ ------------ (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 ============ ============ ========================================================================================================================= *Undistributed investment income -- net .................................. $ 295,148 $ 303,140 ============ ============ =========================================================================================================================
See Notes to Financial Statements. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
The following per share data and ratios have been derived from information provided in the For the Six financial statements. Months Ended For the Year Ended October 31, April 30, ------------------------------------------- Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995 ======================================================================================================================== 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 dividends from investment income -- net to Common Shareholders ............. (.36) (.71) (.71) (.73) (.75) ========================================================================================================================
F-40 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 ======== ======= ======= ======= ======= ======================================================================================================================== 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, end Data: 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: ========================================================================================================================
* 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. F-41 MuniVest Pennsylvania Insured Fund, April 30, 1999 - -------------------------------------------------------------------------------- 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'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. o Financial futures contracts -- The Fund may purchase or sell financial futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. o Options -- The Fund is authorized to write covered call options and purchase put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired, or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. (c) Income taxes -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income -- Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. F-42 (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 $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 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-43 [This page is intentionally left blank.] F-44 Unaudited Financial Statements for MuniHoldings Pennsylvania Insured Fund for the Period February 26, 1999 to March 31, 1999 F-45 MuniHoldings Pennsylvania Insured Fund, March 31, 1999
S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) ==================================================================================================================================== Pennsylvania -- NR* VMIG1+ $ 1,400 Allegheny County, Pennsylvania, Hospital Development Authority 103.8% 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 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 ------------------------------------------------------------------------------------------------------------------ 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 ------------------------------------------------------------------------------------------------------------------
F-46 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 ======== ====================================================================================================================================
(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) - -------------------------------------------------------------------------------- Number of Expiration Value Contracts Issue Date (Notes 1a & 1b) - -------------------------------------------------------------------------------- 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. See Notes to Financial Statements. ================================================================================ Portfolio To simplify the listings of MuniHoldings Pennsylvania Insured Abbreviations 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- + Temporary investments in short-term municipal securities. F-47 MuniHoldings Pennsylvania Insured Fund, March 31, 1999 - -------------------------------------------------------------------------------- STATEMENT OF ASSETS, LIABILITIES AND CAPITAL - -------------------------------------------------------------------------------- As of March 31, 1999 =============================================================================================================== 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 ------------ 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 ============ ===============================================================================================================
* Auction Market Preferred Shares. See Notes to Financial Statements. - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- For the Period February 26, 1999+ to March 31, 1999 ======================================================================================================= Investment Interest and amortization of premium and discount earned $ 160,653 Income (Note 1d): ======================================================================================================= Expenses: Investment advisory fees (Note 2) ...................... $ 17,557 Commission fees (Note 4) ............................... 3,434
F-48 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 ========= =======================================================================================================
+ Commencement of operations. See Notes to Financial Statements. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
For the Period Feb. 26, 1999+ to Increase (Decrease) in Net Assets: March 31, 1999 ======================================================================================================================= 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) ------------ ======================================================================================================================= Beneficial Interest Proceeds from issuance of Common Shares ....................................... 31,125,000 Transactions Proceeds from issuance of Preferred Shares .................................... 20,500,000 (Notes 1e & 4): Offering costs resulting from the issuance of Common Shares ................... (128,227) 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 ============ ======================================================================================================================= * Undistributed investment income -- net ....................................... $ 128,517 ============ =======================================================================================================================
+ Commencement of operations. See Notes to Financial Statements. F-49 MuniHoldings Pennsylvania Insured Fund, March 31, 1999 - -------------------------------------------------------------------------------- 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 =================================================================================================== 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 =========== 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: ===================================================================================================
* 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. F-50 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 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. F-51 MuniHoldings Pennsylvania Insured Fund, March 31, 1999 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (concluded) - -------------------------------------------------------------------------------- (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) --------- 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-52 Unaudited Financial Statements for Pro Forma MuniYield Pennsylvania Fund as of April 30, 1999 F-53 COMBINED SCHEDULE OF INVESTMENTS FOR MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND APRIL 30, 1999 (Unaudited) (in Thousands) - --------------------------------------------------------------------------------
Pro Forma MuniYield MuniVest MuniHoldings MuniYield Pennsylvania--99.4% Pennsylvania++ Pennsylvania++ Pennsylvania++ Pennsylvania++ - -------------------------------------------------------------------------------- S&P Moody's Face Ratings Ratings Amount Issue - -------------------------------------------------------------------------------- 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
F-54 COMBINED SCHEDULE OF INVESTMENTS FOR MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND APRIL 30, 1999 (Unaudited) (continued) (in Thousands) - --------------------------------------------------------------------------------
Pro Forma Pennsylvania MuniYield MuniVest MuniHoldings MuniYield (continued) Pennsylvania++ Pennsylvania++ Pennsylvania++ Pennsylvania++ - -------------------------------------------------------------------------------- S&P Moody's Face Ratings Ratings Amount Issue - -------------------------------------------------------------------------------- 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...............
F-55 COMBINED SCHEDULE OF INVESTMENTS FOR MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND APRIL 30, 1999 (Unaudited) (continued) (in Thousands) - --------------------------------------------------------------------------------
Pro Forma Pennsylvania MuniYield MuniVest MuniHoldings MuniYield (continued) Pennsylvania++ Pennsylvania++ Pennsylvania++ Pennsylvania++ - -------------------------------------------------------------------------------- S&P Moody's Face Ratings Ratings Amount Issue - -------------------------------------------------------------------------------- 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)............ 2,488 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(a): AAA Aaa 3,375 Senior Series A, 4.75% due 12/01/2027.......... 1,943 1,217 -- 3,160 AAA Aaa 5,150 Sub-Series B, 4.75% due 12/01/2027.............. 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
F-56 COMBINED SCHEDULE OF INVESTMENTS FOR MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND APRIL 30, 1999 (Unaudited) (continued) (in Thousands) - --------------------------------------------------------------------------------
Pro Forma Pennsylvania MuniYield MuniVest MuniHoldings MuniYield (concluded) Pennsylvania++ Pennsylvania++ Pennsylvania++ Pennsylvania++ - -------------------------------------------------------------------------------- S&P Moody's Face Ratings Ratings Amount Issue - -------------------------------------------------------------------------------- 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 (Liabilities in Ex- (161) 1,231 553 (472) cess of Other Assets) -- 0.6%................... -------- ------- ------- -------- Net Assets -- 100.0% $129,808 $82,087 $52,459 $262,259 ======== ======= ======= ========
- -------------------------------------------------------------------------------- F-57 COMBINED SCHEDULE OF INVESTMENTS FOR MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND APRIL 30, 1999 (Unaudited) (concluded) (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.
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. ACES Adjustable Convertible Extendable Securities AMT Alternative Minimum Tax (subject to) 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
See Notes to Financial Statements. F-58 The following unaudited pro forma Combined Statement of Assets, Liabilities and Capital 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 AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND As of April 30, 1999 (Unaudited)
Pro Forma MuniYield MuniVest MuniHoldings MuniYield Pennsylvania Pennsylvania Pennsylvania Adjustments Pennsylvania ------------ ------------ ------------ ----------- ------------ 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 adviser (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 22,702 340,000(2) 416,101 ------------ ----------- ----------- ----------- ------------ Total liabilities....... 2,300,239 107,176 312,001 2,095,441 4,814,857 ------------ ----------- ----------- ----------- ------------ Net Assets: Net Assets.............. $129,807,780 $82,087,268 $52,459,162 $(2,095,441) $262,258,769 ============ =========== =========== =========== ============ 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 (291,266) 169,633,072 Undistributed investment income--net............ 1,172,691 295,148 287,602 (1,755,441) -- Accumulated realized capital 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 $(2,095,441) $262,258,769 ============ =========== =========== =========== ============ Net asset value per share of Common Stock.. $ 15.26 $ 13.52 $ 14.82 $ 15.04 ============ =========== =========== =========== ============ *Identified Cost $123,609,119 $76,924,058 $52,090,557 -- $252,623,734 ============ =========== =========== =========== ============ + AMPS 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 ============ =========== =========== =========== ============
- -------- ** Auction Market Preferred Shares (1) Assumes the distribution of undistributed net investment income. (2) Reflects the charge for estimated Reorganization expenses of $340,000. See Notes to Financial Statements. F-59 The following unaudited pro forma Combined Statement of Operations 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 AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND (Unaudited)
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+ MuniYield to April 30, 1999 to April 30, 1999 to April 30, 1999 Adjustments Pennsylvania ----------------- ----------------- ------------------ ----------- ------------ Investment Income (Note 1d): Interest and amortization of premium and discount earned................... $3,629,400 $2,226,969 $388,834 $6,245,203 ---------- ---------- -------- ---------- Expenses: 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 (Losses) 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 $3,002,582 ========== ========== ======== ======= ==========
- -------- (1) Reflects the anticipated savings as a result of the Reorganization through fewer audits and consolidation of accounting, printing and other services. (2) This Pro Forma Combined Statement of Operations excludes non-recurring estimated Reorganization expenses of $340,000. + Commencement of operations. See Notes to Financial Statements. F-60 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," which term as used herein shall refer to MuniYield Pennsylvania Fund, after giving effect to the Reorganization) 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. 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-61 MUNIYIELD PENNSYLVANIA FUND, MUNIVEST PENNSYLVANIA INSURED FUND AND MUNIHOLDINGS PENNSYLVANIA INSURED FUND COMBINED NOTES TO FINANCIAL STATEMENTS (Concluded) 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 $15,089 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-62 EXHIBIT I INFORMATION PERTAINING TO EACH FUND .General Information Pertaining to the Funds
Defined Term Fiscal State of Meeting Fund Used in Exhibit I Year End Organization Time - ---- ----------------- -------- ------------ ------- 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.
Capital Shares Outstanding as of the Record Date ------------------ Common Fund Shares AMPS - ---- ---------- ------- MuniYield Pennsylvania........................................ 5,891,406 1,600 MuniVest Pennsylvania......................................... 4,041,184 1,100 MuniHoldings Pennsylvania..................................... 2,170,570 820
.Information Pertaining to Officers and Trustees
Year in Which Each Nominee of MuniHoldings Pennsylvania Became a Member of the Board ----------------------------------------------- Fund Bodurtha Glenn London Martin May Perold Zeikel - ---- -------- ----- ------ ------ ---- ------ ------ MuniHoldings Pennsylvania....... 1998 1999 1998 1998 1998 1998 1998
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.
Trustees/Nominees Trustees/Nominees Elected by Holders Fund Elected by Holders of AMPS of Shares of Common Shares and AMPS - ---- ---------------------------------- ------------------------------------- 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 Andre F. Perold 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
I-1 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.
Board Audit Committee ---------------------------- -------------------------- # # Per Aggregate Meetings Annual Per Meeting Meetings Annual Meeting Fees and Fund Held* Fee ($) Fee ($)** Held Fee ($) Fee ($)** Expenses ($) - ---- -------- ------- ----------- -------- ------- --------- ------------ MuniYield Pennsylvania.. 5 2,500 250 4 500 125 26,197 MuniVest Pennsylvania... 7 2,500 250 4 500 125 23,045 MuniHoldings Pennsylvania........... 4 2,500 250 3 500 125 20,855
- -------- * 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.
Compensation From MuniVest Pennsylvania and MuniHoldings Pennsylvania ($)* -------------------------------------------- Fund Bodurtha London Martin May Perold - ---- ------------------ -------- ------- -------- MuniVest Pennsylvania.............. 4,500 4,500 4,500 4,500 4,500 MuniHoldings Pennsylvania.......... 4,375 4,375 4,375 4,375 4,375
Compensation From MuniYield Pennsylvania ($)* ----------------------------------------------------- Fund Cecil Crum Meyer Sunderland Touchton Weiss - ---- ------- ------- ------- ----------- --------- ------- MuniYield Pennsylvania.... 4,500 4,500 4,500 4,500 4,500 3,250
- -------- * 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.
Aggregate Compensation From FAM/MLAM Advised Funds Paid Name of Board Member to Board members ($)* - -------------------- ---------------------- 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............................................ $140,842
- -------- * The Trustees serve on the boards of MLAM/FAM advised funds as follows: Mr. Cecil (35 registered investment companies consisting of 35 portfolios); Mr. Crum (17 registered investment companies consisting of 17 portfolios); Mr. Meyer (35 registered investment companies consisting of 35 portfolios); Mr. Sunderland (20 registered investment companies consisting of 36 portfolios); Mr. Touchton (20 registered investment companies consisting of 36 portfolios) and Mr. Weiss (17 registered investment companies consisting of 17 portfolios); I-2 Set forth in the table below is information regarding the aggregate compensation paid by all FAM/MLAM Advised Funds, including MuniVest Pennsylvania and MuniHoldings Pennsylvania, to the non-affiliated Board members for the year ended December 31, 1998.
Aggregate Compensation From FAM/MLAM Advised Funds Name of Board Member Paid to Board members ($)(*) - -------------------- ---------------------------- 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
- -------- (*) 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 Item 2. Election of Trustees. Unless otherwise noted, the address of each Trustee is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
Trustee Since ------------------------- MuniYield MuniVest Name, Address and Biography Age Pennsylvania Pennsylvania - ------------------------------------------------- --- ------------ ------------ 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; Director, Gilder Group LLC and related companies since 1999. 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.
I-3
Trustee Since ------------------------- MuniYield MuniVest Name, Address and Biography Age Pennsylvania Pennsylvania - --------------------------------------------- --- ------------ ------------ 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 from 1991 to 1999; Director, TIBCO from 1994 to 1996; Director, Genbel Securities Limited and Genbel Bank since 1999. 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.
I-4
Trustee Since ------------------------- MuniYield MuniVest Name, Address and Biography Age Pennsylvania Pennsylvania - ------------------------------------------------- --- ------------ ------------ Laurie Simon Hodrick............................. 37 1999* -- 809 Uris Hall, 3022 Broadway, New York, New York 10027. Professor of Finance and Economics, Graduate School of Business, Columbia University since 1998; Associate Professor of Finance and Economics, Graduate School of Business, Columbia University from 1996 to 1998; Associate Professor of Finance, J.L. Kellogg Graduate School of Management, Northwestern University from 1992 to 1996. 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; Harman International Industries, Inc. and Ethan Allen Interiors, Inc. 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. *Ms. Hodrick was elected to the Board of MuniYield Pennsylvania on November 4, 1999 and therefore no other information is required to be provided in this Exhibit I.
I-5 Set forth in the table below is information about the officers of each of the Funds.
Officer Since -------------------------------------- MuniYield MuniVest MuniHoldings Name and Biography Age Office Pennsylvania Pennsylvania Pennsylvania - ------------------ --- -------------- ------------ ------------ ------------ 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 1998 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.
- -------- * Mr. Glenn was elected President of each Fund in 1999. Prior to that he served as Executive Vice President of each Fund. I-6 EXHIBIT II AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of the 9th day of November, 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 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 trust with transferable shares, 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 (c) Each of the Acquired Funds 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 audited 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) Each of the Acquired Funds has been furnished with MuniYield 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 MuniYield Pennsylvania as of the respective dates indicated, in conformity with generally accepted accounting principles applied on a consistent basis. (e) 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. (f) 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. (g) 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. (h) 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. (i) 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. (j) 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. (k) 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). (l) 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 II-3 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' 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. (m) 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. The Board of Trustees of MuniYield Pennsylvania has designated 1,600 preferred shares as Auction Market Preferred Shares. Each outstanding common share of beneficial interest and each outstanding Auction Market Preferred Share of MuniYield Pennsylvania is fully paid and nonassessable and has full voting rights. (n) 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. (o) 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. (p) 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. (q) 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 trust with transferable shares, 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 (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 MuniYield Pennsylvania and MuniHoldings Pennsylvania has been furnished with MuniVest Pennsylvania's Annual Report to Shareholders for the fiscal year ended October 31, 1998, and the audited financial statements appearing therein, having been audited by Deloitte & Touche LLP, independent public accountants, 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. (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 (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 common 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. The Board of Trustees of MuniVest Pennsylvania has designated 1,100 of the preferred shares as Auction Market Preferred Shares. Each outstanding common share of beneficial interest and each outstanding Auction Market Preferred Share of MuniVest Pennsylvania is fully paid and nonassessable and has full voting rights. (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, 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 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 trust with transferable shares, 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 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 $0.10 per share. The Board of Trustees of MuniHoldings Pennsylvania has designated 820 of the preferred shares as Auction Market Preferred Shares, Series A. Each outstanding common share of beneficial interest and each outstanding Auction Market Preferred Share of MuniHoldings Pennsylvania is fully paid and nonassessable and has full voting rights. (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 (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 5 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 5 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 18, 2000, or such earlier or later day and time as may be mutually agreed upon in writing (the "Valuation Time"). II-9 (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(k) and 3(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 final 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 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 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 at the Valuation Time, 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 (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 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 5 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 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) to the best of such counsel's knowledge, no consent, approval, authorization or order of any United States federal 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 such as may be required under state securities laws; (ii) 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; (iii) 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; (iv) 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; (v) the execution and delivery of the Agreement by the Funds does not, and the consummation of the Reorganization will not, violate any material provisions of 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; (vi) 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; (vii) no Fund, to the knowledge of such counsel, is required to qualify to do business as a foreign corporation in any jurisdiction 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; (viii) 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; (ix) all actions required to be taken by the Funds to authorize this Agreement and to effect the Reorganization have been duly authorized by all necessary actions on the part of such Fund; and (x) such opinion is solely for the benefit of the Funds and their Trustees and officers. Such opinion also shall state that (a) 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 (b) such counsel does not express any II-15 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 and the opinion of Bingham Dana LLP as to matters of Massachusetts law. (f) That the Acquired Funds shall have received an opinion or opinions of Bingham Dana LLP, as Massachusetts 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 trust with transferable shares 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 the Funds or 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 filing or registration with, or consent, approval, authorization or order of any Massachusetts state court or governmental authority is required for the consummation by the Funds of the Reorganization, except such as have been obtained from the Board of Trustees and shareholders of the Funds and such as may be required under Massachusetts state securities law; (vii) all actions required to be taken by the Funds to authorize this Agreement and to effect the Reorganization have been duly authorized by all necessary actions on the part of such Fund; and (viii) such opinion is solely for the benefit of the Funds and their Trustees and officers. In giving the opinion set forth above, Bingham Dana 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. (g) 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 II-16 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 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. (h) 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. (i) 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. (j) That Acquired Funds shall have received from Deloitte & Touche LLP a letter dated within three days prior to 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. II-17 (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 MuniYield Pennsylvania or would prohibit the Reorganization. (l) 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 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 October 31, 1999 (for MuniVest Pennsylvania) and September 30, 1999 (for MuniHoldings Pennsylvania) (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 November 1, 1999 (for MuniVest Pennsylvania) and October 1, 1999 (for MuniHoldings Pennsylvania), 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 November 1, 1999 (for MuniVest Pennsylvania) and October 1, 1999 (for MuniHoldings Pennsylvania), 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. II-18 (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 an opinion of Bingham Dana LLP, as Massachusetts 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(f) of this Agreement and such other matters as MuniYield Pennsylvania reasonably may deem necessary or desirable. (h) 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. (i) That MuniYield Pennsylvania shall have received from Deloitte & Touche LLP a letter dated within three days prior to 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 each of the Acquired Funds 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 each Acquired Fund 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; (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 each 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. (j) 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. (k) 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. (l) 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. II-19 (m) 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. (n) 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. (o) 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. 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 9 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 10 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 31, 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 and 3 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. II-20 (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 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 12(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 12(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 II-21 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. 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 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. Attest: MuniYield Pennsylvania Fund /s/ Alice A. Pellegrino By /s/ Donald C. Burke - ------------------------------------- ----------------------------------- Alice A. Pellegrino, Secretary Donald C. Burke, Vice President and Treasurer Attest: MuniVest Pennsylvania Insured Fund /s/ Alice A. Pellegrino By /s/ Donald C. Burke - ------------------------------------- ----------------------------------- Alice A. Pellegrino, Secretary Donald C. Burke, Vice President and Treasurer Attest: MuniHoldings Pennsylvania Insured Fund /s/ Alice A. Pellegrino By /s/ Donald C. Burke - ------------------------------------- ---------------------------------- Alice A. Pellegrino, Secretary Donald C. Burke, Vice President and Treasurer
II-23 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 Funds have 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 annual 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 Expenditures from Commonwealth revenues (excluding pooled financing expenditures) during fiscal 1997 totaled $16,347.7 million. 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 those proposed in February 1997. 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 the 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 helped eliminate the negative difference between the budgetary basis unappropriated balance and the GAAP basis unreserved- undesignated balance 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 1984. Fiscal 1998 total revenues and other sources rose 4.3%. Expenditures and other uses during fiscal 1998 rose by 4.5%. The 1999 fiscal year ended with an unappropriated surplus (prior to the transfer to the Tax Stabilization Reserve Fund) of $702.9 million, an increase of $214.2 million from June 30, 1998. Transfers to the Tax Stabilization Reserve Fund total $255.4 million for fiscal year 1999 consisting of $105.4 million representing the III-2 statutory 15% of the fiscal year-end unappropriated surplus and an additional $150 million from the unappropriated surplus authorized by the General Assembly. The $447.5 million balance of the unappropriated surplus was carried over to fiscal year 2000. The higher unappropriated surplus was generated by tax revenues that were $712.0 million (3.9%) above estimate and $61.0 million of non-tax revenue (18.4%) above estimate. Higher than anticipated appropriation lapses also contributed to the higher surplus. A portion of the higher revenues and appropriation lapses were used for supplemental fiscal 1999 appropriations totaling $357.8 million. These supplemental appropriations represent expected one-time obligations. Including the supplemental appropriations and net of appropriation lapses, expenditures for fiscal 1999 totaled $18,144.9 million, a 5.9% increase over expenditures during fiscal 1998. Appropriations enacted for fiscal 1999 when the budget was originally adopted were 4.1% ($713.2 million) above the appropriations enacted for fiscal 1998 (including supplemental appropriations). Reserves for tax refunds for fiscal 1999 were raised during the fiscal year to $644.0 million, a $39.2 million increase over the budget as enacted. Reserves for tax refunds for fiscal 1999 are $266.0 million below the reserve established for fiscal 1998. 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. The General Fund budget for the 2000 fiscal year was approved by the General Assembly in May 1999. The adopted budget includes estimated spending of $19,061.5 million and estimated revenues (net of estimated tax refunds and enacted tax changes) of $18,699.9 million. Funds to cover the $361.6 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 $18,367.5 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 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 2.8% over revised fiscal 1999 receipts. Appropriations from Commonwealth funds are budgeted to increase by 3.8% over revised fiscal 1999 appropriations. According to a Pennsylvania Department of Revenue News Release, dated September 30, 1999, the state collected $1.8 billion in General Fund revenues in September, 1999, $55.2 million (3.2%) more than anticipated. Fiscal years- to-date General Fund collections total $4.3 billion, which is $76 million (2.1%) more than anticipated. 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. III-3 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 August, 1999 stood at a seasonably adjusted rate of 4.5%. The seasonably adjusted national unemployment rate for August, 1999 was 4.2%. 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, 1999, the Commonwealth had $4,924.5 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 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 Pennsylvania Intergovernmental Cooperation Authority (the "PICA") was created by Commonwealth legislation in 1991 to assist Philadelphia in remedying fiscal emergencies. 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 15, 1999. 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 $1,014.1 million in Special Revenue bonds outstanding as of June 30, 1999. III-4 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. In February 1999, Dom Giordano, filed 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. The Commonwealth Court dismissed the petitioner's action with prejudice. The petitioner has appealed the Commonwealth Court's ruling to the Supreme Court. County of Allegheny v. Commonwealth of Pennsylvania In December 1987, the Supreme Court of Pennsylvania held in County of Allegheny v. Commonwealth of Pennsylvania, that the statutory scheme for county funding of the judicial system is in conflict with the Pennsylvania Constitution. However, the Supreme Court of Pennsylvania stayed its judgment to afford the General Assembly an opportunity to enact appropriate funding legislation consistent with its opinion and ordered that the prior system of county funding shall remain in place until this is done. The Court appointed a special master to devise and submit a plan for implementation. The Interim Report of the Master recommended a four phase transition to state funding of a unified judicial system, during each of which specified court employees would transfer into the state payroll system. On April 22, 1998, the General Assembly enacted the General Appropriation Act of 1998, including an appropriation to the Supreme Court of approximately $12 million for funding county court administrators. This appropriation was designed to enable the Commonwealth to implement Phase I. Release of the funding was delayed until substantive legislation could be enacted to facilitate the employees' transfer to State employment. A similar appropriation was made by the General Appropriation Act of 1999. Thereafter, on June 22, 1999, the Governor approved Act 1999-12 under which approximately 165 county-level court administrators are to become employees of the Commonwealth. Act 12 also triggered the release of the appropriations that had been made for this purpose in 1998 and 1999. Bank Shares Tax Litigation In November 1989, Fidelity Bank, N.A. ("Fidelity") filed a declaratory judgment action in the Commonwealth Court of Pennsylvania in which Fidelity raised various challenges to the constitutional validity of the Amended Bank Shares Act (Act No. 1989-21) and related legislation. In 1995 Fidelity and the Commonwealth agreed to a settlement of the issues raised by Fidelity. Under a separate Settlement Agreement the Commonwealth settled with the intervening banks, referred to as "New Banks," in connection with issues concerning the New Bank Tax Credit Law which were raised in an appeal to the Pennsylvania Supreme Court. Other banks have also filed petitions that are currently pending with the Commonwealth Court. One of these banks, Royal Bank of Pennsylvania, filed a Stipulation of Facts with the Court and in effect proceeded forward on behalf of all the other banks. These appeals raise the issues that were advanced by Fidelity, although not brought to final resolution by the Pennsylvania Supreme Court. In January 1998, a panel of the Commonwealth Court ruled in favor of the Commonwealth, finding no constitutional violation. Royal Bank filed exceptions. On July 30, 1998, the Commonwealth Court, en banc, denied those exceptions. On May 25, 1999, the Pennsylvania Supreme Court affirmed per curium the Commonwealth Court's decision and order. No petition for certiorari was filed. Therefore, the Royal Bank litigation has ended. However, the vast majority of the remaining banks have exceptions pending before the Commonwealth Court or appeals pending before the Pennsylvania Supreme Court. III-5 Pennsylvania Association of Rural and Small Schools (PARSS) v. Ridge In 1991, an association of rural and small schools and several parties filed a lawsuit against the Governor and Secretary of Education, 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. Commonwealth Court held 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 October 1, 1999, the Pennsylvania Supreme Court affirmed the Commonwealth Court decision. The parallel federal action remains pending. Pennsylvania Human Relations Commission v. School District of Philadelphia, et al. v. Commonwealth of Pennsylvania, et al. In November 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." In February 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 remedial orders of the Commonwealth Court. In addition, a group of interveners filed a third-party complaint against the Commonwealth of Pennsylvania and the City of Philadelphia requesting Commonwealth Court 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. The Supreme Court of Pennsylvania assumed extraordinary plenary jurisdiction. In May 1999, the Supreme Court of Pennsylvania directed that the Commonwealth, the Governor, the City of Philadelphia and the Mayor of Philadelphia be dismissed from the case. The Court then remanded the original matter--an enforcement action by the Pennsylvania Human Relations Commission against the School District of Philadelphia to eliminate racial de facto segregation in the public system--to Commonwealth Court for further proceedings. No appeal has been filed or is expected. Thus, the Commonwealth and the Governor are no longer parties to this case. Ridge v. State Employees' Retirement Board In 1993 and in 1995, Joseph H. Ridge, a former judge of the Allegheny Court of Common Pleas, filed suit in the Commonwealth Court alleging that the use of gender distinct actuarial factors for benefits based upon his III-6 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. Due to the constitutional nature of the claim, it is possible that a decision adverse to the Retirement Board would 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). In 1996, the Commonwealth Court heard oral arguments en banc on Judge Ridge's motion for judgment on the pleadings. On February 13, 1997, the Commonwealth Court denied Judge Ridge's motion for judgment on the pleadings. The case is currently in discovery. Yesenia Marrerro, et al. v. Commonwealth, et al. In February 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, among other things, 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. In March 1998, Commonwealth Court dismissed the case on the grounds that the issues presented are not justiciable. On October 1, 1999 the Supreme Court of Pennsylvania affirmed the Commonwealth Court's order. Powell v. Ridge In March 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 claim that the Commonwealth's system for funding public schools has the effect of discriminating on the basis of race and violates Title VI of the Civil Rights Act of 1964. The plaintiffs asked the court to declare the funding system to be illegal, to enjoin the defendants from violating the regulation in the future and to award counsel fees and costs. 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. The District Court found that the plaintiffs had failed to state a claim under the Title VI regulation at issue or under 42 U.S.C. (S)1983 and dismissed the action in its entirety with prejudice. The plaintiffs appealed. In August 1999, the U.S. Court of Appeals for the Third Circuit reversed the District Court's dismissal of the action and remanded the case for further proceedings including the filing of an answer. The defendants and legislator intervenors have filed petitions for writ of certiorari with the U.S. Supreme Court. III-7 Rite Aid of Pennsylvania, Inc. v. Houstoun In March 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 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. In August 1998, the District 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 appealed the District Court's orders. 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). The case is pending in the District Court. No substantial proceedings have occurred since the remand. In addition, a case raising analogous state law issues is pending in Commonwealth Court. Pennsylvania general obligation bonds are currently 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-8 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 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 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 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 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 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: 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.
IV-6 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.
IV-7 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 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 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 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 (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 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. 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.(a) (d) --Form of Certificate of Designation creating Series B AMPS.(a) 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 --Copies of instruments defining the rights of shareholders, including the relevant portions of the Declaration of Trust and the By-Laws of the Registrant.(b) 6 --Form of Investment Advisory Agreement between Registrant and Fund Asset Management, L.P. 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.(c) 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.
C-1 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. 15 --Not applicable. 16 --Power of Attorney (Included on the signature page of this Registration Statement).
- -------- (a) Filed on October 4, 1999 as an Exhibit to Registrant's Registration Statement on Form N-14 (File No. 333-88395). (b) Reference is made to Article V (section 5.1), 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, Article VI, Article VII, Article XII, Article XIII and Article XIV of the Registrant's By- Laws. (c) To be filed by amendment. 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 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 9th day of November, 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.
Signatures Title Date ---------- ----- ---- /s/ Terry K. Glenn President and Trustee November 9, 1999 ______________________________________ (Principal Executive (Terry K. Glenn) Officer) /s/ Donald C. Burke Vice President and November 9, 1999 ______________________________________ Treasurer (Principal (Donald C. Burke) Financial and Accounting Officer) /s/ Donald Cecil Trustee November 9, 1999 ______________________________________ (Donald C. Cecil) /s/ M. Colyer Crum Trustee November 9, 1999 ______________________________________ (M. Colyer Crum) Trustee ______________________________________ (Laurie Simon Hodrick) /s/ Edward H. Meyer Trustee November 9, 1999 ______________________________________ (Edward H. Meyer) /s/ Jack B. Sunderland Trustee November 9, 1999 ______________________________________ (Jack B. Sunderland) /s/ J. Thomas Touchton Trustee November 9, 1999 ______________________________________ (J. Thomas Touchton) /s/ Fred G. Weiss Trustee November 9, 1999 ______________________________________ (Fred G. Weiss) /s/ Arthur Zeikel Trustee November 9, 1999 ______________________________________ (Arthur Zeikel)
C-3 EXHIBITS
Exhibit No. Description - ------- ----------- 1(a) --Declaration of Trust. (b) --Certificate of Designation creating AMPS. 2 --By-laws of the Registrant. 6 --Form of Investment Advisory Agreement between Registrant and Fund Asset Management, L.P. 7(a) --Form of Purchase Agreement for the Common Shares. 7(b) --Form of Purchase Agreement for the AMPS. 7(c) --Form of Merrill Lynch Standard Dealer Agreement. 9 --Custodian Agreement between 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. 13(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement between Registrant and State Street Bank and Trust Company. 13(b) --Form of Auction Agent Agreement. 13(c) --Form of Broker-Dealer Agreement. 13(d) --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 Insured Fund.
[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" Proposal 1. By signing and dating the reverse side of this card, you authorize the proxies to vote the proposal as marked, or if not marked, to vote "FOR" the proposal, and to use their discretion to vote for any other matter as may properly come before the meeting or any adjournment thereof. If you do not intend to personally attend the meeting, please complete and return this card at once in the enclosed envelope. (Continued and to be signed on the reverse side) [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. [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" Proposal 1. By signing and dating the reverse side of this card, you authorize the proxies to vote the proposal as marked, or if not marked, to vote "FOR" the proposal, and to use their discretion to vote for any other matter as may properly come before the meeting or any adjournment thereof. If you do not intend to personally attend the meeting, please complete and return this card at once in the enclosed envelope. (Continued and to be signed on the reverse side) [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. [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" Proposal 1. By signing and dating the reverse side of this card, you authorize the proxies to vote the proposal as marked, or if not marked, to vote "FOR" the proposal, and to use their discretion to vote for any other matter as may properly come before the meeting or any adjournment thereof. If you do not intend to personally attend the meeting, please complete and return this card at once in the enclosed envelope. (Continued and to be signed on the reverse side) [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. [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" Proposal 1. By signing and dating the reverse side of this card, you authorize the proxies to vote the proposal as marked, or if not marked, to vote "FOR" the proposal, and to use their discretion to vote for any other matter as may properly come before the meeting or any adjournment thereof. If you do not intend to personally attend the meeting, please complete and return this card at once in the enclosed envelope. (Continued and to be signed on the reverse side) [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. [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" Proposals 1, 2 and 3. By signing and dating the reverse side of this card, you authorize the proxies to vote the proposal as marked, or if not marked, to vote "FOR" each proposal, and to use their discretion to vote for any other matter as may properly come before the meeting or any adjournment thereof. If you do not intend to personally attend the meeting, please complete and return this card at once in the enclosed envelope. (Continued and to be signed on the reverse side) [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. Dated: ______________________________ X _____________________________________________ Signature X _____________________________________________ Signature, if held jointly Sign, date, and return the Proxy Card promptly using the enclosed envelope. [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" Proposals 1, 2 and 3. (Continued and to be signed on the reverse side) [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 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. EX-99.1A 2 DECLARATION OF TRUST EXHIBIT 1(A) DECLARATION OF TRUST OF MUNIYIELD PENNSYLVANIA FUND THE DECLARATION OF TRUST of MuniYield Pennsylvania Fund is made the 24th day of August, 1992, by the parties signatory hereto, as trustees (such persons, so long as they shall continue in office in accordance with the terms of this Declaration of Trust, and all other persons who at the time, in question have been duly elected or appointed as trustees in accordance with the provisions of this Declaration of Trust and are then in office, being hereinafter called the "Trustees"). W I T N E S S E T H : -------------------- WHEREAS, the Trustees desire to form a trust fund under the law of Massachusetts for the investment and reinvestment of funds contributed thereto; and WHEREAS, it is proposed that the beneficial interest in the trust assets be divided into transferable shares of beneficial interest as hereinafter provided; NOW, THEREFORE, the Trustees hereby declare that they will hold in trust all money and property contributed to the trust fund to manage and dispose of the same for the benefit of the holders from time to time of the shares of beneficial interest issued hereunder and subject to the provisions hereof, to wit: ARTICLE I The Trust --------- 1.1. Name. The name of the trust created hereby (the "Trust") shall be ---- "MuniYield Pennsylvania Fund", and so far as may be practicable the Trustees shall conduct the Trust's activities, execute all documents and sue or be sued under that name, which name (and the word "Trust" wherever hereinafter used) shall refer to the Trustees as Trustees, and not individually, and shall not refer to the officers, agents, employees or shareholders of the Trust. However, should the Trustees determine that the use of such name is not advisable, they may select such other name for the Trust as they deem proper and the Trust may hold its property and conduct its activities under such other name. Any name change shall become effective upon the execution by a majority of the then Trustees of an instrument setting forth the new name. Any such instrument shall have the status of an amendment to this Declaration. 1.2. Definitions. As used in this Declaration, the following terms shall ----------- have the following meanings: The terms "Affiliated Person", "Assignment", "Commission", "Interested ----------------- ---------- ---------- ---------- Person", "Majority Shareholder Vote" (the 67% or more than 50% requirement of - ------ ------------------------- the third sentence of Section 2(a)(42) of the 1940 Act, whichever may be applicable) and "Principal Underwriter" shall have the meanings given them in --------------------- the 1940 Act. "Certificate of Designation" means a certificate signed by the Secretary or -------------------------- an Assistant Secretary of the Trust setting forth the resolution or resolutions providing for the issuance of Preferred Shares as described in Article VI hereof. "Common Shareholders" means a record owner of outstanding Common Shares. ------------------- "Common Shares" means the common shares of beneficial interest in the Trust ------------- as described in Article VI hereof and includes fractions of Common Shares as well as whole Common Shares. "Declaration" shall mean this Declaration as amended from time to time. ----------- References in this Declaration to "Declaration", "hereof", "herein" and ----------- ------ ------ "hereunder" shall be deemed to refer to the Declaration rather than the article - ---------- or section in which such words appear. "Fundamental Policies" shall mean the investment restrictions set forth in -------------------- the Prospectus and designated as fundamental policies therein. The "1940 Act" refers to the Investment Company Act of 1940, as amended -------- from time to time, and shall include the rules and regulations and any relevant order of exemption promulgated thereunder by the Commission. "Person" shall mean and include individuals, corporations, partnerships, ------ trusts, associations, joint ventures and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof. 2 "Preferred Shareholders" means a record owner of outstanding Preferred ---------------------- Shares. "Preferred Shares" means the preferred shares of beneficial interest in the ---------------- Trust as described in Article VI hereof and includes fractions of Preferred Shares as well as whole Preferred Shares. "Prospectus" shall mean the currently effective Prospectus of the Trust ---------- under the Securities Act of 1933, as amended. "Registration Statement" means the Registration Statement of the Trust ---------------------- under the Securities Act of 1933 as such Registration Statement may be amended and filed with the Commission from time to time. "Shareholders" shall mean as of any particular time all holders of record ------------ of outstanding Shares at such time. "Shares" shall mean the equal proportionate transferable units of interest ------ into which the beneficial interest in the Trust shall be divided from time to time and includes fractions of Shares as well as whole Shares. As provided in Article VI hereof, the Trust may issue separate classes of Shares; all references to Shares shall be deemed to be Shares of a single class or all classes as the context may require. "Trustees" shall mean the signatories to this Declaration, so long as they -------- shall continue in office in accordance with the terms hereof, and all other persons who at the time in question have been duly elected or appointed and have qualified as trustees in accordance with the provisions hereof and are then in office, are herein referred to as the "Trustees", and reference in this Declaration to a Trustee or Trustees shall refer to such person or persons in their capacity as trustees hereunder. "Trust Property" shall mean as of any particular time any and all property, -------------- real or personal, tangible or intangible, which at such time is owned or held by or for the account of the Trust or the Trustees. 3 ARTICLE II Trustees -------- 2.1. Number and Qualification. The number of Trustees shall be fixed from ------------------------ time to time by written instrument signed by a majority of the Trustees then in office, provided, however, that the number of Trustees shall in no event be less than three or more than fifteen (except prior to the first public offering of Shares of the Trust). Any vacancy created by an increase in Trustees may, to the extent permitted by the 1940 Act, be filled by the appointment of an individual having the qualifications described in this Article made by a written instrument signed by a majority of the Trustees then in office. Any such appointment shall not become effective, however, until the individual named in the written instrument of appointment shall have accepted in writing such appointment and agreed in writing to be bound by the terms of this Declaration. No reduction in the number of Trustees shall have the effect of removing any Trustee from office prior to the expiration of this term. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided in Section 2.3 hereof, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration. A Trustee shall be an individual at least 21 years of age who is not under legal disability. Trustees need not own Shares. 2.2. Term of Office of Trustees. The term of office of all of the Trustees -------------------------- named herein, or elected or appointed prior to the first annual meeting of Shareholders, shall expire on the date of the first annual meeting of Shareholders or special meeting in lieu thereof. Beginning with the Trustees elected at the first annual meeting of Shareholders, the term of each Trustee shall expire at the next annual meeting of Shareholders following the election or appointment of such Trustee and upon the election and qualification of his Successor. The Trustees shall be elected by the affirmative vote of the holders of a majority of the Shares present in person or by proxy at an annual meeting of Shareholders or special meeting in lieu thereof called for that purpose, except as provided in Section 2.3 of this Article; provided, however, that the Preferred Shareholders voting as a class at an annual meeting of the Shareholders or special meeting in lieu thereof called for such purpose, shall elect at least two (2) Trustees at all times, and, provided, further, that the Preferred Shareholders voting as a class shall elect at least a majority of the Trustees, which number of Trustees shall be increased appropriately in order to effectuate such rights after giving effect to resignations of Trustees, (i) if at any time the dividends on the Preferred Shares shall be unpaid in an amount equal to two (2) full years dividends on the Preferred Shares, with such representation to continue until all dividends in arrears shall have been paid or otherwise provided for, or (ii) pursuant to the designations and powers, preferences and rights and the qualifications, limitations and restrictions of the Preferred Shares as determined in accordance with Section 6.1 hereof. Each Trustee elected shall hold office until his successor shall have been elected and shall have qualified or until such time as may otherwise be provided in the By-Laws adopted or amended pursuant to Section 2.7 hereof; except that (a) any Trustee may resign his trust (without need for prior or subsequent accounting) by an instrument in writing signed by him or her and delivered to the other Trustees, which shall take effect upon such delivery or upon such later date as is specified therein; (b) any Trustee may be removed (provided the aggregate number of Trustees after such removal shall not be less than the number required by Section 2.1 hereof) with cause, at any time by written instrument, signed 4 by the remaining Trustees, specifying the date when such removal shall become effective, provided, however, that the Trustees elected by one class of Shares shall have no power to so remove any Trustee elected by another class of Shares; (c) any Trustee who requests in writing to he retired or who has become incapacitated by illness or injury may be retired by written instrument signed by a majority of the other Trustees, specifying the date of his retirement; and (d) a Trustee may be removed at any meeting of Shareholders by a vote of two thirds of the outstanding Shares of the class or classes of Shares of beneficial interest that elected such Trustee. Upon the resignation or removal of a Trustee, or his otherwise ceasing to be Trustee, he shall execute and deliver such documents as the remaining Trustees shall require for the purpose of conveying to the Trust or the remaining Trustees an Trust Property held in the name of the resigning or removed Trustee. Upon the incapacity or death of any Trustee, his legal representative shall execute and deliver on his behalf such documents as the remaining Trustees shall require as provided in the preceding sentence. 2.3. Resignation and Appointment of Trustees. In case of the declination, --------------------------------------- death, resignation, retirement, removal or inability of any of the Trustees, or in case a vacancy shall, by reason of an increase in number, or for any other reason, exist, the remaining Trustees or, prior to the public offering of Shares of the Trust, if only one Trustee shall then remain in office, the remaining Trustee shall fill such vacancy by appointing such other person as they or he, in their or his discretion, shall see fit. Such appointment shall be evidenced by a written instrument signed by a majority of the remaining Trustees or by the remaining Trustee, as the case may be. Any such appointment shall not become effective, however, until the person named in the written instrument or appointment shall have accepted in writing such appointment and agreed in writing to be bound by the terms of the Declaration. Within twelve months of such appointment, the Trustees shall cause notice of such appointment to be mailed to each Shareholder at his address as recorded on the books of the Trust. An appointment of a Trustee may be made by the Trustees then in office and notice thereof mailed to Shareholders aforesaid in anticipation of a vacancy to occur by reason of retirement, resignation or increase in number of Trustees effective at a later date, provided that said appointment shall become effective only at or after the effective date of said retirement, resignation or increase in number of Trustees. The power of appointment is subject to the provisions of Section 16(a) of the 1940 Act. 2.4. Vacancies. The death, declination, resignation, retirement, removal or --------- incapacity of the Trustees, or any one of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Declaration. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided in Section 2.3, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by the Declaration subject to the right of the holders of the Preferred Shares to elect a Trustee to fill such vacancy in accordance with the terms and provisions hereof. A written instrument certifying the existence of such vacancy signed by a majority of the Trustees shall be conclusive evidence of the existence of such vacancy. 2.5. Meetings. Meetings of the Trustees shall be held from time to time upon -------- the call of the Chairman, if any, the President, the Secretary or any two Trustees. Regular meetings of the Trustees may be held without call or notice at a time and place fixed by the By-Laws or by resolution of the Trustees. Notice of any other meeting shall be mailed or otherwise given not 5 less than 48 hours before the meeting but may be waived in writing by any Trustee either before or after such meeting. The attendance of a Trustee at a meeting shall constitute a waiver of notice of such meeting except where a Trustee attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been lawfully called or convened. The Trustees may act with or without a meeting. A quorum for all meetings of the Trustees shall be a majority of the Trustees. Unless provided otherwise in this Declaration, any action of the Trustees may be taken at a meeting by vote of a majority of the Trustees present (a quorum being present) or without a meeting by written consents of a majority of the Trustees. Any committee of the Trustees, including an executive committee, if any, may act with or without a meeting. A quorum for all meetings of any such committee shall be a majority of the members thereof. Unless provided otherwise in this Declaration, any action of any such committee may be taken at a meeting by vote of a majority of the members present (a quorum being present) or without a meeting by written consent of a majority of the members. With respect to actions of the Trustees and any committee of the Trustees, Trustees who are Interested Persons of the Trust within the meaning of Section 1.2 hereof or otherwise interested in any action to be taken may be counted for quorum purposes under this Section and shall be entitled to vote to the extent permitted by the 1940 Act. All or any one or more Trustees may participate in a meeting of the Trustees or any committee thereof by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and participation in a meeting pursuant to such communications systems shall constitute presence in person at such meeting. 2.6. Officers. The Trustees shall annually elect a President, a Secretary and -------- a Treasurer and may elect a Chairman. The Trustees may elect or appoint or authorize the Chairman, if any, or President to appoint such other officers or agents with such powers as the Trustees may deem to be advisable. The Chairman and President shall be and the Secretary and Treasurer may, but need not, be a Trustee. 2.7. By-Laws. The Trustees may adopt and from time to time amend or repeal ------- the By-Laws for the conduct of the business of the Trust. 6 ARTICLE III Powers of Trustees ------------------ 3.1. General. The Trustees shall have exclusive and absolute control over ------- the Trust Property and over the business of the Trust to the same extent as if the Trustees were the sole owners of the Trust Property and business in their own right, but with such powers of delegation as may be permitted by this Declaration. The Trustees may perform such acts as in their sole discretion are proper for conducting the business of the Trust. The enumeration of any specific power herein shall not be construed as limiting the aforesaid power. Such powers of the Trustees may be exercised without order of or resort to any court. 3.2. Investments. The Trustees shall have power, subject to the Fundamental ----------- Policies, to: (1) conduct, operate and carry on the business of an investment company; (2) subscribe for, invest in, reinvest in, purchase or otherwise acquire hold, pledge, sell, assign, transfer, exchange, distribute or otherwise deal in or dispose of negotiable or non-negotiable instruments, obligations, evidences of indebtedness, certificates of deposit or indebtedness, commercial paper, repurchase agreements, reverse repurchase agreements, options, futures contracts, options on futures contracts and other investments, including, without limitation, those issued, guaranteed or sponsored by any state, territory or possession of the United Sates and the District of Columbia and their political subdivisions, agencies and instrumentalities, or by the United States Government or its agencies or instrumentalities, or international instrumentalities, or by any bank, savings institution, corporation or other business entity organized under the laws of the United States and, to the extent provided in the Prospectus and Registration Statement and not prohibited by the Fundamental Policies, organized under foreign laws; and to exercise any and all rights, powers and privileges of ownership or interest in respect of any and all such investments of every kind and description, including, without limitation, the right to consent and otherwise act with respect thereto, with power to designate one or more persons, firms, associations, or corporations to exercise any of said rights, powers and privileges in respect of any of said instrument; and the Trustees shall be deemed to have the foregoing powers with respect to any additional securities in which the Trust may invest should the investment policies set forth in the Prospectus and Registration Statement or the Fundamental Policies be amended. The Trustees shall not be limited to investing in obligations maturing before the possible termination of the Trust, nor shall the Trustee be limited by any law limiting the investments which may be made by fiduciaries. 3.3. Legal Title. Legal title to all the Trust Property shall be vested in ----------- the Trustees as joint tenants except that the Trustees shall have power to cause legal title to any Trust Property to be hold by or in the name of one or more of the Trustees, or in the name of the Trust, or in the name of any other Person as nominee, on such terms as the Trustees may determine, provided that the interest of the Trust therein is appropriately protected. 7 The right, title and interest of the Trustees in the Trust Property shall vest automatically in each person who may hereafter become a Trustee upon his due election and qualification. Upon the resignation, removal or death of a Trustee he shall automatically, cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered. 3.4. Issuance and Repurchase of Securities. The Trustees shall have the power ------------------------------------- to issue, sell, repurchase, retire, cancel, acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in, Shares, including shares in fractional denominations, and, subject to the more detailed provisions set forth in Articles VI, VIII and X, to apply to any such repurchase, retirement, cancellation or acquisition of Shares any funds or property of the Trust whether capital or surplus or otherwise, to the full extent now or hereafter permitted by the laws of the Commonwealth of Massachusetts governing business corporations. 3.5. Borrow Money. Subject to the Fundamental Policies, the Trustees shall ------------ have power to borrow money or otherwise obtain credit and to secure the same by mortgaging, pledging or otherwise subjecting as security the assets of the Trust, including the lending of portfolio securities, and to endorse, guarantee, or undertake the performance of any obligation, contract or engagement of any other person, firm, association or corporation. 3.6. Delegation; Committees. The Trustees shall have power, consistent with ---------------------- their continuing exclusive authority over the management of the Trust and the Trust Property, to delegate from time to time to such of their number or to officers, employees or agents of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Trustees or otherwise as the Trustees may deem expedient, to the same extent as such delegation is permitted to directors of a Massachusetts business corporation and is permitted by the 1940 Act. 3.7. Collection and Payment. The Trustees shall have power to collect all ---------------------- property due to the Trust; to pay all claims including taxes, against the Trust Property; to prosecute, defend, compromise or abandon any claim relating to the Trust Property; to foreclose any security interest securing any obligation, by virtue of which any property is owed to the Trust; and to enter into releases, agreements and other instruments. 3.8. Expenses. The Trustees shall have power to incur and pay any expenses -------- which in the opinion of the Trustees are necessary or incidental to carry out any of the purposes of this Declaration, and to pay reasonable compensation from the funds of the Trust to themselves as Trustees. The Trustees shall fix the compensation of all officers, employees and Trustees. The Trustee may pay themselves such compensation for special services, including legal, underwriting, syndicating and brokerage services, as they in good faith may deem reasonable and reimbursement for expenses reasonably incurred by themselves on behalf of the Trust. 3.9. Miscellaneous Powers. The Trustees shall have the power to: (a) employ -------------------- or contract with such Persons as the Trustees may deem desirable for the transaction of the business of the Trust; (b) enter into joint ventures, partnerships and any other combinations or 8 associations; (c) purchase, and pay for out of Trust Property, insurance policies insuring the Shareholders, Trustees, officers, employees, agents, investment advisers, distributors, selected dealers or independent contractors of the Trust against all claims arising by reason of holding any such position or by reason of any action taken or omitted by any such Person in such capacity, whether or not constituting negligence, or whether or not the Trust would have the power to indemnify such Person against such liability; (d) establish pension, profit-sharing, share purchase, and other retirement, incentive and benefit plans for any Trustees officers, employees and agents of the Trust; (e) make donations, irrespective of benefit to the Trust, for charitable, religious, educational, scientific, civic or law, indemnify any similar purposes; (f) to the extent permitted by Person with whom the Trust has dealings, including any advisor, administrator, manager, distributor and selected dealers, to such extent as the Trustees shall determine; (g) guarantee indebtedness or contractual obligations of others; (h) determine and change the fiscal year of the Trust and the method by which its accounts shall be kept; and (i) adopt a seal for the Trust, but the absence of such seal shall not impair the validity of any instrument executed on behalf of the Trust. 3.10. Further Power. The Trustees shall have power to conduct the business ------------- of the Trust and carry on its operations in any and all of its branches and maintain offices both within and without the Commonwealth of Massachusetts, in any and all states of the United States of America, in the District of Columbia, and in any and all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments, and to do all such other things and execute all such instruments as they deem necessary, proper or desirable in order to promote the interests of the Trust although such things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this Declaration, the presumption shall be in favor of a grant of power to the Trustees. The Trustees will not be required to obtain any court order to deal with the Trust Property. 9 ARTICLE IV Management and Distribution Arrangements ---------------------------------------- 4.1. Management Arrangements. Subject to a Majority Shareholder Vote, as ----------------------- required by the 1940 Act, the Trustees may in their discretion from time to time enter into advisory or management contracts whereby the other party to such contract shall undertake to furnish the Trustees such advisory and management services as the Trustees shall from time to time consider desirable and all upon such terms and conditions as the Trustees may in their discretion determine. Notwithstanding any provisions of this Declaration, the Trustees may authorize any adviser or manager (subject to such general or specific instructions as the Trustees may from time to time adopt) to effect purchases, sales, loans or exchanges of portfolio securities of the Trust on behalf of the Trustees or may authorize any officer, employee or Trustee to effect such purchases, sales, loans or exchanges pursuant to recommendations of any such adviser or manager (and all without further action by the Trustees). Any such purchases, sales, loans and exchanges shall be deemed to have been authorized by all of the Trustees. 4.2. Distribution Arrangements. The Trustees may in their discretion from ------------------------- time to time enter into a contract, providing for the sale of the Shares of the Trust to net the Trust not less than the par value per share, whereby the Trust may either agree to sell the Shares to the other party to the contract or appoint such other party its sales agent for such Shares. In either case, the contract shall be on such terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Article IV or the By-Laws; and such contract may also provide for the repurchase or sale of Shares by such other party as principal or as agent of the Trust and may provide that such other party may enter into selected dealer agreements with registered securities dealers to further the purpose of the distribution or repurchase of the Shares. 4.3. Parties to Contract. Any contract of the character described in Section ------------------- 4.1 and 4.2 of this Article IV or in Article VII hereof may be entered into with any corporation, firm, trust or association, although one or more of the Trustees or officers of the Trust may be an officer, director, Trustee, shareholder, or member of such other party to the contract, and no such contract shall be invalidated or rendered voidable by reason of the existence of any such relationship, nor shall any person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust under or by reason of said contract or accountable for any profit realized directly or indirectly therefrom, provided that the contract when entered into was reasonable and fair and not inconsistent with the provisions of this Article IV or the By-Laws. The same person (including a, firm, corporation, trust, or association) may be the other party to contracts entered into pursuant to Sections 4.1 and 4.2 above or Article VII, and any individual may be financially interested or otherwise affiliated with persons who are parties to any or all of the contracts mentioned in this Section 4.3. 4.4. Provisions and Amendments. Any contract entered into pursuant to Section ------------------------- 4.1 and 4.2 of this Article IV shall be consistent with and subject to the requirements of Section 15 of the 1940 Act with respect to its continuance in effect, its termination, and the method of authorization and approval of such contract or renewal thereof, and no amendment to any contract, entered into pursuant to Section 4.1 shall be effective unless assented to by a Majority Shareholder Vote. 10 ARTICLE V Limitations of Liability of Shareholders, Trustees and Others ------------------- 5.1. No Personal Liability of Shareholders, Trustees, etc. No shareholder ----------------------------------------------------- shall be subject to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. No Trustee, officer, employee or agent of the Trust shall be subject to any personal liability whatsoever to any Person, other than the Trust or its Shareholders, in connection with Trust Property or the affairs of the Trust, save only that arising from his bad faith, willful misfeasance, gross negligence or reckless disregard of his duty to such Person; and all such Persons shall look solely to the Trust Property for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is made a party to any suit or proceeding to enforce any such liability, he shall not on account thereof, be held to any personal liability. The Trust shall indemnify and hold each Shareholder harmless from and against all claims and liabilities, to which such Shareholder may become subject by reason of his being or having been a Shareholder, and shall reimburse such Shareholder for all legal and other expenses reasonably incurred by him in connection with any such claim or liability. The rights accruing to a Shareholder under this Section 5.1 shall not exclude any other right to which such Shareholder may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust to indemnify or reimburse a Shareholder in any appropriate situation even though not specifically provided herein. 5.2. Non-Liability of Trustees, etc. No Trustee, officer, employee or agent ------------------------------- of the Trust shall be liable to the Trust, its Shareholders, or to any Shareholder, Trustee, officer, employee, or agent thereof for any action or failure to act (including without limitation the failure to compel in any way any former or acting Trustee to redress any breach of trust) except for his own bad faith, willful misfeasance, gross negligence or reckless disregard of his duties. 5.3. Mandatory Indemnification. The Trust shall indemnify each of its ------------------------- Trustees, officers, employees, and agents (including persons who serve at its requests as directors, officers or trustees of another organization in which it has any interest, as a shareholder, creditor or otherwise) against all liabilities and expenses (including amounts paid in satisfaction of judgments, in compromise, as fines and penalties, and as counsel fees) reasonably incurred by him in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which he may be involved or with which he may be threatened, while in office or thereafter, by reason of his being or having been such a Trustee, officer, employee or agent, except with respect to any matter as to which he shall have been adjudicated to have acted in bad faith, willful misfeasance, gross negligence or reckless disregard of his duties; provided, however, that as to any matter disposed of by a compromise payment by such person, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless the Trust shall have received a written opinion from independent legal counsel approved by the Trustees to the effect that if either the matter of willful misfeasance, gross negligence or reckless disregard of duty, or the matter of good faith and reasonable belief as to the best interests of the Trust, had been adjudicated, it would have been adjudicated in favor of such person. The rights accruing to any Person under these 11 provisions shall not exclude any other right to which he may be lawfully entitled; provided that no Person may satisfy any right of indemnity or reimbursement granted herein or in Section 5.1 or to which he may be otherwise entitled except out of the property of the Trust, and no Shareholder shall be personally liable to any Person with respect to any claim for indemnity or reimbursement or otherwise. The Trustees may make advance payments in connection with indemnification under this Section 5.3, provided that the indemnified person shall have given a written undertaking to reimburse the Trust in the event it is subsequently determined that he is not entitled to such indemnification. 5.4. No Bond Required of Trustees. No Trustee shall, as such, be obligated ---------------------------- to give any bond or surety or other security for the performance of any of his duties hereunder. 5.5. No Duty of Investigation; Notice in Trust Instruments, etc. No ----------------------------------------------------------- purchaser, lender, transfer agent or other person dealing with the Trustees or any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, loaned, or delivered to or on the order of the Trustees or of said officer, employee or agent. Every obligation, contract, instrument, certificate, Share, other security of the Trust or undertaking, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively taken to have been executed or done by the executors thereof only in their capacity as Trustees under this Declaration or in their capacity as officers, employees or agents of the Trust. Every written obligation, contract, instrument, certificate, Share, other security of the Trust or undertaking made or issued by the Trustees or by any officers, employees or agents of the Trust, in their capacity as such, shall contain an appropriate recital to the effect that the Shareholders, Trustees, officers, employees and agents of the Trust shall not personally be bound by or liable thereunder, nor shall resort be had to their private property for the satisfaction of any obligation or claim thereunder, and appropriate references shall be made therein to the Declaration, and may contain any further recital which they may deem appropriate, but the omission of such recital shall not operate to impose personal liability on any of the Trustees, Shareholders, officers, employees or agents of the Trust. The Trustees may maintain insurance for the protection of the Trust Property, its Shareholders, Trustees, officers, employees and agents in such amount as the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable. 5.6. Reliance on Experts, etc. Each Trustee and officer or employee of the ------------------------- Trust shall, in the performance of his duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of its officers or employees or by any investment adviser, distributor, selected dealers, accountants, appraisers or other experts or consultants elected with reasonable care by the Trustees, officers or employees of the, Trust, regardless of whether such counsel or expert may also be a Trustee. 12 ARTICLE VI Shares of Beneficial Interest ----------------------------- 6.1. Beneficial Interest. The interest of the beneficiaries hereunder shall ------------------- be divided into transferable shares of beneficial interest of $0.10 par value. The Trustees of the Trust 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. The number of such shares of beneficial interest authorized hereunder is unlimited. All Shares issued hereunder including, without limitation, Shares issued in connection with a dividend in Shares or a split in Shares, shall be fully, paid and nonassessable. Pursuant to the powers vested in the Trustees by this Section 6.1, the Trustees hereby authorize the issuance of an unlimited number of common shares of beneficial interest, par value $0.10 per share (the "Common Shares"), together with 1,000,000 preferred shares of beneficial interest, par value of $0.10 per share (the "Preferred Shares"). The designations and powers, preferences and rights, and the qualifications, limitations and restrictions of the Common Shares are as set forth in this Declaration of Trust. The designations and powers, preferences and rights, and the qualifications, limitations and restrictions of the Preferred Shares are as follows: The Preferred Shares shall be issued from time to time in one or more series with such distinctive serial designations and (i) may have such voting powers, full or limited; (ii) may be subject to redemption at such time or times and at such price or prices; (iii) may be entitled to receive dividends (which may be cumulative or noncumulative) at such rate or rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes of shares; (iv) may have such preferences or other rights upon the dissolution of, or upon any distribution of the assets of, the Trust; (v) may be made convertible into, or exchangeable for, shares of any other class or classes of shares of the Trust, at such price or prices or at such rates of exchange and with such adjustments; (vi) shall have such other relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, all as shall hereafter be stated and expressed in, the resolution or resolutions providing for the issue of such Preferred Shares from time to time adopted by the Trustees pursuant to authority so to do which is hereby expressly vested in the Board; and are as further set out in this Declaration of Trust. A certificate signed by the Secretary or an Assistant Secretary of the Trust setting forth the resolution or resolutions providing for such issuance of Preferred Shares and reciting that such resolution was or such resolutions were duly adopted by the Trustees (the "Certificate of Designation") shall be conclusive evidence of the action providing for the issuance of such Preferred Shares when lodged among the records of the Trust. 6.2. Rights of Shareholders. The ownership of the Trust Property of every ---------------------- description and the right to conduct any business hereinbefore described are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest conferred by their Shares, and they shall have no right to call for any partition or division of any property, profits, rights or interests of the Trust nor can they be called upon to share or assume 13 any losses of the Trust or suffer an assessment of any kind by virtue of their ownership of Shares. The Shares shall be personal property giving only the rights in this Declaration specifically set forth. The Shares shall not entitle the holder to preference, preemptive, appraisal, conversion or exchange rights, except for rights or appraisal specified in Section 10.4 and except as the Trustees may determine with respect to any class or series of Shares. 6.3. Trust Only. It is the intention of the Trustees to create only the ---------- relationship of Trustee and beneficiary between the Trustees and each Shareholder from time to time. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment or any form of legal relationship other than a trust. Nothing in this Declaration shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association. 6.4. Issuance of Shares. The Trustees, in their discretion, may from time to ------------------ time without a vote of the Shareholders issue Shares, in addition to the then issued and outstanding Shares and Shares held in the treasury, to such party or parties and for such amount not less than par value and type of consideration, including cash or property, at such time or times, and on such terms as the Trustees may deem best, and may in such manner acquire other assets (including the acquisition of assets subject to, and in connection with the assumption of, liabilities) and businesses. In connection with any issuance of Shares, the Trustees may issue fractional Shares. The Trustees may from time to time divide or combine the Shares into a greater or lesser number without thereby changing the proportionate beneficial interests in the Trust. Contributions to the Trust may be accepted for, and Shares shall be redeemed as whole Shares and/or 1/1,000ths of a Share or multiples thereof. 6.5. Register of Shares. A register shall be kept at the Trust or a transfer ------------------ agent duly appointed by the Trustees under the direction of the Trustees which shall contain the names and addresses of the Shareholders and the number of Shares held by them respectively and a record of all transfers thereof. Such register shall be conclusive as to who are the holders of the Shares and who shall be entitled to receive dividends or distributions or otherwise to exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled to receive payment of any dividend or distribution, nor to have notice given to him as herein provided, until he has given his address to a transfer agent or such other officer or agent of the Trustees as shall keep the said register for entry thereon. It is not contemplated that certificates will be issued for the Shares; however, the Trustees, in their discretion, may authorize the issuance of share certificates and promulgate appropriate rules and regulations as to their use. 6.6. Transfer Agent and Registrar. The Trustee shall have power to employ a ---------------------------- transfer agent or transfer agents, and a registrar or registrars. The transfer agent or transfer agents may keep the said register and record therein the original issues and transfers, if any, of the said shares. Any such transfer agent and registrar shall perform the duties usually performed by transfer agents and registrars of certificates of stock in a corporation, except as modified by the Trustees. 6.7. Transfer of Shares. Shares shall be transferable on the records of the ------------------ Trust only by the record holder thereof or by his agent thereto duly authorized in writing, upon delivery to the Trustees or a transfer agent of the Trust of a duly executed instrument of transfer, together 14 with such evidence of the genuineness of each such execution and authorization and of other matters as may reasonably be required. Upon such delivery the transfer shall be recorded on the register of the Trust. Until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereof and neither the Trustees nor any transfer agent or registrar nor any officer, employee or agent of the Trust shall be affected by any notice of the proposed transfer. Any person becoming entitled to any Shares in consequence of the death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation of law, shall be recorded on the register of Shares as the holder of such Shares upon production of the proper evidence thereof to the Trustees or a transfer agent of the Trust, but until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereof and neither the Trustees nor any transfer agent or registrar nor any officer or agent of the Trust shall be affected by any notice of such death, bankruptcy or incompetence, or other operation of law. 6.8. Notices. Any and all notices to which any Shareholder hereunder may be ------- entitled and any and all communications shall be deemed duly served or given if mailed, postage prepaid, addressed to any Shareholder of record, at his last known address as recorded on the register of the Trust. 15 ARTICLE VII Custodian --------- 7.1. Appointment and Duties. The Trustees shall at all times employ ---------------------- custodian or custodians, meeting the qualifications for custodians for portfolio securities of investment companies contained in the 1940 Act, as custodian with authority as its agent, but subject to such restrictions, limitations and other requirements, if any, as may be contained in the By-Laws of the Trust and the 1940 Act: (1) to hold the securities owned by the Trust and deliver the same upon written order; (2) to receive and receipt for any moneys due to the Trust and deposit the same in its own banking department or elsewhere as the Trustees may direct; (3) to disburse such funds upon orders or vouchers; (4) if authorized by the Trustees, to keep the books and accounts of the Trust and furnish clerical and accounting services; and (5) if authorized to do so by the Trustees, to compute the net income of the Trust; all upon such basis of compensation as may be agreed upon between the Trustees and the custodian. If so directed by a majority Shareholder Vote, the custodian shall deliver and pay over all property of the Trust held by it as specified in such vote. The Trustees may also authorize the custodian to employ one or more sub- custodians from time to time to perform such of the acts and services of the custodian and upon such terms and conditions, as may be agreed upon between the custodian and such sub-custodian and approved by the Trustees, provided that in every case such sub-custodian shall meet the qualifications for custodians contained in the 1940 Act. 7.2. Central Certificate System. Subject to such rules, regulations and -------------------------- orders as the Commission may adopt, the Trustees may direct the custodian to deposit all or any part of the securities owned by the Trust in a system for the central handling of securities established by a national securities exchange or a national securities association registered with the Commission under the Securities Exchange Act of 1934, or such other person as may be permitted by the Commission, or otherwise in accordance with the 1940 Act, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities, provided that all such deposits shall be subject to withdrawal only upon the order of the Trust. 16 ARTICLE VIII Determination of Net Asset Value, Net Income and Distributions ---------------------------- 8.1. Net Asset Value. The net asset value of each outstanding Share of the --------------- Trust shall be determined at such time or times on such days as the Trustees may determine, in accordance with the 1940 Act. The method of determination of net asset value of Shares of each class shall be determined by the Trustees and shall be as set forth in the Prospectus and Registration Statement with any expenses being borne solely by a class of Shares being reflected in the net asset value of such Shares. The power and duty to make the daily calculations may be delegated by the Trustees to the adviser, administrator, manager, custodian, transfer agent or such other person as the Trustees may determine. The Trustees may suspend the daily determination of net asset value to the extent permitted by the 1940 Act. 8.2. Distributions to Shareholders. The Trustees shall from time to time ----------------------------- distribute ratably among the Shareholders such proportion of the net profits, surplus (including paid-in surplus), capital, or assets held by the Trustees as they deem proper with any expenses being borne solely by a class of Shares being reflected in the net profits or other assets being distributed to such class. Such distribution may be made in cash or property (including without limitation any type of obligations of the Trust or any assets thereof), and the Trustees may distribute ratably among the Shareholders additional Shares issuable hereunder in such manner, at such times, and on such terms as the Trustee; may deem proper. Such distributions may be among the Shareholders of record at the time of declaring a distribution or among the Shareholders of record at such later date as the Trustees shall determine. The Trustees may always retain from the net profits such amounts as they may deem necessary to pay the debts or expenses of the Trust or to meet obligations of the Trust, or as they deem desirable to use in the conduct of its affairs or to retain for future requirements or extensions of the business. The Trustees may adopt and offer to Shareholders such dividend reinvestment plans, cash dividend payout plans or related plans as the Trustees shall deem appropriate. Inasmuch as the computation of net income and gains for federal income tax purposes may vary from the computation thereof on the books, the above provisions shall be interpreted to give the Trustees the power in their discretion to distribute for any fiscal year as ordinary dividends and as capital gains distributions, respectively, additional amounts sufficient to enable the Trust to avoid or reduce liability for taxes. 8.3. Power to Modify Foregoing Procedures. Notwithstanding any of the ------------------------------------ foregoing provisions of this Article VIII, the Trustees may prescribe, in their absolute discretion, such other bases and times for determining the per share net asset value of the Trust's Shares or net income, or the declaration and payment of dividends and distributions as they deem necessary or desirable or to enable the Trust to comply with any provision of the 1940 Act, including any rule or regulation adopted pursuant to the 1940 Act by the Commission or any securities association registered under the Securities Exchange Act of 1934, all as in effect now or hereafter amended or modified. 17 ARTICLE IX Shareholders ------------ 9.1. Voting Powers. The Shareholders shall have power to vote only (i) for ------------- the election of Trustees as provided in Section 2.2 hereof, (ii) for the removal of Trustees as provided in Section 2.2 hereof, (iii) with respect to any investment advisory or management contract as provided in Section 4.1, (iv) with respect to the termination of the Trust as provided in Section 10.2, (v) with respect to any amendment of the Declaration to the extent and as provided in Section 10.3, (vi) with respect to any merger, consolidation or sale of assets as provided in Section 10.4, (vii) with respect to any conversion to an "open- end" company as provided in Section 10.5, (viii) with respect to incorporation or reorganization of the Trust to the extent and as provided in Section 10.6, (ix) to the same extent as the stockholders of a Massachusetts business corporation as to whether or not a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or the Shareholders, (x) with respect to such additional matters relating to the Trust as may be required by law, the Declaration, the By-Laws or any registration of the Trust with the Commission (or any successor agency) or any state, or as and when the Trustees may consider necessary or desirable, and (xi) with respect to those matters set forth in the designations and powers, preferences and rights and the qualifications, limitations and restrictions of the Preferred Shares, as determined in accordance with Section 6.1 hereof. Each whole share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional Share shall be entitled to a proportionate fractional vote, except that Shares held in the treasury of the Trust as of the record date, as determined in accordance with the By-Laws, shall not be voted. There shall be no cumulative voting in the election of Trustees. Until Shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, the Declaration or the By-Laws to be taken by Shareholders. The By-Laws may include further provisions for Shareholder's votes and meetings and related matters. 9.2. Meetings of Shareholders. ------------------------ (a) Annual Meetings. Annual meetings of the Shareholders shall be held at --------------- such place within or without the Commonwealth of Massachusetts on such day and at such time as the Trustees shall designate. (b) Special Meetings. Special meetings of the Shareholders may be called at ---------------- any time by a majority of the, Trustees and shall be called by any Trustee upon written request of Shareholders holding in the aggregate not less than 10% of the outstanding Shares having voting rights, such request specifying the purpose or purposes for which such meeting is to be called. Any such meeting shall be held within or without the Commonwealth of Massachusetts on such day and at such time as the Trustees shall designate. The holders of a majority of the outstanding Shares present in person or by proxy shall constitute a quorum at any annual or special meeting for the transaction of any business, except as may otherwise be required by the 1940 Act, the laws of the Commonwealth of Massachusetts or other applicable law or by this Declaration or the By-Laws of the Trust. If a quorum is present at a meeting, the affirmative vote of a majority of the Shares represented at the meeting 18 constitutes the action of the Shareholders, unless the 1940 Act, the laws of the Commonwealth of Massachusetts or other applicable law, the Declaration or the By-Laws of the Trust requires a greater number of affirmative votes. If the Shares shall be divided into classes with a class having exclusive voting rights with respect to certain matters, the aforesaid quorum and voting requirements with respect to action to be taken by the Shareholders of the class on such matters shall be applicable only to the Shares of such class. 9.3. Notice of Meetings. Notice of all meetings of the Shareholders, stating ------------------ the time, place and purposes of the meeting, shall be given by the Trustees by mail to each Shareholder at his registered address, mailed at least 10 days and not more than 60 days before the meeting. Only the business stated in the notice of the meeting shall be considered at such meeting. Any adjourned meeting may be held as adjourned without further notice. 9.4. Record Date for Meetings. For the purpose of determining the ------------------------ Shareholders who are entitled to notice of and to vote at any meeting, or to participate in any distribution, or for the purposes of any other action, the Trustees may from time to time close the transfer books for such period, not exceeding 30 days, as the Trustees may determine; or without closing the transfer books the Trustees may fix a date not more than 60 days prior to the date of any meeting of Shareholders or daily dividends or other action as a record date for the determination of the Persons to be treated as Shareholders of record for such purposes, except for dividend payments which shall be governed by Section 8.2 hereof. 9.5. Proxies, etc. At any meeting of Shareholders, any holder of Shares ------------- entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Secretary, or with such other officer or agent of the Trust as the Secretary may direct, for verification prior to the time at which such vote shall be taken. Pursuant to a resolution of a majority of the Trustees, proxies may be solicited in the name of one or more Trustees or one or more of the officers of the Trust. Only Shareholders of record shall be entitled to vote. Each full Share shall be entitled to one vote and fractional Shares shall be entitled to a vote of such fraction. When any Share is held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such Share, but if more than one of them shall be present at such meeting in person by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Share. A proxy purporting to be executed by or on behalf of a shareholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. If the holder of any such Share is a minor or a person of unsound mind, and subject to guardianship or to the legal control of any other person as regards the charge or management of such Share, he may vote by his guardian or such other person appointed or having such control, and such vote may be given in person or by proxy. 9.6. Reports. The Trustees shall cause to be prepared at least annually a ------- report of operations containing a balance sheet and statement of income and undistributed income of the Trust prepared in conformity with generally accepted accounting principles and an opinion of an independent public accountant or such financial statements. Copies of such reports shall be mailed to all Shareholders of record within the time required by the 1940 Act, and in any event within a reasonable period preceding the annual meeting of Shareholders. The Trustees shall, in addition, furnish to the Shareholders at least semi-annually interim reports containing an 19 unaudited balance sheet of the Trust as of the end of such period and an unaudited statement of income and surplus for the period from the beginning of the current fiscal year to the end of such period. 9.7. Inspection of Records. The records of the Trust shall be open to --------------------- inspection by Shareholders to the same extent as is permitted shareholders of a Massachusetts business corporation. 9.8. Shareholder Action by Written Consent. Any action which may be taken by ------------------------------------- Shareholders may be taken without a meeting if a majority of Shareholders entitled to vote on the matter (or such larger proportion thereof as shall be required by any express provision of this Declaration) consent to the action in writing and the written consents are filed with the records of the meetings of Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders. 20 ARTICLE X Duration; Termination of Trust; Amendment; Mergers, Etc. ------------------------ 10.1. Duration. Subject to possible termination in accordance with the -------- provisions of Section 10.2 hereof, the Trust created hereby shall continue without limitation of time. 10.2. Termination of Trust. -------------------- (a) The Trust may be terminated by the affirmative of the holders of not less than two-thirds of the Shares at any meeting of Shareholders or if such termination has been approved by the affirmative vote of at least two thirds of the Trustees, in which case the affirmative vote of the holders of not less than a majority of such Shares. Upon the termination of the Trust, (i) The Trust shall carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust Property to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business. (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements, as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property, in cash or in kind or partly each, among the Shareholders of each class, according to the respective rights taking into account the proper allocation of expenses being borne solely by any class of Shares. (b) After termination of the Trust and distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Shareholders shall thereupon cease. 10.3. Amendment Procedure. ------------------- (a) Except as provided in paragraph (b) of this Section 10.3, this Declaration may be amended by a vote of a majority of the Shares at a meeting of Shareholders, or by an instrument in writing, without a meeting signed by a majority of the Trustees and consented to by the holders of not less than a majority of such Shares. The Trustees may also amend this Declaration without the vote or consent of Shareholders (i) to change the name of the Trust, 21 (ii) to supply any omission, or cure, correct or supplement any ambiguous, defective or inconsistent provision hereof, (iii) if they deem it necessary to conform this Declaration to the requirements of applicable federal or state laws or regulations or the requirements of the Internal Revenue Code, or to eliminate or reduce any federal, state or local taxes which are or may be payable by the Trust or the Shareholders, but the Trustee shall not be liable for failing to do so, (iv) to make any changes deemed necessary to effectuate the designations and powers, preferences and rights, and the qualifications, limitations and restrictions adopted by the Trustees with respect to the Preferred Shares pursuant to Section 6.1 hereof, or (v) for any other purpose which does not adversely affect the rights of any Shareholder with respect to which the amendment is or purports to be applicable. (b) No amendment may be made, under Section 10.3(a) above, which would change any rights with respect to any Shares of the Trust by reducing the amount payable thereon upon liquidation of the Trust or by diminishing or eliminating any voting rights pertaining thereto, except with the vote or consent of the holders of two-thirds of the Shares of the Trust so affected outstanding and entitled to vote. Nothing contained in this Declaration shall permit the amendment of this Declaration to impair the exemption from personal liability of the Shareholders, Trustees, officers, employees and agents of the Trust or to permit assessments upon Shareholders. (c) A certification in recordable form signed by a majority of the Trustees or by the Secretary or any Assistant Secretary of the Trust setting forth an amendment and reciting that it was duly adopted by the Shareholders or by the Trustees as aforesaid or a copy of the Declaration, as amended, in recordable form, and executed by a majority of the Trustees or certified by the Secretary or any Assistant Secretary of the Trust, shall be conclusive evidence of such amendment when lodged among the records of the Trust. Notwithstanding any other provision hereof, until such time as a Registration Statement under the Securities Act of 1933, as amended, covering the first public offering of Shares of the Trust shall have become effective, this Declaration may be terminated or amended in any respect by the affirmative vote of a majority of the Trustees or by an instrument signed by a majority of the Trustees. 10.4. Merger, Consolidation and Sale of Assets. Notwithstanding any other ---------------------------------------- provisions of this Declaration or the By-Laws of the Trust, a favorable vote of the holders of at least two-thirds of the outstanding Shares of the Trust entitled to be voted on the matter shall be required to approve, adopt or authorize (i) a merger or consolidation or share exchange of the Trust with any other entity, or (ii) a sale or exchange of all or substantially all of the assets of the Trust (other than in the regular course of its investment activities), unless such action has previously been approved, adopted or authorized by the affirmative vote of at least two-thirds of the total number of Trustees fixed in accordance with this Declaration, in which case the affirmative vote of the holders of a majority of the outstanding Shares of the Trust entitled to vote thereon shall be required. In respect of any such merger, consolidation, sale or exchange of assets, any Shareholder shall be entitled to rights of appraisal of his Shares to the same extent as a shareholder of a Massachusetts business corporation in respect of a merger, consolidation, sale or exchange of assets of a Massachusetts business corporation, and such right shall be his exclusive remedy in respect of his dissent from any such action. 22 10.5. Conversion to Open-End Company. Notwithstanding any other provisions ------------------------------ of this Declaration or the By-Laws of the Trust, a favorable vote of the holders of two-thirds of the outstanding Shares of the Trust entitled to be voted on the matter shall be required to approve, adopt or authorize an amendment to this Declaration that makes the Common Shares a "redeemable security" (as that term is defined in section 2(a)(32) the Investment Company Act of 1940, as amended) unless such action has previously been approved, adopted or authorized by the affirmative vote of at least two-thirds of the total number of Trustees fixed in accordance with this Declaration, in which case the affirmative vote of the holders of a majority of the outstanding Shares of the Trust entitled to vote thereon shall be required. 10.6. Incorporation. With the approval of the holders of a majority of the ------------- Shares, the Trustees may cause to be organized or assist in organizing a corporation or corporations under the laws of any jurisdiction or any other trust, partnership, association or other organization to take over all of the Trust Property or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, convey and transfer the Trust Property to any such corporation, trust, association or organization in exchange for the Shares or securities thereof or otherwise, and to lend money to, subscribe for the Shares or securities of, and enter into any contracts with any such corporation, trust, partnership, association or organization, or any corporation, partnership, trust, association or organization in which the Trust holds or is about to acquire shares or any other interest. The Trustees may also cause merger or consolidation between the Trust or any successor thereto and any such corporation, trust, partnership, association or other organization if and to the extent permitted by law, as provided under the law then in effect. Nothing contained herein shall be construed as requiring approval of Shareholders for the Trustees to organize or assist in organizing one or more corporations, trusts, partnerships, associations or other organizations and selling, conveying or transferring a portion of the Trust Property to such organizations or entities. 23 ARTICLE XI Miscellaneous ------------- 11.1. Filing. This Declaration, any amendment hereto or any Certificate of ------ Designation shall be filed in the office of the Secretary of the Commonwealth of Massachusetts and in such other places as may be required under the laws of Massachusetts and may also be filed or recorded in such other places as the Trustees deem appropriate. Each amendment so filed shall be accompanied by a certificate signed and acknowledged by a Trustee or the Secretary or any Assistant Secretary stating that such action was duly taken in a manner provided herein. Unless an amendment or certificate or Certificate of Designation sets forth some later time for the effectiveness thereof, such amendment or certificate or Certificate of Designation shall be effective upon its filing. A restated Declaration, containing the original Declaration and all amendments theretofore made, may be executed from time to time by a majority of the Trustees and shall, upon filing with a the Secretary of the Commonwealth of Massachusetts, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments thereto. 11.2. Resident Agent. The Trust shall maintain a resident agent in the -------------- Commonwealth of Massachusetts, which agent shall initially be CT Corporation System, 2 Oliver Street Boston, Massachusetts 02109. The Trustees may designate a successor resident agent, provided, however, that such appointment shall not become effective until written notice thereof is delivered to the office of the Secretary of the Commonwealth. 11.3. Governing Law. This Declaration is executed by the Trustees and ------------- delivered in the Commonwealth of Massachusetts and with reference to the laws thereof, and the rights of all parties and the validity and construction of every provision hereof shall be subject to and construed according to the laws of said State and reference shall be specifically made to the business corporation law of the Commonwealth of Massachusetts as to the construction of matters not specifically covered herein or as to which an ambiguity exists. 11.4. Counterparts. This Declaration may be simultaneously executed in ------------ several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart. 11.5. Reliance by Third Parties. Any certificate executed by an individual ------------------------- who, according to the records of the Trust, or of any recording office in which this Declaration may be recorded, appears to be a Trustee hereunder, or Secretary or Assistant Secretary of the Trust, certifying to: (a) the number or identity of Trustees or Shareholders, (b) the due authorization of the execution of any instrument or writing, (c) the form of any vote passed at a meeting of Trustees or Shareholders, (d) the fact that the number of Trustees or Shareholders present at any meeting or executing any written instrument satisfies the requirements of this Declaration, (e) the form of any By-Laws adopted by or the identity of any officers elected by the Trustees, or (f) the existence of any fact or facts which in any manner relate to the affairs of the Trust, shall be conclusive evidence as to the matters so certified in favor of any person dealing with the Trustees and their successors. 24 11.6. Provisions in Conflict with Law or Regulations. ---------------------------------------------- (a) The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the regulated investment company provisions of the Internal Revenue Code or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of this Declaration; provided, however, that such determination shall not affect any of the remaining provisions of this Declaration or render invalid or improper any action taken or omitted prior to such determination. (b) If any provision of this Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration in any jurisdiction. The principal office of the Trust is 800 Scudders Mill Road, Plainsboro, NJ 08536. 25 IN WITNESS WHEREOF, the undersigned have caused these presents executed as of the day and year first above written. ----------------------------------------------- Jerry Weiss 13 Bayberry Road Princeton, New Jersey 08540 ----------------------------------------------- Mark B. Goldfus 509 Bergen Street Lawrenceville, New Jersey 08648 ----------------------------------------------- Robert E. Putney, III 12131 Taylor Court Lawrenceville, New Jersey 08648 ----------------------------------------------- William E. Aldrich ___ Windsor Road Needham, Massachusetts 02192 26 EX-99.1B 3 CERTIFICATE DESIGNATION Exhibit 99.1(b) MUNIYIELD PENNSYLVANIA FUND CERTIFICATE The undersigned hereby certifies that he is the Secretary of MuniYield Pennsylvania 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 November 23, 1992, establishing the powers, qualifications, rights and preferences of the Auction Market Preferred Shares of the Trust, wh1ph 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 23rd day of November, 1992. _____________________________ Mark B Goldfus Secretary MUNIYIELD PENNSYLVANIA FUND CERTIFICATE OF DESIGNATION DATED NOVEMBER 23, 1992 ESTABLISHING POWERS, QUALIFICATIONS, RIGHTS AND PREFERENCES OF THE AUCTION MARKET PREFERRED SHARES ("AMPS(R)") WHEREAS the Board of Trustees of MuniYield Pennsylvania 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 such preferred shares. NOW, THEREFORE, the Board of Trustees does hereby authorize the issuance of a series of 800 preferred shares, par value $0.10 per share, liquidation preference $50,000 per share plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared), designated Auction Market Preferred Shares. The preferences, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption, of the preferred shares are as follows: - ----------------------------------- (R) Registered trademark of Merrill Lynch & Co., Inc. 2 DESIGNATION A series of 800 shares of preferred shares, par value $.10 per share, liquidation preference $50,000 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". Each Auction Market Preferred Share (sometimes referred to herein as "AMPS") shall be issued on November 30, 1992; have an Initial Dividend Rate equal to 3.15% per annum; have Initial 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 Auction Market Preferred Shares shall constitute a separate series of preferred shares of the Trust, and each Auction Market Preferred Share 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 3 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 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. 4 "Adviser" means the Trust's investment adviser which initially shall be Fund Asset Management, Inc. "Affiliate" shall mean 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 an Existing Holder of one or more shares of AMPS or a Potential Holder that is identified as such in such holder's Purchaser's Letter. "AMPS" means the Auction Market Preferred Shares. "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 shares of AMPS and Other AMPS Outstanding on such Valuation Date multiplied by the sum of (a) $50,000 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 for each series of AMPS that follows such Valuation Date; (C) the aggregate amount of cash dividends that would accumulate at the then current Maximum Applicable Rate on any shares of 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 5 90 days subsequent to such Valuation Date; (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 payables 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 have a rating assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 and, with respect to S&P, at least AAA, SP-1+ or A-1+, in both cases irrevocably deposited by the Trust for the payment of the amount needed to redeem shares of AMPS subject to redemption or any of (i)(B) through (i)(F). "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 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. 6 "Applicable Percentage" has the meaning set forth in paragraph 11(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 Schroder Bank & Trust Company unless and until another commercial bank, trust company or other financial institution appointed by a resolution of the Board of Directors 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 11 of this Certificate of Designation. "Broker-Dealer" shall mean any broker-dealer, or other entity permitted by law to perform the functions required of a Broker-Dealer in paragraph 11 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" shall mean an agreement between the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the procedures specified in paragraph 11 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. 7 "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, 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. "Declaration" means the Declaration of Trust, as amended and supplemented (including this Certificate of Designation), of the Trust on file in 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 AAA, 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 Coverage Amount," as of any Valuation Date, means (A)(i) the aggregate amount of cash dividends that will accumulate on all shares of Outstanding AMPS and Other AMPS, in each case to (but not including) the next Dividend Payment Date therefor for the AMPS that follows such Valuation Date plus (ii) the aggregate amount of all liabilities existing on such Valuation Date which are payable on or prior to such next Dividend Payment Date less (B) the sum of (i) the combined Market Value of Deposit Securities irrevocably deposited with the Auction Agent for the payment of cash dividends on all shares of AMPS and Other AMPS, 8 (ii) the book value of receivables for Pennsylvania Municipal Bonds and 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 in any event on or prior to such next Dividend Payment Date, and (iii) interest on Pennsylvania Municipal Bonds and Municipal Bonds which is scheduled to be paid on or prior to the next Dividend Payment Date. "Dividend Coverage Assets," as of any Valuation Date, means, in the case of shares of AMPS and Other AMPS, Deposit Securities with maturity or tender payment dates not later in each case than the Dividend Payment Date therefor that follows such Valuation Date. "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 Person who has signed a Purchaser's Letter and is listed as the holder of record of shares of AMPS in the Share Books. "First Initial Dividend Payment Date" means December 31, 1992. "Forward Commitment" has the meaning set forth in paragraph 9(c) of this Certificate of Designation. "Holder" means a Person identified as a holder of record of shares of AMPS in the Share Register. "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. 9 "Initial Dividend Payment Date" means each of the First Initial Dividend Payment Date and the Last Initial Payment Date. "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 specified herein applicable to the Initial Dividend Period for the 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. "Last Initial Dividend Payment Date" means January 12, 1993. "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 $50,000 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 10 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 Association of Securities Dealers, Inc. and 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 Directors. "Maximum Applicable Rate," with respect to AMPS, has the meaning set forth in paragraph 11(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. 11 "Minimum Liquidity Level" means, as of any Valuation Date, an aggregate Market Value of the Trust's Dividend Coverage Assets not less than the Dividend coverage Amount. "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) the rating by Moody's or S&P on such Bond and (b) the Moody's Exposure Period, in accordance with the table set forth below:
Rating Category -------------------------------------------------- Moody's Exposure Period Aaa* Aa* A* Baa* Other** VM1G-1*** SP-1+*** - ------------------------------------------------------------- ----- ----- ---- ------ ------- --------- -------- 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
____________________ * 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) no 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-l 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 12 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 $10,000,000. In addition, Pennsylvania Municipal Bonds and Municipal Bonds in the Trust's portfolio must be within the following diversification requirements in order to be included within Moody's Eligible Assets: 13
Minimum Maximum Maximum Maximum Issue Size Underlying Issue Type County Rating ($ Millions) Obligor (%)(1) Concentration (%)(1)(3) Concentration (%)(1)(4) - ------ --------------- ----------------- ------------------------ ------------------------- Aaa...................... 10 100 100 100 Aa....................... 10 20 60 60 A........................ 10 10 40 40 Baa...................... 10 6 20 20 Other (2)................ 10 4 12 12 Maximum State Rating Concentration (1)(5) - ------ -------------------- Aaa...................... 100 Aa....................... 60 A........................ 40 Baa...................... 20 Other (2)................ 12
____________________ (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 such 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 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. 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 Transaction" has the meaning set forth in paragraph 9(b) of these Certificate of Designation. "Moody's Volatility Factor" means 100% during the Initial Dividend Period until 49 days prior to the last day of such Dividend Period. Thereafter, "Moody's Volatility Factor" means 15 272% 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 Rate Factor ----------------- ------------------ less than or equal to 5% 292% greater than 5% but less than or equal to 10% 313% greater than 10% but less than or equal to 15% 338% greater than 15% but less than or equal to 20% 364% greater than 20% but less than or equal to 25% 396% greater than 25% but less than or equal to 30% 432% greater than 30% but less than or equal to 35% 472% greater than 35% but less than or equal to 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-2 (File No. 33-53616) 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. "Municipal Index" has the meaning set forth in paragraph 9(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 stock, including all outstanding shares of 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 coverage for senior securities which are stock of a closed-end investment company as a condition of paying dividends on its common stock). 16 "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 shares of 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 shares of 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 to the Auction Agent, all Existing Holders (at their addresses appearing in the Share Books) and the Securities Depository. Notwithstanding the 17 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 shares of 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 shares 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. "Notice of Special Dividend Period" has the meaning set forth in paragraph 2(c)(iii) of this Certificate of Designation. 18 "Optional Redemption Price" shall mean $50,000 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, shares of AMPS theretofore issued by the Trust except, without duplication, (A) any shares of 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 moneys shall have been deposited in trust by the Trust pursuant to paragraph 4(c) and (B) any shares of AMPS as to which the Trust or any Affiliate thereof shall be an Existing Holder, provided that shares of 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. "Pennsylvania Municipal Bonds" means municipal obligations issued by or on behalf of the Commonwealth of Pennsylvania, its political subdivisions, agencies and instrumentalities and by other qualifying issuers that pay interest which, in the opinion of bond counsel to the issuer, is exempt from Federal and Pennsylvania income taxes. 19 "Person" shall mean and include 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. "Potential Holder" shall mean any Person, including any Existing Holder, (A) who shall have executed a Purchaser's Letter and (B) who may be interested in acquiring shares of AMPS (or, in the case of an Existing Holder, additional shares of AMPS). "Preferred Shares" means the preferred shares, par value $.10 per share, of the Trust, and includes AMPS and Other AMPS. "Premium Call Period" has the meaning set forth under the definition of "Specific Redemption Provisions". "Pricing Service" shall mean 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. "Purchaser's Letter" means a letter addressed to the Trust, the Auction Agent and a Broker-Dealer in which a Person agrees, among other things, to offer to purchase, purchase, offer to sell and/or sell shares of AMPS as set forth in paragraph 11 of this Certificate of Designation. "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 January 25, 1993. "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. 20 "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. "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 Corporation 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) the rating by S&P or Moody's on such Bond and (b) the S&P Exposure Period, in accordance with the tables set forth below: 21
For Pennsylvania Municipal Bonds: - --------------------------------- Rating Category ----------------------------------------------------------- S&P Exposure Period AAA* AA* A* BBB* - ------------------- ----------------------------------------------------------- 40 Business Days........................... 210% 215% 230% 270% 22 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
___________________ * 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 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; provided, however, such short-term Pennsylvania Municipal Bonds rated by Moody's 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 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 and (ii) no S&P Discount Factor will be applied to cash or to Receivables for Pennsylvania Municipal Bonds Sold. "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 if such receivables are due within five Business D4ys of such Valuation Date. The Trust may adopt S&P Discount Factors for Municipal Bonds provided that S&P advises the Trust in writing that 22 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, 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, is rated at least A by Moody's (provided that such Moody's-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 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); (iv) is not subject to a covered call or covered put option written by the Trust; (v) is not part of a private placement of Pennsylvania Municipal Bonds; and (vi) 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 issued by an issuer with a total of at least $50 million of securities outstanding. 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 23 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 guaranteed or insured by any one bond insurer will be considered S&P Eligible Assets only to the extent the fair market value of such Pennsylvania Municipal Bonds does not exceed 25% of the aggregate fair market value of the S&P Eligible Assets; and (3) 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 20% 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 20% 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. 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) 24 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. The Trust may include 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 9(a) of this Certificate of Designation. "S&P Volatility Factor" means 228% during the Initial Dividend Period for the AMPS. Thereafter, "S&P Volatility Factor" means, depending on the applicable Reference Rate, the following: Reference Rate -------------- Taxable Equivalent of the Short-Term Municipal Bond Rate................................ 277% 30-day "AA" Composite Commercial Paper Rate.............................. 228% 60-day "AA" Composite Commercial Paper Rate.............................. 228% 90-day "AA" Composite Commercial Paper Rate.............................. 222% 25 Reference Rate -------------- 180-day "AA" Composite Commercial Paper Rate.............................. 217% 1-year U.S. Treasury Bill Rate.......................................... 198% 2-year U.S. Treasury Note Rate.......................................... 185% 3-year U.S. Treasury Note Rate.......................................... 178% 4-year U.S. Treasury Note Rate.......................................... 171% 5-year U.S. Treasury Note Rate.......................................... 169% Notwithstanding the foregoing, the S&P Volatility Factor may mean 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 shares of AMPS that agrees to follow the procedures required to be followed by such securities depository in connection with the shares of 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 or more than 364. 26 "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 shares of AMPS subject to such Dividend Period 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 shares of AMPS subject to such Dividend Period shall be redeemable at the Trust's option at a price per share equal to $50,000 plus accumulated but unpaid dividends plus a premium expressed as a percentage of $50,000, 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 27 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 shares of 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 or any successor index (the "Kenny 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 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). 28 "Treasury Bonds" shall have the meaning set forth in paragraph 9(a) of this Certificate of Designation. "Trust" means MuniYield Pennsylvania 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 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 29 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 and the Minimum Liquidity Level, 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. (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, Dividend Coverage Amount, Dividend Coverage Assets, Independent Accountants, Initial Margin, Market Value, Maximum Potential Additional Dividend Liability, Minimum Liquidity Level, 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 Directors 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 to adjust, modify, alter or change 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 adjustment, modification, alteration or change will not adversely affect their then-current ratings on the AMPS. 30 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 shares of 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 shares of AMPS will be designated as exempt- interest dividends. For the purposes of this section, the term "net tax-exempt income" shall exclude capital gains of the Trust. (b) (i) Cash dividends on shares of 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 First Initial Dividend Payment Date with respect to the AMPS. Dividends on the AMPS during the Initial Dividend Period shall be payable on each Initial Dividend Payment Date, except that if any Initial Dividend Payment Date is not a Business Day, then (i) the Dividend Payment Date shall be the first Business Day next succeeding such Initial Dividend Payment Date if such Initial Dividend Payment Date is a Saturday, Sunday, Monday, Tuesday, Wednesday or Thursday, or (ii) the Dividend Payment Date shall be the first Business Day next preceding such Initial Dividend Payment Date if such Initial Dividend Payment Date is a Friday. If, however, in the case of clause (ii) in the preceding sentence, the Securities Depository shall make available to its participants and members in funds immediately available in New York City on Initial Dividend Payment Dates the amount due as 31 dividends on such Initial Dividend Payment Dates (and the Securities Depository shall have so advised the Trust), and if the day that otherwise would be the Initial Dividend Payment Date is not a Business Day, then the Dividend Payment Date shall be the next succeeding Business Day. Following the Last 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 and (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 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 (i) the Dividend Payment Date shall be the first Business Day next succeeding such Normal Dividend Payment Date if such Normal Dividend Payment Date is a Saturday, Sunday, Monday, Tuesday, Wednesday or Thursday, or (ii) the Dividend Payment Date shall be the first Business Day next preceding such Normal Dividend Payment Date if such Normal Dividend Payment Date is a Friday. If, however, in the case of clause,(ii) in the preceding sentence, the Securities Depository shall make available to its participants and members in funds immediately available in New York City on Dividend Payment Dates the amount due as dividends on such Dividend Payment Dates (and the Securities Depository shall have so advised the Trust), and if the Normal Dividend Payment Date is not a Business Day, then the Dividend Payment Date shall be the next succeeding Business Day. 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 32 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 Directors shall fix the Dividend Payment Date. The Initial Dividend Period, 7-day Dividend Periods and Special Dividend Periods are hereinafter 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 Stock 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 Last Initial Dividend Payment Date (the "Initial Dividend Period"), the Applicable Rate shall be the Initial Dividend Rate. Commencing on the Last Initial Dividend Payment Date, 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 Dividend Rate for each Dividend Period commencing during a Non-Payment Period shall be equal to the Non-Payment Period Rate; and each Dividend Period, 33 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 shares of 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 preceding such Dividend Payment Date, the Trust has declared such dividend payable on such Dividend Payment Date to the Holders of such shares of 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 shares of 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 shares of AMPS on the date set for such redemption, the preceding sentence shall not apply and the Applicable Dividend 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. 34 (ii) The amount of cash dividends per share of AMPS payable (if declared) on each Dividend Payment Date of the Initial Dividend Period, each 7- day Dividend Period and 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 such share was outstanding and the denominator of which will be 365, multiplying the amount so obtained by $50,000, and rounding the amount so obtained to the nearest cent. During any Long Term Dividend Period, the amount of dividends per share payable on any Dividend Payment Date shall be computed on the basis of a year consisting of twelve 30-day months. (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 the number of days (other than 7) evenly divisible by seven, and not fewer than seven or 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 the Trust has given written notice thereof to S&P and received written confirmation from Moody's that such action would not impair the ratings then assigned to the AMPS by Moody's and 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 35 Period, in the case of a Short Term Dividend Period, shall be given on or prior to the fourth Business Day but not more than seven Business Days prior to an Auction Date for AMPS and, in the case of a Long Term Dividend Period, shall be given on or prior to the 14th day but not more than 28 days prior to an 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 third 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 third 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 of its revocation (a "Notice of 36 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 Response. 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. If the Trust is prohibited from giving a Notice of Special Dividend Period as a result of any of the factors enumerated in clause 37 (x), (y) or (z) of the prior sentence or if the Trust gives a Notice of Revocation with respect to a Notice of Special Dividend Period for the AMPS, the next 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 of beneficial interest, in excess of full cumulative dividends and applicable late charge, as herein provided, on the shares of AMPS (except for Additional Dividends as provided in paragraph 2(e) 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 shares of 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 shares of AMPS as to dividends or upon liquidation) in respect of the Common Shares or any other shares of beneficial interest of the Trust ranking junior to or on a parity with the shares of AMPS as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any 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 shares of AMPS as to dividends and upon liquidation) or any other such Parity Shares (except by 38 conversion into or exchange for shares of beneficial interest of the Trust ranking junior to or on a parity with the shares of AMPS as to dividends and upon liquidation), unless (A) immediately after such 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 shares of 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 shares 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 Dividend 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 share or shares of 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 shares of 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 shares of 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 39 Retroactive Taxable Allocation is made, provide notice thereof to the Auction Agent and to each holder of a Right applicable to such shares of AMPS (initially Cede & Co. as nominee of the Depository Trust Company) during such fiscal year at such 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 shares 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 shares 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 shares of AMPS at the greater of: (x) the maximum combined marginal regular Federal and Pennsylvania individual income tax rate applicable to ordinary income; or (y) the maximum combined marginal regular Federal and Pennsylvania corporate income tax rate 40 (taking into account the Federal income tax deductibility of state taxes paid or incurred but not any phase out of personal exemptions, itemized deductions, or the benefit of lower tax brackets). (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 shares of 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 shares of 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 shares of 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 $50,000 per share plus accumulated but unpaid dividends (whether or not earned or declared) thereon to date of distribution, and after such payment the holders of AMPS 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 41 liquidation are not paid in full, the Holders and the holders of such other class or series will share 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 share exchange of the Trust with or into any other 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, upon giving a Notice of Redemption, the Trust at its option may redeem shares of 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 such share 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 shares of AMPS on such redemption date. 42 (ii) The Trust shall redeem, out of funds legally available therefor, at the Mandatory Redemption Price per share, shares of 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 respectively 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 shares of AMPS to be redeemed shall be equal to the lesser of (i) the minimum number of shares 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 shares of AMPS and other Preferred Shares the redemption of which would have such result, all shares of AMPS and other Preferred Shares then Outstanding shall be redeemed), and (ii) the maximum number of shares 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 shares of AMPS required to be redeemed in accordance with the foregoing, the Trust shall allocate the number required to be redeemed which would result in the Trust having S&P Eligible Assets and Moody's Eligible Assets each 43 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 shares of 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, shares of 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 shares 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 shares of 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 shares of 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 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 44 Amount. In the event that less than all the outstanding shares of a series of AMPS are to be redeemed and there is more than one Holder, the shares of that series of AMPS to be redeemed shall be selected by lot or such other method as the Trust shall deem fair and equitable. (c) Whenever shares of AMPS are to be redeemed, the Trust, not less than 20 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 shares 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 shares of AMPS to be redeemed, (iv) the place or places where shares of 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 a cash amount equal to the redemption payment for the shares of AMPS 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 45 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 moneys 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 shares 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 shall 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 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 46 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 shares of 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). (c) Right to Vote with Respect to Certain Other Matters. So long as any --------------------------------------------------- shares of 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, or increase the authorized or issued amount of, any class or series of shares ranking prior to or on a parity with any series of Preferred Shares with respect to payment of dividends or the distribution of assets on liquidation, or increase the authorized amount of 47 AMPS or any other Preferred Shares, 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 shares of AMPS or any other Preferred Shares. To the extent permitted under the 1940 Act, in the event shares of more than one series of AMPS are outstanding, 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 shares of 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 Common Shares and Preferred Shares, including AMPS, voting together as a single class necessary to authorize the action in question. (d) Voting Procedures. ----------------- (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 48 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 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. 49 (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 trustee's 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)(ii). (e) Exclusive Remedy. Unless otherwise required by law, the Holders of ---------------- shares of AMPS shall not have any rights or preferences other than those specifically set forth herein. The Holders of shares 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 shares of AMPS, the exclusive remedy of the Holders shall be the right to vote for directors 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 share of AMPS is outstanding, the 1940 Act AMPS Asset Coverage. 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, 50 (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 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 Amounts 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 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 51 first day of a Special Dividend Period, the Trust will deliver an AMPS Basic Maintenance Report to S&P and the Auction Agent. Whenever the Trust delivers an AMPS Basic Maintenance Report to S&P pursuant to this paragraph 7(b), it shall also deliver a Certificate of Minimum Liquidity 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 and a Certificate of Minimum Liquidity 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) and (with respect to S&P only while S&P is rating the AMPS) such Certificate, (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 52 Basic Maintenance Amount and Moody's Eligible Assets of an aggregate Discounted Value at least equal to the AMPS Basic Maintenance Amount, (iv) that (with respect to S&P only) in such Certificate, the Trust determined the Minimum Liquidity Level and the Trust's Deposit Securities in accordance with this Certificate of Designation, including maturity or tender date, (v) with respect to the S&P rating on Pennsylvania Municipal Bonds or Municipal Bonds, the issuer name, issue size and coupon rate listed in such Report and (with respect to S&P only) such Certificate, 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, (vi) 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 and (with respect to S&P only) such Certificate, 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), (vii) 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 and (with respect to S&P only) such Certificate to the bid or mean price listed in such Report and (with respect to S&P only) such Certificate 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 (viii) with respect to such confirmation to Moody's, that the Trust has satisfied the requirements of paragraph 9(b) of this Certificate of Designation (such confirmation is herein called the "Accountant's Confirmation"). 53 (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 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 shares of 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 54 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. (g) For so long as shares of 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. Minimum Liquidity Level. (a) For so long as any shares of AMPS are rated ----------------------- by S&P, the Trust shall be required to have, as of each Valuation Date, Dividend Coverage Assets having in the aggregate a Market Value not less than the Dividend Coverage Amount. (b) As of each Valuation Date, as long as any shares of AMPS are rated by S&P, the Trust shall determine (i) the Market Value of the Dividend Coverage Assets owned by the Trust 55 as of that Valuation Date, (ii) the Dividend Coverage Amount on that Valuation Date, and (iii) whether the Minimum Liquidity Level is met as of that Valuation Date. The calculations of the Dividend Coverage Assets, the Dividend Coverage Amount and whether the Minimum Liquidity Level is met shall be set forth in a certificate (a "Certificate of Minimum Liquidity") dated as of the Valuation Date. The AMPS Basic Maintenance Report and the Certificate of Minimum Liquidity may be combined in one certificate. The Trust shall cause the Certificate of Minimum Liquidity to be delivered to S&P not later than the close of business on the third Business Day after the Valuation Date applicable to such Certificate pursuant to paragraph 7(b). The Minimum Liquidity Level shall be deemed to be met as of any date of determination if the Trust has timely delivered a Certificate of Minimum Liquidity relating to such date which states that the same has been met and which is not manifestly inaccurate. In the event that a Certificate of Minimum Liquidity is not delivered to S&P when required, the Minimum Liquidity Level shall be deemed not to have been met as of the applicable date. (c) If the Minimum Liquidity Level is not met as of any Valuation Date, then the Trust shall purchase or otherwise acquire Dividend Coverage Assets to the extent necessary so that the Minimum Liquidity Level is met as of the fifth Business Day following such Valuation Date. The Trust shall, by such fifth Business Day, provide to S&P a Certificate of Minimum Liquidity setting forth the calculations of the Dividend Coverage Assets and the Dividend Coverage Amount and showing that the Minimum Liquidity Level is met as of such fifth Business Day together with a report of the custodian of the Trust's assets confirming the amount of the Trust's Dividend Coverage Assets as of such fifth Business Day. 56 9. Certain Other Restrictions. -------------------------- (a) For so long as any shares of 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 shares of 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 with remaining maturities of ten years or more ("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 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 $100,000 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 57 time of such transaction to own or have sold the lesser of (A) outstanding futures contracts based on Treasury Bonds and on the Municipal Index exceeding in number 25% or the quotient of the Market Value of the Trust's total assets divided by $100,000 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 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 short-term, 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 58 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. (b) For so long as any shares of 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 shares of 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 59 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 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 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 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 60 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) 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; (vii) 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 for the purpose of hedging the anticipated purchase of an asset prior to completion of such purchase; and (viii) 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 61 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. 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 shares of 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 62 settlement time (other than such contracts that constitute Moody's Hedging Transactions that are permitted under paragraph 9(b) of these 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 (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 shares of 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 shares of AMPS by S&P and/or Moody's, as the case may be, (i) borrow money except for the purpose of clearing transactions in 63 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), (ii) engage in short sales of securities, (iii) lend any securities, (iv) issue any class or series of stock 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 entity, (vii) change the Pricing Service or (viii) engage in reverse repurchase agreements. 10. 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 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. 11. Auction Procedures. (a) Certain definitions. As used in this paragraph ------------------ 11, the following terms shall have the following meanings, unless the context otherwise requires: (i) "AMPS" shall mean the shares of AMPS being auctioned pursuant to this paragraph 11. (ii) "Auction Date" shall mean the first Business Day preceding the first day of a Dividend Period. (iii)"Available AMPS" shall have the meaning specified in paragraph 11(d)(i) below. (iv) "Bid" shall have the meaning specified in paragraph 11(b)(i) below. (v) "Bidder" shall have the meaning specified in paragraph 11(b)(i) below. 64 (vi) "Hold Order" shall have the meaning specified in paragraph 11(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 shares of AMPS as follows: Applicable Applicable Credit Ratings Percentage of Percentage of - ------------------------------------ Reference Rate - Reference Rate - Moody's S&P No Notification Notification - --------------------- ------------ -------------------- ------------------ "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% 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 65 organizations to act as a Substitute Rating Agency or Substitute Rating Agencies, as the case may be. (viii) "Order" shall have the meaning specified in paragraph 11(b)(i) below. (ix) "Sell Order" shall have the meaning specified in paragraph 11(b)(i) below. (x) "Submission Deadline" shall mean 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" shall have the meaning specified in paragraph 11(d)(i) below. (xii) "Submitted Hold Order" shall have the meaning specified in paragraph 11(d)(i) below. (xiii) "Submitted Order" shall have the meaning specified in paragraph 11(d)(i) below. (xiv) "Submitted Sell Order" shall have the meaning specified in paragraph 11(d)(i) below. (xv) "Sufficient Clearing Bids" shall have the meaning specified in paragraph 11(d)(i) below. (xvi) "Winning Bid Rate" shall have the meaning specified in paragraph 11(d)(i) below. (b) Orders by Existing Holders and Potential Holders. ------------------------------------------------ (i) On or prior to the Submission Deadline on each Auction Date: 66 (A) each Existing Holder may submit to a Broker-Dealer information as to: (1) the number of Outstanding shares, if any, of AMPS held by such Existing Holder which such Existing Holder 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 Existing Holder which such Existing Holder 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 Existing Holder; and/or (3) the number of Outstanding shares, if any, of AMPS held by such Existing Holder which such Existing Holder 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 Holders that shall be maintained in good faith for the purpose of conducting a competitive Auction, shall contact Potential Holders, including Persons that are not Existing Holders, on such list to determine the number of Outstanding shares, if any, of AMPS which each such Potential Holder 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 Holder. For the purposes hereof, the communication to a Broker-Dealer of information referred to in clause (A) or (B) of this paragraph 11(b)(i) is hereinafter referred to as an "Order" and each Existing Holder and each Potential Holder placing an Order is hereinafter referred to as a "Bidder"; an Order containing the information referred to in clause (A)(1) of this paragraph 11(b)(i) is hereinafter referred to as a "Hold Order"; an order containing the information referred 67 to in clause (A)(2) or (B) of this paragraph 11(b)(i) is hereinafter referred to as a "Bid"; and an Order containing the information referred to in clause (A)(3) of this paragraph 11(b)(i) is hereinafter referred to as a "Sell Order". (ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer to sell: (1) the number of Outstanding shares of 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 shares of AMPS to be determined as set forth in paragraph 11(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 shares of AMPS to be determined as set forth in paragraph 11(e)(ii)(C) if such specified rate per annum shall be higher than the Maximum Applicable Rate and Sufficient Clearing Bids do not exist. (B) A Sell Order by an Existing Holder shall constitute an irrevocable offer to sell: (1) the number of Outstanding shares of AMPS specified in such Sell Order; or (2) such number or a lesser number of Outstanding shares of AMPS to be determined as set forth in paragraph 11(e)(ii)(C) if Sufficient Clearing Bids do not exist. 68 (C) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase: (1) the number of Outstanding shares of 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 shares of AMPS to be determined as set forth in paragraph 11(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 and specifying with respect to each Order: (A) the name of the Bidder placing such Order; (B) the aggregate number of Outstanding shares of 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 69 (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 shares of 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 Dividend Period which is not a Special Dividend Period) and a Sell Order (in the case of an Auction relating to a Special Dividend Period) to have been submitted on behalf of such Existing Holder covering the number of Outstanding shares of 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 shares of 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 shares of 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 shares of AMPS subject to such Hold Orders exceeds the number of Outstanding shares of AMPS held by such Existing Holder, the 70 number of shares 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 shares of 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 shares of AMPS held by such Existing Holder over the number of shares of AMPS subject to any Hold Order referred to in paragraph 11(c)(iv)(A) above (and if more than one Bid submitted on behalf of such Existing Holder specifies the same rate per annum and together they cover more than the remaining number of shares that can be the subject of valid Bids after application of paragraph 11(c)(iv)(A) above and of the foregoing portion of this paragraph 11(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 11(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 shares of AMPS held by such Existing Holder over the number of shares of AMPS subject to Hold orders referred to in paragraph 11(c)(iv)(A) and Bids referred to in paragraph 11(c)(iv)(B); provided that if more than one Sell Order is submitted on behalf of any Existing Holder and the number of shares of AMPS subject to such Sell Orders is greater than such excess, the number of shares of AMPS subject to 71 each of such Sell Orders shall be reduced pro rata so that such Sell Orders, in the aggregate, cover exactly the number of shares 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 shares of AMPS therein specified. (d) Determination of Sufficient Clearing Bids, Winning Bid Rate and --------------------------------------------------------------- Applicable Rate. - --------------- (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 shares of AMPS over the number of Outstanding shares of 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 shares of 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 shares of 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 72 (2) the number of Outstanding shares of AMPS that are subject to Submitted Sell Orders (if such excess or such equality exists (other than because the number of Outstanding shares of AMPS in clauses (1) and (2) above are each zero because all of the Outstanding shares of AMPS are the subject of Submitted Hold Orders), such Submitted Bids by Potential Holders being hereinafter referred to collectively as "Sufficient Clearing Bids"); and (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 shares of 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 shares of 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 11(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: 73 (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 shares of 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 (C) if all of the Outstanding shares of 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 59% of the Reference Rate (or 90% 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 shares of 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 paragraph 11(d)(i), the Submitted Bids and Submitted Sell Orders shall be 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 11(e)(iii) and paragraph 11(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: 74 (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 shares of 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 Existing Holder to continue to hold the Outstanding shares of 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 shares of AMPS that are the subject of such Submitted Bid, unless the number of Outstanding shares of AMPS subject to all such Submitted Bids shall be greater than the number of Outstanding shares of AMPS ("Remaining Shares") equal to the excess of the Available AMPS over the number of Outstanding shares of AMPS subject to Submitted Bids described in paragraph 11(e)(i)(B) and paragraph 11(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 shares of AMPS, but only in an amount equal to the difference between (1) the number of Outstanding shares of AMPS then held by such Existing Holder subject to such Submitted Bid and (2) the number of shares of AMPS obtained by multiplying (x) 75 the number of Remaining Shares by (y) a fraction the numerator of which shall be the number of Outstanding shares of AMPS held by such Existing Holder subject to such Submitted Bid and the denominator of which shall be the sum of the numbers of Outstanding shares of 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 shares of AMPS obtained by multiplying (x) the difference between the Available AMPS and the number of Outstanding shares of AMPS subject to Submitted Bids described in paragraph 11(e)(i)(B), paragraph 11(e)(i)(C) and paragraph 11(e)(i)(D) by (y) a fraction the numerator of which shall be the number of Outstanding shares of AMPS subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding shares of 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 shares of AMPS are subject to Submitted Hold Orders), subject to the provisions of paragraph 11(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 shares of AMPS that are the subject of such Submitted Bid; 76 (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 shares of 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 shares of AMPS then held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and (2) the number of shares of AMPS obtained by multiplying (x) the difference between the Available AMPS and the aggregate number of Outstanding shares of AMPS subject to Submitted Bids described in paragraph 11(e)(ii)(A) and paragraph 11(e)(ii)(B) by (y) a fraction the numerator of which shall be the number of Outstanding shares of 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 shares of AMPS subject to all such Submitted Bids and Submitted Sell Orders. (iii) If, as a result of the procedures described in paragraph 11(e)(i) or paragraph 11(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 shares 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 77 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 11(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 shares of AMPS for purchase among Potential Holders so that only whole shares of 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 shares of AMPS on such Auction Date. (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 shares of AMPS to be purchased and the aggregate number of the Outstanding shares of 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 shares of AMPS. (f) Miscellaneous. The Board of Trustees may interpret the provisions ------------- of this paragraph 11 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 Existing Holders of AMPS. An Existing Holder (A) may sell, transfer or otherwise dispose of shares of 78 AMPS only pursuant to a Bid or Sell Order in accordance with the procedures described in this paragraph 11 or to or through a Broker-Dealer or to a Person that has delivered a signed copy of a Purchaser's Letter to the Auction Agent, provided that in the case of all transfers other than pursuant to Auctions such Existing Holder, its Broker-Dealer 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 shares of 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 Existing Holder's beneficial ownership. Neither the Trust nor any affiliate shall submit an Order in any Auction. Any Existing Holder that is an Affiliate shall not sell, transfer or otherwise dispose of shares of AMPS to any Person other than the Trust. All of the Outstanding shares of AMPS 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 shares of AMPS may be registered in the Stock Register in the name of the Existing Holder thereof and such Existing Holder thereupon will be entitled to receive certificates therefor and required to deliver certificates therefor upon transfer or exchange thereof. 12. Securities Depository; Share Certificates. (a) If there is a Securities ----------------------------------------- Depository, one certificate for all of the shares of 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 shares of AMPS. All such certificates shall bear a legend to the effect that such certificates are issued subject to the provisions restricting the transfer of shares of AMPS of a series contained in this Certificate of Designation and each 79 Purchaser's Letter. 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 shares of AMPS. Except as provided in paragraph (b) below, the Securities Depository or its nominee will be the Holder, and no Existing Holder shall receive certificates representing its ownership interest in such shares. (b) If the Applicable Rate applicable to all shares of AMPS 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 12(a)) registered in the names of the Existing Holders or their nominees and rescind the stop-transfer instructions referred to in paragraph 12(a) with respect to such shares. 13. Personal Liability. The Declaration of Trust establishing MuniYield ------------------ Pennsylvania Fund, dated August 26, 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 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. 80 The Reference Portfolio will, taken as a whole, have the following attributes: Weighted Average Moody's Rating: At least Baa3 Maximum aggregate Reference Security Notional Amount: U.S.$1,000,000,000 Maximum share of aggregate Reference Security Notional Amount (i) attributable to any single arranger or (ii) originally issued within any three-month period: 33% Each Reference Security must also (a) have a legal final maturity no later than * 2012, (b) have been arranged by a different arranger than that of each other Reference Security and (c) not, on the day of designation as part of the Reference Portfolio, be in default (however defined in the relevant governing documentation) or be on watch for downgrade as to its rating by Moody's. The Reference Portfolio will further be divided into two parts or groups ("Group I and "Group II" and each a "Group"). Group I (or each Reference Security in Group I, as appropriate) will have the following attributes: Moody's Rating: Aaa Share of aggregate Reference Security Notional Amount on and after . 2000: At least 70% Minimum number of Reference Securities: 20 Maximum Reference Security Notional Amount: U.S.$40,000,000 Maximum number of Insured Securities: 4 (of which two may be insured by the same bond insurer) Maximum number of EMGI Securities: 5 where: "Insured Securities" means Reference Securities whose Aaa Mood's ratings are based on bond insurance; "EMGI Securities" means Reference Securities having more than 35 per cent. of their underlying credit exposure to loans or securities having ultimate obligors in Emerging Market Countries; and "Emerging Market Countries" means countries that are [not members of the Organisation for Economic Cooperation and Development]. Group II (or each Reference Security in Group II, as appropriate) will have the following attributes: Weighted Average Moody's Rating: Baa2 Share of aggregate Reference Security Notional Amount on and after . 2000: 30% or less Minimum number of Reference Securities: 15 Maximum Reference Security Notional Amount: U.S. $25,000,000 Maximum number of EMGII Securities: 33% of Group II number of Reference Securities where: "EMGII Securities" means Reference Securities having more than 0 per cent. and 7 per cent. or less of their underlying credit exposure to loans or securities having ultimate obligors in Emerging Market Countries; and "Emerging Market Countries" has the meaning given with respect to Group I; provided, that no Reference Security in Group II may have any underlying credit exposure to such loans or securities unless such Reference Security is an EMGII Security. 2 and "Emerging Market Countries" means countries that are [not members of the Organisation for Economic Cooperation and Development]. Group II (or each Reference Security in Group II, as appropriate) will have the following attributes: Weighted Average Moody's Rating: Baa2 Share of aggregate Reference Security Notional Amount on and after . 2000: 30% or less Minimum number of Reference Securities: 15 Maximum Reference Security Notional Amount: U.S. $25,000,000 Maximum number of EMGII Securities: 33% of Group II number of Reference Securities where: "EMGII Securities" means Reference Securities having more than 0 per cent. and 7 per cent. or less of their underlying credit exposure to loans or securities having ultimate obligors in Emerging Market Countries; and "Emerging Market Countries" has the meaning given with respect to Group I; provided, that no Reference Security in Group II may have any underlying credit exposure to such loans or securities unless such Reference Security is an EMGII Security. 2 EX-99.2 4 BY-LAWS OF REGISTRANT EXHIBIT 2 - -------------------------------------------------------------------------------- BY-LAWS OF MUNIYIELD PENNSYLVANIA FUND - -------------------------------------------------------------------------------- MUNIYIELD PENNSYLVANIA FUND --------------------------- BY-LAWS ------- These By-Laws are made and adopted pursuant to Section 2.7 of the Declaration of Trust establishing MUNIYIELD PENNSYLVANIA FUND, dated July 24, 1992, as from time to time amended (hereinafter called the "Declaration"). All words and terms capitalized in these By-Laws shall have the meaning or meanings set forth for such words or terms in the Declaration. ARTICLE I --------- Shareholder Meetings -------------------- Section 1.1 Chairman. The Chairman, if any, shall act as chairman at all -------- meetings of the Shareholders; in his absence, the President shall act as chairman; and in the absence of the Chairman and President, the Trustee or Trustees present at each meeting may elect a temporary chairman for the meeting, who may be one of themselves. Section 1.2 Proxies; Voting. Shareholders may vote either in person or by duly --------------- executed proxy and each full share represented at the meeting shall have one vote, all as provided in Article IX of the Declaration. No proxy shall be valid after eleven (11) months from the date of its execution, unless a longer period is expressly stated in such proxy. Section 1.3 Closing of Transfer Books and Fixing Record Dates. For the purpose ------------------------------------------------- of determining the Shareholders who are entitled to notice of or to vote or act at any meeting, including any adjournment thereof, or who are entitled to participate in from time to time close the transfer books or fix a record date in the manner provided in Section 9.4 of the Declaration. If the Trustees do not prior to any meeting of Shareholders so fix a record date or close the transfer books, then the date of mailing notice of the meeting or the date upon which the dividend resolution is adopted, as the case may be, shall be the record date. Section 1.4 Inspectors of Election. In advance of any meeting of Shareholders, ---------------------- the Trustees may appoint Inspectors of Election to act at the meeting or any adjournment thereof. If Inspectors of Election are not so appointed, the Chairman, if any, of any meeting of Shareholders may, and on the request of any Shareholder or his proxy shall, appoint Inspectors of Election of the meeting. The number of Inspectors shall be either one or three. If appointed at the meeting on the request of one or more Shareholders or proxies, a majority of Shares present shall determine whether one or three Inspectors are to be appointed, but failure to allow such determination by the shareholders shall not affect the validity of the appointment of Inspectors of Election. in case any person appointed as Inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Trustees in advance of the convening of the meeting or at the meeting by the person acting as chairman. The Inspectors of Election shall determine the number of Shares outstanding, the Shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, shall receive votes, ballots or consents, shall hear and determine all challenges and questions in any way arising in connection with the right to vote, shall count and tabulate all votes or consents, determine the results, and do such other acts as may be proper to conduct the election or vote with fairness to all Shareholders. If there are three Inspectors of Election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. On request of the Chairman, if any, of the meeting, or of any Shareholder or his proxy, the Inspectors of Election shall make a report in writing of any challenge or question or matter determined by them and shall execute a certificate of any facts found by them. Section 1.5 Records at Shareholder Meetings. At each meeting of the ------------------------------- Shareholders there shall be open for inspection the minutes of the last previous Shareholder Meeting of the Trust and a list of the Shareholders of the Trust, certified to be true and correct by the Secretary or other proper agent of the Trust, as of the record date of the meeting or the date of closing of transfer books, as the case may be. Such list of Shareholders shall contain the name of each Shareholder in alphabetical order and the address of and number of Shares owned by such Shareholder. Shareholders shall have such other rights and procedures of inspection of the books and records of the Trust as are granted to shareholders of a Massachusetts business corporation. ARTICLE II ---------- Trustees -------- Section 2.1 Annual and Regular Meetings. The Trustees shall hold an annual --------------------------- meeting for the election of officers and the transaction of other business which may come before such meeting, on such date as shall be fixed by the Trustees from time to time. Regular meetings of 3 the Trustees may be held without call or notice at such place or places and times as the Trustees may by resolution provide from time to time. Section 2.2 Special Meetings. Special Meetings of the Trustees shall be held ---------------- upon the call of the Chairman, if any, the President, the Secretary or any two Trustees, at such time, on such day, and at such place, as shall be designated in the notice of the meeting. Section 2.3 Notice. Notice of a meeting shall be given by mail or by telegram ------ (which term shall include a cablegram) or delivered personally. If notice is given by mail, it shall be mailed not later than 48 hours preceding the meeting and if given by telegram or personally, such telegram shall be sent or delivery made not later than 48 hours preceding the meeting. Notice by telephone shall constitute personal delivery for these purposes. Notice of a meeting of Trustees may be waived before or after any meeting by signed written waiver. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Trustees need be stated in the notice or waiver of notice of such meeting, and no notice need be given of action proposed to be taken by unanimous written consent. The attendance of a Trustee at a meeting shall constitute a waiver of notice of such meeting except where a Trustee attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been lawfully called or convened. Section 2.4 Chairman; Records. The Chairman, if any, shall act as chairman at ----------------- all meetings of the Trustees; in his absence, the President shall act as chairman; and, in the absence of the Chairman and the President, the Trustees present shall elect one of their number to act as temporary chairman. The results of all actions taken at a meeting of the Trustees, or by unanimous written consent of the Trustees, shall be recorded by the Secretary. Section 2.5 Retirement. Each Trustee's term of office shall expire as of ---------- December 31 of the year in which such Trustee reaches seventy-two years of age. ARTICLE III ----------- Officers -------- Section 3.1 Officers of the Trust. The officers of the Trust shall consist of --------------------- a Chairman, if any, a President, a Secretary, a Treasurer and such other officers or assistant officers, including Vice Presidents, as may be elected by the Trustees. Any two or more of the offices may be held 4 by the same person, except that the same person may not be both President and Secretary. The Trustees may designate a Vice President as an Executive Vice President and may designate the order in which the other Vice Presidents may act. The Chairman and the President shall be Trustees, but no other officer of the Trust need be a Trustee. Section 3.2 Election and Tenure. At the initial organizational meeting and ------------------- thereafter at each annual meeting of the Trustees, the Trustees shall elect the Chairman, if any, President, Secretary, Treasurer and such other officers as the Trustees shall deem necessary or appropriate in order to carry out the business of the Trust. Such officers shall hold office until the next annual meeting of the Trustees and until their successors have been duly elected and qualified. The Trustees may fill any vacancy in office or add any additional officers at any time. Section 3.3 Removal of Officer. Any officer May be removed at any time, with ------------------ or without cause, by action of a majority of the Trustees. This provision shall not prevent the making of a contract of employment for a definite term with any officer and shall have no effect upon any cause of action which any officer may have as a result of removal in breach of a contract of employment. Any officer may resign at any time by notice in writing signed by such officer and delivered or mailed to the Chairman, if any, President, or Secretary, and such resignation shall take effect immediately upon receipt by the Chairman, if any, President, or Secretary, or at a later date according to the terms of such notice in writing. Section 3.4 Bonds and Surety. Any officer may be required by the Trustees to ---------------- be bonded for the faithful performance of his duties in such amount and with such sureties as the Trustees may determine. Section 3.5 Chairman, President, and Vice Presidents. The Chairman, if any, ---------------------------------------- shall, if present, preside at all meetings of the Shareholders and of the Trustees and shall exercise and perform such other powers and duties as may from time to time be assigned to him by the Trustees. Subject to such supervisory powers, if any, as may be given by the Trustees to the Chairman, if any, the President shall be the chief executive officer of the Trust and, subject to the control of the Trustees, shall have general supervision, direction and control of the business of the Trust and of its employees and shall exercise such general powers of management as are usually vested in the office of President of a corporation. In the absence of the Chairman, if any, the President shall preside at all meetings of the Shareholders and the Trustees. The President 5 shall be, ex-officio, a member of all standing committees, except as otherwise provided in the resolutions or instruments creating any such committees. Subject to direction of the Trustees, the Chairman, if any, and the President shall each have power in the name and on behalf of the Trust to execute any and all loan documents, contracts, agreements, deeds, mortgages, and other instruments in writing, and to employ and discharge employees and agents of the Trust. Unless otherwise directed by the Trustees, the Chairman, if any, and the President shall each have full authority and power, on behalf of all of the Trustees, to attend and to act and to vote, on behalf of the Trust at any meetings of business organizations in which the Trust holds an interest, or to confer such powers upon any other persons, by executing any proxies duly authorizing such persons. The Chairman, if any, and the President shall have such further authorities and duties as the Trustees shall from time to time determine. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Trustees or, if more than one and not ranked, the Vice President designated by the Trustees, shall perform all of the duties of the President, and when so acting shall have all the powers of and be subject to all of the restrictions upon the President. Subject to the direction of the Trustees, and of the President, each Vice President shall have the power in the name and on behalf of the Trust to execute any and all loan documents, contracts, agreements, deeds, mortgages and other instruments in writing, and, in addition, shall have such other duties and powers as shall be designated from time to time by the Trustees or by the President. Section 3.6 Secretary. The Secretary shall keep the minutes of all meetings --------- of, and record all votes of, Shareholders, Trustees and the Executive Committee, if any. He shall be custodian of the seal of the Trust, if any, and he (and any other person so authorized by the Trustees) shall affix the seal or, if permitted, a facsimile thereof, to any instrument executed by the Trust which would be sealed by a Massachusetts corporation executing the same or a similar instrument and shall attest the seal and the signature or signatures of the officer or officers executing such instrument on behalf of the Trust. The Secretary shall also perform any other duties commonly incident to such office in a Massachusetts business corporation, and shall have such other authorities and duties as the Trustees shall from time to time determine. Section 3.7 Treasurer. Except as otherwise directed by the Trustees, the --------- Treasurer shall have the general supervision of the monies, funds, securities, notes receivable and other valuable papers and documents of the Trust, and shall have and exercise under the supervision of the 6 Trustees and of the President all powers and duties normally incident to his office. He may endorse for deposit or collection all notes, checks and other instruments payable to the Trust or to its order. He shall deposit all funds of the Trust in such depositories as the Trustees shall designate. He shall be responsible for such disbursement of the funds of the Trust as may be ordered by the Trustees or the President. He shall keep accurate account of the books of the Trust's transactions which shall be the property of the Trust, and which together with all other property of the Trust in his possession, shall be subject at all times to the inspection and control of the Trustees. Unless the Trustees shall otherwise determine, the Treasurer shall be the principal accounting officer of the Trust and shall also be the principal financial officer of the Trust. He shall have such other duties and authorities as the Trustees shall from time to time determine. Notwithstanding anything to the contrary herein contained, the Trustees may authorize any adviser, administrator, manager or transfer agent to maintain bank accounts and deposit and disburse funds of the Trust. Section 3.8 Other Officers and Duties. The Trustees may elect such other ------------------------- officers and assistant officers as they shall from time to time determine to be necessary or desirable in order to conduct the business of the Trust. Assistant officers shall act generally in the absence of the officer whom they assist and shall assist that officer in the duties of his office. Each officer, employee and agent of the Trust shall have such other duties and authority as may be conferred upon him by the Trustees or delegated to him by the President. ARTICLE IV ---------- Miscellaneous ------------- Section 4.1 Custodians. In accordance with Section 7.1 of the Declaration, the ---------- funds of the Trust shall be deposited with such custodian or custodians as the Trustees shall designate and shall be drawn out on checks, drafts or other orders signed by such officer, officers, agent or agents (including any adviser, administrator or manager), as the Trustees may from time to time authorize. Section 4.2 Signatures. All contracts and other instruments shall be executed ---------- on behalf of the Trust by such officer, officers, agent or agents, as provided in these By-Laws or as the Trustees may from time to time by resolution provide. 7 Section 4.3 Seal. The seal of the Trust, if any, may be affixed to any ---- document, and the seal and its attestation may be lithographed, engraved or otherwise printed on any document with the same force and effect as if it had been imprinted and attested manually in the same manner and with the same effect as if done by a Massachusetts business corporation.. ARTICLE V --------- Share Certificates and Share Transfers -------------------------------------- Section 5.1 Share Certificates. Each holder of Shares of the Trust shall be ------------------ entitled upon request to have a certificate or certificates, in such form as shall be approved by the Trustees, representing the number of Shares owned by him, provided, however, that certificates for fractional shares shall not be delivered in any case. The certificates representing Shares shall be signed by or in the name of the Trust by the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with the seal of the Trust. Any or all of the signatures on the seal on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate shall be issued, it may be issued by the Trust with the same effect as if such officer, transfer agent or registrar were still in office at the date of issue. Section 5.2 Transfer Agents, Registrars and the Like. As provided in Section ---------------------------------------- 6.6 of the Declaration, the Trustees shall have authority to employ and compensate such transfer agents and registrars with respect to the Shares of the Trust as the Trustees shall deem necessary or desirable. In addition, the Trustees shall have power to employ and compensate such dividend disbursing agents, warrant agents and agents for the reinvestment of dividends as they shall deem necessary or desirable. Any of such agents shall have such power and authority as is delegated to any of them by the Trustees. Section 5.3 Transfer of Shares. The Shares of the Trust shall be transferable ------------------ on the books of the Trust only upon delivery to the Trustees or a transfer agent of the Trust of proper documentation as provided in Section 6.7 of the Declaration, and on surrender of the certificate or certificates, if issued, for such Shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. The Trust, or its transfer agents, shall 8 be authorized to refuse any transfer unless and until presentation of such evidence as may be reasonably required to show that the requested transfer is proper. Section 5.4 Registered Shareholders. The Trust may deem and treat the holder ----------------------- of record of any Share as the absolute owner thereof for all purposes and shall not be required to take any notice of any right or claim of right of any other person. Section 5.5 Regulations. The Trustees may make such additional rules and ----------- regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of Shares of the Trust. Section 5.6 Lost, Destroyed or Mutilated Certificates. The holder of any ----------------------------------------- certificate representing Shares of the Trust shall immediately notify the Trust of any loss, destruction or mutilation of such certificate, and the Trust may issue a new certificate in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost or destroyed or which shall have been mutilated, and the Trustees may, in their discretion, require such owner or his legal representatives to give the Trust a bond in such sum, limited or unlimited, and in such form and with such surety or sureties, as the Trustees in their absolute discretion shall determine, to indemnify the Trust against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or issuance of a new certificate. Anything herein to the contrary notwithstanding, the Trustees in their absolute discretion, may refuse to issue any such new certificates, except pursuant to legal proceedings under the laws of the Commonwealth of Massachusetts. ARTICLE VI ---------- Advancement of Indemnification Moneys ------------------------------------- Section 6.1 Conditions to Advancement. Insofar as the conditional advancing of ------------------------- indemnification moneys to Trustees, officers, employees or agents of the Trust pursuant to Section 5.3 of the Declaration for actions based upon the Investment Company Act of 1940 may be concerned, such payments will be made only on the following conditions: (i) the advances must be limited to amounts used, or to be used, for the preparation or presentation of a defense to the action, including costs connected with the preparation of a settlement; (ii) advances may be made only upon receipt of a written promise by, or on behalf of, the recipient to repay that 9 amount of the advance which exceeds the amount to which it is ultimately determined that he is entitled to receive from the Trust by reason of indemnification; and (iii) (a) such promise must be secured by a surety bond, other suitable insurance or an equivalent form of security which assures that any repayments may be obtained by the Trust without delay or litigation, which bond, insurance or other form of security must be provided by the recipient of the advance, or (b) a majority of a quorum of the Trust's disinterested, non- party Trustees, or an independent legal counsel in a written opinion, shall determine, based upon a review of readily available facts, that the recipient of the advance ultimately will be found entitled to indemnification. ARTICLE VII ----------- Amendment of By-Laws -------------------- Section 7.1 Amendment and Repeal of By-Laws. In accordance with Section 2.7 of ------------------------------- the Declaration, the Trustees shall have the power to alter, amend or repeal the By-Laws or adopt new By-laws at any time. Action by the Trustees with respect to the By-Laws shall be taken by an affirmative vote of a majority of the Trustees. The Trustees shall in no event adopt By-Laws which are in conflict with the Declaration, and any apparent inconsistency shall be construed in favor of the related provisions in the Declaration. The Declaration establishing MuniYield Pennsylvania Fund, 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 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 MuniYield Pennsylvania Fund 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 said MuniYield Pennsylvania Fund but the "Trust Property" only shall be liable. 10 EX-99.6 5 INVESTMENT ADVISORY AGREEMENT EXHIBIT 6 INVESTMENT ADVISORY AGREEMENT AGREEMENT made this 12th day of October, 1992, by and between MUNIYIELD PENNSYLVANIA FUND, a Massachusetts business trust (hereinafter referred to as the "Fund"), and FUND ASSET MANAGEMENT, INC., a Delaware corporation (hereinafter referred to as the "Investment Adviser"). W I T N E S S E T H: ------------------- WHEREAS, the Fund is engaged in business as a closed-end management investment company registered under the Investment Company Act of 1940, as amended (hereinafter referred to as the "Investment Company Act"); and WHEREAS, the Investment Adviser is engaged principally in rendering management and investment advisory services and is registered as an investment adviser under the Investment Adviser's Act of 1940; and WHEREAS, the Fund desires to retain the Investment Adviser to provide management and investment advisory services to the Fund in the manner and on the terms hereinafter set forth; and WHEREAS, the Investment Adviser is willing to provide management and investment advisory services to the Fund on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, the Fund and the Investment Adviser hereby agree as follows: ARTICLE I --------- Duties of the Investment Adviser -------------------------------- The Fund hereby employs the Investment Adviser to act as manager and investment adviser of the Fund and to furnish, or arrange for affiliates to furnish, the management and investment advisory services described below, subject to the policies of, review by and overall control of the Board of Trustees of the Fund, for the period and on the terms and conditions set forth in this Agreement. The Investment Adviser hereby accepts such employment and agrees during such period, at its own expense, to render, or arrange for the rendering of, such services and to assume the obligations herein set forth for the compensation provided for herein. The Investment Adviser and its affiliates shall for all purposes herein be deemed to be independent contractors and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent the Fund in any way or otherwise be deemed agents of the Fund. (a) Investment Advisory Services. The Investment Adviser shall perform (or ---------------------------- arrange for the performance by affiliates of) the management and administrative services necessary for the operation of the Fund including administering shareholder accounts and handling shareholder relations. The Investment Adviser shall provide the Fund with office space, facilities, equipment and necessary personnel and such other services as the Investment Adviser, subject to review by the Board of Trustees, shall from time to time determine to be necessary or useful to perform its obligations under this Agreement. The Investment Adviser shall also, on behalf of the Fund, conduct relations with custodians, depositories, transfer agents, pricing agents, dividend disbursing agents, other shareholder servicing agents, accountants, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and such other persons in any such 2 other capacity deemed to be necessary or desirable. The Investment Adviser shall generally monitor the Fund's compliance with investment policies and restrictions as set forth in filings made by the Fund under the Federal securities laws. The Investment Adviser shall make reports to the Board of Trustees of its performance of obligations hereunder and furnish advice and recommendations with respect to such other aspects of the business and affairs of the Fund as it shall determine to be desirable. (b) Investment Advisory Services. The Investment Adviser shall provide (or - --- ---------------------------- arrange for affiliates to provide) the Fund with such investment research, advice and supervision as the latter may from time to time consider necessary for the proper supervision of the assets of the Fund, shall furnish continuously an investment program for the Fund and shall determine from time to time which securities shall be purchased, sold or exchanged and what portion of the assets of the Fund shall be held in the various securities in which the Fund invests, options, futures, options on futures or cash, subject always to the restrictions of the Declaration of Trust and By-Laws of the Fund, as amended from time to time, the provisions of the Investment Company Act and the statements relating to the Fund's investment objectives, investment policies and investment restrictions as the same are set forth in filings made by the Fund under the Federal securities laws. The Investment Adviser shall make decisions for the Fund as to foreign currency matters and make determinations as to foreign exchange contracts, foreign currency options, foreign currency futures and related options on foreign currency futures. The Investment Adviser shall make decisions for the Fund as to the manner in which voting rights, rights to consent to corporate action and any other rights pertaining to the Fund's portfolio securities shall be exercised. Should the Trustees at any time, however, make any definite determination as to investment policy and notify the Investment Adviser thereof in writing, the 3 Investment Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Investment Adviser shall take, on behalf of the Fund, all actions which it deems necessary to implement the investment policies determined as provided above, and in particular to place all orders for the purchase or sale of portfolio securities for the Fund's account with brokers or dealers selected by it, and to that end, the Investment Adviser is authorized as the agent of the Fund to give instructions to the Custodian of the Fund as to deliveries of securities and payments of cash for the account of the Fund. In connection with the selection of such brokers or dealers and the placing of such orders with respect to assets of the Fund, the Investment Adviser is directed at all times to seek to obtain execution and prices within the policy guidelines determined by the Board of Trustees and set forth in filings made by the Fund under the Federal securities laws. Subject to this requirement and the provisions of the Investment Company Act, the Securities Exchange Act of 1934, as amended, and other applicable provisions of law, the Investment Adviser may select brokers or dealers with which it or the Fund is affiliated. ARTICLE II ---------- Allocation of Charges and Expenses ---------------------------------- (a) The Investment Adviser. The Investment Adviser assumes and shall pay for ---------------------- maintaining the staff and personnel necessary to perform its obligations under this Agreement, and shall at its own expense, provide the office space, facilities, equipment and necessary personnel which it is obligated to provide under Article I hereof, and shall pay all compensation of officers of the Fund and all Trustees of the Fund who are affiliated persons of the Investment Adviser. 4 (b) The Fund. The Fund assumes and shall pay or cause to be paid all other -------- expenses of the Fund including, without limitation: taxes, expenses for legal and auditing services, costs of printing proxies, stock certificates, shareholder reports, prospectuses, charges of the custodian, any sub- custodian and transfer agent, expenses of portfolio transactions, Securities and Exchange Commission fees, expenses of registering the shares under Federal, state and foreign laws, fees and actual out-of-pocket expenses of Trustees who are not affiliated persons of the Investment Adviser, accounting and pricing costs (including the daily calculation of the net asset value), insurance, interest, brokerage costs, litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Fund. It is also understood that the Fund will reimburse the Investment Adviser for its costs in providing accounting services to the Fund. ARTICLE III ----------- Compensation of the Investment Adviser -------------------------------------- (a) Investment Advisory Fee. For the services rendered, the facilities ----------------------- furnished and expenses assumed by the Investment Adviser, the Fund shall pay to the Investment Adviser at the end of each calendar month a fee based upon the average weekly value of the net assets of the Fund at the annual rate of 0.50 of 1.0% (0.50%) of the average weekly net assets of the Fund (i.e., the average weekly value of the total assets of the Fund, minus the ----- sun of accrued liabilities of the Fund and accumulated dividends on outstanding preferred shares), commencing on the day following effectiveness hereof. For purposes of this calculation, average weekly net assets is 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. It is understood that the liquidation preference of any outstanding preferred shares (other 5 than accumulated dividends) is not considered a liability in determining the Fund's average weekly net assets. If this Agreement becomes effective subsequent to the first day of a month or shall terminate before the last day of a month, compensation for that part of the month this Agreement is in effect shall be prorated in a manner consistent with the calculation of the fee as set forth above. Subject to the provisions of subsection (b) hereof, payment of the Investment Adviser's compensation for the preceding month shall be made as promptly as possible after completion of the computations contemplated by subsection (b) hereof. During any period when the determination of net asset value is suspended by the Board of Trustees, the average net asset value of a share for the last week prior to such suspension shall for this purpose be deemed to be the net asset value at the close of each succeeding week until it is again determined. (b) Expense Limitations. In the event the operating expenses of the Fund, ------------------- including amounts payable to the Investment Adviser pursuant to subsection (a) hereof, for any fiscal year ending on a date on which this Agreement is in effect exceed the expense limitations applicable to the Fund imposed by applicable state securities laws or regulations thereunder, as such limitations may be raised or lowered from time to time, the Investment Adviser shall reduce its management and investment advisory fee by the extent of such excess and, if required pursuant to any such laws or regulations, will reimburse the Fund in the amount of such excess; provided, however, to the extent permitted by law, there shall be excluded from such expenses the amount of any interest, taxes, brokerage fees and commissions and extraordinary expenses (including but not limited to legal claims and liabilities and litigation costs and any indemnification related thereto) paid or payable by the Fund. Whenever the expenses of the Fund exceed a pro rata portion of the applicable annual expense limitations, the estimated amount of reimbursement under such limitations shall be applicable as an offset against the monthly payment of the fee due 6 to the Investment Adviser. Should two or more such expenses limitations be applicable as at the end of the last business day of the month, that expense limitation which results in the largest reduction in the Investment Adviser's fee shall be applicable. ARTICLE IV ---------- Limitation of Liability of the Investment Adviser ------------------------------------------------- The Investment Adviser shall not be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the management of the Fund, except for willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of reckless disregard of its obligations and duties hereunder. As used in this Article IV, the term "Investment Adviser" shall include any affiliates of the Investment Adviser performing services for the Fund contemplated hereby and directors, officers and employees of the Investment Adviser and such affiliates. ARTICLE V --------- Activities of the Investment Adviser ------------------------------------ The services of the Investment Adviser to the Fund are not to be deemed to be exclusive: the Investment Adviser and any person controlled by or under common control with the Investment Adviser (for purposes of this Article V referred to as "affiliates") are free to render services to others. It is understood that Trustees, officers, employees and shareholders of the Fund are or may become interested in the Investment Adviser and its affiliates, as directors, officers, employees, partners and shareholders or otherwise, and that directors, officers, employees, partners and shareholders of the Investment Adviser and its affiliates are or may become similarly interested in the Fund, and that the Investment Adviser and directors, officers, 7 employees, partners and shareholders of its affiliates may become interested in the Fund as shareholder or otherwise. ARTICLE VI ---------- Duration and Termination of this Agreement ------------------------------------------ This Agreement shall become effective as of the date first above written and shall remain in force until January 31, 1994 and thereafter, but only so long as such continuance is specifically approved at least annually by (i) the Board of Trustees of the Fund, or by the vote of a majority of the outstanding voting securities of the Fund, and (ii) a majority of those Trustees who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated at any time, without the payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund, or by the Investment Adviser, on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. ARTICLE VII ----------- Amendments of this Agreement ---------------------------- This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the vote of a majority of outstanding voting securities of the Fund, and (ii) a majority of those Trustees who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. 8 ARTICLE VIII ------------ Definitions of Certain Terms ---------------------------- The terms "vote of a majority of the outstanding voting securities", "assignment", "affiliated person" and "interested person", when used in this Agreement, shall have the respective meanings specified in the Investment Company Act and the Rules and Regulations thereunder, subject, however, to such exemptions as may be granted by the Securities and Exchange Commission under said Act. ARTICLE IX ---------- Governing Law ------------- This Agreement shall be construed in accordance with laws of the State of New York and the applicable provisions of the Investment Company Act. To the extent that the applicable laws of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company Act, the latter shall control. ARTICLE X --------- Personal Liability ------------------ The Declaration of Trust establishing MuniYield Pennsylvania Fund, dated August 24, 1992, a copy of which, together with all amendments thereto (the "Declaration"), is on file in the office of the Secretary of the Commonwealth of Massachusetts, provides that the name "MuniYield Pennsylvania Fund" refers to the Trustees under the Declaration collectively as Trustees, but not as individuals of personally; and no Trustee, shareholder, officer, employee or agent of the Fund shall be held to any personal liability, nor shall resort be had to their private 9 property for the satisfaction of any obligation or claim or otherwise in connection with the affairs of the Fund, but the "Trust Property" only shall be liable. 10 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. MUNIYIELD PENNSYLVANIA FUND By ________________________________ (Authorized Signatory) FUND ASSET MANAGEMENT, INC. By ________________________________ (Authorized Signatory) 11 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of' the date first above written. MUNIYIELD PENNSYLVANIA FUND By ________________________________ (Authorized Signatory) FUND ASSET MANAGEMENT, INC. By ________________________________ (Authorized Signatory) SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT WITH FUND ASSET MANAGEMENT As of January 1, 1994 Fund Asset Management was reorganized as a limited partnership, formally known as Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. and the limited partners are Fund Asset Management, Inc. and Merrill Lynch & Co. Inc. Pursuant to Rule 202(a)(l)- l under the Investment Advisers Act of 1940 and Rule 2a-6 under the Investment Company Act of 1940 such reorganization did not constitute an assignment of this investment advisory agreement since it did not involve a change of control or management of the investment adviser. Pursuant to the requirements of Section 205 of the Investment Advisers Act of 1940, however, Fund Asset Management hereby supplements this investment advisory agreement by undertaking to advise you of any change in the membership of the partnership within a reasonable time after any such change occurs. By _________________________________________ Dated: January 3, 1994 EX-99.7A 6 PURCHASE AGREEMENT Exhibit 99.7(a) 5,321,088 Shares MuniYield Pennsylvania Fund (a Massachusetts business trust) Common Shares (Par Value $0.10 Per Share) PURCHASE AGREEMENT ------------------ October 23, 1992 MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED Merrill Lynch World Headquarters World Financial Center North Tower New York, NY 10281-1305 Dear Sirs: MuniYield Pennsylvania Fund, a Massachusetts business trust (the "Fund"), and Fund Asset Management, Inc., a Delaware corporation (the "Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"), with respect to the sale by the Fund and the purchase by the Underwriter of 5,321,088 common shares of beneficial interest, par value $.10 per share, of the Fund (the "Common Shares") and, with respect to the grant by the Fund to the Underwriter of the option described in Section 2 hereof to purchase all or any part of 212,844 additional Common Shares to cover overallotments. The aforesaid 5,321,088 shares (the "Initial Shares"), together with all or any part of the 212,844 additional Common Shares subject to the option described in Section 2 hereof (the "Option Shares"), are collectively hereinafter called the "Shares". Prior to the purchase and public offering of the Shares by the Underwriter, the Fund and the Underwriter shall enter into an agreement substantially in the form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the form of an exchange of any standard form of written telecommunication between the Fund and the Underwriter and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Shares will be governed by this Agreement, as supplemented by the Pricing Agreement. From and after the date of the execution and delivery of the Pricing Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement. The Fund has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form N-2 (No. 33-51410) and a related preliminary prospectus for the registration of the Shares under the Securities Act of 1933, as amended (the 111933 Act"), and a notification on Form N-BA of registration of the Fund as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations of the Commission under the 1940 Act (together with the rules and regulations under the 1933 Act, the "Rules and Regulations") and has filed such amendments to such registration statement on Form N2, if any, and such amended preliminary prospectuses as may have been required to the date hereof. The Fund will prepare and file such additional amendments thereto and such amended prospectuses as may hereafter be required. Such registration statement (as amended, if applicable) and the prospectus constituting a part thereof (including in each case the information, if any, deemed to be part thereof pursuant to Rule 430A(b) of the Rules and Regulations), as from time to time amended or supplemented pursuant to the 1933 Act, are hereinafter referred to as the "Registration Statement" and the "Prospectus", respectively, except that if any revised prospectus shall be provided to the Underwriter by the Fund for use in connection with the offering of the Shares which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective (whether such revised prospectus is required to be filed by the Fund pursuant to Rule 497 (b) or Rule 497 (h) of the Rules and Regulations) , the term "Prospectus" shall refer to each such revised prospectus from and after the time it is first provided to the Underwriter for such use. The Fund understands that the Underwriter proposes to make a public offering of the Shares as soon as the Underwriter deems advisable after the Registration Statement becomes effective and the Pricing Agreement has been executed and delivered. SECTION 1. Representations and Warranties. (a) The Fund and the Adviser each severally represents and warrants to the Underwriter as of the date hereof and as of the date of the Pricing Agreement (such later date being hereinafter referred to as the "Representation Date") as follows: (i) At the time the Registration Statement becomes effective and at the Representation Date, the Registration Statement will comply in all material respects with the requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. At the time the Registration Statement becomes effective, at the Representation Date and at Closing Time referred to in Section 2, the Prospectus (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriter by the Fund for use in connection with the offering of the Shares which differs from the Prospectus on file with the Commission at the time the Registration Statement becomes effective, in which case at the time such prospectus is first provided to the Underwriter for such use) will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information furnished to the Fund in writing by the Underwriter expressly for use in the Registration Statement or Prospectus. (ii) The accountants who certified the statement of assets and liabilities included in the Registration Statement are independent public accountants as required by the 1933 Act and the Rules and Regulations. 2 (iii) The statement of assets and liabilities included in the Registration Statement presents fairly the financial position of the Fund as at the date indicated and said statement has been prepared in conformity with generally accepted accounting principles. (iv) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, of the Fund, or in the earnings, business affairs or business prospects of the Fund, whether or not arising in the ordinary course of business, (B) there have been no transactions entered into by the Fund which are material to the Fund other than those in the ordinary course of business, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Fund on any class of its capital stock. (v) The Fund has been duly organized and is validly existing as a voluntary association (commonly referred to as a business trust) in good standing under the laws of the Commonwealth of Massachusetts with power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement; the Fund is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required; and the Fund has no subsidiaries. (vi) The Fund is registered with the Commission under the 1940 Act as a closed-end non-diversified management investment company, and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or threatened by the Commission. (vii) The authorized, issued and outstanding shares of beneficial interest of the Fund are as set forth in the Prospectus under the caption "Description of Shares"; the Shares have been duly authorized for issuance and sale to the Underwriter pursuant to this Agreement and, when issued and delivered by the Fund pursuant to this Agreement against payment of the consideration set forth in the Pricing Agreement, will be validly issued and fully paid and nonassessable; the Shares conform in all material respects to all statements relating thereto contained in the Registration Statement; and the issuance of the Shares is not subject to preemptive rights. (viii) The Fund is not in violation of its Declaration of Trust or its By-laws (the "By-Laws") or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, loan agreement, note, lease or other instrument to which it is a party or by which it or its properties may be bound; and the execution and delivery of this Agreement, the Pricing Agreement and the Investment Advisory Agreement and the Custodial Agreement referred to in the Registration Statement (as used herein, the "Advisory Agreement" and the "Custody Agreement", respectively) and the consummation of the transactions contemplated herein and therein have been duly authorized by all necessary Fund action and will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to any material contract, 3 indenture, mortgage, loan agreement, note, lease or other instrument to which the Fund is a party or by which it may be bound or to which any of the property or assets of the Fund is subject, nor will such action result in any violation of the provisions of the Declaration of Trust or By-Laws, as amended, of the Fund or, to the best knowledge of the Fund and the Adviser, any law, administrative regulation or administrative or court decree; and no consent, approval, authorization or order of any court or governmental authority or agency is required for the consummation by the Fund of the transactions contemplated by this Agreement, the Pricing Agreement, the Advisory Agreement and the Custody Agreement, except such as has been obtained under the 1940 Act or as may be required under the 1933 Act, state securities or Blue Sky laws or foreign securities laws in connection with the purchase and distribution of the Shares by the Underwriter. (ix) The Fund owns or possesses or has obtained all material governmental licenses, permits, consents, orders, approvals and other authorizations necessary to lease or own, as the case may be, and to operate its properties and to carry on its businesses as contemplated in the Prospectus. (x) There is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Fund, threatened against or affecting, the Fund, which might result in any material adverse change in the condition, financial or otherwise, business affairs or business prospects of the Fund, or might materially and Adversely affect the properties or assets of the Fund; and there are no material contracts or documents of the Fund which are required to be filed as exhibits to the Registration Statement by the 1933 Act, the 1940 Act or by the Rules and Regulations which have not been so filed. (xi) The Fund owns or possesses, or can acquire on reasonable terms, adequate trademarks, service marks and trade names necessary to conduct its business as described in the Registration Statement, and the Fund has not received any notice of infringement of or conflict with asserted rights of others with respect to any trademarks, service marks or trade names which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially adversely affect the conduct of the business, operations, financial condition or income of the Fund. (b) The Adviser represents and warrants to the Underwriter as of the date hereof and as of the Representation Date as follows: (i) The Adviser has been duly incorporated as a corporation under the laws of the State of Delaware with corporate power and authority to conduct its business as described in the Prospectus. (ii) The Adviser is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act") , and is not prohibited by the Advisers Act or the 1940 Act, or the rules and regulations under such acts, from acting under the Advisory Agreement for the Fund as contemplated by the Prospectus. 4 (iii) This Agreement has been duly authorized, executed and delivered by the Adviser; the Advisory Agreement has been duly authorized, executed and delivered by the Adviser and constitutes a valid and binding obligation of the Adviser, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights and to general equity principles; and neither the execution and delivery of this Agreement, or the Advisory Agreement nor the performance by the Adviser of its obligations hereunder or thereunder will conflict with, or result in a breach of any of the terms and provisions of, or constitute, with or without the giving of notice or lapse of time or both, a default under, any agreement or instrument to which the Adviser is a party or by which it is bound, or any law, order, rule or regulation applicable to it of any jurisdiction, court, federal or state regulatory body, administrative agency or other governmental body, stock exchange or securities association having jurisdiction over the Adviser or its respective properties or operations. (iv) The Adviser has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Prospectus. (v) Any advertisement approved by the Adviser for use in the public offering of the Shares pursuant to Rule 482 under the Rules and Regulations (an "Omitting Prospectus") complies with the requirements of such Rule 482. (c) Any certificate signed by any officer of the Fund or the Adviser and delivered to the Underwriter shall be deemed a representation and warranty by the Fund or the Adviser, as the case may be, to the Underwriter, as to the matters covered thereby. SECTION 2. Sale and Delivery to the Underwriter; Closing. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Fund agrees to sell the Initial Shares to the Underwriter, and the Underwriter agrees to purchase the Initial Shares from the Fund, at the price per share set forth in the Pricing Agreement. (a) If the Fund has elected not to rely upon Rule 430A under the Rules and Regulations, the initial public offering prices and the purchase price per share to be paid by the Underwriter for the Shares has been determined and set forth in the Pricing Agreement, dated the date hereof, and an amendment to the Registration Statement and the Prospectus will be filed before the Registration Statement becomes effective. (b) If the Fund has elected to rely upon Rule 430A under the Rules and Regulations, the purchase price per share to be paid by the Underwriter for the Shares shall be an amount equal to the applicable initial public offering price, less an amount per share to be determined by agreement between the Underwriter and the Fund. The applicable initial public offering price per share shall be a fixed price based upon the number of Shares purchased in a single transaction to be determined by agreement between the Underwriter and the Fund. The initial public offering prices and the purchase price, when so determined, shall be set forth in the Pricing Agreement. In the event that such prices have not been agreed upon and the Pricing Agreement has not been executed and delivered by all parties thereto by the close of business on the fourth business day 5 following the date of this Agreement, this Agreement shall terminate forthwith, without liability of any party to any other party, except as provided in Section 4, unless otherwise agreed to by the Fund, the Adviser and the Underwriter. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Fund hereby grants an option to the Underwriter to purchase all or any part of the Option Shares at the price per share set forth above, less an amount equal to any dividend paid by the Fund and payable on any Initial Shares and not payable on such option Shares. The option hereby granted will expire 45 days after the date hereof (or, if the Fund has elected to rely upon Rule 430A under the Rules and Regulations, 45 days after the execution of the Pricing Agreement) and may be exercised only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Shares upon notice by the Underwriter to the Fund setting forth the number of Option Shares as to which the Underwriter is then exercising the option and the time, date and place of payment and delivery for such Option Shares. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Underwriter but shall not be later than seven full business days after the exercise of said option, nor in any event prior to Closing Time, as hereinafter defined, unless otherwise agreed upon by the Underwriter and the Fund. Payment of the purchase price for, and delivery of certificates for, the Initial Shares shall be made at the office of Brown & Wood, One World Trade Center, New York, New York 10048-0557, or at such other place as shall be agreed upon by the Underwriter and the Fund, at 10:00 A.M. on the fifth business day (unless postponed in accordance with the provisions of Section 10) following the date the Registration Statement becomes effective (or, if the Fund has elected to rely upon Rule 430A under the Rules and Regulations, the f ifth business day after execution of the Pricing Agreement), or such other time not later than ten business days after such date as shall be agreed upon by the Underwriter and the Fund (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the option Shares are purchased by the Underwriter, payment of the purchase price for, and delivery of certificates for, such Option Shares shall be made at the above-mentioned office of Brown & Wood, or at such other place as shall be mutually agreed upon by the Fund and the Underwriter, on each Date of Delivery as specified in the notice from the Underwriter to the Fund. Payment shall be made to the Fund by check or checks drawn in New York Clearing House or similar next day funds and payable to the order of the Fund, against delivery to the Underwriter of certificates for the Shares to be purchased by it. Certificates for the Initial Shares and Option Shares shall be in such denominations and registered in such names as the Underwriter may request in writing at least two business days before Closing Time or the Date of Delivery, as the case may be. The certificates for the Initial Shares and the Option Shares will be made available by the Fund for examination and packaging by the Underwriter not later than 10:00 A.M. on the last business day prior to Closing Time or the Date of Delivery, as the case may be. SECTION 3. Covenants of the Fund. The Fund covenants with the Underwriter as follows: (a) The Fund will use its best efforts to cause the Registration Statement to become effective under the 1933 Act, and will advise the Underwriter promptly as to the time at which 6 the Registration Statement and any amendments thereto (including any post- effective amendment) becomes so effective and, if required, to cause the issuance of any orders exempting the Fund from any provisions of the 1940 Act and will advise the Underwriter promptly as to the time at which any such orders are granted. (b) The Fund will notify the Underwriter immediately, and confirm the notice in writing, (i) of the effectiveness of the Registration Statement and any amendment thereto (including any post-effective amendment), (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, and (v) of the issuance by the Commission of an order of suspension or revocation of the notification on Form N-8A of registration of the Fund as an Investment Company under the 1940 Act or the initiation of any proceeding for that purpose. The Fund will make every reasonable effort to prevent the issuance of any stop order described in subsection (iv) hereunder or any order of suspension or revocation described in subsection (v) hereunder and, if any such stop order or order of suspension or revocation is issued, to obtain the lifting thereof at the earliest possible moment. (c) The Fund will give the Underwriter notice of its intention to file any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Fund proposes for use by the Underwriter in connection with the offering of the Shares, which differs from the prospectus on file at the Commission at the time the Registration Statement becomes effective, whether such revised prospectus is required to be filed pursuant to Rule 497 (b) or Rule 497 (h) of the Rules and Regulations), whether pursuant to the 1940 Act, the 1933 Act, or otherwise, and will furnish the Underwriter with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement to which the Underwriter shall reasonably object. (d) The Fund will deliver to the Underwriter, as soon as practicable, two signed copies of the notification of registration and registration statement as originally filed and of each amendment thereto, in each case with two sets of the exhibits filed therewith, and will also deliver to the Underwriter a conformed copy of the registration statement as originally filed and of each amendment thereto (but without exhibits to the registration statement or any such amendment) for the Underwriter. (e) The Fund will furnish to the Underwriter, from time to time during the period when the Prospectus is required to be delivered under the 1933 Act, such number of copies of the Prospectus (as amended or supplemented) as the Underwriter may reasonably request for the purposes contemplated by the 1933 Act or the Rules and Regulations. (f) If any event shall occur as a result of which it is necessary, in the opinion of counsel for the Underwriter, to amend or supplement the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, the Fund will forthwith amend or supplement the Prospectus by preparing and furnishing to the Underwriter a reasonable number of copies of an amendment or amendments of 7 or a supplement or supplements to, the Prospectus (in form and substance satisfactory to counsel for the Underwriter, so that, as so amended or supplemented, the Prospectus will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading. (g) The Fund will endeavor, in cooperation with the Underwriter, to qualify the Shares for offering and sale under the applicable securities laws of such states and other jurisdictions of the United States as the Underwriter may designate, and will maintain such qualifications in effect for a period of not less than one year after the date hereof. The Fund will file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided. (h) The Fund will make generally available to its security holders as soon as practicable, but no later than 60 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the Rules and Regulations) covering a twelve-month period beginning not later than the first day of the Fund's fiscal quarter next following the "effective" date (as defined in said Rule 158) of the Registration Statement. (i) Between the date of this Agreement and the termination of any trading restrictions or Closing Time, whichever is later, the Fund will not, without your prior consent, offer or sell, or enter into any agreement to sell, any equity or equity related securities of the Fund other than the Shares and shares of Common Stock issued in reinvestment of dividends or distributions. (j) If, at the time that the Registration Statement becomes effective, any information shall have been omitted therefrom in reliance upon Rule 430A of the Rules and Regulations, then immediately following the execution of the Pricing Agreement, the Fund will prepare, and file or transmit for filing with the Commission in accordance with such Rule 430A and Rule 497(h) of the Rules and Regulations, copies of amended Prospectus, or, if required by such Rule 430A, a post-effective amendment to the Registration Statement (including an amended Prospectus), containing all information so omitted. (k) The Fund will use its best efforts to effect the listing of the Shares on the New York Stock Exchange so that trading on such Exchange will begin no later than three weeks from the date of the Prospectus. SECTION 4. Payment of Expenses. The Fund will pay all expenses incident to the performance of its obligations under this Agreement, including, but not limited to, expenses relating to (i) the printing and filing of the registration statement as originally filed and of each amendment thereto, (ii) the printing of this Agreement and the Pricing Agreement, (iii) the preparation, issuance and delivery of the certificates for the Shares to the Underwriter, (iv) the fees and disbursements of the Fund's counsel and accountants, (v) the qualification of the Shares under securities laws in accordance with the provisions of Section 3(g) of this Agreement, including filing fees and any reasonable fees or disbursements of counsel for the Underwriter in connection therewith and in connection with the preparation of the Blue Sky Survey, (vi) the printing and delivery to the Underwriter of copies of the registration statement as originally filed and of each amendment thereto, of the preliminary prospectus, and of the Prospectus and any 8 amendments or supplements thereto, (vii) the printing and delivery to the Underwriter of copies of the Blue Sky Survey, (viii) the fees and expenses incurred with respect to the filing with the National Association of Securities Dealers, Inc. and (ix) the fees and expenses incurred with respect to the listing of the Shares on the New York Stock Exchange. If this Agreement is terminated by the Underwriter in accordance with the provisions of Section 5 or Section 9 (a) (i) , the Fund or the Adviser shall reimburse the Underwriter for all of their reasonable out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriter. In the event the transactions contemplated hereunder are not consummated, the Adviser agrees to pay all of the costs and expenses set forth in the first paragraph of this Section 4 which the Fund would have paid if such transactions were consummated. SECTION 5. Conditions of Underwriter's Obligations. The obligations of the Underwriter hereunder are subject to the accuracy of the representations and warranties of the Fund and the Adviser herein contained, to the performance by the Fund and the Adviser of their respective obligations hereunder, and to the following further conditions: (a) The Registration Statement shall have become effective not later than 5:30 P.M., New York City time, on the date of this Agreement, or at a later time and date not later, however, than 5:30 P.M. on the first business day following the date hereof, or at such later time and date as may be approved by the Underwriter, and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission. If the Fund has elected to rely upon Rule 430A of the Rules and Regulations, the prices of the Shares and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 497 (h) of the Rules and Regulations within the prescribed time period, and prior to Closing Time the Fund shall have provided evidence satisfactory to the Underwriter of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Rules and Regulations. (b) At Closing Time, the Underwriter shall have received: (1) The favorable opinion, dated as of Closing Time, of Brown & Wood, counsel for the Fund and the Underwriter, to the effect that: (i) The Fund has been duly organized and is validly existing as a voluntary association (commonly referred to as a business trust) in good standing under the laws of the Commonwealth of Massachusetts. (ii) The Fund has corporate power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement and the Prospectus. (iii) The Fund is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required. 9 (iv) The Shares have been duly authorized for issuance and sale to the Underwriter pursuant to this Agreement and, when issued and delivered by the Fund pursuant to this Agreement against payment of the consideration set forth in the Pricing Agreement, will be validly issued and fully paid and nonassessable (except for certain possible liability of shareholders described in the Prospectus under "Description of Shares"); the issuance of the Shares is not subject to preemptive rights; and the authorized shares of beneficial interest conform as to legal matters in all material respects to the description thereof in the Registration Statement under the caption "Description of Shares". (v) This Agreement and the Pricing Agreement have each been duly authorized, executed and delivered by the Fund and each complies with all applicable provisions of the 1940 Act. (vi) The Registration Statement is effective under the 1933 Act and, to the best of their knowledge and information, no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission. (vii) At the time the Registration Statement became effective and at the Representation Date, the Registration Statement (other than the financial statements included therein, as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the 1933 Act and the 1940 Act and the Rules and Regulations. (viii) To the best of their knowledge and information, there are no legal or governmental proceedings pending or threatened against the Fund which are required to be disclosed in the Registration Statement, other than those disclosed therein. (ix) To the best of their knowledge and information, there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments of the Fund required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto, the descriptions thereof are correct in all material respects, references thereto are correct, and no default exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument so described, referred to or filed. (x) No consent, approval, authorization or order of any court or governmental authority or agency is required in connection with the sale of the Shares to the Underwriter, except such as has been obtained under 10 the 1933 Act, the 1940 Act or the Rules and Regulations or such as may be required under state or foreign securities laws; and to the best of their knowledge and information, the execution and delivery of this Agreement, the Pricing Agreement, the Advisory Agreement and the custody Agreement and the consummation of the transactions contemplated herein and therein will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to, any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Fund is a party or by which it may be bound or to which any of the property or assets of the Fund is subject, nor will such action result in any violation of the provisions of the Declaration of Trust or By-Laws of the Fund, or any law or administrative regulation, or, to the best of their knowledge and information, administrative or court decree. (xi) The Advisory Agreement and the Custody Agreement have each been duly authorized and approved by the Fund and comply as to form in all material respects with all applicable provisions of the 1940 Act, and both have been duly executed by the Fund. (xii) The Fund is registered with the Commission under the 1940 Act as a closed-end nondiversified management investment company, and all required action has been taken by the Fund under the 1933 Act, the 1940 Act and the Rules and Regulations to make the public offering and consummate the sale of the Shares pursuant to this Agreement; the provisions of the Declaration of Trust and By-Laws of the Fund comply as to form in all material respects with the requirements of the 1940 Act; and, to the best of their knowledge and information, no order of suspension or revocation of such registration under the 1940 Act, pursuant to Section 8(e) of the 1940 Act, has been issued or proceedings therefor initiated or threatened by the Commission. (xiii) The information in the Prospectus under the caption "Taxes" (other than information related to Pennsylvania law as to which no opinion need be rendered), to the extent that it constitutes matters of law or legal conclusions, has been reviewed by them and is correct in all material respects. (2) The favorable opinion, dated as of Closing Time, of Stradley, Ronon, Stevens & Young, Special Counsel for the Fund, to the effect that: (i) The information in the Prospectus under the caption "Taxes", to the extent that it constitutes matters of Pennsylvania law or legal conclusions involving matters of Pennsylvania law, has been reviewed by them and is correct in all material respects. 11 (ii) Nothing has come to their attention that would lead them to believe that the information in the Registration Statement under the caption "Investment Objective and Policies - Special Considerations Relating to Pennsylvania Municipal Bonds" and in Appendix I entitled "Economic Conditions in Pennsylvania", at the time it became effective or at the Representation Date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the information under such caption and in such appendix in the Prospectus, at the Representation Date (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriter by the Fund for use in connection with the offering of the Shares which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective, in which case at the time they are first provided to the Underwriter for such use) or at Closing Time, included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (3) The favorable opinion, dated as of Closing Time, of Philip L. Kirstein, Esq., General Counsel to the Adviser, in form and substance satisfactory to counsel for the Underwriter, to the effect that: (i) The Adviser has been duly organized as a corporation under the laws of the State of Delaware with corporate power and authority to conduct its business as described in the Registration Statement and the Prospectus. (ii) The Adviser is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act or the 1940 Act, or the rules and regulations under such Acts, from acting under the Advisory Agreement for the Fund as contemplated by the Prospectus. (iii) This Agreement and the Advisory Agreement have been duly authorized, executed and delivered by the Adviser, and the Advisory Agreement constitutes a valid and binding obligation of the Adviser, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights and to general equity principles; and, to the best of his knowledge and information, neither the execution and delivery of this Agreement or the Advisory Agreement nor the performance by the Adviser of its obligations hereunder or thereunder will conflict with, or result in a breach of, any of the terms and provisions of, or constitute, with or without giving notice or lapse of time or both, a default under, any agreement or instrument to which the Adviser is a party or by which the Adviser is bound, or any law, order, rule or regulation applicable to the Adviser of any jurisdiction, court, federal or state regulatory body, 12 administrative agency or other governmental body, stock exchange or securities association having jurisdiction over the Adviser or its properties or operations. (iv) To the best of his knowledge and information, the description of the Adviser in the Registration Statement and the Prospectus does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (4) In giving their opinion required by sub-section (b)(1) of this Section, Brown & Wood shall additionally state that nothing has come to their attention that would lead them to believe that the Registration Statement (other than the financial statements included therein, as to which no opinion need be rendered), at the time it became effective or at the Representation Date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (other than the financial statement included therein, as to which no opinion need be rendered), at the Representation Date (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriter by the Fund for use in connection with the offering of the Shares which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective, in which case at the time they are first provided to the Underwriter for such use) or at Closing Time, included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In giving their opinion, Brown & Wood may rely as to matters involving the laws of the Commonwealth of Massachusetts upon the opinion of Bingham, Dana & Gould. Bingham, Dana & Gould and Brown & Wood may rely, as to matters of fact, upon certificates and written statements of officers and employees of and accountants for the Fund and the Adviser and of public officials. (c) At Closing Time, (i) the Registration Statement and the Prospectus shall contain all statements which are required to be stated therein in accordance with the 1933 Act, the 1940 Act and the Rules and Regulations and in all material respects shall conform to the requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and the Prospectus shall 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, and no action, suit or proceeding at law or in equity shall be pending or, to the knowledge of the Fund or the Adviser, threatened against the Fund or the Adviser which would be required to be set forth in the Prospectus other than as set forth therein, (ii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change in the condition, financial or otherwise, of the Fund or in its earnings, business affairs or business prospects, whether or not arising in the ordinary course of business, from that set forth in the Registration Statement and Prospectus, (iii) the Adviser shall have the financial resources available to it necessary for the 13 performance of its services and obligations as contemplated in the Registration Statement and the Prospectus and (iv) no proceedings shall be pending or, to the knowledge of the Fund or the Adviser, threatened against the Fund or the Adviser before or by any Federal, state or other commission, board or, administrative agency wherein an unfavorable decision, ruling or finding would materially and adversely affect the business, property, financial condition or income of either the Fund or the Adviser other than as set forth in the Registration Statement and the Prospectus; and the Underwriter shall have received, at Closing Time, a certificate of the President or Treasurer of the Fund and of the President or a Vice President of the Adviser dated as of Closing Time, evidencing compliance with the appropriate provisions of this subsection (c). (d) At Closing Time, the Underwriter shall have received certificates, dated as of Closing Time, (i) of the President or Treasurer of the Fund to the effect that the representations and warranties of the Fund contained in Section 1(a) are true and correct with the same force and effect as though expressly made at and as of Closing Time and, (ii) of the President or a Vice President of the Adviser to the effect that the representations and warranties of the Adviser contained in sections 1(a) and (b) are true and correct with the same force and effect as though expressly made at and as of Closing Time. (e) At the time of execution of this Agreement, the Underwriter shall have received from Deloitte & Touche a letter, dated such date in form and substance satisfactory to the Underwriter, to the effect that: (i) they are independent accountants with respect to the Fund within the meaning of the 1933 Act and the Rules and Regulations; (ii) in their opinion, the statement of assets and liabilities examined by them and included in the Registration Statement complies as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1940 Act and the Rules and Regulations; and (iii) they have performed specified procedures, not constituting an audit, including a reading of the latest available interim financial statements of the Fund, a reading of the minute books of the Fund, inquiries of officials of the Fund responsible for financial accounting matters and such other inquiries and procedures as may be specified in such letter, and on the basis of such inquiries and procedures nothing came to their attention that caused them to believe that at the date of the latest available statement of assets and liabilities read by such accountants, or at a subsequent specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock or net assets of the Fund as compared with amounts shown on the statement of net assets included in the Prospectus. (f) At Closing Time, the Underwriter shall have received from Deloitte & Touche a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the "specified date" referred to shall be a date not more than five days prior to Closing Time. 14 (g) At Closing Time, all proceedings taken by the Fund and the Adviser in connection with the organization and registration of the Fund under the 1940 Act and the issuance and sale of the Shares as herein and therein contemplated shall be satisfactory in form and substance to the Underwriter. (h) In the event the Underwriter exercises its option provided in Section 2 hereof to purchase all or any portion of the Option Shares, the representations and warranties of the Fund and the Adviser contained herein and the statements in any certificate furnished by the Fund and the Adviser hereunder shall be true and correct as of each Date of Delivery, and the Underwriter shall have received: (1) Certificates, dated the Date of Delivery, of the President or Treasurer of the Fund and of the President or a Vice President of the Adviser confirming that the information contained in the certificate delivered by each of them at Closing Time pursuant to Sections 5(c) and (d), as the case may be, remains true as of such Date of Delivery. (2) The favorable opinion of Brown & Wood LLP, counsel for the Fund, Stradley, Ronon, Stevens & Young, special Pennslyvania counsel for the Fund and Philip L. Kirstein, Esq., General Counsel to the Adviser, each in form and substance satisfactory to the Underwriter, dated such Date of Delivery, relating to the option Shares and otherwise to the same effect as the opinions required by Sections 5(b)(1), (2) and (3), respectively. (3) A letter from Deloitte & Touche, in form and substance satisfactory to the Underwriter and dated such Date of Delivery, substantially the same in scope and substance as the letter furnished to the Underwriter pursuant to Section 5(e), except that the "specified date" in the letter furnished pursuant to this Section 5(h)(3) shall be a date not more than five days prior to such Date of Delivery. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Underwriter by notice to the Fund at any time at or prior to Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 4. SECTION 6. Indemnification. (a) The Fund and the Adviser, jointly and severally, agree to indemnify and hold harmless the Underwriter and each person, if any, who controls the Underwriter within the meaning of Section 15 of the 1933 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the information deemed to be part of the Registration Statement pursuant to Rule 430A of the Rules and Regulations, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a 15 material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever as incurred to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the indemnifying party; and (iii) against any and all expense whatsoever (including the fees and disbursements of counsel chosen by the Underwriter) reasonably incurred in investigating, preparing or defending against any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement does not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Fund by the Underwriter expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (b) The Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Fund and the Adviser, their respective trustees and directors, each of the Fund's officers who signed the Registration Statement, and each person, if any, who controls the Fund or the Adviser within the meaning of Section 15 of the 1933 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Fund by the Underwriter expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) In addition to the foregoing indemnification, the Adviser also agrees to indemnify and hold harmless the Underwriter and each person, if any, who controls the Underwriter within the meaning of Section 15 of the 1933 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, with respect to any Omitting Prospectus or any advertising materials approved by the Adviser for use in connection with the public offering of the Shares. (d) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may 16 be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of any such action. In no event shall the indemnifying parties be liable for the fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. SECTION 7. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in Section 6 is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Fund, the Adviser and the Underwriter shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement as incurred by the Fund, the Adviser and the Underwriter, as incurred, in such proportion that the Underwriter is responsible for that portion represented by the percentage that the aggregate underwriting compensation payable pursuant to Section 2 hereof bears to the aggregate initial public offering pride of the Shares sold under this Agreement and the Fund and the Adviser are responsible for the balance; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person, if any, who controls the Underwriter within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as the Underwriter, and each trustee and director of the Fund and the Adviser, respectively, each officer of the Fund who signed the Registration Statement, and each person, if any, who controls the Fund or the Adviser within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as the Fund and the Adviser, respectively. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or the Pricing Agreement, or contained in certificates of officers of the Fund or the Adviser submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of the Underwriter or controlling person, or by or on behalf of the Fund or the Adviser and shall survive delivery of the Shares to the Underwriter. SECTION 9. Termination of Agreement. (a) The Underwriter, by notice to the Fund, may terminate this Agreement at any time at or prior to Closing Time (i) if there has been, since the date of this Agreement or since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Fund or the Adviser, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or elsewhere or any outbreak of hostilities or other calamity or crisis or any escalation of existing hostilities the effect of which is such as to make it, in the Underwriter's judgment, impracticable to market the Shares or enforce contracts for the sale of the Shares, or (iii) if trading in the Common Stock has been suspended by the Commission or if trading generally on either the American Stock Exchange or the New York Stock Exchange has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by either of said 17 exchanges or by order of the Commission or any other governmental authority, or if a banking moratorium has been declared by Federal or New York authorities. (b) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4. SECTION 10. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of written telecommunication. Notices to the Underwriter shall be directed to Merrill Lynch World Headquarters, North Tower, World Financial Center, New York, New York 10281, Attention: Theresa Lang, Director; notices to the Fund or the Adviser shall be directed to each of them at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attention: Arthur Zeikel, President. SECTION 11. Parties. This Agreement and the Pricing Agreement shall inure to the benefit of and be binding upon the Underwriter, the Fund, the Adviser and their respective successors. Nothing expressed or mentioned in this Agreement or the Pricing Agreement is intended or shall be construed to give any person, firm or corporation, other than the parties hereto and their respective successors and the controlling persons and officers, directors and trustees referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and the Pricing Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benef it of the parties hereto and thereto and their respective successors, and said controlling persons and officers, directors and trustees and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Shares from the Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 12. Liability of Shareholders, Trustees and Officers. This Agreement is executed by or on behalf of the trustees of the Fund solely in their capacity as such trustees, and shall not constitute their personal obligation either jointly or severally in their individual capacities. No trustee, officer or shareholder of the Fund shall be liable for any obligations of the Fund under this instrument and the Fund shall be solely liable therefor; all parties hereto shall look solely to the Fund property for the payment of any claim, or the performance of any obligation, hereunder. SECTION 13. Governing Law and Time. This Agreement and the Pricing Agreement shall be governed by the laws of the State of New York applicable to agreements made and to be performed in said State. Specified times of day refer to New York City time. 18 Exhibit A 5,321,088 Shares MuniYield Pennsylvania Fund (a Massachusetts business trust) Common Shares (Par Value $.10 Per Share) PRICING AGREEMENT ----------------- October 23, 1992 MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281 Dear Sirs: Reference is made to the Purchase Agreement, dated February 21, 1992 (the "Purchase Agreement") , relating to the purchase by Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, (the "Underwriter"), of the above common shares of beneficial interest, par value $. 10 per share (the "Initial Shares") , of MuniYield Pennsylvania Fund (the "Fund") and relating to the option granted to the Underwriter to purchase up to an additional 212,844 common shares of beneficial interest, par value $.10 per share, of the Fund to cover over-allotments in connection with the sale of the Initial Shares (the "Option Shares") . The Initial Shares and all or any part of the Option Shares are collectively herein referred to as the "Shares". Pursuant to Section 2 of the Purchase Agreement, the Fund agrees with the Underwriter as follows: 1. The applicable initial public offering price per share for the Shares, determined as provided in said Section 2, shall be as follows: (a) $15.00 for purchases in single transactions of less than 3,500 Shares; (b) $14.85 for purchases in single transactions of 3,500 or more Shares but less than 7,000 Shares; and (c) $14.70 for purchases in single transactions of 7,000 or more Shares. A-1 2. The purchase price per share for the Shares to be paid by the Underwriter shall be $14.175 being an amount equal to the applicable initial public offering price set forth above less (i) $.825 per share for purchases in single transactions of less than 3,500 Shares; (ii) $.675 per share for purchases in single transactions of 3,500 or more Shares but less than 7,000 Shares and (iii) $.525 per share for purchases in single transactions of 7,000 or more Shares. This Agreement is executed by or on behalf of the trustees of the Fund solely in their capacity as such trustees, and shall not constitute their personal obligation either jointly or severally in their individual capacities. No trustee, officer or shareholder of the Fund shall be liable for any obligations of the Fund under this instrument and the Fund shall be solely liable therefor; all parties hereto shall look solely to the Fund property for the payment of any claim, or the performance of any obligation, hereunder. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Fund a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriter and the Fund in accordance with its terms. Very truly yours, MUNIYIELD PENNSYLVANIA FUND By:___________________________________ (Authorized Officer) Confirmed and Accepted, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By:________________________________ Vice President Investment Banking Group A-2 EX-99.7B 7 PURCHASE AGREEMENT Exhibit 7(b) $40,000,000 MUNIYIELD PENNSYLVANIA FUND (a Massachusetts business trust) AUCTION MARKET PREFERRED SHARES(R) ["AMPS"(R)] 800 Shares Liquidation Preference $50,000 Per Share PURCHASE AGREEMENT ------------------ November 20, 1992 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters World Financial Center North Tower New York, New York 10281-1201 Dear Sirs: MuniYield Pennsylvania Fund, a Massachusetts business trust (the "Trust"), and Fund Asset Management, Inc., a Delaware corporation (the "Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") with respect to the sale by the Fund and the purchase by the Underwriter of 800 shares of auction market preferred shares (collectively, the "Shares"), par value $.10 per share, liquidation preference $50,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared). Prior to the purchase and public offering of the Shares by the Underwriter, the Fund and the Underwriter shall enter into an agreement substantially in the form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the form of an exchange of any standard form of written telecommunication between the Fund and the Underwriter and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Shares will be governed by this Agreement, as supplemented by the Pricing Agreement. From and after the date of the execution and delivery of the Pricing Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement. ______________________ (R) Registered trademark of Merrill Lynch & Co., Inc. The Fund has filed with the Securities and Exchange Commission (the "Commission") a notification on Form N-8A of registration of the Fund as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and a registration statement on Form N-2 (No. 33-53616) and a related preliminary prospectus for the registration of the Shares under the Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act, and the rules and regulations of the Commission under the 1933 Act and the 1940 Act (the "Rules and Regulations") and has filed such amendments to such registration statement on Form N-2, if any, and such amended preliminary prospectuses as may have been required to the date hereof. The Fund will prepare and file such additional amendments thereto and such amended prospectuses as may hereafter be required. Such registration statement (as amended at the time it becomes effective, if applicable) and the prospectus constituting a part thereof (including in each case the information, if any, deemed to be part thereof pursuant to Rule 430A(b) of the Rules and Regulations), as from time to time amended or supplemented pursuant to the 1933 Act, are hereinafter referred to as the "Registration Statement" and the "Prospectus," respectively, except that if any revised prospectus shall be provided to the Underwriter by the Fund for use in connection with the offering of the shares which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective (whether such revised prospectus is required to be filed by the Fund pursuant to Rule 497(b) or Rule 497(h) of the Rules and Regulations) the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriter for such use. The Fund understands that the Underwriter proposes to make a public offering of the Shares as soon as the Underwriter deems advisable after the Registration Statement becomes effective and the Pricing Agreement has been executed and delivered. SECTION 1. Representations and Warranties. (a) The Fund and the Adviser ------------------------------ each severally represents and warrants to the Underwriter as of the date hereof and as of the date of the Pricing Agreement (such later date being hereinafter referred to as the "Representation Date") as follows: (i) At the time the Registration Statement becomes effective and at the Representation Date, the Registration Statement will comply in all material respects with the requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. At the time the Registration Statement becomes effective, at the Representation Date and at Closing Time as defined in Section 2, the Prospectus (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriter by the Fund for use in connection with the offering of the Shares which differs from the Prospectus on file with the Commission at the time the Registration Statement becomes effective, in which case at the time it is first provided to the Underwriter for such use) will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, -------- however, that the representations and warranties in this subsection shall ------- not apply to statements in or omissions from the Registration Statement or 2 Prospectus made in reliance upon and in conformity with information furnished to the Fund in writing by the Underwriter expressly for use in the Registration Statement or Prospectus. (ii) The accountants who certified the statement of assets, liabilities and capital included in the Registration Statement are independent public accountants as required by the 1933 Act and the Rules and Regulations. (iii) The financial statements included in the Registration Statement present fairly the financial position of the Fund as at the date indicated and the results of its operations for the period specified; such financial statements have been prepared in conformity with generally accepted accounting principles; and the information in the Prospectus under the headings "Description of Shares" and "Portfolio Composition" has been fairly presented. (iv) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, of the Fund, or in the earnings, business affairs or business prospects of the Fund, whether or not arising in the ordinary course of business, (B) there have been no transactions entered into by the Fund which are material to the Fund other than those in the ordinary course of business and (C) except for regular monthly dividends on the outstanding shares of beneficial interest, par value $.10 per share ("Common Shares") of the Fund, there has been no dividend or distribution of any kind declared, paid or made by the Fund on any class of its shares of beneficial interest. (v) The Fund has been duly organized and is validly existing as a voluntary association (commonly referred to as a business trust) in good standing under the laws of The Commonwealth of Massachusetts with power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement; the Fund is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required; and the Fund has no subsidiaries. (vi) The Fund is registered with the Commission under the 1940 Act as a closed-end, non-diversified management investment company, and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or threatened by the Commission. (vii) The authorized, issued and outstanding shares of beneficial interest of the Fund are as set forth in the Prospectus under the caption "Description of Shares"; the outstanding Common Shares have been duly authorized and validly issued and are fully paid and nonassessable; the Shares have been duly authorized for issuance and sale to the Underwriter pursuant to this Agreement and, when issued and delivered by the Fund pursuant to this Agreement against payment of the consideration set forth in the Pricing Agreement, will be validly issued and fully paid and nonassessable; the Common Shares and the Shares conform in all material respects to all statements relating thereto contained 3 in the Registration Statement; and the issuance of the Shares to be purchased by the Underwriter is not subject to preemptive rights. (viii) The Fund is not in violation of its Declaration of Trust or by- laws, as amended (the "By-Laws") or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which it is a party or by which it or its properties may be bound; and the execution and delivery of this Agreement, the Pricing Agreement and the Investment Advisory Agreement, the Custodian Agreement, the Auction Agent Agreement and the Depository Agreement referred to in the Registration Statement (the "Advisory Agreement," "Auction Agreement," "Custodian Agreement" and "Depository Agreement," respectively), and the consummation of the transactions contemplated herein and therein, will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Fund is a party or by which it may be bound or to which any of the property or assets of the Fund is subject, nor will such action result in any violation of the provisions of the Declaration of Trust or By-Laws of the Fund or, to the best knowledge of the Fund and the Adviser, any law, administrative regulation or administrative or court decree; and no consent, approval, authorization or order of any court or governmental authority or agency is required for the consummation by the Fund of the transactions contemplated by this Agreement, the Pricing Agreement, the Advisory Agreement, the Custodian Agreement, the Auction Agreement and the Depository Agreement, except such as has been obtained under the 1940 Act or as may be required under the 1933 Act or state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriter. (ix) The Fund owns or possesses or has obtained all material governmental licenses, permits, consents, orders, approvals and other authorizations necessary to lease or own, as the case may be, and to operate its properties and to carry on its businesses as contemplated in the Prospectus, and the Fund has not received any notice of proceedings relating to the revocation or modification of any such licenses, permits, covenants, orders, approvals or authorizations. (x) There is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending or, to the knowledge of the Fund or the Adviser, threatened against or affecting the Fund which might result in any material adverse change in the condition, financial or otherwise, business affairs or business prospects of the Fund or might materially and adversely affect the properties or assets of the Fund; and there are no material contracts or documents of the Fund which are required to be filed as exhibits to the Registration Statement by the 1933 Act, the 1940 Act or by the Rules and Regulations which have not been so filed. 4 (xi) The Fund owns or possesses, or can acquire on reasonable terms, adequate trademarks, service marks and trade names necessary to conduct the business now operated by it, and the Fund has not received any notice of infringement of or conflict with asserted rights of others with respect to any trademarks, service marks and trade names which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the conduct of the business operations, financial condition or income of the Fund. (xii) The Fund intends to, and will, direct the investment of the proceeds of the offering described in the Registration Statement in such a manner as to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended ("Subchapter M of the Code"), and intends to qualify as a regulated investment company under Subchapter M of the Code. (xiii) This Agreement, the Pricing Agreement, the Advisory Agreement and the Custodian Agreement have each been duly authorized, executed and delivered by the Fund, and each complies with all applicable provisions of the 1940 Act. (xiv) The Auction Agreement and the Depository Agreement have each been duly authorized for execution and delivery by the Fund and, when executed and delivered by the Fund, will constitute a valid and binding obligation of the Fund, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights and to general equity principles. (b) The Adviser represents and warrants to the Underwriter as of the date hereof and as of the Representation Date as follows: (i) The Adviser has been duly incorporated under the laws of the State of Delaware with corporate power and authority to conduct its business as described in the Prospectus. (ii) The Adviser is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is not prohibited by the Advisers Act or the 1940 Act or the rules and regulations under such acts from acting under the Advisory Agreement for the Fund as contemplated by the Prospectus. (iii) This Agreement has been duly authorized, executed and delivered by the Adviser; the Advisory Agreement is in full force and effect and constitutes a valid and binding obligation of the Adviser, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights and to general equity principles; and neither the execution and delivery of this Agreement nor the performance by the Adviser of its obligations hereunder or under the Advisory Agreement will conflict with, or result in a breach of, any of the terms and provisions of, or constitute, with or without the giving of notice or lapse of time or both, a default under, any agreement or instrument to which the Adviser 5 is a party or by which it is bound, or any law, order, rule or regulation applicable to it of any jurisdiction, court, federal or state regulatory body, administrative agency or other governmental body, stock exchange or securities association having jurisdiction over the Adviser or its respective properties or operations. (iv) The Adviser has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Prospectus. (c) Any certificate signed by any officer of the Fund or the Adviser and delivered to the Underwriter shall be deemed a representation and warranty by the Fund or the Adviser, as the case may be, to the Underwriter as to the matters covered thereby. SECTION 2. Sale and Delivery to the Underwriter; Closing. --------------------------------------------- (a) On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Fund agrees to sell the Shares to the Underwriter, and the Underwriter agrees to purchase the Shares from the Fund, at the price per share set forth in the Pricing Agreement. (i) If the Fund has elected not to rely upon rule 430A under the Rules and Regulations, the initial public offering price and the purchase price per share to be paid by the Underwriter for the Shares each has been determined and set forth in the Pricing Agreement, dated the date hereof, and an amendment to the Registration Statement and the Prospectus will be filed before the Registration Statement becomes effective. (ii) If the Fund has elected to rely upon rule 430A under the Rules and Regulations, the purchase price pet share to be paid by the Underwriter for the Shares shall be an amount equal to the initial public offering price, less an amount per share to be determined by agreement between the Underwriter and the Fund. The initial public offering price per share shall be a fixed price to be determined by agreement between the Underwriter and the Fund. The initial public offering price and the purchase price, when so determined, shall be set forth in the Pricing Agreement. In the event that such prices have not been agreed upon and the Pricing Agreement has not been executed and delivered by all parties thereto by the close of business on the fourth business day following the date of this Agreement, this Agreement shall terminate forthwith, without liability of any party to any other party, except as provided in Section 5, unless otherwise agreed to by the Fund, the Adviser and the Underwriter. (b) Payment of the purchase price for, and delivery of' certificates for, the Shares shall be made at the office of Brown & Wood, One World Trade Center, New York, New York 10048-0557, or at such other place as shall be agreed upon by the Underwriter and the Fund, at 10:00 A.M. on the fifth business day following the date the Registration Statement becomes effective (or, if the Fund has elected to rely upon rule 430A under the Rules and Regulations, the fifth business day after execution of the Pricing Agreement), or such other time not later than ten business days after such date as shall be agreed upon by the Underwriter and the Fund (such time and date of payment and delivery being herein called "Closing Time"). Payment shall be made 6 to the Fund by Federal fund check or checks or similar same-day funds and payable to the order of the Fund, against delivery to the Underwriter of the certificate for the Shares to be purchased by it. The Shares shall be represented by a certificate registered in the name of Cede & Co., as nominee for The Depository Trust Company. The certificate for the Shares will be made available for examination by the Underwriter not later than 10:00 A.M. on the last business day prior to Closing Time. SECTION 3. Covenants of the Fund. The Fund covenants with the Underwriter as --------------------- follows: (a) The Fund will use its best efforts (i) to cause the Registration Statement to become effective under the 1933 Act and will advise the Underwriter promptly as to the time at which the Registration Statement and any amendments thereto (including any post-effective amendment) becomes so effective and (ii) if required, to cause the issuance of any orders exempting the Fund from any provisions of the 1940 Act and will advise the Underwriter promptly as to the time at which any such orders are granted. (b) The Fund will notify the Underwriter immediately, and confirm the notice in writing, (i) of the effectiveness of the Registration Statement and any amendments thereto (including any post-effective amendment), (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose and (v) of the issuance by the Commission of an order of suspension or revocation of the notification on Form N-8A of registration of the Fund as an investment company under the 1940 Act or initiation of any proceeding for that purpose. The Fund will make every reasonable effort to prevent the issuance of any stop order described in subsection (iv) hereunder or any order of suspension or revocation described in subsection (v) hereunder and, if any stop order or order of suspension or revocation is issued, to obtain the lifting thereof at the earliest possible moment. (c) The Fund will give the Underwriter notice of its intention to file any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Fund proposes for use by the Underwriter in connection with the offering of the Shares which differs from the prospectus on file at the Commission at the time the Registration Statement becomes effective, whether such revised prospectus is required to be filed pursuant to Rule 497(b) or Rule 497(h) of the Rules and Regulations) whether pursuant to the 1940 Act, the 1933 Act, or otherwise, and will furnish the Underwriter with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement to which the Underwriter or counsel for the Underwriter shall reasonably object. (d) The Fund will deliver to the Underwriter, as soon as practicable, two signed copies of the registration statement as originally filed and of each amendment thereto, in each case with two sets of the exhibits filed therewith, and will also deliver to the Underwriter a 7 conformed copy of the registration statement as originally filed and of each amendment thereto (but without exhibits to the registration statement or to any such amendment) for the Underwriter. (e) The Fund will furnish to the Underwriter, from time to time during the period when the Prospectus is required to be delivered under the 1933 Act, such number of copies of the Prospectus (as amended or supplemented) as the Underwriter may reasonably request for the purposes contemplated by the 1933 Act or the Rules and Regulations. (f) If any event shall occur as a result of which it is necessary, in the opinion of counsel for the Underwriter, to amend or supplement the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, the Fund will forthwith amend or supplement the Prospectus by preparing and furnishing to the Underwriter a reasonable number of copies of an amendment or amendments of, or a supplement or supplements to, the Prospectus (in form and substance satisfactory to counsel for the Underwriter), so that, as so amended or supplemented, the Prospectus will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading. (g) The Fund will endeavor, in cooperation with the Underwriter, to qualify the Shares for offering and sale under the applicable securities laws of such states and other jurisdictions of the United States as the Underwriter may designate and will maintain such qualifications in effect for a period of not less than one year after the date hereof. The Fund will file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided. (h) The Fund will make generally available to its security holders as soon as practicable, but not later than 60 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the Rules and Regulations) covering a twelve- month period beginning not later than the first day of the Fund's fiscal quarter next following the "effective" date (as defined in said Rule 158) of the Registration Statement. (i) Between the date of this Agreement and the termination of any trading restrictions or Closing Time, whichever is later, the Fund will not, without your prior consent, offer or sell or enter into any agreement to sell any equity or equity related securities of the Fund other than the Shares and Common Shares issued in reinvestment of dividends or distributions. (j) If, at the time that the Registration Statement becomes effective, any information shall have been omitted therefrom in reliance upon Rule 430A of the Rules and Regulations, then immediately following the execution of the Pricing Agreement, the Fund will prepare and file or transmit for filing with the Commission in accordance with such Rule 430A and Rule 497(h) of the Rules and Regulations, copies of an amended Prospectus or, if required by such Rule 430A, a post-effective amendment to the Registration Statement (including an amended Prospectus) containing all information so omitted. 8 (k) The Fund will use its best efforts to maintain its qualification as a regulated investment company under Subchapter M of the Code. SECTION 4. Covenants of the Underwriter. The Underwriter covenants and ---------------------------- agrees with the Fund as follows: (a) It will sell Shares only to a person who has agreed to execute and deliver, whose Broker-Dealer (as defined in the Prospectus) has agreed to execute and deliver or who has already executed and delivered a Master Purchaser's Letter (as defined in the Prospectus) in accordance with the terms of the Prospectus. (b) No later than Closing Time, it will execute and deliver a Master Purchaser's Letter in accordance with the terms of the Prospectus. (c) No later than the second business day succeeding Closing Time, it will provide the Fund and the Auction Agent (as defined in the Prospectus) with a list of the persons to whom it has sold Shares, the number of Shares sold to each such person and the number of Shares it is holding as of the date of such notice. SECTION 5. Payment of Expenses. The Fund will pay all expenses incident to ------------------- the performance of its obligations under this Agreement, including, but not limited to, expenses relating to (i) the printing and filing of the Registration Statement as originally filed and of each amendment thereto, (ii) the preparation, issuance and delivery of the certificates for the Shares to the Underwriter, (iii) the fees and disbursements of the Fund's counsel and accountants, (iv) the qualification of the Shares under securities laws in accordance with the provisions of Section 3(g) of this Agreement, including filing fees and any fees or disbursements of counsel for the Underwriter in connection therewith and in connection with the preparation of the Blue Sky Survey, (v) the printing and delivery to the Underwriter of copies of the Registration Statement as originally filed and of each amendment thereto, of the preliminary prospectuses, and of the Prospectus and any amendments or supplements thereto, (vi) the printing and delivery to the Underwriter of copies of the Blue Sky Survey and (vii) the fees charged by rating agencies for the rating of the Shares. If this Agreement is terminated by the Underwriter in accordance with the provisions of Section 6 or Section 10(a)(i), the Fund or the Adviser shall reimburse the Underwriter for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriter. In the event the transactions contemplated hereunder are not consummated, the Adviser agrees to pay all of the costs and expenses set forth in the first paragraph of this Section 5 which the Fund would have paid if such transactions had been consummated. SECTION 6. Conditions of Underwriter's Obligations. The obligations of the --------------------------------------- Underwriter hereunder are subject to the accuracy of the representations and warranties of the Fund and the Adviser herein contained, to the performance by the Fund and the Adviser of their respective obligations hereunder, and to the following further conditions: 9 (a) The Registration Statement shall have become effective not later than 5:30 P.M., New York City time, on the date hereof or at such later time and date as may be approved by the Underwriter, and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission. If the Fund has elected to rely upon Rule 430A of the Rules and Regulations, the price of the Shares and any price- related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 497(h) of the Rules and Regulations within the prescribed time period, and prior to Closing Time the Fund shall have provided evidence satisfactory to the Underwriter of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Rules and Regulations. (b) At Closing Time, the Underwriter shall have received: (i) The favorable opinion, dated as of Closing Time, of Brown & Wood LLP, counsel for the Fund and the Underwriter, to the effect that: (1) The Fund has been duly organized and is validly existing as an unincorporated association commonly referred to as a business trust under the laws of The Commonwealth of Massachusetts. (2) The Fund has power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus. (3) The Fund is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required, except where the failure to so qualify would not have a material adverse effect on the condition, financial or otherwise, business affairs or business prospects of the Fund. (4) The outstanding Common Shares have been duly authorized and validly issued and are fully paid and non-assessable. (5) The Shares have been duly authorized for issuance and sale to the Underwriter pursuant to this Agreement and, when issued and delivered by the Fund pursuant to this Agreement against payment of the consideration set forth in the Pricing Agreement, will be validly issued and fully paid and non-assessable; the issuance of the Shares is not subject to preemptive or other similar rights; and the authorized shares of beneficial interest conform in all material respects to the description thereof in the Registration Statement. (6) This Agreement and the Pricing Agreement each has been duly authorized, executed and delivered by the Fund, and each complies with all applicable provisions of the 1940 Act. 10 (7) The Registration Statement is effective under the 1933 Act and, to the best of their knowledge and information, no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act, and no proceedings for that purpose have been instituted, are pending or are contemplated. (8) At the time the Registration Statement became effective and at the Representation Date, the Registration Statement (other than the financial statements included therein, as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the 1933 Act, the 1940 Act and the Rules and Regulations. (9) To the best of their knowledge and information, there are no legal or governmental proceedings pending or threatened against the Fund which are required to be disclosed in the Registration Statement, other than those disclosed therein. (10) To the best of their knowledge and information, there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments of the Fund required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto, the descriptions thereof or references thereto are correct, and no default exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, loan agreement, note or lease so described, referred to or filed. (11) No consent, approval, authorization or order of any court or governmental authority or agency is required in connection with the sale of the Shares to the Underwriter, except such as has been obtained under the 1933 Act, the 1940 Act or the Rules and Regulations or such as may be required under state securities laws; and to the best of their knowledge and information, the execution and delivery of this Agreement, the Pricing Agreement, the Advisory Agreement, the Custodian Agreement, the Auction Agreement and the Depository Agreement and the consummation of the transactions contemplated herein and therein will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Fund is a party or by which it may be bound or to which any of the property or assets of the Fund is subject, nor will such action result in any violation of the provisions of the Declaration of Trust or By-Laws of the Fund, or any law, administrative regulation or administrative or court decree. (12) The Advisory Agreement and the Custodian Agreement have each been duly authorized, executed and delivered by the Fund, and each complies with all applicable provisions of the 1940 Act. 11 (13) The Fund is registered with the Commission under the 1940 Act as a closed-end, non-diversified management investment company, and all required action has been taken by the Fund under the 1933 Act, the 1940 Act and the Rules and Regulations to make the public offering and consummate the sale of the Shares pursuant to this Agreement; the provisions of the Declaration of Trust and By-Laws of the Fund comply as to form in all material respects with the requirements of the 1940 Act; and, to the best of their knowledge and information, no order of suspension or revocation of such registration under the 1940 Act, pursuant to Section 8(e) thereof, has been issued or proceedings therefor initiated or threatened by the Commission. (14) The information in the Prospectus under the caption "Taxes" (other than information related to Pennsylvania law, as to which no opinion need be rendered), to the extent that it constitutes matters of law or legal conclusions, has been reviewed by them and is correct in all material respects. (15) The Auction Agreement and the Depository Agreement each have been duly authorized, executed and delivered by the Fund, and each constitutes a valid and binding obligation of the Fund, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights and to general equity principles. (ii) The favorable opinion, dated as of Closing Time, of Stradley, Ronon, Stevens & Young Special Counsel for the Fund, to the effect that: (1) The information in the Prospectus under the caption "Taxes", to the extent that it constitutes matters of Pennsylvania law or legal conclusions or legal opinions involving matters of law, has been reviewed by them and is correct in all material respects. (2) Nothing has come to their attention that would lead them to believe that the information in the Registration Statement under the caption "Investment Objective and Policies -- Special Considerations Relating to Pennsylvania Municipal Bonds" and in Appendix A entitled "Economic Conditions in Pennsylvania", at the time it became effective or at the Representation Date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the information under such caption and in such appendix in the Prospectus, at the Representation Date (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriter by the Fund for use in connection with the offering of the Shares which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective, in which case at the time they are first provided to the Underwriter for such use) or at Closing Time, included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 12 (iii) The favorable opinion, dated as of Closing Time, of Philip L. Kirstein, Esq., General Counsel to the Adviser, in form and substance satisfactory to counsel for the Underwriter, to the effect that: (1) The Adviser has been duly organized as a corporation under the laws of the State of Delaware with corporate power and authority to conduct its business as described in the Registration Statement and the Prospectus. (2) The Adviser is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act or the 1940 Act or the rules and regulations under such Acts from acting under the Advisory Agreement for the Fund as contemplated by the Prospectus. (3) This Agreement has been duly authorized, executed and delivered by the Adviser; the Advisory Agreement is in fully force and effect and constitutes a valid and binding obligation of the Adviser, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights and to general equity principles, and, to the best of his knowledge and information, neither the execution and delivery of this Agreement or the Advisory Agreement nor the performance by the Adviser of its obligations hereunder or thereunder will conflict with, or result in a breach of, any of the terms and provisions of, or constitute, with or without giving notice of lapse of time or both, a default under, any agreement or instrument to which it is a party or by which the Adviser is bound, or any law, order, rule or regulations applicable to the Adviser of any jurisdiction, court, Federal or state regulatory body, administrative agency or other governmental body, stock exchange or securities association having jurisdiction over the Adviser or its respective properties or operations. (4) To the best of his knowledge and information, the description of the Adviser in the Registration Statement and the Prospectus does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (iv) In giving their opinion required by subsection (b)(i) of this Section, Brown & Wood shall additionally state that nothing has come to their attention that would lead them to believe that the Registration Statement (excluding the financial statements and financial schedules included therein, as to which such counsel need express no belief), at the time it became effective or at the Representation Date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (except for the financial statements and financial schedules included therein as to which such counsel need express no belief), at the Representation Date (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriter by the Fund for use in connection with the offering of the Shares which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective, in which case at 13 the time it is first provided to the Underwriter for such use) or at Closing Time, included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In giving their opinion, Brown & Wood may rely, as to all matters governed by the law of The Commonwealth of Massachusetts, upon the opinion of Bingham, Dana & Gould, and Brown & Wood may rely, as to matters of fact, upon certificates and written statements of officers and employees of and accountants of the Fund and the Adviser and of public officials. (c) At Closing Time (i) the Registration Statement and the Prospectus shall contain all statements which are required to be stated therein in accordance with the 1933 Act, the 1940 Act and the Rules and Regulations and in all material respects shall conform to the requirements of the 1933 Act, the 1940 Act and the Rules and Regulations, and the Prospectus shall not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein in the light of the circumstances under which they were made, not misleading and no action, suit or proceeding at law or in equity shall be pending or, to the knowledge of the Fund or the Adviser, threatened against the Fund or the Adviser which would be required to be set forth in the Prospectus other than as set forth therein, (ii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change in the condition, financial or otherwise, of the Fund or in its earnings, business affairs or business prospects, whether or not arising in the ordinary course of business, from that set forth in the Registration Statement and Prospectus, (iii) the Adviser shall have the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Registration Statement and the Prospectus, (iv) no proceedings shall be pending or, to the knowledge of the Fund or the Adviser, threatened against the Fund or the Adviser before or by any Federal, state or other commission, board or administrative agency wherein an unfavorable decision, ruling or finding would materially and adversely affect the business, property, financial condition or income of either the Fund or the Adviser other than as set forth in the Registration Statement and the Prospectus and (v) Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P") shall have confirmed that the Shares have been rated "aaa" and AAA, respectively, by such agencies; and the Underwriter shall have received, at Closing Time, a certificate of the President or Treasurer of the Fund and of the President or a Vice President of the Adviser dated as of Closing Time, evidencing compliance with the appropriate provisions of this subsection (c), together with true and correct copies of letters from Moody's and S&P confirming their rating. (d) At Closing Time, the Underwriter shall have received certificates, dated as of Closing Time, (i) of the President or Treasurer of the Fund to the effect that the representations and warranties of the Fund contained in Section 1(a) are true and correct with the same force and effect as though expressly made at and as of Closing Time and (ii) of the President or a Vice President of the Adviser to the effect that the representations and warranties of the Adviser contained in Sections 1(a) and (b) are true and correct with the same force and effect as though expressly made at and as of Closing Time. 14 (e) At the time of execution of this Agreement, the Underwriter shall have received from Deloitte & Touche a letter, dated the date hereof, in form and substance satisfactory to the Underwriter, to the effect that: (i) they are independent accountants with respect to the Fund within the meaning of the 1933 Act and the Rules and Regulations; (ii) in their opinion, the statement of assets, liabilities and capital examined by them and included in the Registration Statement complies as to form in all material respects with the applicable accounting requirements of the 1933 Act and 1940 Act and the Rules and Regulations; (iii) they have performed specified procedures, not constituting an audit, including a reading of the latest available interim financial statements of the Fund, a reading of the minutes books of the Fund, inquiries of officials of the Fund responsible for financial accounting matters and such other inquiries and procedures as may be specified in such letter, and on the basis of such inquiries and procedures nothing came to their attention that caused them to believe that (A) the unaudited financial statements as of November 2, 1992 included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations applicable to unaudited interim financial statements included in registration statements or are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement, and (B) during the period from November 2, 1992 to a specified date not more than five days prior to the date of this Agreement, there was any change in the shares of beneficial interest or net assets of the Fund or any increase in the long-term debt of the Fund, as compared with amounts shown on the unaudited financial statements included in the Registration Statement, except for changes which the Registration Statement discloses have occurred or may occur; and (iv) in addition to the procedures referred to in clause (iii) above, they have performed other specified procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data, financial information and financial statements appearing in the Registration Statement, which have previously been specified by you and which shall be specified in such letter, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Fund. (f) At Closing Time, the Underwriter shall have received from Deloitte & Touche a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the "specified date" referred to shall be a date not more than five days prior to closing Time. (g) At Closing Time, counsel for the Underwriter shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Shares as herein contemplated and to pass upon related 15 proceedings, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Fund and the Adviser in connection with the organization and registration of the Fund under the 1940 Act and the issuance and sale of the Shares as herein contemplated shall be satisfactory in form and substance to the Underwriter and counsel for the Underwriter. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Underwriter by notice to the Fund at any time at or prior to Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 5. SECTION 7. Indemnification. (a) The Fund and the Adviser, jointly and --------------- severally, agree to indemnify and hold harmless the Underwriter and each person, if any, who controls the Underwriter within the meaning of Section 15 of the 1933 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the information deemed to be part of the Registration Statement pursuant to Rule 430A of the Rules and Regulations, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Fund; and (iii) against any and all expenses whatsoever (including the fees and disbursements of counsel chosen by the Underwriter) reasonably incurred in investigating, preparing or defending against any litigation or investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement does not apply to any loss, - -------- ------- liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Fund by the Underwriter expressly for use in the Registration Statement (or any 16 amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (b) The Underwriter agrees to indemnify and hold harmless the Fund and its trustees and the Adviser, and its directors, each of the Fund's officers who signed the Registration Statement, and each person, if any, who controls the Fund or the Adviser within the meaning of Section 15 of the 1933 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment or supplement thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Fund by the Underwriter expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action. In no event shall the indemnifying parties be liable for the fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. SECTION 8. Contribution. In order to provide for just and equitable ------------ contribution in circumstances in which the indemnity agreement provided for in Section 7 is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Fund and the Underwriter shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement as incurred by the Fund and the Underwriter, as incurred, in such proportions that the Underwriter is responsible for that portion represented by the percentage that the underwriting compensation payable pursuant to Section 2 hereof bears to the initial public offering price appearing on the cover page of the Prospectus, and the Fund is responsible for the balance; provided, however, that no person -------- ------- guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the provisions of this Section 8, the Underwriter shall not be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay in respect of such losses, liabilities, claims, damages and expenses. For purposes of this Section, each person, if any, who controls the Underwriter within the meaning of Section 15 of the 1933 Act shall have the same tights to contribution as the Underwriter, and each trustee of the Fund, each officer of the Fund who signed the Registration Statement, and each person, if any, who controls the Fund 17 within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as the Fund. SECTION 9. Representations, Warranties and Agreements to Survive Delivery. -------------------------------------------------------------- All representations, warranties and agreements contained in this Agreement and the Pricing Agreement, or contained in certificates of officers of the Fund or the Adviser submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of the Underwriter or a controlling person, or by or on behalf of the Fund or the Adviser and shall survive delivery of the Shares to the Underwriter. SECTION 10. Termination of Agreement. (a) The Underwriter, by notice to the ------------------------ Fund, may terminate this Agreement at any time or prior to Closing Time (i) if there has been, since the date of this Agreement or since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Fund or the Adviser, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or any outbreak of hostilities or escalation thereof or other calamity or crisis the effect of which is such as to make it, in the Underwriter's judgment, impracticable to market the Shares or enforce contracts for the sale of the shares, or (iii) if trading in the Common Shares has been suspended by the Commission or if trading generally on either the American Stock Exchange or the New York Stock Exchange has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by either of said exchanges or by order of the Commission or any other governmental authority, or if a banking moratorium has been declared by Federal or New York authorities. (b) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 5. SECTION 11. Notices. All notices and other communications hereunder shall be ------- in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of written telecommunication. Notices to the Underwriter shall be directed to Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated at Merrill Lynch World Headquarters, North Tower, World Financial Center, New York, New York 10281-1201, Attention: Richard N. Doyle, Vice President; notices to the Fund or the Adviser shall be directed to each of them at 800 Scudders Mill Road, Plainsboro, New Jersey, 08536, Attention: Arthur Zeikel. SECTION 12. Parties. This Agreement and the Pricing Agreement shall inure to ------- the benefit of and be binding upon the Underwriter, the Fund, the Adviser and their respective successors. Nothing expressed or mentioned in this Agreement or the Pricing Agreement is intended or shall be construed to give any person, firm or corporation, other than the parties hereto and their respective successors and the controlling persons and officers and directors referred to in Sections 7 and 8 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and the Pricing Agreement and all conditions and provisions hereof are intended 18 to be for the sole and exclusive benefit of the parties hereto and thereto and their respective successors and said controlling persons and officers and directors or trustees and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Shares from the Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 13. Liability of Shareholders, Trustees and Officers. A copy of the ------------------------------------------------ Agreement and Declaration of Trust of the Fund is on file with the Secretary of State of The Commonwealth of Massachusetts and notice is hereby given that this Agreement has been executed on behalf of the Fund by an officer of the Fund as an officer and not individually and the obligations of the Fund arising out of this Agreement are not binding upon any of the trustees, officers or shareholders of the Fund individually but are binding only upon the assets and property of the Fund. SECTION 14. Governing Law and Time. This Agreement and the Pricing Agreement ---------------------- shall be governed by the laws of the State of New York applicable to agreements made and to be performed in said State. Specified times of day refer to New York City time. 19 If the foregoing is in accordance with your understanding of our Agreement, please sign and return to us a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriter, the Fund and the Adviser in accordance with its terms. Very truly yours, MUNIYIELD PENNSYLVANIA FUND By: ------------------------------------ Authorized Officer FUND ASSET MANAGEMENT, INC. By: ------------------------------------ Authorized Officer CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated By: Merrill Lynch, Pierce, Fenner & Smith Incorporated By: ------------------------------------------- Vice President Investment Banking 20 EXHIBIT A $40,000,000 MUNIYIELD PENNSYLVANIA FUND (a Massachusetts business trust) AUCTION MARKET PREFERRED SHARES(R) [AMPS(R)] 800 Shares Liquidation Preference, $50,000 Per Share PRICING AGREEMENT ----------------- November 23, 1992 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters World Financial Center North Tower New York, New York 10281-1201 Dear Sirs: Reference is made to the Purchase Agreement, dated November 20, 1992 (the "Purchase Agreement"), relating to the purchase by Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") of 800 shares of auction market preferred shares of the Fund, par value $.10 per share, liquidation preference $50,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) (collectively, the "Shares") of MuniYield Pennsylvania Fund (the "Fund"). Pursuant to Section 2 of the Purchase Agreement, the Fund agrees with the Underwriter as follows: 1. The initial public offering price per share for the Shares, determined as provided in said Section 2, shall be $50,000. - ------------------- (R) Registered trademark of Merrill Lynch & Co., Inc. 2. The purchase price per share for the Shares to be paid by the Underwriter shall be $49,125, being an amount equal to the initial public offering price set forth above less $875 per share. 3. The dividend rate for the AMPS for the Initial Dividend Period ending January 11, 1993 will be 3.15%. 2 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Fund a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriter and the Fund in accordance with its terms. Very truly yours, MUNIYIELD PENNSYLVANIA FUND By: ---------------------------------- Authorized Officer CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated By: Merrill Lynch, Pierce, Fenner and Smith Incorporated By: ---------------------------------- Vice President Investment Banking 3 EX-99.7C 8 MERRILL LYNCH STANDARD DEALER AGREEMENT EXHIBIT 7(C) Revised October 29, 1990 Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, N.Y. 10281-1305 STANDARD DEALER AGREEMENT ------------------------- Dear Sirs: In connection with public offerings of securities underwritten by us, or by a group of underwriters (the "Underwriters") represented by us, you may be offered the opportunity to purchase a portion of such securities, as principal, at a discount from the offering price representing a selling concession or reallowance granted as consideration for services rendered by you in the sale of such securities. We request that you agree to the following terms and provisions, and make the following representations, which, together with any additional terms and provisions set forth in any wire or letter sent to you in connection with a particular offering, will govern all such purchases of securities and the reoffering thereof by you. Your subscription to, or purchase of, such securities will constitute your reaffirmation of this Agreement. 1. When we are acting as representative (the "Representative") of the Underwriters in offering securities to you, it should be understood that all offers are made subject to prior sale of the subject securities, when, as and if such securities are delivered to and accepted by the Underwriters and subject to the approval of legal matters by their counsel. In such cases, any order from you for securities will be strictly subject to confirmation and we reserve the right in our uncontrolled discretion to reject any order in whole or in part. Upon release by us; you may reoffer such securities at the offering price fixed by us. With our consent, you may allow a discount, not in excess of the reallowance fixed by us, in selling such securities to other dealers, provided that in doing so you comply with the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (the "NASD"). Upon our request, you will advise us of the identity of any dealer to whom you allow such a discount and any Underwriter or dealer from whom you receive such a discount. After the securities are released for sale to the public, we may vary the offering price and other selling terms. 2. You represent that you are a dealer actually engaged in the investment banking or securities business and that you are either (i) a member in good standing of the NASD or (ii) a dealer with its principal place of business located outside the United States, its territories or possessions and not registered under the Securities Exchange Act of 1934 (a "non-member foreign dealer") or (iii) a bank not eligible for membership in the NASD. If you are a non-member foreign dealer, you agree to make no sales of securities within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein. Non-member foreign dealers and banks agree, in making any sales, to comply with the NASD's interpretation with respect to free-riding and withholding. In accepting a selling concession where we are acting as Representative of the Underwriters, in accepting a reallowance from us whether or not we are acting as such Representative, and in allowing a discount to any other person, you agree to comply with the provisions of Section 24 of Article III of the Rules of Fair Practice of the NASD, and, in addition, if you are a non-member foreign dealer or bank, you agree to comply, as though you were a member of the NASD, with the provisions of Sections 8 and 36 of Article III of such Rules of Fair Practice and to comply with Section 25 of Article III thereof as that Section applies to a non-member foreign dealer or bank. You represent that you are fully familiar with the above provisions of the Rules of Fair Practice of the NASD. 3. If the securities have been registered under the Securities Act of 1933 (the "1933 Act"), in offering and selling such securities, you are not authorized to give any information or make any representation not contained in the prospectus relating thereto. You confirm that you are familiar with the rules and policies of the Securities and Exchange Commission relating to the distribution of preliminary and final prospectuses, and you agree that you will comply therewith in any offering covered by this Agreement. If we are acting as Representative of the Underwriters, we will make available to you, to the extent made available to us by the issuer of the securities, such number of copies of the prospectus or offering documents, for securities not registered under the 1933 Act, as you may reasonably request. 4. If we are acting as Representative of the Underwriters of securities of an issuer that is not required to file reports under the Securities Exchange Act of 1934 (the " 1934 Act"), you agree that you will not sell any of the securities to any account over which you have discretionary authority. 5. Payment for securities purchased by you is to be made at our office, One Liberty Plaza, 165 Broadway, New York, N.Y. 10006 (or at such other place as we may advise), at the offering price less the concession allowed to you, on such date as we may advise, by certified or official bank check in New York Clearing House funds (or such other funds as we may advise), payable to our order, against delivery of the securities to be purchased by you. We shall have authority to make appropriate arrangements for payment for and/or delivery through the facility of The Depository Trust Company or any such other depository or similar facility for the securities. 6. In the event that, prior to the completion of the distribution of securities covered by this Agreement, we purchase in the open market or otherwise any securities, delivered to you, if we are acting as Representative of the Underwriters, you agree to repay to us for the accounts of the Underwriters the amount of the concession allowed to you plus brokerage commissions and any transfer taxes paid in connection with such purchase. 7. At any time prior to the completion of the distribution of securities covered by this Agreement you will, upon our request as Representative of the Underwriters, report to us the amount of securities purchased by you which then remains unsold and will, upon our request, sell to us for the account of one or more of the Underwriters such amount of such unsold securities as we may designate, at the offering price less an amount to be determined by us not in excess of the concession allowed to you. 2 8. If we are acting as Representative of the Underwriters, upon application to us, we will inform you of the states and other jurisdictions of the United States in which it is believed that the securities being offered are qualified for sale under, or are exempt from the requirements of, their respective securities laws, but we assume no responsibility with respect to your right to sell securities in any jurisdiction. We shall have authority to file with the Department of State of the State of New York a Further State Notice with respect to the securities, if necessary. 9. You agree that in connection with any offering of securities covered by this Agreement you will comply with the applicable provisions of the 1933 Act and the 1934 Act and the applicable rules and regulations of the Securities and Exchange Commission thereunder, the applicable rules and regulations of the NASD, and the applicable rules of any securities exchange having jurisdiction over the offering. 10. We shall have full authority to take such action as we may deem advisable in respect of all matters pertaining to any offering covered by this Agreement. We shall be under no liability to you except for our lack of good faith and for obligations assumed by us in this Agreement, except that you do not waive any rights that you may have under the 1933 Act or the rules and regulations thereunder. 11. Any notice from us shall be deemed to have been duly given if mailed or transmitted by any standard form of written telecommunications to you at the above address or at such other address as you shall specify to us in writing. 12. With respect to any offering of securities covered by this Agreement, the price restrictions contained in Paragraph 1 hereof and the provisions of Paragraphs 6 and 7 hereof shall terminate as to such offering at the close of business on the 45th day after the securities are released for sale or, as to any or all such provisions, at such earlier time as we may advise. All other provisions of this Agreement shall remain operative and in full force and effect with respect to such offering. 13. This Agreement shall be governed by the laws of the State of New York. Please confirm your agreement hereto by signing the enclosed duplicate copy hereof in the place provided below and returning such signed duplicate copy to us at World Headquarters, North Tower, World Financial Center, New York, N.Y. 10281-1305, Attention: Corporate Syndicate. Upon receipt thereof, this instrument and such signed duplicate copy will evidence the agreement between us. Very truly yours, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: _______________________________ Name: Fred F. Hessinger 3 Confirmed and accepted as of the day of , 19 ____________________________________________ Name of Dealer ____________________________________________ Authorized Officer or Partner (if not Officer or Partner, attach copy of Instrument of Authorization) 4 EX-99.9 9 CUSTODIAN AGREEMENT Exhibit 99.9 CUSTODIAN CONTRACT Between MUNIYIELD PENNSYLVANIA FUND and STATE STREET BANK AND TRUST COMPANY
TABLE OF CONTENTS ----------------- Page ---- 1. Employment of Custodian and Property to be Held by It........................ 1 2. Duties of the Custodian with Respect to Property of the Fund Held By the Custodian.................................................................... 2 2.1 Holding Securities.................................................... 2 2.2 Delivery of Securities................................................ 2 2.3 Registration of Securities............................................ 6 2.4 Bank Accounts......................................................... 6 2.5 Availability of Federal Funds......................................... 7 2.6 Collection of Income.................................................. 7 2.7 Payment of Fund Monies................................................ 8 2.8 Liability for Payment in Advance of Receipt of Securities Purchased... 10 2.9 Appointment of Agents................................................. 10 2.10 Deposit of Fund Assets in Securities Systems.......................... 11 2.10A Fund Assets Held in the Custodian's Direct Paper System............... 13 2.11 Segregated Account.................................................... 14 2.12 Ownership Certificates for Tax Purposes............................... 15 2.13 Proxies............................................................... 15 2.14 Communications Relating to Fund Portfolio Securities.................. 16 2.15 Proper Instructions................................................... 16 2.16 Actions Permitted without Express Authority........................... 17 2.17 Evidence of Authority................................................. 17 3. Duties of Custodian with Respect to the Books of Account and Calculation of Net Asset Value and Net Income............................................... 18 4. Records...................................................................... 18 5. Opinion of Fund's Independent Accountant..................................... 19 6. Reports to Fund by Independent Public Accountants............................ 19 7. Compensation of Custodian.................................................... 20 8. Responsibility of Custodian.................................................. 20 9. Effective Period Termination and Amendment................................... 21 10. Successor Custodian.......................................................... 22 11. Interpretive and Additional Provisions....................................... 24 12. Massachusetts Law to Apply................................................... 24 13. Prior Contracts.............................................................. 24
CUSTODIAN CONTRACT ------------------ This Contract between MuniYield Pennsylvania Fund a corporation organized and existing under the laws of Massachusetts having its principal place of business at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, hereinafter called the "Fund", and State Street Bank and Trust Company, a Massachusetts trust company, having its principal place of business at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the "Custodian", WITNESSETH: That in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows: 1. Employment of Custodian and Property to be Held by It ----------------------------------------------------- The Fund hereby employs the Custodian as the custodian of its assets pursuant to the provisions of the Articles of Incorporation. The Fund agrees to deliver to the Custodian all securities and cash owned by it, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Fund from time to time, and the cash consideration received by it for such new or treasury shares of capital stock, $.10 par value, ("Shares") of the Fund as may be issued or sold from time to time. The Custodian shall not be responsible for any property of the Fund held or received by the Fund and not delivered to the Custodian. Upon receipt of "Proper Instructions" (within the meaning of Section 2.15), the Custodian shall from time to time employ one or more sub-custodians, but only in accordance with an applicable vote by the Board of Directors of the Fund, and provided that the Custodian shall have no more or less responsibility or liability to the Fund on account of any actions or omissions of any sub-custodian so employed than any such sub- custodian has to the Custodian. 2. Duties of the Custodian with Respect to Property of the Fund Held By the ------------------------------------------------------------------------ Custodian --------- 2.1 Holding Securities. The Custodian shall hold and physically segregate for ------------------ the account of the Fund all non-cash property, including all securities owned by the Fund, other than (a) securities which are maintained pursuant to Section 2.10 in a clearing agency which acts as a securities depository or in a book-entry system authorized by the U.S. Department of the Treasury, collectively referred to herein as "Securities System" and (b) commercial paper of an issuer for which State Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper") which is deposited and/or maintained in the Direct Paper System of the Custodian pursuant to Section 2.10A. 2.2 Delivery of Securities. The Custodian shall release and deliver securities ---------------------- owned by the Fund held by the Custodian or in a Securities System account of the Custodian or in the Custodian's Direct Paper book entry system account ("Direct Paper System Account") only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: 1) Upon sale of such securities for the account of the Fund and receipt of payment therefor; 2) Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Fund; -2- 3) In the case of a sale effected through a Securities System, in accordance with the provisions of Section 2.10 hereof; 4) To the depository agent in connection with tender or other similar offers for portfolio securities of the Fund; 5) To the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian; 6) To the issuer thereof, or its agent, for transfer into the name of the Fund or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent appointed pursuant to Section 2.9 or into the name or nominee name of any sub- custodian appointed pursuant to Article 1; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new securities are to be -------- delivered to the Custodian; 7) Upon the sale of such securities for the account of the Fund, to the broker or its clearing agent, against a receipt, for examination in accordance with "street delivery" custom; provided that in any such case, the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian's own negligence or willful misconduct; -3- 8) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 9) In the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 10) For delivery in connection with any loans of securities made by the Fund, but only against receipt of adequate collateral as agreed upon -------- from time to time by the Custodian and the Fund, which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to the Custodian's account in the book-entry system authorized by the U.S. Department of the Treasury, the Custodian will not be held liable or responsible for the delivery of securities owned by the Fund prior to the receipt of such collateral; -4- 11) For delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, but only against -------- receipt of amounts borrowed; 12) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund; 13) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian, and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund; and 14) For any other proper corporate purpose, but only upon receipt of, in -------- addition to Proper Instructions, a certified copy of a resolution of the Board of Directors or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, specifying the securities to be delivered, setting forth the purpose for -5- which such delivery is to be made, declaring such purpose to be a proper corporate purpose, and naming the person or persons to whom delivery of such securities shall be made. 2.3 Registration of Securities. Securities held by the Custodian (other than -------------------------- bearer securities) shall be registered in the name of the Fund or in the name of any nominee of the Fund or of any nominee of the Custodian which nominee shall be assigned exclusively to the Fund, unless the Fund has ------ authorized in writing the appointment of a nominee to be used in common with other registered investment companies having the same investment adviser as the Fund, or in the name or nominee name of any agent appointed pursuant to Section 2.9 or in the name or nominee name of any sub-custodian appointed pursuant to Article 1. All securities accepted by the Custodian on behalf of the Fund under the terms of this Contract shall be in "street name" or other good delivery form. If, however, the Fund directs the Custodian to maintain securities in "street name", the Custodian shall utilize its best efforts only to timely collect income due the Fund on such securities and to notify the Fund on a best efforts basis only of relevant corporate actions including, without limitation, pendency of calls, maturities, tender or exchange offers. 2.4 Bank Accounts. The Custodian shall open and maintain a separate bank ------------- account or accounts in the name of the Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Contract, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Fund, other than cash maintained by the Fund in a bank account established and used in accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held by the -6- Custodian for the Fund may be deposited by it to its credit as Custodian in the Banking Department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; provided, however, that every such bank or trust company shall be qualified -------- to act as a custodian under the Investment Company Act of 1940 and that each such bank or trust company and the funds to be deposited with each such bank or trust company shall be approved by vote of a majority of the Board of Directors of the Fund. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. 2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and ----------------------------- the Custodian, the Custodian shall, upon the receipt of Proper Instructions, make federal funds available to the Fund as of specified times agreed upon from time to time by the Fund and the Custodian in the amount of checks received in payment for Shares of the Fund which are deposited into the Fund's account. 2.6 Collection of Income. Subject to the provisions of Section 2.3, the -------------------- Custodian shall collect on a timely basis all income and other payments with respect to registered securities held hereunder to which the Fund shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to bearer securities if, on the date of payment by the issuer, such securities are held by the Custodian or its agent thereof and shall credit such income, as collected, to the Fund's custodian account. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect -7- interest when due on securities held hereunder. Income due the Fund on securities loaned pursuant to the provisions of Section 2.2 (10) shall be the responsibility of the Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is properly entitled. 2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be ---------------------- continuing instructions when deemed appropriate by the parties, the Custodian shall pay out monies of the Fund in the following cases only: 1) Upon the purchase of securities, options, futures contracts or options on futures contracts for the account of the Fund but only (a) against the delivery of such securities or evidence of title to such options, futures contracts or options on futures contracts to the Custodian (or any bank, banking firm or trust company doing business in the United States or abroad which is qualified under the Investment Company Act of 1940, as amended, to act as a custodian and has been designated by the Custodian as its agent for this purpose) registered in the name of the Fund or in the name of a nominee of the Custodian referred to in Section 2.3 hereof or in proper form for transfer; (b) in the case of a purchase effected through a Securities System, in accordance with the conditions set forth in Section 2.10 hereof; (c) in the case of a purchase involving the Direct Paper System, in accordance with the conditions set forth in Section 2.10A; -8- (d) in the case of repurchase agreements entered into between the Fund and the Custodian, or another bank, or a broker-dealer which is a member of NASD, (i) against delivery of the securities either in certificate form or through an entry crediting the Custodian's account at the Federal Reserve Bank with such securities or (ii) against delivery of the receipt evidencing purchase by the Fund of securities owned by the Custodian along with written evidence of the agreement by the Custodian to repurchase such securities from the Fund or (e) for transfer to a time deposit account of the Fund in any bank, whether domestic or foreign; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank pursuant to Proper Instructions from the Fund as defined in Section 2.15; 2) In connection with conversion, exchange or surrender of securities owned by the Fund as set forth in Section 2.2 hereof; 3) For the payment of any expense or liability incurred by the Fund, including but not limited to the following payments for the account of the Fund: interest, taxes, management, accounting, transfer agent and legal fees, and operating expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses; 4) For the payment of any dividends declared pursuant to the governing documents of the Fund; -9- 5) For payment of the amount of dividends received in respect of securities sold short; 6) For any other proper purpose, but only upon receipt of, in addition -------- to Proper Instructions, a certified copy of a resolution of the Board of Directors or of the Executive Committee of the Fund signed by an officer of the Fund and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such purpose to be a proper purpose, and naming the person or persons to whom such payment is to be made. 2.8 Liability for Payment in Advance of Receipt of Securities Purchased. ------------------------------------------------------------------- Except as specifically stated otherwise in this Contract, in any and every case where payment for purchase of securities for the account of the Fund is made by the Custodian in advance of receipt of the securities purchased in the absence of specific written instructions from the Fund to so pay in advance, the Custodian shall be absolutely liable to the Fund for such securities to the same extent as if the securities had been received by the Custodian. 2.9 Appointment of Agents. The Custodian may at any time or times in its --------------------- discretion appoint (and may at any time remove) any other bank or trust company which is itself qualified under the Investment Company Act of 1940, as amended, to act as a custodian, as its agent to carry out such of the provisions of this Article 2 as the Custodian may from time to time direct; provided, however, that the appointment of any agent shall not relieve the -------- Custodian of its responsibilities or liabilities hereunder. -10- 2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit -------------------------------------------- and/or maintain securities owned by the Fund in a clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934, which acts as a securities depository, or in the book-entry system authorized by the U.S. Department of the Treasury and certain federal agencies, collectively referred to herein as "Securities System" in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions: 1) The Custodian may keep securities of the Fund in a Securities System provided that such securities are represented in an account ("Account") of the Custodian in the Securities System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 2) The records of the Custodian with respect to securities of the Fund which are maintained in a Securities System shall identify by book- entry those securities belonging to the Fund; 3) The Custodian shall pay for securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Fund. The Custodian shall transfer securities sold for the account of the Fund upon (i) receipt of advice from the Securities -11- System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System of transfers of securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Custodian and be provided to the Fund at its request. Upon request, the Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund in the form of a written advice or notice and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Fund. 4) The Custodian shall provide the Fund with any report obtained by the Custodian on the Securities System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Securities System; 5) The Custodian shall have received the initial or annual certificate, as the case may be, required by Article 9 hereof; 6) Anything to the contrary in this Contract notwithstanding, the Custodian shall be liable to the Fund for any loss or damage to the Fund resulting from use of the Securities System by reason of any negligence, misfeasance or misconduct of the Custodian or any of its agents or of any of its or their employees or from failure of the Custodian or any such agent to enforce effectively such rights as it may have against the Securities -12- System; at the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claim against the Securities System or any other person which the Custodian may have as a consequence of any such loss or damage if and to the extent that the Fund has not been made whole for any such loss or damage. 2.10A Fund Assets Held in the Custodian's Direct Paper System. The Custodian ------------------------------------------------------- may deposit and/or maintain securities owned by the Fund in the Direct Paper System of the Custodian subject to the following provisions: 1) No transaction relating to securities in the Direct Paper System will be effected in the absence of Proper Instructions; 2) The Custodian may keep securities of the Fund in the Direct Paper System only if such securities are represented in an account ("Account") of the Custodian in the Direct Paper System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 3) The records of the Custodian with respect to securities of the Fund which are maintained in the Direct Paper System shall identify by book-entry those securities belonging to the Fund; 4) The Custodian shall pay for securities purchased for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such payment and transfer of securities to the account of the Fund. -13- The Custodian shall transfer securities sold for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such transfer and receipt of payment for the account of the Fund; 5) The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund, in the form of a written advice or notice, of Direct Paper on the next business day following such transfer and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transaction in the Securities System for the account of the Fund; 6) The Custodian shall provide the Fund with any report on its system of internal accounting control as the Fund may reasonably request from time to time. 2.11 Segregated Account. The Custodian shall upon receipt of Proper ------------------ Instructions establish and maintain a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities, including securities maintained in an account by the Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Exchange Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for -14- purposes of segregating cash or government securities in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon purchased or sold by the Fund, (iii) for the purposes of compliance by the Fund with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the Securities and Exchange Commission relating to the maintenance of segregated accounts by registered investment companies and (iv) for other proper corporate purposes, but only, in the case of clause --- ---- (iv), upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes of such segregated account and declaring such purposes to be proper corporate purposes. 2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute --------------------------------------- ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to securities of the Fund held by it and in connection with transfers of securities. 2.13 Proxies. The Custodian shall, with respect to the securities held ------- hereunder, cause to be promptly executed by the registered holder of such securities, if the securities are registered otherwise than in the name of the Fund or a nominee of the Fund, all proxies, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to such securities. -15- 2.14 Communications Relating to Fund Portfolio Securities. Subject to the ---------------------------------------------------- provisions of Section 2.3, the Custodian shall transmit promptly to the Fund all written information (including, without limitation, pendency of calls and maturities of securities and expirations of rights in connection therewith and notices of exercise of call and put options written by the Fund and the maturity of futures contracts purchased or sold by the Fund) received by the Custodian from issuers of the securities being held for the Fund. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund all written information received by the Custodian from issuers of the securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. If the Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian at least three business days prior to the date on which the Custodian is to take such action. 2.15 Proper Instructions. Proper Instructions as used throughout this Article ------------------- 2 means a writing signed or initialed by one or more person or persons as the Board of Directors shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved, including a specific statement of the purpose for which such action is requested. Oral instructions will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Fund shall cause all oral instructions to be confirmed in writing. Upon receipt of a certificate of the Secretary or an Assistant Secretary as to the authorization by the Board of Directors of the Fund accompanied by a detailed description of procedures approved by the Board of Directors, -16- Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Board of Directors and the Custodian are satisfied that such procedures afford adequate safeguards for the Fund's assets. For purposes of this Section, Proper Instructions shall include instructions received by the Custodian pursuant to any three-party agreement which requires a segregated asset account in accordance with Section 2.11. 2.16 Actions Permitted without Express Authority. The Custodian may in its ------------------------------------------- discretion, without express authority from the Fund: 1) make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this Contract, provided that all such payments shall be accounted for to -------- the Fund; 2) surrender securities in temporary form for securities in definitive form; 3) endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; and 4) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Fund except as otherwise directed by the Board of Directors of the Fund. 2.17 Evidence of Authority. The Custodian shall be protected in acting upon --------------------- any instructions, notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly executed by or on behalf of the Fund. The Custodian -17- may receive and accept a certified copy of a vote of the Board of Directors of the Fund as conclusive evidence (a) of the authority of any person to act in accordance with such vote or (b) of any determination or of any action by the Board of Directors pursuant to the Articles of Incorporation as described in such vote, and such vote may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary. 3. Duties of Custodian with Respect to the Books of Account and Calculation ------------------------------------------------------------------------ of Net Asset Value and Net Income --------------------------------- The Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the Board of Directors of the Fund to keep the books of account of the Fund and/or compute the net asset value per share of the outstanding shares of the Fund or, if directed in writing to do so by the Fund, shall itself keep such books of account and/or compute such net asset value per share. If so directed, the Custodian shall also calculate weekly the net income of the Fund as described in the Fund's currently effective prospectus and shall advise the Fund and the Transfer Agent weekly of the total amounts of such net income and, if instructed in writing by an officer of the Fund to do so, shall advise the Transfer Agent periodically of the division of such net income among its various components. The calculations of the net asset value per share and the weekly income of the Fund shall be made at the time or times described from time to time in the Fund's currently effective prospectus. 4. Records ------- The Custodian shall create and maintain all records relating to its activities and obligations under this Contract in such manner as will meet the obligations of the Fund under the Investment Company Act of 1940, with particular attention to Section 31 thereof and Rules 3la-1 -18- and 3la-2 thereunder. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the Securities and Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund with a tabulation of securities owned by the Fund and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations. 5. Opinion of Fund's Independent Accountant ---------------------------------------- The Custodian shall take all reasonable action, as the Fund may from time to time request, to obtain from year to year favorable opinions from the Fund's independent accountants with respect to its activities hereunder in connection with the preparation of the Fund's Form N-2, and Form N-SAR or other annual reports to the Securities and Exchange Commission and with respect to any other requirements of such Commission. 6. Reports to Fund by Independent Public Accountants ------------------------------------------------- The Custodian shall provide the Fund, at such times as the Fund may reasonably require, with reports by independent public accountants on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and options on futures contracts, including securities deposited and/or maintained in a Securities System, relating to the services provided by the Custodian under this Contract; such reports, shall be of sufficient scope and in sufficient detail, as may reasonably be required by the Fund to provide reasonable assurance that any material inadequacies would be disclosed by such examination, and, if there are no such inadequacies, the reports shall so state. -19- 7. Compensation of Custodian ------------------------- The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between the Fund and the Custodian. 8. Responsibility of Custodian --------------------------- So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Contract and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties, including any futures commission merchant acting pursuant to the terms of a three-party futures or options agreement. The Custodian shall be held to the exercise of reasonable care in carrying out the provisions of this Contract; but shall be kept indemnified by and shall be without liability to the Fund for any action taken or omitted by it in good faith without negligence. It shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Fund) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. If the Fund requires the Custodian to take any action with respect to securities, which action involves the payment of money or which action may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund being liable for the payment of money or incurring liability of some other form, the Fund, as a prerequisite to requiring the Custodian to take such action, shall provide indemnity to the Custodian in an amount and form satisfactory to it. -20- If the Fund requires the Custodian, its affiliates, subsidiaries or agents, to advance cash or securities for any purpose (including but not limited to securities settlements, foreign exchange contracts and assumed settlement) or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the Fund shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of the Fund assets to the extent necessary to obtain reimbursement. 9. Effective Period, Termination and Amendment ------------------------------------------- This Contract shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than thirty (30) days after the date of such delivery or mailing; provided, however that the -------- Custodian shall not act under Section 2.10 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors of the Fund has approved the initial use of a particular Securities System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Board of Directors has reviewed the use by the Fund of such Securities System, as required in each case by Rule 17f-4 under the Investment Company Act of 1940, as amended and that the Custodian shall not act under Section 2.10A hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the -21- Board of Directors has approved the initial use of the Direct Paper System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Board of Directors has reviewed the use by the Fund of the Direct Paper System; provided further, however, that the Fund shall not amend or terminate ---------------- this Contract in contravention of any applicable federal or state regulations, or any provision of the Articles of Incorporation, and further provided, that the Fund may at any time by action of its Board of Directors (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Contract in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction. Upon termination of the Contract, the Fund shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its costs, expenses and disbursements. 10. Successor Custodian ------------------- If a successor custodian shall be appointed by the Board of Directors of the Fund, the Custodian shall, upon termination, deliver to such successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all securities then held by it hereunder and shall transfer to an account of the successor custodian all of the Fund's securities held in a Securities System. If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of a certified copy of a vote of the Board of Directors of the Fund, deliver at the -22- office of the Custodian and transfer such securities, funds and other properties in accordance with such vote. In the event that no written order designating a successor custodian or certified copy of a vote of the Board of Directors shall have been delivered to the Custodian on or before the date when such termination shall become effective, then the Custodian shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the Investment Company Act of 1940, doing business in Boston, Massachusetts, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all securities, funds and other properties held by the Custodian and all instruments held by the Custodian relative thereto and all other property held by it under this Contract and to transfer to an account of such successor custodian all of the Fund's securities held in any Securities System. Thereafter, such bank or trust company shall be the successor of the Custodian under this Contract. In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to failure of the Fund to procure the certified copy of the vote referred to or of the Board of Directors to appoint a successor custodian, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Contract relating to the duties and obligations of the Custodian shall remain in full force and effect. -23- 11. Interpretive and Additional Provisions -------------------------------------- In connection with the operation of this Contract, the Custodian and the Fund may from time to time agree on such provisions interpretive of or in addition to the provisions of this Contract as may in their joint opinion be consistent with the general tenor of this Contract. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, provided that no such interpretive or additional provisions -------- shall contravene any applicable federal or state regulations or any provision of the Articles of Incorporation of the Fund. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Contract. 12. Massachusetts Law to Apply -------------------------- This Contract shall be construed and the provisions thereof interpreted under and in accordance with laws of The Commonwealth of Massachusetts. 13. Prior Contracts --------------- This Contract supersedes and terminates, as of the date hereof, all prior contracts between the Fund and the Custodian relating to the custody of the Fund's assets. -24- IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representative and its seal to be hereunder affixed as of the 12th day of October, 1992. ATTEST MUNIYIELD PENNSYLVANIA FUND By - ----------------------------------- ----------------------------------- Gerald M. Richard, Treasurer ATTEST STATE STREET BANK AND TRUST COMPANY By - ----------------------------------- ----------------------------------- Assistant Secretary Senior Vice President -25- EX-99.10 10 DIVIDEND REINVESTMENT PLAN EXHIBIT 10 MUNIYIELD PENNSYLVANIA FUND TERMS AND CONDITIONS OF AUTOMATIC DIVIDEND REINVESTMENT PLAN 1. Appointment of Agent. You, _________________, will act as Agent for -------------------- me, and will open an account for me under the Dividend Reinvestment Plan (the "Plan") in the same name as my present shares of Beneficial Interest, par value $.10 per share ("Common Stock"), of MUNIYIELD PENNSYLVANIA FUND (the "Fund") are registered, and will automatically put into effect for me the dividend reinvestment option of the Plan as of the first record date for a dividend or capital gains distribution (collectively referred to herein as a "dividend"), payable at the election of shareholders in cash or shares of Beneficial Interest. 2. Dividends Payable in Common Shares. My participation in the Plan ---------------------------------- constitutes an election by me to receive dividends in shares of Beneficial Interest whenever the Fund declares a dividend. In such event, the dividend amount shall automatically be made payable to me entirely in shares of Beneficial Interest which shall be acquired by the Agent for my account, depending upon the circumstances described in paragraph 3, either (i) through receipt of additional shares of unissued but authorized shares of Beneficial Interest from the Fund ("newly issued shares") as described in paragraph 6 or (ii) by purchase of outstanding shares of Beneficial Interest on the open market ("open-market purchases") as described in paragraph 7. 3. Determination of Whether Newly-Issued Shares or Open Market Purchases. --------------------------------------------------------------------- If on the payment date for the dividend (the "valuation date"), the net asset value per share of the Common Shares, as defined in paragraph 8, is equal to or less than the market price per share of the Common Shares, as defined in paragraph 8, plus estimated brokerage commissions (such condition being referred to herein as "market premium"), the Agent shall invest the dividend amount in newly issued shares on my behalf as described in paragraph 6. If on the valuation date, the net asset value per share is greater than the market value (such condition being referred to herein as "market discount"), the Agent shall invest the dividend amount in shares acquired on my behalf in open-market purchases as described in paragraph 7. 4. Purchase Period for open-Market Purchases. In the event of a market ----------------------------------------- discount on the valuation date, the Agent shall have until the last business day before the next ex-dividend date with respect to the shares of Beneficial Interest or in no event more than 30 days after the valuation date (the "last purchase date") to invest the dividend amount in shares acquired in open-market purchases except where temporary curtailment or suspension of purchases is necessary to comply with applicable provisions of federal securities laws. 5. Failure to Complete Open-Market Purchases During Purchase Period. If ---------------------------------------------------------------- the Agent is unable to invest the full dividend amount in open-market purchases during tne purchase period because the market discount has shifted to a market premium or otherwise, the Agent will invest the uninvested poftion of the dividend amount in newly issued shares at the close of business on the last purchase date as described in paragraph 4; except that the Agent may not acquire newly issued shares after the valuation date under the foregoing circumstances unless it has received a legal opinion that registration of such shares is not required under the Securities Act of 1933 or unless the shares to be issued are registered under such Act. 6. Acquisition of Newly-Issued Shares. In the event that all or part of ---------------------------------- the dividend amount is to be invested in newly issued shares, you shall automatically receive such newly-issued shares of Beneficial Interest, including fractions, for my account and the number of additional newly-issued shares of Beneficial Interest to be credited to my account shall be determined by dividing the dollar amount of the dividend on my shares to be invested in newly-issued shares by the net asset value per share of Common Shares on the date the shares are issued (the valuation date in the case of an initial market premium or the last purchase date in case the Agent is unable to complete open-market purchases during the purchase period); provided, that the maximum discount from the then current market price per share on the date of issuance shall not exceed 5%. 7. Manner of Making Open-Market Purchases. In the event that the dividend -------------------------------------- amount is to be invested in shares of Beneficial Interest acquired in open- market purchases, you shall apply the amount of such dividend on my shares (less my pro rata share of brokerage commissions incurred with respect to your open- market purchases) to the purchase on the open-market of shares of the Common Stock for my account. Open-market purchases may be made on any securities exchange where the Common Shares are traded, in the over-the-counter market or in negotiated transactions and may be on such terms as to price, delivery and otherwise as you shall determine. My funds held by you uninvested will not bear interest, and it is understood that, in any event, you shall have no liability in connection with any inability to purchase shares within 30 days after the initial date of such purchase as herein provided, or with the timing of any purchases affected. You shall have no responsibility as to the value of the Common Shares acquired for my account. For the purposes of cash investments you may commingle my funds with those of other shareholders of the Fund for whom you similarly act as Agent, and the average price (including brokerage commissions) of all shares purchased by you as Agent in the open market shall be the price per share allocable to me in connection with open-market purchases. 8. Meaning of Market Price and Net Asset Value. For all purposes of the ------------------------------------------- Plan: (a) the market price of the Common Shares on a particular date shall be the last sales price on the Stock Exchange (the "Exchange") on that date, or, if there is no sale on the Exchange on that date, then the mean between the closing bid and asked quotations for such stock on the Exchange on such date and (b) net asset value per share of the Common Shares on a particular date shall be as determined by or on behalf of the Fund. 9. Registration of Shares Acquired Pursuant to the Plan. You may hold my ---------------------------------------------------- shares of Beneficial Interest acquired pursuant to the Plan, together with the shares of other shareholders of the Fund acquired pursuant to the Plan, in noncertificated form in your name or that of your nominee. You will forward to me any proxy solicitation material and will vote any shares so held for me only in accordance with the proxy returned by me to the Fund. Upon my written request, you will deliver to me, without charge, a certificate or certificates for the full shares held by you for my account. 2 10. Confirmations. You will confirm to me each acquisition made for my ------------- account as soon as practicable but not later than 60 days after the date thereof. 11. Fractional Interests. Although I may from time to time have an -------------------- undivided fractional interest (computed to three decimal places) in a share of the Fund, no certificates for a fractional share will be issued. However, dividends and distributions on fractional shares will be credited to my account. In the event of termination of my account under the Plan, you will adjust for any such undivided fractional interest in cash at the market value of the Fund's shares at the time of termination less the pro rata expense of any sale required to make such an adjustment. 12. Stock Dividends or Share Purchase Rights. Any stock dividends or ---------------------------------------- split shares distributed by the Fund on shares held by you for me will be credited to my account. In the event that the Fund makes available to its shareholders rights to purchase additional shares or other securities, the shares held for me under the Plan will be added to other shares held by me in calculating the number of rights to be issued to me. 13. Service Fee. Your service fee for handling capital gains ----------- distributions or income dividends will be paid by the Fund. I will be charged for my pro rata share of brokerage commissions on all open market purchases. 14. Termination of Account. I may terminate my account under the Plan by ---------------------- notifying you in writing. Such termination will be effective immediately if my notice is received by you not less than ten days prior to any dividend or distribution record date; otherwise such termination will be effective on the first trading day after the payment date for such dividend or distribution with respect to any subseqaent dividend or distribution. The Plan may be terminated by you or the Fund upon notice in writing mailed to me at least 90 days prior to any record date for the payment of any dividend or distribution by the Fund. Upon any termination you will cause a certificate or certificates for the full shares held for me under the Plan and cash adjustment for any fraction to be delivered to me without charge. If I elect by notice to you in writing in advance of such termination to have you sell part or all of my shares and remit the proceeds to me, you are authorized to deduct brokerage commissions for this transaction from the proceeds. 15. Amendment of Plan. These terms and conditions may be amended or ----------------- supplemented by you or the Fund at any time or times but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to me appropriate written notice at least 90 days prior to the effective date thereof. The amendment or supplement shall be deemed to be accepted by me unless, prior to the effective date, thereof, you receive written notice of the termination of my account under the Plan. Any such amendment may include an appointment by you in your place and stead of a successor Agent under these terms and conditions, with full power and authority to perform all or any of the acts to be performed by the Agent under these terms and conditions. Upon any such appointment of an Agent for the purpose of receiving dividends and distributions, the Fund will be authorized to pay to such successor Agent, for my account, all dividends and distributions payable on Common Shares of the Fund held in my name or under the Plan for retention or application by such successor Agent as provided in these terms and conditions. 3 16. Extent of Responsibility of Agent. You shall at all times act in good --------------------------------- faith and agree to use your best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement and to comply with applicable law, but assume no responsibility and shall not be liable for loss or damage due to errors unless such error is caused by your negligence, bad faith, or willful misconduct or that of your employees. 17. Governing Law. These terms and conditions shall be governed by the ------------- laws of the State of New York without regard to its conflicts of laws provisions. 4 EX-99.11 11 OPINION AND CONSENT OF BROWN AND WOOD LLP EXHIBIT 99.11 BROWN & WOOD LLP ONE WORLD TRADE CENTER NEW YORK, NEW YORK 10048-0557 TELEPHONE: 212-839-5300 FACSIMILE: 212-839-5599 November 9, 1999 MuniYield Pennsylvania Fund 800 Scudders Mill Road Plainsboro, New Jersey 08536 Ladies and Gentlemen: We have acted as counsel for MuniYield Pennsylvania Fund (the "Fund") in connection with the proposed acquisition by the Fund of substantially all of the assets and the assumption by the Fund of substantially all of the liabilities of MuniVest Pennsylvania Insured Fund ("MuniVest Pennsylvania") and MuniHoldings Pennsylvania Insured Fund ("MuniHoldings Pennsylvania"), in exchange for newly- issued common shares of beneficial interest and auction market preferred shares of the Fund (collectively the "Reorganization"). This opinion is furnished in connection with the Fund's Registration Statement on Form N-14 under the Securities Act of 1933, as amended (File No. 333-88395) (the "Registration Statement"), relating to common shares of beneficial interest, par value $.10 per share, and auction market preferred shares of the Fund, par value $0.05 per share (the "Shares"), to be issued in the Reorganization. As counsel for the Fund, we are familiar with the proceedings taken by it and to be taken by it in connection with the authorization, issuance and sale of the Shares. In addition, we have examined and are familiar with the Declaration of Trust of the Fund, as amended, the By-Laws of the Fund, as amended, and such other documents as we have deemed relevant to the matters referred to in this opinion. Based upon the foregoing, we are of the opinion that subsequent to the approval of the Agreement and Plan of Reorganization between the Fund, MuniVest Pennsylvania and MuniHoldings Pennsylvania set forth in the joint proxy statement and prospectus constituting a part of the Registration Statement (the "Proxy Statement and Prospectus"), the Shares, upon issuance in the manner referred to in the Registration Statement, for consideration not less than the par value thereof, will be legally issued, fully paid and non-assessable common shares or auction market preferred shares, as the case may be, of the Fund (except for certain possible liability of shareholders described in the Proxy Statement and Prospectus under "Item 1. The Reorganization - Comparison of the Funds - Capital Shares"). In rendering the foregoing opinions, we have relied, without independent investigation or verification, as to all matters involving the laws of the Commonwealth of Massachusetts, upon the opinion of Bingham Dana LLP. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name in the Proxy Statement and Prospectus constituting a part thereof. Very truly yours, /s/ Brown & Wood LLP 2 EX-99.13A 12 TRANSFER AGENCY AND SERVICE AGREEMENT REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT between MUNIYIELD PENNSYLVANIA FUND and STATE STREET BANK AND TRUST COMPANY TABLE OF CONTENTS ----------------- Page ---- Article 1 Terms of Appointment; Duties of the Bank.. 1 Article 2 Fees and Expenses......................... 3 Article 3 Representations and Warranties of the Bank 4 Article 4 Representations and Warranties of the Fund 5 Article 5 Data Access and Proprietary Information... 5 Article 6 Indemnification........................... 8 Article 7 Standard of Care.......................... 10 Article 8 Covenants of the Fund and the Bank........ 10 Article 9 Termination of Agreement.................. 11 Article 10 Assignment................................ 12 Article 11 Amendment................................. 12 Article 12 Massachusetts Law to Apply................ 12 Article 13 Force Majeure............................. 13 Article 14 Consequential Damages..................... 13 Article 15 Merger of Agreement....................... 13 i REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT ------------------------------------------------ AGREEMENT made as of 12th day of October, 1992, and between MUNIYIELD PENNSYLVANIA FUND, a Massachusetts corporation , having its principal office and place of business at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having its principal office and place of business at 225 Franklin Street, Boston, Massachusetts 02110 (the "Bank"). WHEREAS, the Fund desires to appoint the Bank as its registrar, transfer agent, dividend disbursing agent, custodian of certain retirement plans and agent in connection with certain other activities and the Bank desires to accept such appointment; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: Article 1 Terms of Appointment; Duties of the Bank ---------------------------------------- 1.01. Subject to the terms and conditions set forth in this Agreement, the Fund hereby employs and appoints the Bank to act as, and the Bank agrees to act as registrar, transfer agent for the Fund's authorized and issued shares of its common stock ("Shares"), dividend disbursing agent, custodian of certain retirement plans and agent in connection with any dividend reinvestment plan as set out in the prospectus of the Fund, corresponding to the date of this Agreement. 1.02. The Bank agrees that it will perform the following services: (a) In accordance with procedures established from time to time by agreement between the Fund and the Bank, the Bank shall: (i) Issue and record the appropriate number of Shares as authorized and hold such Shares in the appropriate Shareholder account; (ii) Effect transfers of Shares by the registered owners thereof upon receipt of appropriate documentation; (iii) Execute transactions directly with broker-dealers authorized by the Fund who shall thereby be deemed to be acting on behalf of the Fund; (iv) Prepare and transmit payments for dividends and distributions declared by the Fund; (v) Act as agent for Shareholders pursuant to the dividend reinvestment and cash purchase plan as amended from time to time in accordance with the terms of the agreement to be entered into between the Shareholders and the Bank in substantially the form attached as Exhibit A hereto; (vi) Issue replacement certificates for those certificates alleged to have been lost, stolen or destroyed upon receipt by the Bank of indemnification satisfactory to the Bank and protecting the Bank and the Fund, and the Bank as its option, may issue replacement certificates in place of mutilated stock certificates upon presentation thereof and without such indemnity. 2 (b) In addition to and neither in lieu nor in contravention of the services set forth in the above paragraph (a), the Bank shall: (i) perform all of the customary services of a registrar, transfer agent, dividend disbursing agent, custodian of certain retirement plans and agent of the dividend reinvestment and cash purchase plan as described in Article 1 consistent with those requirements in effect as at the date of this Agreement. The detailed definition, frequency, limitations and associated costs (if any) set out in the attached fee schedule, include but are not limited to: maintaining all Shareholder accounts, preparing Shareholder meeting lists, mailing proxies, and mailing Shareholder reports to current Shareholders, withholding taxes on U.S. resident and non-resident alien accounts where applicable, preparing and filing U.S. Treasury Department Forms 1099 and other appropriate forms required with respect to dividends and distributions by federal authorities for all registered Shareholders. (c) The Bank shall provide additional services on behalf of the Fund (i.e., escheatment services) which may be agreed upon in writing between the Fund and the Bank. Article 2 Fees and Expenses ----------------- 2.01. For the performance by the Bank pursuant to this Agreement, the Fund agrees to pay the Bank an annual maintenance fee as set out in the initial fee schedule attached hereto. Such fees and out-of-pocket expenses and advances identified under Section 2.02 below may be changed from time to time subject to mutual written agreement between the Fund and the Bank. 2.02. In addition to the fee paid under Section 2.01 above, the Fund agrees to reimburse the Bank for out-of-pocket expenses, including but not limited to confirmation production, postage forms, telephone, microfilm, microfiche, tabulating proxies, records storage, or advances incurred by the Bank for the items set out in the fee schedule attached hereto. In addition, any 3 other expenses incurred by the Bank at the request or with the consent of the Fund, will be reimbursed by the Fund. 2.03. The Fund agrees to pay all fees and reimbursable expenses within five days following the receipt of the respective billing notice. Postage and the cost of materials for mailing of dividends, proxies, Fund reports and other mailings to all Shareholder accounts shall be advanced to the Bank by the Fund at least seven (7) days prior to the mailing date of such materials. Article 3 Representations and Warranties of the Bank ------------------------------------------ The Bank represents and warrants to the Fund that: 3.01. It is a trust company duly organized and existing and in good standing under the laws of the Commonwealth of Massachusetts. 3.02. It is duly qualified to carry on its business in the Commonwealth of Massachusetts. 3.03. It is empowered under applicable laws and by its Charter and By-Laws to enter into and perform this Agreement. 3.04. All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. 3.05. It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. 4 Article 4 Representations and Warranties of the Fund ------------------------------------------ The Fund represents and warrants to the Bank that: 4.01. It is a corporation duly organized and existing and in good standing under the laws of Maryland. 4.02. It is empowered under applicable laws and by its Articles of Incorporation and By-Laws to enter into and perform this Agreement. 4.03. All corporate proceedings required by said Articles of Incorporation and By-Laws have been taken to authorize it to enter into and perform this Agreement. 4.04. It is a closed-end, diversified investment company registered under the Investment Company Act of 1940, as amended. 4.05. To the extent required by federal securities laws a registration statement under the Securities Act of 1933, as amended, is currently effective and appropriate state securities law filings have been made with respect to all Shares of the Fund being offered for sale; information to the contrary will result in immediate notification to the Bank. 4.06. It shall make all required filings under federal and state securities laws. Article 5 Data Access and Proprietary Information --------------------------------------- 5.01. The Fund acknowledges that the data bases, computer programs, screen formats, report formats, interactive design techniques, and documentation manuals furnished to the Fund by the Bank as part of the Fund's ability to access certain Fund-related data ("Customer Data") maintained by the Bank on data bases under the control and ownership of the Bank ("Data 5 Access Services") constitute copyrighted, trade secret, or other proprietary information (collectively, "Proprietary Information") of substantial value to the Bank. The Fund agrees to treat all Proprietary Information as proprietary to the Bank and further agrees that it shall not divulge any Proprietary Information to any person or organization except as may be provided hereunder. Without limiting the foregoing, the Fund agrees for itself and its employees and agents: (a) to access Customer Data solely from locations as may be designated in writing by the Bank and solely in accordance with the Bank's applicable user documentation (b) to refrain from copying or duplicating in any way the Proprietary Information; (c) to refrain from obtaining unauthorized access to any portion of the Proprietary Information, and if such access is inadvertently obtained, to inform in a timely manner of such fact and dispose of such information in accordance with the Bank's instructions; (d) to refrain from causing or allowing third-party data acquired hereunder from being retransmitted to any other computer facility or other location, except with the prior written consent of the Bank; (e) that the Fund shall have access only to those authorized transactions agreed upon by the parties; (f) to honor all reasonable written requests made by the Bank to protect at the Bank's expense the rights of the Bank in Proprietary Information at common law, under federal copyright law and under other federal or state law. 6 Each party shall take reasonable efforts to advise its employees of their obligations pursuant to this Article 5. The obligations of this Article shall survive any earlier termination of this Agreement. 5.02. If the Fund notifies the Bank that any of the Data Access Services do not operate in material compliance with the most recently issued user documentation for such services, the Bank shall endeavor in a timely manner to correct such failure. Organizations from which the Bank may obtain certain data included in the Data Access Services are solely responsible for the contents of such data and the Fund agrees to make no claim against the Bank arising out of the contents of such third-party data, including, but not limited to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 5.03. If the transactions available to the Fund include the ability to originate electronic instructions to the Bank in order to (i) effect the transfer or movement of cash or Shares or (ii) transmit Shareholder information or other information (such transactions constituting a "COEFI") , then in such event the Bank shall be entitled to rely on the validity and authenticity of such instruction without undertaking any further inquiry as long as such instruction is undertaken in conformity with security procedures established by the Bank from time to time. 7 Article 6 Indemnification --------------- 6.01. The Bank shall not be responsible for, and the Fund shall indemnify and hold the Bank harmless from and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to: (a) All actions of the Bank or its agents or subcontractors required to be taken pursuant to this Agreement, provided that such actions are taken in good faith and without negligence or willful misconduct. (b) The Fund's lack of good faith, negligence or willful misconduct which arise out of the breach of any representation or warranty of the Fund hereunder. (c) The reliance on or use by the Bank or its agents or subcontractors of information, records, documents or services which (i) are received by the Bank or its agents or subcontractors, and (ii) have been prepared, maintained or performed by the Fund or any other person or firm on behalf of the Fund including but not limited to any previous transfer agent or registrar. (d) The reliance on, or the carrying out by the Bank or its agents or subcontractors of any instructions or requests of the Fund. (e) The offer or sale of Shares in violation of any requirement under the federal securities laws or regulations or the securities laws or regulations of any state that such Shares be registered in such state or the violation of any stop order or other determination or ruling by any federal agency or any state with respect to the offer or sale of such Shares in such state. 8 6.02. At any time the Bank may apply to any officer of the Fund for instructions, and may consult with legal counsel with respect to any matter arising in connection with the services to be performed by the Bank under this Agreement, and the Bank and its agents or subcontractors shall not be liable and shall be indemnified by the Fund for any action taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel. The Bank, its agents and subcontractors shall be protected and indemnified in acting upon any paper or document furnished by or on behalf of the Fund, reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instruction, information, data, records or documents provided the Bank or its agents or subcontractors by telephone, in person, machine readable input, telex, CRT data entry or other similar means authorized by the Fund, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Fund. The Bank, its agents and subcontractors shall also be protected and indemnified in recognizing stock certificates which are reasonably believed to bear the proper manual or facsimile signatures of the officers of the Fund, and the proper countersignature of any former transfer agent or former registrar, or of a co- transfer agent or co-registrar. 6.03. In order that the indemnification provisions contained in this Article 6 shall apply, upon the assertion of a claim for which the Fund may be required to indemnify the Bank, the Bank shall promptly notify the Fund of such assertion, and shall keep the Fund advised with respect to all developments concerning such claim. The Fund shall have the option to participate with the Bank in the defense of such claim or to defend against said claim in its own name or in the name of the Bank. The Bank shall in no case confess any claim or make any compromise in any case in which the Fund may be required to indemnify the Bank except with the Fund's prior written consent. 9 Article 7 Standard of Care ---------------- 7.01. The Bank shall at all times act in good faith and agrees to use its best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement, but assumes no responsibility and shall not be liable for loss or damage due to errors unless said errors are caused by its negligence, bad faith, or willful misconduct or that of its employees. Article 8 Covenants of the Fund and the Bank ---------------------------------- 8.01. The Fund shall promptly furnish to the Bank the following: (a) A certified copy of the resolution of the Board of Directors of the Fund authorizing the appointment of the Bank and the execution and delivery of this Agreement. (b) A copy of the Articles of Incorporation and By-Laws of the Fund and all amendments thereto. 8.02. The Bank hereby agrees to establish and maintain facilities and procedures reasonably acceptable to the Fund for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices. 8.03. The Bank shall keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable. To the extent required by Section 31 of the Investment Company Act of 1940, as amended, and the Rules thereunder, the Bank agrees that all such records prepared or maintained by the Bank relating to the services to be performed by the Bank hereunder are the property of the Fund and will be preserved, maintained and made 10 available in accordance with such Section and Rules, and will be surrendered promptly to the Fund on and in accordance with its request. 8.04. The Bank and the Fund agree that all books, records, information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall remain confidential, and shall not be voluntarily disclosed to any other person, except as may be required by law. 8.05. In cases of any requests or demands for the inspection of the Shareholder records of the Fund, the Bank will endeavor to notify the Fund and to secure instructions from an authorized officer of the Fund as to such inspection. The Bank reserves the right, however, to exhibit the Shareholder records to any person whenever it is advised by its counsel that it may be held liable for the failure to exhibit the Shareholder records to such person. Article 9 Termination of Agreement ------------------------ 9.01. This Agreement may be terminated by either party upon one hundred twenty (120) days written notice to the other. 9.02. Should the Fund exercise its right to terminate, all out-of-pocket expenses associated with the movement of records and material will be borne by the Fund. Additionally, the Bank reserves the right to charge for any other reasonable expenses associated with such termination and/or a charge equivalent to the average of three (3) month's fees. 11 Article 10 Assignment ---------- 10.01. Except as provided in Section 10-03 below, neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party. 10.02. This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. 10.03. The Bank may, without further consent on the part of the Fund, subcontract for the performance hereof with (i) Boston Financial Data Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered as a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934, as amended ("Section 17A(c)(l)"), (ii) a BFDS subsidiary duly registered as a transfer agent pursuant to Section 17A(c)(1) or (iii) a BFDS affiliate; provided, however, that the Bank shall be as fully responsible to the Fund for the acts and omissions of any subcontractor as it is for its own acts and omissions. Article 11 Amendment --------- 11.01. This Agreement may be amended or modified by a written agreement executed by both parties and authorized or approved by a resolution of the Board of Directors of the Fund. Article 12 Massachusetts Law to Apply -------------------------- 12.01. This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of the Commonwealth of Massachusetts. 12 Article 13 Force Majeure ------------- 13.01. In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes. Article 14 Consequential Damages --------------------- 14.01. Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement or for any consequential damages arising out of any act or failure to act hereunder. Article 15 Merger of Agreement ------------------- 15.01. This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject hereof whether oral or written. 13 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers, as of the day and year first above written. MUNIYIELD PENNSYLVANIA By:_____________________________ GERALD M. RICHARD, TREASURER ATTEST: ______________________ STATE STREET BANK AND TRUST COMPANY BY:_______________________________ ATTEST: ________________________ 14 EX-99.13B 13 AUCTION AGENT AGREEMENT - ------------------------------------------------------------------------------- AUCTION AGENT AGREEMENT between MUNIYIELD PENNSYLVANIA FUND and IBJ SCHRODER BANK & TRUST COMPANY Dated as of November 30, 1992 Relating to Auction Market Preferred Shares(R) ("AMPS"(R)) of MUNIYIELD PENNSYLVANIA FUND - ------------------------------------------------------------------------------- (R) Registered trademark of Merrill Lynch & Co., Inc. THIS AUCTION AGENT AGREEMENT dated as of November 30, 1992, between MUNIYIELD PENNSYLVANIA FUND, a Massachusetts business trust (the "Trust"), and IBJ SCHRODER BANK & TRUST COMPANY, a New York banking corporation. The Trust proposes to duly authorize and issue 800 shares of Auction Market Preferred Shares(R), (with 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)) pursuant to the Trust's Certificate of Designation (as defined below). The shares are sometimes referred to together herein as "AMPS." An Auction (as defined below) will be conducted for the AMPS. The Trust desires that IBJ Schroder Bank & Trust Company perform certain duties as agent in connection with each Auction of shares of AMPS (the "Auction Agent") and as the transfer agent, registrar, dividend disbursing agent and redemption agent with respect to the shares of AMPS (the "Paying Agent") upon the terms and conditions of this Agreement, and hereby appoints IBJ Schroder Bank & Trust Company as said Auction Agent and Paying Agent in accordance with those terms and conditions (hereinafter generally referred to as the "Auction Agent" except in Sections 3 and 4 below). NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the Trust and the Auction Agent agree as follows: 1. Definitions and Rules of Construction. -------------------------------------- 1.1 Terms Defined by Reference to Certificate of Designation. --------------------------- Capitalized terms not defined herein shall have the respective meanings specified in the Certificate of Designation. 1.2 Terms Defined Herein. -------------------- As used herein and in the Settlement Procedures (as defined below), the following terms shall have the following meanings, unless the context otherwise requires: (a) "Affiliate" shall mean any Person, other than Merrill Lynch, Pierce, Fenner & Smith Incorporated, made known to the Auction Agent to be controlled by, in control of or under common control with, the Trust, or its successors. (b) "Agent Member" of any Person shall mean such Person's agent member of the Securities Depository who is identified as such in such Person's Purchaser's Letter. (c) "Auction" shall have the meaning specified in Section 2.1 hereof. (d) "Auction Procedures" shall mean the Auction Procedures that are set forth in Paragraph 11 of the Certificate of Designation. - -------------- (R) Registered trademark of Merrill Lynch & Co., Inc. 2 (e) "Authorized Officer" shall mean each Senior Vice President, Vice President, Assistant Vice President, Trust Officer, and Assistant Secretary and Assistant Treasurer of the Auction Agent assigned to its Corporate Trust and Agency Group and every other officer or employee of the Auction Agent designated as an "Authorized Officer" for purposes hereof in a communication to the Trust. (f) "Broker-Dealer Agreement" shall mean each agreement between the Auction Agent and a Broker-Dealer substantially in the form attached hereto as Exhibit A. (g) "Certificate of Designation" shall mean the Certificate of Designation of the Trust, establishing the powers, preferences and rights of the AMPS, filed on November 24, 1992, in the Office of the Secretary of State of The Commonwealth of Massachusetts. (h) "Holder" shall be a holder of record of one or more shares of AMPS, listed as such in the stock register maintained by the Paying Agent pursuant to Section 4.6. (i) "Purchaser's Letter" shall mean a letter addressed to the Trust, the Auction Agent and a Broker-Dealer, substantially in the form attached to the Broker-Dealer Agreement as Exhibit A. (j) "Settlement Procedures" shall mean the Settlement Procedures attached to the Broker-Dealer Agreement as Exhibit B. (k) "Trust Officer" shall mean the Chairman and Chief Executive Officer, the President, each Vice President (whether or not designated by a number or word or words added before or after the title "Vice President"), the Secretary, the Treasurer, each Assistant Secretary and each Assistant Treasurer of the Trust and every other officer or employee of the Trust designated as a "Trust Officer" for purposes hereof in a notice from the Trust to the Auction Agent. 1.3 Rules of Construction. --------------------- Unless the context or use indicates another or different meaning or intent, the following rules shall apply to the construction of this Agreement: (a) Words importing the singular number shall include the plural number and vice versa. (b) The captions and headings herein are solely for convenience of reference and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. (c) The words "hereof," "herein," "hereto," and other words of similar import refer to this Agreement as a whole. 3 (d) All references herein to a particular time of day shall be to New York City time. 2. The Auction. ------------ 2.1 Purpose; Incorporation by Reference of Auction Procedures and Settlement Procedures. ------------------------------------- (a) The Certificate of Designation provides that the Applicable Rate on shares of AMPS, for each Dividend Period therefor after the Initial Dividend Period shall be the rate per annum that a commercial bank, trust company, or other financial institution appointed by the Trust advises results from implementation of the Auction Procedures. The Board of Trustees of the Trust has adopted a resolution appointing IBJ Schroder Bank & Trust Company as Auction Agent for purposes of the Auction Procedures. The Auction Agent hereby accepts such appointment and agrees that, on each Auction Date, it shall follow the procedures set forth in this Section 2 and the Auction Procedures for the purpose of determining the Applicable Rate for the AMPS for the next Dividend Period therefor. Each periodic operation of such procedures is hereinafter referred to as an "Auction." (b) All of the provisions contained in the Auction Procedures and the Settlement Procedures are incorporated herein by reference in their entirety and shall be deemed to be a part hereof to the same extent as if such provisions were fully set forth herein. 2.2 Preparation for Each Auction; Maintenance of Registry of Beneficial Owners. --------------------------------- (a) Pursuant to Section 2.5 hereof, the Trust shall not designate any Person to act as a Broker-Dealer without prior written approval of the Auction Agent (which approval shall not be withheld unreasonably). At the time of closing of the initial issuance and sale of the AMPS (the "Closing"), the Trust shall provide the Auction Agent with a list of the Broker-Dealers previously approved by the Auction Agent and shall cause to be delivered to the Auction Agent for execution by the Auction Agent a Broker-Dealer Agreement signed by each such Broker-Dealer. The Auction Agent shall keep such list current and accurate and shall indicate thereon, or on a separate list, the identity of each Existing Holder, if any, whose most recent Order was submitted by a Broker-Dealer on such list and resulted in such Existing Holder continuing to hold or purchasing shares of AMPS. Not later than five days prior to any Auction Date for which any change in such list of Broker- Dealers is to be effective, the Trust shall notify the Auction Agent in writing of such change and, if any such change is the addition of a Broker- Dealer to such list, the Trust shall cause to be delivered to the Auction Agent for execution by the Auction Agent a Broker-Dealer Agreement signed by such Broker-Dealer. The Auction Agent shall have entered into a Broker- Dealer Agreement with each Broker-Dealer prior to the participation of any such Broker-Dealer in any Auction. 4 (b) In the event that the Auction Date for any Auction shall be changed after the Auction Agent shall have given the notice referred to in clause (vii) of Paragraph (a) of the Settlement Procedures, the Auction Agent, by such means as the Auction Agent deems practicable, shall give notice of such change to the Broker-Dealers not later than the earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M. on the old Auction Date. (c) 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 will 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 a number of whole years 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 the Trust has given written notice thereof to S&P and received written confirmation from Moody's that such action would not impair the rating then assigned to the AMPS by Moody's and 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 mandatory 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 fourth 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 14th day but not more than 28 days prior to the Auction Date for the AMPS. Upon receiving such Request for Special Dividend Period, the Broker- Dealers shall jointly determine whether given the factors set forth in paragraph 2(c)(iii) of the Certificate of Designation 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 third Business Day prior to such Auction Date. If the Broker-Dealers shall not give the Trust and the Auction Agent a Response by such third Business Day or if the Response states that given the factors referred to above it is not advisable that the Trust give a Notice of Special Dividend Period (as defined below) 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 Response. The Trust shall not give a Notice of Special Dividend Period, or, if such Notice of Special Dividend Period shall have already been given, shall give telephonic and written notice of its revocation (a "Notice of Revocation") to the Auction Agent, each Broker-Dealer, and the Securities Depository 5 on or prior to the Business Day prior to the relevant Auction Date if (x) either the 1940 Act AMPS 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 referred to above they have concluded that it is advisable to give a Notice of Revocation. If the Trust is prohibited from giving a Notice of Special Dividend Period as a result of the factors enumerated in clause (x), (y) or (z) of the preceding sentence or if the Trust gives a Notice of Revocation with respect to a Notice of Special Dividend Period, the next succeeding Dividend Period will be a 7-day Dividend Period. In addition, in the event sufficient Clearing Bids are not made in any Auction or an Auction is not held for any reason, the next succeeding Dividend Period will be a 7-day Dividend Period, and the Trust may not again give a Notice of Special Dividend Period (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) Except as otherwise provided in paragraph 2(f) of the Certificate of Designation, whenever the Trust intends to include any net capital gains or other income subject to regular Federal income tax in any dividend on shares of 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. Whenever the Auction Agent receives such notice from the Trust, it will in turn notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance with its Broker-Dealer Agreement, will notify its Existing Holders and Potential Holders believed to be interested in submitting an order in the Auction to be held on such Auction Date. Whenever the Trust includes any additional amounts in a dividend as provided in paragraph 2(f) of the Certificate of Designation, the Trust will notify the Auction Agent of such additional amounts to be so included in such dividend at least five Business Days prior to the applicable Dividend Payment Date. Whenever the Auction Agent receives such notice from the Trust it will in turn notify the Securities Depository and each Broker-Dealer, who, on or prior to the applicable Dividend Payment Date, in accordance with its Broker-Dealer Agreement, will notify its Existing Holders. (ii) If the Trust makes a Retroactive Taxable allocation, the Trust will, within 90 days (and generally within 60 days) after the end of its fiscal year for which a Retroactive Taxable Allocation is made provide notice thereof to the Auction Agent and to each holder of shares (initially the Securities Depository) during such fiscal year at 6 such 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 shares of AMPS), out of funds legally available therefor, a cash amount equal to the aggregate Additional Dividend with respect to all Retroactive Taxable Allocations made to such holders during the fiscal year in question. (e) (i) On each Auction Date, the Auction Agent shall determine the Reference Rate and the Maximum Applicable Rate. If the Reference Rate is not quoted on an interest basis but is quoted on a discount basis, the Auction Agent shall convert the quoted rate to an Interest Equivalent, as set forth in paragraph 1 of the Certificate of Designation; or, if the rate obtained by the Auction Agent is not quoted on an interest or discount basis, the Auction Agent shall convert the quoted rate to an interest rate after consultation with the Trust as to the method of such conversion. Not later than 9:30 A.M. on each Auction Date, the Auction Agent shall notify the Trust and the Broker-Dealers of the Reference Rate so determined and the Maximum Applicable Rate. (ii) If the Reference Rate is the applicable "AA" Composite Commercial Paper Rate and such rate is to be based on rates supplied by Commercial Paper Dealers and one or more of the Commercial Paper Dealers shall not provide a quotation for the determination of the applicable "AA" Composite Commercial Paper Rate, the Auction Agent shall immediately notify the Trust so that the Trust can determine whether to select a Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers to provide the quotation or quotations not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers. The Trust shall promptly advise the Auction Agent of any such selection. If the Trust does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, then the rates shall be supplied by the remaining Commercial Paper Dealer or Commercial Paper Dealers. (iii) If, after the date of this Agreement, there is any change in the prevailing rating of AMPS by either of the rating agencies (or substitute or successor rating agencies) referred to in the definition of the Maximum Applicable Rate, thereby resulting in any change in the corresponding applicable percentage for the AMPS, as set forth in said definition (the "Percentage"), the Trust shall notify the Auction Agent in writing of such change in the Percentage prior to 9:00 A.M. on the Auction Date for AMPS next succeeding such change. The Percentage for the AMPS on the date of this Agreement is as specified in paragraph 11(a)(vii) of the Certificate of Designation. The Auction Agent shall be entitled to rely on the last Percentage of which it has received notice from the Trust (or, in the absence of such notice, the Percentage set forth in the preceding sentence) in determining the Maximum Applicable Rate as set forth in Section 2.2(e)(i) hereof. (f) (i) The Auction Agent shall maintain a current registry of the beneficial owners of the shares of the AMPS who shall constitute the Existing Holders for purposes of each Auction. The Trust shall use its best efforts to provide or cause to be provided to the Auction Agent within ten days following the date of Closing a list of the initial Existing Holders of the AMPS, and the Broker-Dealer of each such Existing 7 Holder through which such Existing Holder purchased such shares. The Auction Agent may rely upon, as evidence of the identities of the Existing Holders, such list, the results of each Auction and notices from any Existing Holder, the Agent Member of any Existing Holder or the Broker- Dealer of any Existing Holder with respect to such Existing Holder's transfer of any shares of AMPS to another Person. (ii) In the event of any partial redemption of any shares of AMPS, upon notice by the Trust to the Auction Agent of such partial redemption, the Auction Agent shall promptly request the Securities Depository to notify the Auction Agent of the identities of the Agent Members (and the respective numbers of shares) from the accounts of which shares have been called for redemption and the person or department at such Agent Member to contact regarding such redemption, and at least two Business Days prior to the . Auction preceding the date of redemption with respect to the shares being partially redeemed, the Auction Agent shall request each Agent Member so identified to disclose to the Auction Agent (upon selection by such Agent Member of the Existing Holders whose shares are to be redeemed) the number of shares of the AMPS of each such Existing Holder, if any, to be redeemed by the Trust; provided the Auction Agent has been furnished with the name and telephone number of a person or department at such Agent Member from which it is to request such information. If necessary to procure such information, the Auction Agent shall deliver to each Agent Member a facsimile copy of the Purchaser's Letter of each Existing Holder represented by such Agent Member, which authorizes and instructs such Agent Member to release such information to the Auction Agent. In the absence of receiving any such information with respect to an Existing Holder, from such Existing Holder's Agent Member or otherwise, the Auction Agent may continue to treat such Existing Holder as the beneficial owner of the number of shares of the AMPS shown in the Auction Agent's registry of beneficial owners. (iii) The Auction Agent shall register a transfer of the beneficial ownership of shares of the AMPS from an Existing Holder to another Person only if such transfer is made to a Person that has delivered a signed Purchaser's Letter to the Auction Agent and only if (A) such transfer is pursuant to an Auction or (B) if such transfer is made other than pursuant to an Auction, the Auction Agent has been notified in writing in a notice substantially in the form of Exhibit D to the Broker-Dealer Agreement, by such Existing Holder, the Agent Member of such Existing Holder, or the Broker-Dealer of such Existing Holder of such transfer. The Auction Agent is not required to accept any notice of transfer delivered for an Auction unless it is received by the Auction Agent by 3:00 P.M. on the Business Day next preceding the applicable Auction Date. The Auction Agent shall rescind a transfer made on the registry of the beneficial owners of any shares of AMPS if the Auction Agent has been notified in writing in a notice substantially in the form of Exhibit E to the Broker-Dealer Agreement by the Agent Member or the Broker-Dealer of any Person that (i) purchased any shares of AMPS and the seller failed to deliver such shares or (ii) sold any shares of AMPS and the purchaser failed to make payment to such Person upon delivery to the purchaser of such shares. 8 (g) The Auction Agent may request that the Broker-Dealers, as set forth in Section 3.2(c) of the Broker-Dealer Agreements, provide the Auction Agent with a list of their respective customers that such Broker-Dealers believe are Existing Holders of shares of AMPS. The Auction Agent shall keep confidential any such information and shall not disclose any such information so provided to any Person other than the relevant Broker-Dealer and the Trust, provided that the Auction Agent reserves the right to disclose any such information if it is advised by its counsel that its failure to do so would be unlawful. 2.3 Auction Schedule. ---------------- The Auction Agent shall conduct Auctions in accordance with the schedule set forth below. Such schedule may be changed by the Auction Agent with the consent of the Trust, which consent shall not be unreasonably withheld. The Auction Agent shall give notice of any such change to each Broker-Dealer. Such notice shall be received prior to the first Auction Date on which any such change shall be effective. Time Event ---- ----- By 9:30 A.M. Auction Agent advises the Trust and the Broker-Dealers of the Reference Rate and the Maximum Applicable Rate as set forth in Section 2.2(e)(i) hereof. 9:30 A.M. - 1:00 P.M. Auction Agent assembles information communicated to it by Broker-Dealers as provided in Paragraph 11(c)(i) of the Certificate of Designation. Submission deadline is 1:00 P.M. Not earlier than Auction Agent makes determinations pursuant to 1:00 P.M. Paragraph 11(d)(i) of the Certificate of Designation. By approximately Auction Agent makes determinations pursuant to 3:00 P.M. Paragraph 11(d)(i) of the Certificate of Designation. Submitted Bids and Submitted Sell Orders are accepted and rejected in whole or in part and shares of AMPS allocated as provided in Paragraph 11(e) of the Certificate of Designation. By approximately 10:00 Auction Agent gives notice of Auction results A.M. on the next as set forth in Section 2.4 hereof. succeeding Business Day 9 2.4 Notice of Auction Results. ------------------------- On each Auction Date, the Auction Agent shall notify Broker-Dealers of the results of the Auction held on such date by telephone or through the Auction Agent's Auction Processing System as set forth in Paragraph (a) of the Settlement Procedures. 2.5 Broker-Dealers. -------------- (a) Not later than 12:00 noon on each Auction Date, the Trust shall pay to the Auction Agent in New York Clearing House or similar next-day funds an amount in cash equal to (i) in the case of any Auction Date immediately preceding a 7-day Dividend Period, the product of (A) a fraction the numerator of which is the number of days in such Dividend Period (calculated by counting the first day of such Dividend Period but excluding the last day thereof) and the denominator of which is 360, times (B) 1/4 of 1%, times (C) $50,000, times (D) the sum of the aggregate number of Outstanding shares of AMPS for which the Auction is conducted and (ii) in the case of any Special Dividend Period, the amount determined by mutual consent of the Trust and the Broker-Dealers pursuant to Section 3.5 of the Broker-Dealer Agreements. In lieu of making such payment in New York Clearing House or similar next-day funds, the Trust may make such payment by noon on the Business Day immediately following the Auction Date in the form of Federal funds or similar same-day funds. The Auction Agent shall apply such moneys as set forth in Section 3.5 of the Broker-Dealer Agreements and shall thereafter remit to the Trust any remaining funds paid to the Auction Agent pursuant to this Section 2.5(a). (b) The Trust shall not designate any Person to act as a Broker-Dealer without the prior written approval of the Auction Agent, which written approval shall not be unreasonably withheld. The Trust may designate an Affiliate and Merrill Lynch, Pierce, Fenner & Smith Incorporated to act as a Broker- Dealer. (c) The Auction Agent shall terminate any Broker-Dealer Agreement as set forth therein if so directed by the Trust. (d) Subject to Section 2.5(b) hereof, the Auction Agent shall from time to time enter into such Broker-Dealer Agreements as the Trust shall request. (e) The Auction Agent shall maintain a list of Broker-Dealers. 2.6 Ownership of Shares of AMPS and Submission of Bids by Trust and Affiliates. ------------------------ Neither the Trust nor any Affiliate of the Trust may submit any Sell Order or Bid, directly or indirectly, in any Auction, except that an Affiliate of the Trust that is a Broker-Dealer may submit a Sell Order or Bid on behalf of an Existing Holder or Potential Holder. The Trust shall notify the Auction Agent if the Trust or, to the best of the Trust's knowledge, any Affiliate of the Trust becomes an Existing Holder of any shares of AMPS. Any shares of AMPS redeemed, purchased or otherwise acquired (i) by the Trust shall not be reissued or (ii) by its Affiliates shall not be transferred (other than to the Trust). 10 The Auction Agent shall have no duty or liability with respect to enforcement of this Section 2.6. 2.7 Access to and Maintenance of Auction Records. -------------------------------------------- The Auction Agent shall afford to the Trust, its agents, independent public accountants and counsel, access at reasonable times during normal business hours to review and make extracts or copies (at the Trust's sole cost and expense) of all books, records, documents and other information concerning the conduct and results of Auctions, provided that any such agent, accountant, or counsel shall furnish the Auction Agent with a letter from the Trust requesting that the Auction Agent afford such person access. The Auction Agent shall maintain records relating to any Auction for a period of two years after such Auction (unless requested by the Trust to maintain such records for such longer period not in excess of four years, then for such longer period), and such records shall, in reasonable detail, accurately and fairly reflect the actions taken by the Auction Agent hereunder. The Trust agrees to keep any information regarding the customers of any Broker-Dealer received from the Auction Agent in connection with this Agreement or any Auction confidential and shall not disclose such information or permit the disclosure of such information without the prior written consent of the applicable Broker-Dealer to anyone except such agent, accountant or counsel engaged to audit or review the results of Auctions as permitted by this Section 2.7; provided that the Trust reserves the right to disclose any such information if it is advised by its counsel that its failure to do so would (i) be unlawful or (ii) expose it to liability, unless the Broker-Dealer shall have offered indemnification satisfactory to the Trust. Any such agent, accountant or counsel, before having access to such information, shall agree to keep such information confidential and not to disclose such information or permit disclosure of such information without the prior written consent of the applicable Broker-Dealer; provided that such agent, accountant or counsel may reserve the right to disclose any such information if it is advised by its counsel that its failure to do so would (i) be unlawful or (ii) expose it to liability, unless the Broker-Dealer shall have offered indemnification satisfactory to such agent, accountant or counsel. 3. The Auction Agent as Paying Agent. ---------------------------------- 3.1 Paying Agent. ------------ The Board of Trustees of the Trust has adopted a resolution appointing IBJ Schroder Bank & Trust Company as transfer agent, registrar, dividend disbursing agent and redemption agent for the Trust in connection with any shares of AMPS (the "Paying Agent"). The Paying Agent hereby accepts such appointment and agrees to act in accordance with its standard procedures and the provisions of the Certificate of Designation which are specified herein with respect to the shares of AMPS and as set forth in this section 3. 3.2 The Trust's Notices to Paying Agent. ----------------------------------- Whenever any shares of AMPS are to be redeemed, the Trust shall promptly deliver to the Paying Agent the Notice of Redemption, which will be mailed by the Trust to each Holder, at least five days prior to the date such Notice of Redemption is required to be mailed by the 11 Certificate of Designation. The Paying Agent shall have no responsibility to confirm or verify the accuracy of any such notice. 3.3 Trust to Provide Funds for Dividends, Redemptions and Additional Dividends. ------------------------------------ (a) Not later than noon, on the Business Day immediately preceding each Dividend Payment Date, the Trust shall deposit with the Paying Agent an aggregate amount of New York Clearing House or similar next-day funds equal to the declared dividends to be paid to Holders on such Dividend Payment Date and shall give the Paying Agent irrevocable instructions to apply such funds to the payment of such dividends on such Dividend. Payment Date. In lieu of making such deposit in New York Clearing House or similar next-day funds, the Trust may make such deposit by noon on each Dividend Payment Date in the form of Federal funds or similar same-day funds. (b) If the Trust shall give the Notice of Redemption then, by noon of the Business Day immediately preceding the date fixed for redemption, the Trust shall deposit in trust with the Paying Agent an aggregate amount of New York Clearing House or similar next-day funds sufficient to redeem such shares of AMPS called for redemption and shall give the Paying Agent irrevocable instructions and authority to pay the redemption price to the Holders of shares of AMPS called for redemption upon surrender of the certificate or certificates therefor. In lieu of making such deposit in New York Clearing House or similar next-day funds, the Trust may make such deposit by noon on the date fixed for redemption in the form of Federal funds or similar same-day funds. (c) If the Trust provides notice to the Auction Agent of a Retroactive Taxable Allocation, the Trust shall, within 30 days after such notice is given and by noon of the Business Day immediately preceding the date fixed for payment of an Additional Dividend, deposit in trust with the Paying Agent an aggregate amount of New York Clearing House or similar next-day funds equal to such Additional Dividend and shall give the Paying Agent irrevocable instructions and authority to pay the Additional Dividends to Holders (or former Holders) of AMPS entitled thereto. In lieu of making such deposit in New York Clearing House or similar next-day funds, the Trust may make such deposit by noon on the date fixed for payment of an Additional Dividend in the form of Federal funds or similar same-day funds. 3.4 Disbursing Dividends, Redemption Price and Additional Dividends. ------------------------- After receipt of the New York Clearing House or similar next-day funds (or Federal funds or similar same-day funds) and instructions from the Trust described in sections 3.3(a), (b) and (c) above, the Paying Agent shall pay to the Holders (or former Holders) entitled thereto (i) on each corresponding Dividend Payment Date, dividends on the AMPS, (ii) on any date fixed for redemption, the redemption price of any shares of AMPS called for redemption and (iii) on the date fixed for payment of an Additional Dividend, such Additional Dividend. The amount of dividends for any Dividend Period to be paid by the Paying Agent to Holders will be 12 determined by the Trust as set forth in Paragraph 2 of the Certificate of Designation. The redemption price to be paid by the Paying Agent to the Holders of any shares of AMPS called for redemption will be determined as set forth in Paragraph 4 of the Certificate of Designation. The amount of Additional Dividends to be paid by the Paying Agent in the event of a Retroactive Taxable Allocation to Holders will be determined by the Trust pursuant to paragraph 2(e) of the Certificate of Designation. The Trust shall notify the Paying Agent in writing of a decision to redeem any shares of AMPS on or prior to the date specified in Section 3.2 above, and such notice by the Trust to the Paying Agent shall contain the information required to be stated in the Notice of Redemption required to be mailed by the Trust to such Holders. The Paying Agent shall have no duty to determine the redemption price and may rely on the amount thereof set forth in the Notice of Redemption. 4. The Paying Agent as Transfer Agent and Registrar. ------------------------------------------------- 4.1 Original Issue of Share Certificate. ----------------------------------- On the Date of Original Issue, one certificate for the AMPS shall be issued by the Trust and registered in the name of Cede & Co., as nominee of the Securities Depository, and countersigned by the Paying Agent. 4.2 Registration of Transfer or Exchange of Shares. ---------------------------------------------- Except as provided in this Section 4.2, the shares of the AMPS shall be registered solely in the name of the Securities Depository or its nominee. If the Securities Depository shall give notice of its intention to resign as such, and if the Trust shall not have selected a substitute Securities Depository acceptable to the Paying Agent prior to such resignation, then upon such resignation, the shares of AMPS may, at the Trust's request, be registered for transfer or exchange, and new certificates thereupon shall be issued in the name of the designated transferee or transferees, upon surrender of the old certificate in form deemed by the Paying Agent properly endorsed for transfer with (a) all necessary endorsers' signatures guaranteed in such manner and form as the Paying Agent may require by a guarantor reasonably believed by the Paying Agent to be responsible, (b) such assurances as the Paying Agent shall deem necessary or appropriate to evidence the genuineness and effectiveness of each necessary endorsement and (c) satisfactory evidence of compliance with all applicable laws relating to the collection of taxes in connection with any registration of transfer and exchange or funds necessary for the payment of such taxes. If the certificate or certificates for shares of AMPS are not held by the Securities Depository or its nominee, payments upon transfer of shares in an Auction shall be made in same day funds to the Auction Agent against delivery of certificates therefor. 4.3 Removal of Legend. ----------------- Any request for removal of a legend indicating a restriction on transfer from a certificate evidencing shares of AMPS shall be accompanied by an opinion of counsel stating that such legend may be removed and such shares transferred free of the restriction described in such legend, said opinion to be delivered under cover of a letter from a Trust Officer authorizing the Paying Agent to remove the legend on the basis of said opinion. 13 4.4 Lost Share Certificates. ----------------------- The Paying Agent shall issue and register replacement certificates for certificates represented to have been lost, stolen or destroyed, upon the fulfillment of such requirements as shall be deemed appropriate by the Trust and the Paying Agent, subject at all times to provisions of law, the By-Laws of the Trust governing such matters and resolutions adopted by the Trust with respect to lost securities. The Paying Agent may issue new certificates in exchange for and upon the cancellation of mutilated certificates. Any request by the Trust to the Paying Agent to issue a replacement or new certificate pursuant to this Section 4.4 shall be deemed to be a representation and warranty by the Trust to the Paying Agent that such issuance will comply with such provisions of applicable law and the By-Laws and resolutions of the Trust. 4.5 Disposition of Cancelled Certificates; Record Retention. ----------------- The Paying Agent shall retain share certificates which have been cancelled in transfer or in exchange and accompanying documentation in accordance with applicable rules and regulations of the Securities and Exchange Commission for two calendar years from the date of such cancellation. The Paying Agent shall, upon written request from the Trust, afford to the Trust, its agents and counsel access at reasonable times during normal business hours to review and make extracts or copies (at the Trust's sole cost and expense) of such certificates and accompanying documentation. Upon request by the Trust at any time after the expiration of this two-year period, the Paying Agent shall deliver to the Trust the cancelled certificates and accompanying documentation. The Trust shall, at its expense, retain such records for a minimum additional period of four calendar years from the date of delivery of the records to the Trust and shall make such records available during this period at any time, or from time to time, for reasonable periodic, special, or other examinations by representatives of the Securities and Exchange Commission. The Trust shall also undertake to furnish to the Securities and Exchange commission, upon demand, at either the principal office or at any regional office, complete, correct and current hard copies of any and all such records. Thereafter such records shall not be destroyed by the Trust without the approval of the Paying Agent, which shall not be unreasonably withheld, but will be safely stored for possible future reference. 4.6 Share Register. -------------- The Paying Agent shall maintain the share register, which shall contain a list of the Holders, the number of shares held by each Holder and the address of each Holder. The Paying Agent shall record in the share register any change of address of a Holder upon notice by such Holder. In case of any written request or demand for the inspection of the share register or any other books of the Trust in the possession of the Paying Agent, the Paying Agent will notify the Trust and secure instructions as to permitting or refusing such inspection. The Paying Agent reserves the right, however, to exhibit the share register or other records to any person in case it is advised by its counsel that its failure to do so would (i) be unlawful or (ii) expose it to liability, unless the Trust shall have offered indemnification satisfactory to the Paying Agent. 14 4.7 Return of Funds. --------------- Any funds deposited with the Paying Agent by the Trust for any reason under this Agreement, including for the payment of dividends or the redemption of shares of AMPS, that remain with the Paying Agent after 12 months shall be repaid to the Trust upon the written request of the Trust. 5. Representations and Warranties. ------------------------------ (a) The Trust represents and warrants to the Auction Agent that: (i) the Trust is a duly incorporated and validly existing trust in good standing under the laws of The Commonwealth of Massachusetts and has full power to execute and deliver this Agreement and to authorize, create and issue the shares of AMPS, (ii) the Trust is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended, as a closed-end non- diversified management investment company; (iii) this Agreement has been duly and validly Authorized, executed and delivered by the Trust and constitutes the legal, valid and binding obligation of the Trust, enforceable against the Trust in accordance with its terms, subject as to such enforceability to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equitable principles; (iv) the form of certificate evidencing the shares of AMPS complies with all applicable laws of The Commonwealth of Massachusetts; (v) the shares of AMPS have been duly and validly authorized by the Trust and, upon completion of the initial sale of the shares of such AMPS and receipt of payment therefor, will be validly issued, fully paid and nonassessable; (vi) the offering of the shares of AMPS has been registered under the Securities Act of 1933, as amended, and no further action by or before any governmental body or authority of the United States or of any state thereof is required in connection with the execution and delivery of this Agreement or the issuance of the shares of AMPS except as required by applicable state securities or insurance laws, all of which have been taken; (vii) the execution and delivery of this Agreement and the issuance and delivery of the shares of AMPS do not and will not conflict with, violate, or result in a breach of the terms, conditions or provisions of, or constitute a default under, the Declaration of Trust or the By-Laws of the Trust, any law or regulation applicable to the Trust, any order or decree of any court or public authority having jurisdiction over the Trust, or any mortgage, indenture, contract, agreement or undertaking to which the Trust is a party or by which it is bound; and 15 (viii) no taxes are payable upon or in respect of the execution of this Agreement or the issuance of the shares of AMPS. (b) The Auction Agent represents and warrants to the Trust that the Auction Agent is duly organized and is validly existing as a banking corporation in good standing under the laws of the State of New York and has the corporate power to enter into and perform its obligations under this Agreement. 6. The Auction Agent. ----------------- 6.1 Duties and Responsibilities. --------------------------- (a) The Auction Agent is acting solely as agent for the Trust hereunder and owes no fiduciary duties to any Person except as provided by this Agreement. (b) The Auction Agent undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Auction Agent. (c) In the absence of bad faith or negligence on its part, the Auction Agent shall not be liable for any action taken, suffered or omitted or for any error of judgment made by it in the performance of its duties under this Agreement. The Auction Agent shall not be liable for any error of judgment made in good faith unless the Auction Agent shall have been negligent in ascertaining (or failing to ascertain) the pertinent facts. 6.2 Rights of the Auction Agent. --------------------------- (a) The Auction Agent may rely and shall be protected in acting or refraining from acting upon any communication authorized hereby and upon any written instruction, notice, request, direction, consent, report, certificate, share certificate or other instrument, paper or document reasonably believed by it to be genuine. The Auction Agent shall not be liable for acting upon any telephone communication authorized hereby which the Auction Agent believes in good faith to have been given by the Trust or by a Broker-Dealer. The Auction Agent may record telephone communications with the Trust or with the Broker-Dealers or both. (b) The Auction Agent may consult with counsel of its choice, and the written advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Auction Agent shall not be required to advance, expend or risk its own funds or otherwise incur or become exposed to financial liability in the performance of its duties hereunder. The Auction Agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Trust. (d) The Auction Agent may perform its duties and exercise its rights hereunder either directly or by or through agents or attorneys. 16 6.3 Auction Agent's Disclaimer. -------------------------- The Auction Agent makes no representation as to the validity or adequacy of this Agreement, the Broker-Dealer Agreements or the AMPS. 6.4 Compensation, Expenses and Indemnification. ------------------------------------------ (a) The Trust shall pay the Auction Agent from time to time reasonable compensation for all services rendered by it under this Agreement and the Broker-Dealer Agreements as shall be set forth in a separate writing signed by the Trust and the Auction Agent, subject to adjustments if the AMPS are no longer held of record by the Securities Depository or its nominee or if there shall be such other change as shall materially increase the Auction Agent's obligations hereunder or under the Broker-Dealer Agreements. (b) The Trust shall reimburse the Auction Agent upon its request for all reasonable expenses, disbursements and advances incurred or made by the Auction Agent in accordance with any provision of this Agreement and the Broker-Dealer Agreements (including the reasonable compensation, expenses and disbursements of its agents and counsel), except any expense, disbursement and advances attributable to its negligence or bad faith. (c) The Trust shall indemnify the Auction Agent for, and hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part arising out of or in connection with its agency under this Agreement and the Broker-Dealer Agreements, including the costs and expenses of defending itself against any claim or liability in connection with its exercise or performance of any of its duties hereunder and thereunder, except such as may result from its negligence or bad faith. 7. Miscellaneous. ------------- 7.1 Term of Agreement. ----------------- (a) The term of this Agreement is unlimited unless it shall be terminated as provided in this Section 7.1. The Trust may terminate this Agreement at any time by so notifying the Auction, Agent, provided that if any AMPS remain outstanding the Trust has entered into an agreement in substantially the form of this Agreement with a successor auction agent. The Auction Agent may terminate this Agreement upon prior notice to the Trust on the date specified in such notice, which shall be no earlier than 60 days after delivery of such notice. If the Auction Agent resigns while any shares of AMPS remain outstanding, the Trust shall use its best efforts to enter into an agreement with a successor auction agent containing substantially the same terms and conditions as this Agreement. (b) Except as otherwise provided in this Section 7.1(b), the respective rights and duties of the Trust and the Auction Agent under this Agreement shall cease upon termination of this Agreement. The Trust's representations, warranties, covenants and obligations to the Auction Agent under Sections 5 and 6.4 hereof shall survive the 17 termination hereof. Upon termination of this Agreement, the Auction Agent shall (i) resign as Auction Agent under the Broker-Dealer Agreements, (ii) at the Trust's request, promptly deliver to the Trust copies of all books and records maintained by it in connection with its duties hereunder, and (iii) at the request of the Trust, promptly transfer to the Trust or any successor auction agent any funds deposited by the Trust with the Auction Agent (whether in its capacity as Auction Agent or Paying Agent) pursuant to this Agreement which have not previously been distributed by the Auction Agent in accordance with this Agreement. 7.2 Communications. -------------- Except for (i) communications authorized to be made by telephone pursuant to this Agreement or the Auction Procedures and (ii) communications in connection with Auctions (other than those expressly required to be in writing), all notices, requests and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be given to such party addressed to it at its address or telecopy number set forth below: - ------------------------------------------------------------------------------- If to the Trust, MuniYield Pennsylvania Fund addressed: 800 Scudders Mill Road Plainsboro, New Jersey 08536 Attention: Treasurer Telephone No.: (609) 282-2800 Telecopier No.: (609) 282-3472 - ------------------------------------------------------------------------------- If to the Auction IBJ Schroder Bank & Trust Company Agent, addressed: One State Street New York, New York 10004 Attention: Auction Window Subcellar 1 Telephone No.: (212) 858-2272 Telecopier No.: (212) 797-1148 - ------------------------------------------------------------------------------- or such other address or telecopy number as such party may hereafter specify for such purpose by notice to the other party. Each such notice, request or communication shall be effective when delivered at the address specified herein. Communications shall be given on behalf of the Trust by a Trust Officer and on behalf of the Auction Agent by an Authorized Officer. 7.3 Entire Agreement. ---------------- This Agreement contains the entire agreement between the parties relating to the subject matter hereof, and there are no other representations, endorsements, promises, agreements or understandings, oral, written or inferred between the parties relating to the subject matter hereof except for agreements relating to the compensation of the Auction Agent. 18 7.4 Benefits. -------- Nothing herein, express or implied, shall give to any Person, other than the Trust, the Auction Agent and their respective successors and assigns, any benefit of any legal or equitable right, remedy or claim hereunder. 7.5 Amendment; Waiver. ----------------- (a) This Agreement shall not be deemed or construed to be modified, amended, rescinded, cancelled or waived, in whole or in part, except by a written instrument signed by a duly authorized representative of the party to be charged. The Trust shall notify the Auction Agent of any change in the Certificate of Designation prior to the effective date of any such change. If any such change in the Certificate of Designation materially increases the Auction Agent's obligations hereunder, the Trust shall obtain the written consent to the Auction Agent prior to the effective date of such change. (b) Failure of either party hereto to exercise any right or remedy hereunder in the event of a breach hereof by the other party shall not constitute a waiver of any such right or remedy with respect to any subsequent breach. 7.6 Successors and Assigns. ---------------------- This Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the respective successors and permitted assigns of each of the Trust and the Auction Agent. This Agreement may not be assigned by either party hereto absent the prior written consent of the other party, which consent shall not be unreasonably withheld. 7.7 Severability. ------------ If any clause, provision or section hereof shall be ruled invalid or unenforceable by any court of competent jurisdiction, the invalidity or unenforceability of such clause, provision or section shall not affect any of the remaining clauses, provisions or sections hereof. 7.8 Execution in Counterparts. ------------------------- This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 7.8(A) Liability of Shareholders, Trustees and Officers. ------------------------------------------------ A copy of the Agreement and Declaration of Trust of the Trust is on file with the Secretary of State of The Commonwealth of Massachusetts and notice is hereby given that this Agreement has been executed on behalf of the Trust by an officer of the Trust as an officer and not individually and the obligations of the Trust arising out of this Agreement are not binding upon any of the trustees, officers or shareholders of the Trust individually but are binding only upon the assets and property of the Trust. 19 7.9 Governing Law. ------------- This Agreement 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. 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the date first above written. MUNIYIELD PENNSYLVANIA FUND By: _________________________________ Title: IBJ SCHRODER BANK & TRUST COMPANY By: _________________________________ Title: Assistant Vice President 21 EX-99.13C 14 FORM OF BROKER DEALER AGREEMENT EXHIBIT 13(D) - ------------------------------------------------------------------------------- Form of BROKER-DEALER AGREEMENT between _________ BANK & TRUST COMPANY and _________________________________ Dated as of November 19, 1992 Relating to AUCTION MARKET PREFERRED SHARES(R) ("AMPS"(R)) of MUNIYIELD PENNSYLVANIA FUND - ------------------------------------------------------------------------------- (R) Registered trademark of Merrill Lynch & Co., Inc. BROKER-DEALER AGREEMENT dated as of November 19, 1992 between ____________ Bank & Trust Company, a New York banking corporation (the "Auction Agent") (not in its individual capacity but solely as agent of MuniYield Pennsylvania Fund, a Massachusetts business trust (the "Trust"), pursuant to authority granted to it in the Auction Agent Agreement dated as of November 19, 1992, between the Company and the Auction Agent (the "Auction Agent Agreement")) and ______ __________________________ (together with its successors and assigns hereinafter referred to as "BD"). The Trust has duly authorized and issued 800 shares of Auction Market Preferred Shares(R), with a par value $.10 per share, liquidation preference $50,000 per share plus accumulated but unpaid dividends (whether or not earned or declared), each pursuant to the Trust's Certificate of Designation (as defined below). The shares are sometimes referred to together herein as "AMPS." The Trust's Certificate of Designation provides that the dividend rate on the AMPS for each Dividend Period therefor after the Initial Dividend Period shall be the Applicable Rate therefor, which in each case, in general, shall be the rate per annum that a commercial bank, trust company or other financial institution appointed by the Trust advises results from implementation of the Auction Procedures (as defined below). The Board of Trustees of the Trust has adopted a resolution appointing IBJ Schroder Bank & Trust Company as Auction Agent for purposes of the Auction Procedures, and pursuant to Section 2.5(d) of the Auction Agent Agreement, the Trust has requested and directed the Auction Agent to execute and deliver this Agreement. The Auction Procedures require the participation of one or more Broker- Dealers. __________ (R) Registered trademark of Merrill Lynch & Co., Inc. 2 NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Auction Agent and BD agree as follows: 1. Definitions and Rules of Construction. ------------------------------------- 1.1 Terms Defined by Reference to the Certificate of Designation. Capitalized ------------------------------------------------------------ terms not defined herein shall have the respective meanings specified in the Certificate of Designation of the Trust. 1.2 Terms Defined Herein. As used herein and in the Settlement Procedures (as -------------------- defined below), the following terms shall have the following meanings, unless the context otherwise requires: (a) "Auction" shall have the meaning specified in Section 2.1 hereof. (b) "Auction Procedures" shall mean the Auction Procedures that are set forth in Paragraph 11 of the Certificate of Designation. (c) "Authorized Officer" shall mean each senior Vice President, Vice President, Assistant Vice President, Trust Officer, Assistant Secretary and Assistant Treasurer of the Auction Agent assigned to its Corporate Trust and Agency Group and every other officer or employee of the Auction Agent designated as an "Authorized Officer" for purposes of this Agreement in a communication to BD. (d) "BD Officer" shall mean each officer or employee of BD designated as a "BD Officer" for purposes of this Agreement in a communication to the Auction Agent. (e) "Broker-Dealer Agreement" shall mean this Agreement and any substantially similar agreement between the Auction Agent and a Broker-Dealer. (f) "Certificate of Designation" shall mean the Certificate of Designation, as amended, of the Trust, establishing the powers, preferences and rights of the AMPS filed on November 17, 1992 in the Office of the Secretary of State of The Commonwealth of Massachusetts. (g) "Purchaser's Letter" shall mean a letter addressed to the Trust, the Auction Agent and a Broker-Dealer, substantially in the form attached hereto as Exhibit A. (h) "Settlement Procedures" shall mean the Settlement Procedures attached hereto as Exhibit B. 1.3 Rules of Construction. Unless the context or use indicates another or --------------------- different meaning or intent, the following rules shall apply to the construction of this Agreement: (a) Words importing the singular number shall include the plural number and vice versa. 3 (b) The captions and headings herein are solely for convenience of reference and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. (c) The words "hereof," "herein," "hereto," and other words of similar import refer to this Agreement as a whole. (d) All references herein to a particular time of day shall be to New York City time. 2. Notification of Dividend Period and Advance Notice of Allocation of Taxable --------------------------------------------------------------------------- Income. ------ (a) The provisions contained in paragraph 2 of the Certificate of Designation concerning the notification of a Special Dividend Period will be followed by the Auction Agent and BD, and the provisions contained therein are incorporated herein by reference in their entirety and shall be deemed to be a part of this Agreement to the same extent as if such provisions were fully set forth herein. (b) Except as otherwise provided in paragraph 2(f) of the Certificate of Designation, whenever the Trust intends to include any net capital gains or other income subject to regular Federal income tax in any dividend on shares of any 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. Whenever the Auction Agent receives such notice from the Trust, it will in turn notify BD, who, on or prior to such Auction Date, will notify its Existing Holders and Potential Holders believed to be interested in submitting an Order in the Auction to be held on such Auction Date. Whenever the Trust intends to include any additional amounts in a dividend as provided in paragraph 2(f) of the Certificate of Designation, the Trust will notify the Auction Agent of such additional amounts to be so included in such dividend at least five Business Days prior to the applicable Dividend Payment Date. Whenever the Auction Agent receives such notice from the Trust it will in turn notify the Securities Depository and BD, who, on or prior to the applicable Dividend Payment Date, will notify its Existing Holders. 3. The Auction. ----------- 3.1 Purpose; Incorporation by Reference of Auction Procedures and Settlement ------------------------------------------------------------------------ Procedures. ---------- (a) On each Auction Date, the provisions of the Auction Procedures will be followed by the Auction Agent for the purpose of determining the Applicable Rate for the AMPS, for the next Dividend Period therefor. Each periodic operation of such procedures is hereinafter referred to as an "Auction." (b) All of the provisions contained in the Auction Procedures and the Settlement Procedures are incorporated herein by reference in their entirety and shall be deemed to be a part of this Agreement to the same extent as if such provisions were fully set forth herein. 4 (c) BD is delivering herewith a Purchaser's Letter executed by BD and, in the case of Merrill Lynch, Pierce, Fenner & Smith Incorporated, a list of persons to whom BD will initially sell the shares of AMPS, the number of shares of AMPS BD will sell to each such person and the number of shares of each series of AMPS BD will hold for its own account. BD agrees to act as, and assumes the obligations of and limitations and restrictions placed upon, a Broker-Dealer under this Agreement. BD understands that other Persons meeting the requirements specified in the definition of "Broker- Dealer" contained in Paragraph 1 of the Certificate of Designation may execute a Broker-Dealer Agreement and a Purchaser's Letter and participate as Broker-Dealers in Auctions. (d) BD and other Broker-Dealers may participate in Auctions for their own accounts, provided that BD or such other Broker-Dealers, as the case may be, has executed a Purchaser's Letter. However, the Trust may by notice to BD and all other Broker-Dealers prohibit all Broker-Dealers from submitting Bids in Auctions for their own accounts, provided that Broker-Dealers may continue to submit Hold Orders and Sell Orders. 3.2 Preparation for Each Auction. ------------------------------- (a) Not later than 9:30 A.M. on each Auction Date for the AMPS, the Auction Agent shall advise BD by-telephone of the Reference Rate and the Maximum Applicable Rate in effect on such Auction Date. (b) In the event that the Auction Date for any Auction shall be changed after the Auction Agent has given the notice referred to in clause (vii) of paragraph (a) of the Settlement Procedures, the Auction Agent, by such means as the Auction Agent deems practicable, shall give notice of such change to BD not later than the earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M. on the old Auction Date. Thereafter, BD shall promptly notify customers of BD that BD believes are Existing Holders of shares of AMPS of such change in the Auction Date. (c) The Auction Agent from time to time may request BD to provide it with a list of the respective customers BD believes are Existing Holders of shares of AMPS. BD shall comply with any such request, and the Auction Agent shall keep confidential any such information, including information received as to the identity of Bidders in any Auction, and shall not disclose any such information so provided to any Person other than the Trust; and such information shall not be used by the Auction Agent or its officers, employees, agents or representatives for any purpose other than such purposes as are described herein. The Auction Agent shall transmit any list of customers BD believes are Existing Holders of shares of AMPS and information related thereto only to its officers, employees, agents or representatives in the Corporate Trust and Agency Group who need to know such information for the purposes of acting in accordance with this Agreement and shall prevent the transmission of such information to others and shall cause its officers, employees, agents and representatives to abide by the foregoing confidentiality restrictions; provided, however, that the Auction Agent shall have no responsibility or liability for the actions of any of its officers, employees, agents or representatives after they have left the employ of the Auction Agent. 5 (d) The Auction Agent is not required to accept the Purchaser's Letter for any Potential Holder for an Auction unless it is received by the Auction Agent by 3:00 P.M. on the Business Day next preceding such Auction. 3.3 Auction Schedule; Method of Submission of orders. --------------------------------------------------- (a) The Trust and the Auction Agent shall conduct Auctions for the AMPS in accordance with the schedule set forth below. Such schedule may be changed at any time by the Auction Agent with the consent of the Trust, which consent shall not be unreasonably withheld. The Auction Agent shall give notice of any such change to BD. Such notice shall be received prior to the first Auction Date on which any such change shall be effective. Time Event By 9:30 A.M. Auction Agent advises the Trust and Broker-Dealers of Reference Rate and the Maximum Applicable Rate as set forth in Section 3.2(a) hereof. 9:30 A.M. - 1:00 P.M. Auction Agent assembles information communicated to it by Broker-Dealers as provided in Paragraph 11(c)(i) of the Certificate of Designation. Submission Deadline is 1:00 P.M. Not earlier than 1:00 P.M. Auction Agent makes determinations pursuant to Paragraph 11(d)(i) of the Certificate of Designation. By approximately 3:00 P.M. Auction Agent advises Trust of results of Auction as provided in Paragraph 11(d)(ii) of the Certificate of Designation. Submitted Bids and Submitted Sell Orders are accepted and rejected in whole or in part and shares of AMPS are allocated as provided in Paragraph 11(e) of the Certificate of Designation By approximately 10:00 A.M. Auction Agent gives notice of Auction results as on the next succeeding set forth in Section 3.4(a) hereof. Business Day (b) BD agrees to maintain a list of Potential Holders and to contact the Potential Holders on such list on or prior to each Auction Date for the purposes set forth in Paragraph 11 of the Certificate of Designation. (c) BD agrees not to sell, assign or dispose of any shares of AMPS to any Person who has not delivered a signed Purchaser's Letter to the Auction Agent, unless BD submits orders for such Person listing BD as the Existing Holder or the Potential Holder. 6 (d) BD shall submit Orders to the Auction Agent in writing in substantially the form attached hereto as Exhibit C. BD shall submit separate Orders to the Auction Agent for each Potential Holder or Existing Holder on whose behalf BD is submitting an order and shall not net or aggregate the Orders of Potential Holders or Existing Holders on whose behalf BD is submitting Orders. (e) BD shall deliver to the Auction Agent (i) a written notice, substantially in the form attached hereto as Exhibit D, of transfers of shares of AMPS, made through BD by an Existing Holder to another Person other than pursuant to an Auction, and (ii) a written notice, substantially in the form attached hereto as Exhibit E, of the failure of shares of AMPS to be transferred to or by any Person that purchased or sold shares of AMPS or through BD pursuant to an Auction. The Auction Agent is not required to accept any notice delivered pursuant to the terms of the foregoing sentence with respect to an Auction unless it is received by the Auction Agent by 3:00 P.M. on the Business Day next preceding the applicable Auction Date. 3.4 Notice of Auction Results. ---------------------------- (a) On each Auction Date, the Auction Agent shall notify BD by telephone as set forth in paragraph (a) of the Settlement Procedures. On the Business Day next succeeding such Auction Date, the Auction Agent shall notify BD in writing of the disposition of all Orders submitted by BD in the Auction held on such Auction Date. (b) BD shall notify each Existing Holder or Potential Holder on whose behalf BD has submitted an Order as set forth in paragraph (b) of the Settlement Procedures and take such other action as is required of BD pursuant to the Settlement Procedures. If any Existing Holder selling shares of AMPS in an Auction fails to deliver such shares, the BD of any Person that was to have purchased shares of AMPS in such Auction may deliver to such Person, a number of whole shares of such AMPS that is less than the number of shares that otherwise was to be purchased by such Person. In such event, the number of shares of AMPS to be so delivered shall be determined by such BD. Delivery of such lesser number of shares shall constitute good delivery. Upon the occurrence of any such failure to deliver shares, such BD shall deliver to the Auction Agent the notice required by Section 3.3(e)(ii) hereof. Notwithstanding the foregoing terms of this Section 3.4(b), any delivery or non-delivery of shares of AMPS which represents any departure from the results of an Auction, as determined by the Auction Agent, shall be of no effect unless and until the Auction Agent shall have been notified of such delivery or non-delivery in accordance with the terms of Section 3.3(e) hereof. The Auction Agent shall have no duty or liability with respect to enforcement of this Section 3.4(b). 3.5 Service Charge to Be Paid to BD. On the Business Day next succeeding each ------------------------------- Auction Date, the Auction Agent shall pay to BD from moneys received from the Trust an amount equal to: (a) in the case of any Auction Date immediately preceding a 7-day Dividend Period, the product of (i) a fraction the numerator of which is the number of days in such Dividend Period (calculated by counting the first day of such Dividend Period but excluding the last day thereof) and the denominator of which is 360, times (ii) 1/4 of 1%, times (iii) $50,000, times (iv) the sum of (A) the aggregate number of AMPS placed by BD in the applicable 7 Auction that were (x) the subject of a Submitted Bid of an Existing Holder submitted by BD and continued to be held as a result of such submission and (y) the subject of a Submitted Bid of a Potential Holder submitted by BD and were purchased as a result of such submission plus (B) the aggregate number of AMPS subject to valid Hold Orders (determined in accordance with Paragraph 11 of the Certificate of Designation) submitted to the Auction Agent by BD plus (C) the number of AMPS deemed to be subject to Hold Orders by Existing Holders pursuant to Paragraph 11 of the Certificate of Designation that were acquired by such Existing Holders through BD and (b) in the case of any Auction Date immediately preceding a Special Dividend Period, that amount as mutually agreed upon by the Trust and BD, based on the selling concession that would be applicable to an underwriting of fixed or variable rate preferred shares with a similar final maturity or variable rate dividend period, at the commencement of such Long Term Dividend Period. For purposes of subclause (a)(iv)(C) of the foregoing sentence, if any Existing Holder who acquired shares of AMPS through BD transfers those shares to another Person other than pursuant to an Auction, then the Broker-Dealer for the shares so transferred shall continue to be BD, provided, however, that if the transfer was effected by, or if the transferee is, a Broker-Dealer other than BD, then such Broker-Dealer shall be the Broker-Dealer for such shares. 4. The Auction Agent. ----------------- 4.1 Duties and Responsibilities. --------------------------- (a) The Auction Agent is acting solely as agent for the Trust hereunder and owes no fiduciary duties to any other Person by reason of this Agreement. (b) The Auction Agent undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Auction Agent. (c) In the absence of bad faith or negligence on its part, the Auction Agent shall not be liable for any action taken, suffered, or omitted or for any error of judgment made by it in the performance of its duties under this Agreement. The Auction Agent shall not be liable for any error of judgment made in good faith unless the Auction Agent shall have been negligent in ascertaining (or failing to ascertain) the pertinent facts. 4.2 Rights of the Auction Agent. --------------------------- (a) The Auction Agent may rely and shall be protected in acting or refraining from acting upon any communication authorized by this Agreement and upon any written instruction, notice, request, direction, consent, report, certificate, share certificate or other instrument, paper or document believed by it to be genuine. The Auction Agent shall not be liable for acting upon any telephone communication authorized by this Agreement which the Auction Agent believes in good faith to have been given by the Trust or by a Broker-Dealer. The Auction Agent may record telephone communications with the Broker-Dealers. 8 (b) The Auction Agent may consult with counsel of its own choice, and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Auction Agent shall not be required to advance, expend or risk its own funds or otherwise incur or become exposed to financial liability in the performance of its duties hereunder. (d) The Auction Agent may perform its duties and exercise its rights hereunder either directly or by or through agents or attorneys. 4.3 Auction Agent's Disclaimer. The Auction Agent makes no representation as to -------------------------- the validity or adequacy of this Agreement or the AMPS. 5. Miscellaneous. ------------- 5.1 Termination. Any party may terminate this Agreement at any time upon five ----------- days' prior notice to the other party; provided, however, that if BD is Merrill Lynch, Pierce, Fenner & Smith Incorporated, neither BD nor the Auction Agent may terminate this Agreement without first-obtaining prior written consent of the Trust of such termination, which consent shall not be unreasonably withheld. 5.2 Participant in Securities Depository; Payment of Dividends in Same-Day ---------------------------------------------------------------------- Funds. ----- (a) BD is, and shall remain for the term of this Agreement, a member of, or participant in, the Securities Depository (or an affiliate of such a member or participant). (b) BD represents that it (or if such BD does not act as Agent Member, one of its affiliates) shall make all dividend payments on the AMPS available in same-day funds on each Dividend Payment Date to customers that use such BD or affiliate as Agent Member. 5.3 Agent Member. At the date hereof, BD is a participant of the Securities ----------------------------------------------------------------------- Depository. ---------- 5.4 Communications. Except for (i) communications authorized to be made by -------------- telephone pursuant to this Agreement or the Auction Procedures and (ii) communications in connection with the Auctions (other than those expressly required to be in writing), all notices, requests and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be given to such party, addressed to it, at its address or telecopy number set forth below: If to BD 60 Broad Street, 5th Floor addressed: New York, New York 10004 Attention: Telecopier No.: (212) 656-1154 Telephone No.: (212) 656-1156 9 If to the Auction ____________ Bank & Trust Company Agent, addressed: One State Street New York, New York 10004 Attention: Auction Window Subcellar 1 Telecopier No.: (212) 797-1148 Telephone No.: (212) 858-2272 or such other address or telecopy number as such party may hereafter specify for such purpose by notice to the other party. Each such notice, request or communication shall be effective when delivered at the address specified herein. Communications shall be given on behalf of BD by a BD Officer and on behalf of the Auction Agent by an Authorized officer. BD may record telephone communications with the Auction Agent. 5.5 Entire Agreement. This Agreement contains the entire agreement between the ---------------- parties relating to the subject matter hereof, and there are no other representations, endorsements, promises, agreements or understandings, oral, written or inferred, between the parties relating to the subject matter hereof. 5.6 Benefits. Nothing in this Agreement, express or implied, shall give to any -------- person, other than the Trust, the Auction Agent and BD and their respective successors and assigns, any benefit of any legal or equitable right, remedy or claim under this Agreement. 5.7 Amendment; Waiver. ----------------- (a) This Agreement shall not be deemed or construed to be modified, amended, rescinded, cancelled or waived, in whole or in part, except by a written instrument signed by a duly authorized representative of the party to be charged. (b) Failure of either party to this Agreement to exercise any right or remedy hereunder in the event of a breach of this Agreement by the other party shall not constitute a waiver of any such right or remedy with respect to any subsequent breach. 5.8 Successors and Assigns. This Agreement shall be binding upon, inure to the ---------------------- benefit of, and be enforceable by, the respective successors and permitted assigns of each of BD and the Auction Agent. This Agreement may not be assigned by either party hereto absent the prior written consent of the other party; provided, however, that this Agreement may be assigned by the Auction Agent to a successor Auction Agent selected by the Trust without the consent of BD. 5.9 Severability. If any clause, provision or section of this Agreement shall ------------ be ruled invalid or unenforceable by any court of competent jurisdiction, the invalidity or unenforceability of such clause, provision or section shall not affect any remaining clause, provision or section hereof. 10 5.10 Execution in Counterparts. This Agreement may be executed in several ------------------------- counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 6. Governing Law. This Agreement 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. 11 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the date first above written. __________ BANK & TRUST COMPANY By: ____________________________________ Title: Assistant Vice President _________________________________ By: ____________________________________ Title: 12 EXHIBIT C --------- AUCTION BID FORM Submit To: IBJ Schroder Bank & Trust Co. Issue _______________________ Securities Transfer Department Auction Date ________________ One State Street New York, New York 10004 Telephone: (212) 858-2272 Attention: Auction Window Facsimile: (212) 797-1148 The undersigned Broker-Dealer submits the following order on behalf of the Bidder listed below: Name of Bidder: _________________ EXISTING HOLDER Shares now held _____________ HOLD __________ BID at rate of __________ SELL __________ POTENTIAL HOLDER # of shares bid _________ BID at rate of _________ Notes: (1) If submitting more than one Bid for one Bidder, use additional Auction Bid Forms. (2) If one or more Bids covering in the aggregate more than the number of outstanding shares held by any Existing Holder are submitted, such bid shall be considered valid in the order of priority set forth in the Auction Procedures on the above issue. (3) A Hold or Sell may be placed only by an Existing Holder covering a number of shares not greater than the number of shares currently held. (4) Potential Holders may make only Bids, each of which must specify a rate. If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate specified. (5) Bids may contain no more than three figures to the right of the decimal point (.001 of 1%). Fractions will not be accepted. NAME OF BROKER-DEALER ______________________ Authorized Signature _______________________ EXHIBIT D --------- (To be used only for transfers made other than pursuant to an Auction.) TRANSFER FORM Re: MuniYield Pennsylvania Fund Auction Market Preferred Shares(R) ("AMPS") We are (check one): [ ] the Existing Holder named below; [ ] the Broker-Dealer for such Existing Holder; or [ ] the Agent Member for such Existing Holder. We hereby notify you that such Existing Holder has transferred ________ shares of AMPS to ____________. ___________________________ (Name of Existing Holder) ___________________________ (Name of Broker-Dealer) ___________________________ (Name of Agent Member) By: _______________________ Printed Name: Title: EXHIBIT E --------- (To be used only for failures to deliver AMPS sold pursuant to an Auction) NOTICE OF A FAILURE TO DELIVER Complete either I or II I. We are a Broker-Dealer for _________________ (the "Purchaser"), which purchased _________ shares of AMPS of MuniYield Pennsylvania Fund in the Auction held on _______________ from the seller of such shares. II. We are a Broker-Dealer for _________________ (the "Seller"), which sold ________ shares of AMPS of MuniYield Pennsylvania Fund in the Auction held on _________ to the Purchaser of such shares. We hereby notify you that (check one) -- _____ the Seller failed to deliver such shares to the Purchaser _____ the Purchaser failed to make payment to the Seller upon delivery of such shares Name: _____________________ (Name of Broker-Dealer) By: _____________________ Printed Name: Title: EX-99.13D 15 LETTER OF REPRESENTATIONS Exhibit 99.13(d) LETTER OF REPRESENTATIONS MUNIYIELD PENNSYLVANIA FUND and IBJ SCHRODER BANK & TRUST COMPANY November 30, 1992 The Depository Trust Company 55 Water Street New York, New York 10041 Attention: General Counsel's Office Re: MuniYield Pennsylvania Fund Issuance of Auction Market Preferred Shares(R) ["AMPS" (R)] -------------------------------------------------- Ladies and Gentlemen: The purpose of this letter is to set forth certain matters relating to the issuance and sale by MuniYield Pennsylvania Fund, a Massachusetts business trust (the "Issuer"), of 800 shares of Auction Market Preferred Shares. The shares are sometimes herein together called the "AMPS." A description of the AMPS and the related offering are contained in a prospectus, dated November 23, 1992 (the "Prospectus"). IBJ Schroder Bank & Trust Company, in its capacity as Auction Agent (as defined in the Prospectus), will act as the transfer agent, registrar, dividend disbursing agent and redemption agent with respect to the shares of AMPS. The shares of AMPS are being distributed through The Depository Trust Company ("DTC") by Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"). To induce DTC to accept the shares of AMPS as eligible for deposit at DTC and to act in accordance with its rules (the "DTC Rules") with respect to the shares of AMPS, the Issuer and the Auction Agent make the following representations to DTC: 1. Prior to the issuance of the shares of AMPS on November 30, 1992 the Issuer shall cause the Underwriter to deposit with DTC a share certificate representing the AMPS, registered in the name of DTC's nominee, Cede & Co., which will respectively represent the total number of shares of AMPS, and said certificate shall remain in DTC's custody. 2. The Prospectus describes provisions for the solicitation of consents from, and voting by, holders of the shares of AMPS under certain circumstances. The Issuer shall establish a record date or record dates for such purposes and give DTC notice of such record date or dates not less than 15 calendar days in advance of such record date or dates to the extent practicable. 3. In the event of a full or partial redemption of outstanding shares of AMPS, the Issuer or the Auction Agent shall give DTC notice of such event not less than 20 days prior to the redemption date. 4. In the event of a partial redemption of shares of AMPS outstanding, the Issuer or the Auction Agent shall send DTC a notice specifying: the number of shares of AMPS to be redeemed and the date such notice is to be mailed to shareholders of the Issuer or published by the Issuer ("Publication Date"). Such notice shall be sent to DTC by a secure means (e.g., legible facsimile transmission, registered or certified mail, overnight express delivery or hand delivery) in a timely manner designed to assure that such notice is in DTC's possession no later than the close of business on the Business Day (as defined in the Prospectus) before the Publication Date. (The Issuer or the Auction Agent sending such notice shall have a method to verify subsequently the use of such means and timeliness of the notice.) In the event of a partial redemption, the Publication Date shall not be less than 20 days prior to the redemption date. 5. The Prospectus indicates that the dividend rate for the shares of AMPS may vary from time to time. Absent other existing arrangements with DTC, the Issuer or.the Auction Agent shall give DTC notice of each such change in the dividend rate on the same day the new rate is determined by telephone to the Supervisor of the Dividend Announcement Section at (212) 709- 1270, and such notice shall be followed by prompt written confirmation sent by a secure means as described in paragraph 4 above to: Manager, Announcements, Dividend Department The Depository Trust Company 7 Hanover Square, 22nd Floor New York, New York 10004 6. The Prospectus indicates that each purchaser of shares of AMPS or its Broker-Dealer will be required to sign a Purchaser's Letter (as defined in the Prospectus) that contains provisions restricting transfer of the shares of AMPS purchased. The Issuer and the Auction Agent acknowledge that as long as Cede & Co. is the sole record owner of the shares of AMPS, Cede & Co. shall be entitled to all voting rights applicable to the shares of AMPS and to receive the full amount of all dividends, Additional Dividends, liquidation proceeds and redemption proceeds payable with respect to the shares of AMPS. The Issuer and the Auction Agent acknowledge that DTC shall treat any DTC Participant (defined in the DTC Rules to mean, generally, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations for whom DTC, directly or indirectly, holds securities) having shares of AMPS credited to its DTC account as entitled to the full benefits of ownership of such shares even if the credits of shares of AMPS to the DTC account of such DTC Participant result from transfers or failures to transfer in violation of the provisions of the Purchaser's Letter. Without limiting the generality of the preceding sentence, the Issuer and the Auction Agent acknowledge that DTC shall 2 treat any DTC Participant having shares of AMPS credited to its account as entitled to receive dividends, distributions and voting rights, if any, in respect of such shares and, subject to Section 17 hereof, to receive certificates evidencing such shares of AMPS if such certificates are to be issued in accordance with the Issuer's Declaration of Trust (as defined in the Prospectus). (The treatment by DTC of the effects of the crediting by it of shares of AMPS to the accounts of DTC Participants described in the preceding two sentences shall not affect the rights of the Issuer, participants in Auctions (as defined in the Prospectus) relating to the shares of AMPS, purchasers, sellers or holders of shares of AMPS against any DTC Participant). DTC shall have no responsibility to ascertain that any transfer of shares of AMPS is made in accordance with the provisions of the Purchaser's Letter. 7. The Prospectus indicates that in the event the Issuer retroactively allocates any net capital gains or other income subject to regular Federal income tax to shares of AMPS without having given advance notice thereof to the Auction Agent as described in the Prospectus 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 shares of AMPS or the liquidation of the Issuer (the amount of such allocation referred to herein as a "Retroactive Taxable Allocation"), the Issuer will, within 90 days (and generally within 60 days) after the end of the Issuer's fiscal year for which a Retroactive Taxable Allocation is made, provide notice thereof to the Auction Agent and to each holder of shares of AMPS (initially Cede & Co. as nominee of DTC) during such fiscal year at such holder's address as the same appears or last appeared on the stock books of the Issuer. The Issuer 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 AMPS), out of funds legally available therefor, an amount equal to the aggregate Additional Dividend (as defined in the Prospectus) with respect to all Retroactive Taxable Allocations made to such holders during the fiscal year in question. 8. The Issuer will notify DTC, at least 10 Business Days prior to the payment date for any Additional Dividends, of (i) the record date for holders of shares of AMPS entitled to receive Additional Dividends, (ii) the amount of Additional Dividends payable on a per share basis to such holders and (iii) the CUSIP numbers set forth on the share certificates representing such shares of AMPS. 9. The Prospectus indicates that if the Issuer does not give advance notice of the amount of capital gains or other income subject to regular Federal income tax to be included in a dividend on shares of AMPS in the related Auction, the Issuer may include such taxable income in a dividend on shares of AMPS 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. The Issuer or the Auction Agent will notify DTC, at least five Business Days prior to the applicable Dividend Payment Date, of the amount of such additional amount to be included in the dividend on a per share basis. 3 10. The Prospectus indicates that in the event a Response (as defined in the Prospectus) indicates that it is advisable that the Issuer give a Notice of Special Dividend Period (as defined in the Prospectus) for the AMPS, the Issuer may by no later than the second day prior to such Auction Date give a Notice of Special Dividend Period (as defined in the Prospectus) to the Auction Agent, DTC 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 response. The Issuer is required to give telephonic and written notice (a "Notice of Revocation") to the Auction Agent, each Broker-Dealer, and DTC on or prior to the Business Day prior to the relevant Auction Date under the circumstances specified in the Prospectus. 11. All notices and payment advices sent to DTC shall contain the CUSIP numbers set forth on the share certificates representing the AMPS. 12. Notices to DTC by facsimile transmission shall be sent to (212) 709-1093 or (212) 709-1094. The Issuer or Auction Agent shall call (212) 709-6884 to confirm such receipt of notice. Except as provided in paragraph 5 hereof, notices to DTC by any other means shall be sent to: Manager, Reorganization Department Reorganization Window The Depository Trust Company 7 Hanover Square, 23rd Floor New York, New York 10004 13. Dividend payments shall be received by Cede Co., as nominee of DTC, or its registered assigns in same-day funds on each payment date or the equivalent as agreed between the Issuer or the Auction Agent and DTC ("Fed-Funds"). Such payment shall be made payable to the order of "Cede & Co." Absent any other agreement between the Issuer or the Auction Agent and DTC, such payments shall be addressed as- follows: Manager, Cash Receipts, Dividends The Depository Trust Company 7 Hanover Square, 24th Floor New York, New York 10004 14. Redemption payments shall be made in Fed-Funds in the manner set forth in the SDFS Paying Agent Operating Procedures, a copy of which has previously been provided to the Auction Agent. 15. DTC may direct the Issuer or the Auction Agent to use any other telephone number for facsimile transmission, address, or department of DTC as the number, address or department to which payments of dividends, redemption proceeds or notices may be sent. 4 16. In the event of a redemption necessitating a reduction in the number of shares of AMPS outstanding, DTC in its discretion may (a) request the Issuer to execute and deliver new share certificates representing the remaining outstanding shares of AMPS or (b) may make appropriate notations on the certificates indicating the date and amounts of such reductions. In the case of redemption of all of the shares, DTC will surrender the certificates to the Auction Agent for cancellation if required. 17. In the event the Issuer determines that beneficial owners of the shares of AMPS of any series (generally, the Existing Holders as defined in the Issuer's Charter) shall be able to obtain certificates representing such shares of AMPS (as provided for in the Issuer's Charter), the Issuer or the Auction Agent shall notify DTC of the availability of share certificates representing such shares of AMPS, as the case may be, and shall issue, transfer and exchange such certificates as required by DTC and others in appropriate amounts. 18. DTC may determine to discontinue providing its services as securities depository with respect to the shares of AMPS at any time by giving reasonable notice to the Issuer and the Auction Agent (at which time DTC will confirm with the Auction Agent the aggregate amount of the respective shares of AMPS outstanding). Under such circumstances the Issuer and the Auction Agent will cooperate with DTC in taking appropriate action to provide for a substitute or successor securities depository or to make available one or more separate certificates evidencing the shares of AMPS to any DTC Participant having such shares credited to its DTC account. 19. The Issuer hereby authorizes DTC to provide to the Auction Agent position listings of its DTC Participants with respect to the shares of AMPS from time to time at the request of the Auction Agent and at DTC's customary fee, and also authorizes DTC, in the event of a partial redemption of shares of AMPS, to provide, and DTC hereby agrees to provide the Auction Agent, upon request, with the names of those DTC Participants whose positions in such shares of AMPS have been selected for redemption by DTC. DTC agrees to use its best efforts to notify the Auction Agent of those DTC Participants whose positions in the shares of AMPS have been selected for redemption by DTC. The Issuer authorizes the Auction Agent to provide DTC with such signatures, exemplars of signatures and authorizations to act as may be deemed necessary by DTC to permit DTC to discharge its obligations to its DTC Participants and appropriate regulatory authorities. This authorization, unless revoked by the Issuer, shall continue with respect to the shares of AMPS while any such shares are on deposit at DTC, until and unless the Auction Agent shall no longer be acting. In such event, the Issuer shall provide DTC with similar evidence of the authorization of any successor thereto so to act. 20. Nothing herein shall be deemed to require the Auction Agent to advance funds on behalf of the Issuer. 5 21. A copy of the Agreement and Declaration of Trust of the Issuer is on file with the Secretary of State of The Commonwealth of Massachusetts and notice is hereby given that this letter has been executed on behalf of the Issuer by an officer of the Issuer as an officer and not individually and the obligations of the Issuer arising out of this letter are not binding upon any of the trustees, officers or shareholders of the Issuer individually but are binding only upon the assets and property of the Issuer. Very truly yours, MUNIYIELD PENNSYLVANIA FUND as Issuer By:____________________________ Title: IBJ SCHRODER BANK & TRUST COMPANY as Auction Agent By:____________________________ Title: Received and Accepted: THE DEPOSITORY TRUST COMPANY By:________________________________ Title: cc: Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated 6 EX-99.14A 16 CONSENT OF DELOITTE AND TOUCHE FOR REGISTRANT EXHIBIT 14(a) INDEPENDENT AUDITORS' CONSENT MuniYield Pennsylvania Fund: We consent to the use in this Pre-Effective Amendment No. 1 to Registration Statement No. 333-88395 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 November 9, 1999 EX-99.14B 17 CONSENT OF DELOITTE AND TOUCHE FOR MUNIVEST EXHIBIT 14(b) INDEPENDENT AUDITORS' CONSENT MuniVest Pennsylvania Insured Fund: We consent to the use in this Pre-Effective Amendment No. 1 to Registration Statement No. 333-88395 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 November 9, 1999 -----END PRIVACY-ENHANCED MESSAGE-----