<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 4, 1995
SECURITIES ACT FILE NO. 33-55801
INVESTMENT COMPANY ACT FILE NO. 811-7083
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
<TABLE>
<S> <C> <C>
/X/ PRE-EFFECTIVE / / POST-EFFECTIVE
AMENDMENT NO. 1 AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)
</TABLE>
------------------------
MUNIYIELD ARIZONA FUND II, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
(609) 282-2000
(AREA CODE AND TELEPHONE NUMBER)
------------------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
NUMBER, STREET, CITY, STATE, ZIP CODE)
------------------------
ARTHUR ZEIKEL
MUNIYIELD ARIZONA FUND II, INC.
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:
<TABLE>
<S> <C>
FRANK P. BRUNO, ESQ. MARK B. GOLDFUS, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT, L.P.
ONE WORLD TRADE CENTER 800 SCUDDERS MILL ROAD
NEW YORK, NY 10048-0557 PLAINSBORO, NJ 08543-9011
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED OFFERING: As soon as practicable after the
Registration Statement becomes effective under the Securities Act of 1933.
------------------------
CALCULATION OF THE REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933:
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF SECURITIES AMOUNT BEING MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1) PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Stock
($.10 par value)................... 5,464,430 $12.37 $67,594,999 $13,519
Auction Market Preferred Stock,
Series B........................... 694 $25,000(2) $17,350,000 $3,470
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Represents the liquidation preference of a share of preferred stock after
the reorganization.
(3) 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MUNIYIELD ARIZONA FUND II, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14 PROXY STATEMENT AND PROSPECTUS
ITEM NO. CAPTION
- ---------- ------------------------------
<S> <C> <C>
PART A
- ----------
Item 1. Beginning of Registration
Statement and Outside Front
Cover Page of Prospectus.... Registration Statement Cover
Page; Prospectus Cover Page
Item 2. Beginning and Outside Back
Cover Page of Prospectus.... Table of Contents
Item 3. Synopsis Information and Risk
Factors..................... Agreement and Plan of
Reorganization--Summary; Agreement
and Plan of Reorganization--Risk
Factors and Special Considerations
Item 4. Information About the
Transaction................. Agreement and Plan of
Reorganization--Summary; Agreement
and Plan of Reorganization--The
Reorganization
Item 5. Information About the
Registrant.................. Prospectus Cover Page; Agreement
and Plan of Reorganization--
Summary; Agreement and Plan of
Reorganization--Comparison of the
Funds; Additional Information
Item 6. Information About the Company
Being Acquired.............. Prospectus Cover Page; Agreement
and Plan of Reorganization--
Summary; Agreement and Plan of
Reorganization--Comparison of the
Funds; Additional Information
Item 7. Voting Information............ Notice of Special Meetings of
Stockholders; Introduction;
Agreement and Plan of
Reorganization--Summary; Agreement
and Plan of Reorganization--
Comparison of the Funds; Information
Concerning the Special Meetings;
Additional Information
Item 8. Interest of Certain Persons
and Experts................. Not Applicable
Item 9. Additional Information
Required for Reoffering by
Persons Deemed to be
Underwriters................ Not Applicable
<CAPTION>
PART B
- ----------
<S> <C> <C>
Item 10. Cover Page.................... Not Applicable
Item 11. Table of Contents............. Not Applicable
Item 12. Additional Information About
the Registrant.............. Agreement and Plan of
Reorganization--Comparison of the
Funds
Item 13. Additional Information About
the Company Being
Acquired.................... Agreement and Plan of
Reorganization--Comparison of the
Funds
Item 14. Financial Statements.......... Financial Statements
<CAPTION>
PART C
- ----------
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
MUNIYIELD ARIZONA FUND, INC.
MUNIYIELD ARIZONA FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
NOTICE OF SPECIAL MEETINGS OF STOCKHOLDERS
TO BE HELD ON JANUARY 25, 1995
TO THE STOCKHOLDERS OF
MUNIYIELD ARIZONA FUND, INC.
MUNIYIELD ARIZONA FUND II, INC.:
NOTICE IS HEREBY GIVEN that special meetings of stockholders (the
'Meetings') of MuniYield Arizona Fund, Inc. ('Arizona I') and MuniYield Arizona
Fund II, Inc. ('Arizona II') will be held at the offices of Merrill Lynch Asset
Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey on Wednesday,
January 25, 1995 at 9:00 A.M., New York time (for Arizona I) and 9:30 A.M., New
York time (for Arizona II) for the following purposes:
(1) To approve or disapprove an Agreement and Plan of
Reorganization (the 'Agreement and Plan of Reorganization')
contemplating the acquisition of substantially all of the assets of
Arizona I by Arizona II, and the assumption of substantially all of
the liabilities of Arizona I by Arizona II, in exchange solely for an
equal aggregate value of shares of common stock of Arizona II
('Arizona II Common Stock') and shares of a newly-created series of
Auction Market Preferred Stock of Arizona II ('Arizona II Series B
AMPS') and a distribution of such Arizona II Common Stock to holders
of common stock of Arizona I and such Arizona II Series B AMPS to the
holders of Auction Market Preferred Stock of Arizona I in liquidation
of Arizona I. A vote in favor of this proposal also will constitute a
vote in favor of a liquidation and dissolution of Arizona I and a
termination of its registration under the Investment Company Act of
1940;
(2) To elect a Board of Directors of each Fund 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 of each Fund
for its current fiscal year; and
(4) To transact such other business as properly may come before
the Meetings or any adjournment thereof.
The Boards of Directors of Arizona I and Arizona II have fixed the close of
business on December 14, 1994 as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meetings or any
adjournment thereof.
A complete list of the stockholders of Arizona I or Arizona II, as the case
may be, entitled to vote at the Meetings will be available and open to the
examination of any stockholder of Arizona I or Arizona II, respectively, for any
purpose germane to the Meetings during ordinary business hours from and after
January 4, 1995, at the offices of Arizona II, 800 Scudders Mill Road,
Plainsboro, New Jersey.
You are cordially invited to attend the Meetings. Stockholders who do not
expect to attend the Meetings in person are requested to complete, date and sign
the enclosed form of proxy and return it promptly in the envelope provided for
that purpose. The enclosed proxy is being solicited on behalf of the Boards of
Directors of Arizona I and Arizona II.
By Order of the Boards of Directors
MARK B. GOLDFUS
Secretary
Plainsboro, New Jersey
Dated: January 4, 1995
<PAGE>
[Proxy Card Front] COMMON STOCK
MUNIYIELD ARIZONA FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Mark B.
Goldfus as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Common Stock of MuniYield Arizona Fund, Inc. (the
'Fund') held of record by the undersigned on December 14, 1994 at a Special
Meeting of Stockholders of the Fund to be held on January 25, 1995, or any
adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. 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]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Arizona Fund II, Inc.
FOR / / AGAINST / / ABSTAIN / /
2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to the for all nominees
contrary below) / / listed below / /
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the list below.)
Herbert I. London, Robert R. Martin, Andre F. Perold, Arthur Zeikel
3. To consider and act upon a 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: ______________________________, 1995
X __________________________
Signature
X __________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front] AUCTION MARKET
PREFERRED STOCK
MUNIYIELD ARIZONA FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Mark B.
Goldfus as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Auction Market Preferred Stock of MuniYield Arizona
Fund, Inc. (the 'Fund') held of record by the undersigned on December 14, 1994
at a Special Meeting of Stockholders of the Fund to be held on January 25, 1995,
or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. 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]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Arizona Fund II, Inc.
FOR / / AGAINST / / ABSTAIN / /
2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to the for all nominees
contrary below) / / listed below / /
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the list below.)
Kenneth S. Axelson, Herbert I. London, Robert R. Martin, Joseph L. May, Andre
F. Perold, Arthur Zeikel
3. To consider and act upon a 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: ______________________________, 1995
X __________________________
Signature
X __________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front] COMMON STOCK
MUNIYIELD ARIZONA FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Mark B.
Goldfus as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Common Stock of MuniYield Arizona Fund II, Inc.
(the 'Fund') held of record by the undersigned on December 14, 1994 at a Special
Meeting of Stockholders of the Fund to be held on January 25, 1995, or any
adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. 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]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Arizona Fund, Inc.
FOR / / AGAINST / / ABSTAIN / /
2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to the for all nominees
contrary below) / / listed below / /
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the list below.)
Herbert I. London, Robert R. Martin, Andre F. Perold, Arthur Zeikel
3. To consider and act upon a 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: ______________________________, 1995
X __________________________
Signature
X __________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
<PAGE>
[Proxy Card Front] AUCTION MARKET
PREFERRED STOCK
MUNIYIELD ARIZONA FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Mark B.
Goldfus as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Auction Market Preferred Stock, Series A, of
MuniYield Arizona Fund II, Inc. (the 'Fund') held of record by the undersigned
on December 14, 1994 at a Special Meeting of Stockholders of the Fund to be held
on January 25, 1995, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. 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]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Arizona Fund, Inc.
FOR / / AGAINST / / ABSTAIN / /
2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to the for all nominees
contrary below) / / listed below / /
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the list below.)
Kenneth S. Axelson, Herbert I. London, Robert R. Martin, Joseph L. May, Andre
F. Perold, Arthur Zeikel
3. To consider and act upon a 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: ______________________________, 1995
X __________________________
Signature
X __________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
PROXY STATEMENT AND PROSPECTUS
MUNIYIELD ARIZONA FUND, INC.
MUNIYIELD ARIZONA FUND II, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(609) 282-2000
SPECIAL MEETINGS OF STOCKHOLDERS
JANUARY 25, 1995
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Directors of MuniYield
Arizona Fund, Inc., a Maryland corporation ('Arizona I'), and MuniYield Arizona
Fund II, Inc., a Maryland corporation ('Arizona II'), for use at Special
Meetings of Stockholders (the 'Meetings') called to approve or disapprove the
proposed reorganization whereby (i) Arizona II will acquire substantially all of
the assets, and will assume substantially all of the liabilities, of Arizona I,
in exchange solely for an equal aggregate value of newly-issued shares of Common
Stock, with a par value of $.10 per share, of Arizona II ('Arizona II Common
Stock') and shares of a newly-created series of Auction Market Preferred Stock
('AMPS') of Arizona II, with a par value of $.10 per share and a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) ('Arizona II Series B
AMPS') to be issued by Arizona II; (ii) the name of the surviving fund will be
changed to 'MuniYield Arizona Fund, Inc.'; and (iii) Arizona I will be
deregistered and dissolved (collectively, the 'Reorganization'). Arizona I and
Arizona II sometimes are referred to herein collectively as the 'Funds' and
individually as a 'Fund', each as applicable and each as the context requires.
This Proxy Statement and Prospectus also is being furnished in connection with
the election of a Board of Directors of each Fund and the ratification of the
selection of independent auditors for each Fund.
This Proxy Statement and Prospectus serves as a prospectus of Arizona II
under the Securities Act of 1933, as amended (the 'Securities Act'), in
connection with the issuance of Arizona II Common Stock and Arizona II Series B
AMPS in the Reorganization.
The aggregate net asset value of the Arizona II Common Stock to be issued to
the holders of shares of Common Stock, with a par value of $.10 per share, of
Arizona I ('Arizona I Common Stock') will equal the aggregate net asset value of
the shares of Arizona I Common Stock on the date of the Reorganization.
Similarly, it is intended that the aggregate liquidation preference of the
Arizona II Series B AMPS to be issued to the holders of shares of AMPS of
Arizona I, with a par value of $.05 per share and a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) ('Arizona I AMPS') will equal the
aggregate liquidation preference of the Arizona I AMPS on the date of the
Reorganization. Immediately upon the receipt by Arizona II of substantially all
of Arizona I's assets and the assumption by Arizona II of substantially all of
Arizona I's liabilities, Arizona I will be liquidated and Arizona II Common
Stock and Arizona II Series B AMPS will be distributed to Arizona I's
stockholders. Thereafter, Arizona I will terminate its registration under the
Investment Company Act of 1940, as amended (the 'Investment Company Act'), and
will liquidate and dissolve in accordance with the laws of the State of
Maryland.
Both Arizona I and Arizona II are non-diversified, leveraged, closed-end
management investment companies with virtually identical investment objectives.
Both Arizona I and Arizona II seek to provide stockholders with as high a level
of current income exempt from Federal and Arizona income taxes as is consistent
with their respective investment policies and prudent investment management.
Arizona I and Arizona II seek to achieve their respective investment objectives
by investing primarily in a portfolio of long-term, investment grade municipal
obligations the interest on which, in the opinion of bond counsel to the issuer,
is exempt from Federal and Arizona income taxes ('Arizona Municipal Bonds').
There can be no assurance that after the Reorganization the surviving fund will
achieve the investment objective of either Arizona I or Arizona II.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT AND
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
This Proxy Statement and Prospectus sets forth concisely the information
about Arizona I and Arizona II that stockholders of Arizona I and Arizona II
should know before considering the Reorganization and should be retained for
future reference. Arizona I and Arizona II have authorized the solicitation of
proxies in connection with the Reorganization solely on the basis of this Proxy
Statement and Prospectus and the accompanying documents.
Arizona I Common Stock and Arizona II Common Stock are listed on the
American Stock Exchange (the 'AMEX') under the symbols 'MZA' and 'MZT',
respectively. Subsequent to the Reorganization, shares of Common Stock of
MuniYield Arizona Fund, Inc. will be listed on the AMEX under the symbol 'MZT'.
Reports, proxy materials and other information concerning either Fund may be
inspected at the offices of the AMEX, 86 Trinity Place, New York, New York
10006.
The address of the principal executive offices of both Arizona I and Arizona
II is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the telephone
number is (609) 282-2000.
------------------------
THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS JANUARY 4, 1995.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTION.......................................................... 3
AGREEMENT AND PLAN OF REORGANIZATION
SUMMARY............................................................. 4
RISK FACTORS AND SPECIAL CONSIDERATIONS............................. 14
COMPARISON OF THE FUNDS............................................. 16
THE REORGANIZATION.................................................. 44
ELECTION OF DIRECTORS................................................. 51
SELECTION OF INDEPENDENT AUDITORS..................................... 58
INFORMATION CONCERNING THE SPECIAL MEETINGS........................... 58
ADDITIONAL INFORMATION................................................ 60
CUSTODIAN............................................................. 61
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR............... 61
LEGAL PROCEEDINGS..................................................... 61
LEGAL OPINIONS........................................................ 61
EXPERTS............................................................... 61
STOCKHOLDER PROPOSALS................................................. 62
INDEX TO FINANCIAL STATEMENTS......................................... F-1
</TABLE>
<TABLE>
<S> <C> <C>
EXHIBIT I --AGREEMENT AND PLAN OF REORGANIZATION................. I-1
EXHIBIT II --ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA......... II-1
EXHIBIT III --RATINGS OF FIXED INCOME SECURITIES................... III-1
</TABLE>
2
<PAGE>
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Directors of Arizona I and
Arizona II 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 January 25, 1995, at 9:00 A.M., New York time (for Arizona I) and 9:30 A.M.,
New York time (for Arizona II). The mailing address for both Arizona I and
Arizona II is Box 9011, Princeton, New Jersey 08543-9011. The approximate
mailing date of this Proxy Statement and Prospectus is January 5, 1995.
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 Arizona I or Arizona II, as the case may be, at the address
indicated above or by voting in person at the Meetings. 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, proxies will be voted
'FOR' each of the following proposals: (1) to approve the Agreement and Plan of
Reorganization between Arizona I and Arizona II (the 'Agreement and Plan of
Reorganization'); (2) to elect a Board of Directors of each Fund to serve for
the ensuing year; and (3) to ratify the selection of Deloitte & Touche LLP as
the independent auditors of each Fund for the current fiscal year.
With respect to proposal 1, approval of the Agreement and Plan of
Reorganization will require the affirmative vote of stockholders representing
more than 50% of the outstanding shares of Arizona I Common Stock and Arizona I
AMPS, voting together as a single class, and more than 50% of the outstanding
shares of Arizona I AMPS, voting separately as a class, as well as the
affirmative vote of stockholders representing more than 50% of the outstanding
shares of Arizona II Common Stock and AMPS of Arizona II, with a par value of
$.10 per share and a liquidation preference of $25,000 per share plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) ('Arizona II AMPS'), voting together as a single class, and more than
50% of the outstanding shares of Arizona II AMPS, voting separately as a class.
With respect to proposal 2, holders of shares of Arizona I AMPS are entitled to
elect two Directors of their Fund and holders of shares of Arizona I Common
Stock and Arizona I AMPS together are entitled to elect the remaining Directors
of their Fund; similarly, holders of shares of Arizona II AMPS are entitled to
elect two Directors of their Fund and holders of shares of Arizona II Common
Stock and Arizona II AMPS together are entitled to elect the remaining Directors
of their Fund. Assuming a quorum is present, (x) election of the two Directors
of Arizona I or Arizona II, as the case may be, by the holders of shares of
their respective AMPS, voting separately as a class, will require the
affirmative vote of the holders of a majority of shares of their respective
AMPS, represented at the Meetings and entitled to vote; and (y) election of the
remaining Directors of Arizona I or Arizona II, as the case may be, will require
the affirmative vote of the holders of a majority of shares of their respective
Common Stock and AMPS, voting together as a single class, represented at the
Meetings and entitled to vote. With respect to proposal 3, approval of the
ratification of the selection of Deloitte & Touche LLP as the independent
auditors of Arizona I will require the affirmative vote of the holders of a
majority of shares of the Arizona I Common Stock and the Arizona I AMPS
represented at the Meetings and entitled to vote, voting together as a single
class; similarly, approval of the ratification of the selection of Deloitte &
Touche LLP as the independent auditors of Arizona II will require the
affirmative vote of the holders of a majority of shares of the Arizona II Common
Stock and the Arizona II AMPS represented at the Meetings and entitled to vote,
voting together as a single class.
3
<PAGE>
The Boards of Directors of Arizona I and Arizona II have fixed the close
of business on December 14, 1994 as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meetings or any
adjournment thereof. Stockholders on the record date will be entitled to one
vote for each share held, with no shares having cumulative voting rights. As of
December 14, 1994, there were issued and outstanding 2,513,709 shares of Arizona
I Common Stock, 694 shares of Arizona I AMPS, 1,867,043 shares of Arizona II
Common Stock and 518 shares of Arizona II AMPS. To the knowledge of the
management of Arizona I and Arizona II, no person owned beneficially more than
5% of the respective outstanding shares of either class of capital stock of
Arizona I or Arizona II at such record date.
The Boards of Directors of Arizona I and Arizona II know of no business
other than that discussed in proposals 1, 2 and 3 above which 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.
AGREEMENT AND PLAN OF 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 I.
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 Arizona I by Arizona II
and the subsequent distribution of Arizona II Common Stock and Arizona II Series
B AMPS to the holders of Arizona I Common Stock and Arizona I AMPS,
respectively, (ii) the amendment of the Articles of Incorporation of Arizona II
to change its name to 'MuniYield Arizona Fund, Inc.' and (iii) the subsequent
deregistration and dissolution of Arizona I.
At special meetings of the Boards of Directors of Arizona I and Arizona
II held on June 17, 1994, the Boards of Directors of Arizona I and Arizona II
deemed advisable a proposal that Arizona II acquire substantially all of the
assets, and assume substantially all of the liabilities, of Arizona I in
exchange solely for Arizona II Common Stock and Arizona II Series B AMPS to be
distributed to the stockholders of Arizona I in liquidation of Arizona I.
Subject to obtaining the necessary approvals from the Arizona I and Arizona II
stockholders, the Board of Directors of Arizona I deemed advisable the
deregistration of Arizona I under the Investment Company Act and its dissolution
under the laws of the State of Maryland, and the Board of Directors of Arizona
II deemed advisable an amendment to the Articles of Incorporation of Arizona II
to change its name to 'MuniYield Arizona Fund, Inc.'
Both Arizona I and Arizona II seek to provide stockholders with as high a
level of current income exempt from Federal and Arizona income taxes as is
consistent with their respective investment policies and prudent investment
management. Both Arizona I and Arizona II seek to achieve their investment
objectives by investing primarily in a portfolio of Arizona Municipal Bonds.
Arizona I and Arizona II are both non-diversified, leveraged, closed-end
management investment companies registered under the Investment Company Act. If
the Arizona I and Arizona II stockholders approve
4
<PAGE>
the Reorganization, Arizona II Common Stock and Arizona II Series B AMPS will be
distributed to Arizona I stockholders in exchange for the assets of Arizona I.
After the Reorganization, Arizona I will terminate its registration under the
Investment Company Act and its incorporation under Maryland law.
Based upon their evaluation of all relevant information, the Directors of
Arizona I and Arizona II have determined that the Reorganization will benefit
the holders of Common Stock of both Arizona I and Arizona II. Specifically,
after the Reorganization, Arizona I stockholders will remain invested in a
closed-end fund that has investment objectives and policies virtually identical
to those of Arizona I and which utilizes the same management personnel. In
addition, it is anticipated that both Arizona I and Arizona II common
stockholders will be subject to a reduced overall operating expense ratio based
on the combined assets of the surviving fund after the Reorganization. It is not
anticipated that the Reorganization directly will benefit the holders of shares
of Arizona I AMPS or Arizona II AMPS; however, the Reorganization will not
adversely affect the holders of shares of AMPS of either Fund and the expenses
of the Reorganization will not be borne by the holders of shares of AMPS of
either Fund.
In deciding to recommend the Reorganization, the Boards of Directors of
Arizona I and Arizona II took into account the investment objectives and
policies of both Arizona I and Arizona II, the expenses incurred both due to the
Reorganization and on an ongoing basis by the new and existing stockholders of
Arizona II and the potential benefits, including economies of scale, to Arizona
I and Arizona II common and preferred stockholders as a result of the
Reorganization. The Boards of Directors of Arizona I and Arizona II, including
all of the Directors who are not 'interested persons', as defined in the
Investment Company Act, of Arizona I or Arizona II, have determined that the
Reorganization is in the best interests of the common and preferred stockholders
of Arizona I and Arizona II and that the interests of such stockholders will not
be diluted as a result of effecting the Reorganization.
If all of the requisite approvals are obtained, it is anticipated that
the Reorganization will occur on January 26, 1995. Under the Agreement and Plan
of Reorganization, however, the Board of Directors of either Arizona I or
Arizona II may cause the Reorganization to be postponed or abandoned should
either Board determine that it is in the best interests of the stockholders of
either Arizona I or Arizona II, respectively, to do so. The Agreement and Plan
of Reorganization may be terminated, and the Reorganization abandoned, whether
before or after approval by the Funds' stockholders, at any time prior to the
Exchange Date (as defined below) (i) by mutual consent of the Boards of
Directors of Arizona I and Arizona II; (ii) by the Board of Directors of Arizona
I if any condition to Arizona I's obligations has not been fulfilled or waived
by such Board; or (iii) by the Board of Directors of Arizona II if any condition
to Arizona II's obligations has not been fulfilled or waived by such Board.
5
<PAGE>
PRO FORMA FEE TABLE FOR COMMON STOCKHOLDERS OF ARIZONA I, ARIZONA II
AND THE COMBINED FUND AS OF OCTOBER 31, 1994 (UNAUDITED)(A)
<TABLE>
<CAPTION>
ACTUAL
----------------------- PRO FORMA FOR
ARIZONA I ARIZONA II COMBINED FUND
--------- ---------- -------------
<S> <C> <C> <C>
Common Stockholder
Transaction Expenses:
Maximum Sales Load (as a
percentage of the
offering price) imposed
on purchases of Common
Stock.................... 5.50%(b) 5.50%(b) (c)
Dividend Reinvestment and
Cash Purchase Plan
Fees..................... None None None
Annual Fund Operating Expenses
(as a percentage of
average net assets for the
year ended October 31,
1994):
Investment Advisory Fees.... 0.50% 0.50% 0.50%
Other Expenses
Transfer Agent Fees...... 0.05% 0.07% 0.03%
Custodian Fee............ 0.01 0.01 0.01
Miscellaneous............ 0.37 0.51 0.35
--------- ---------- -----
--------- ----------
Total Other Expenses........ 0.43 0.59 0.39
--------- ---------- -----
--------- ---------- -----
Total Annual Operating
Expenses.................... 0.93%(d) 1.09%(d) 0.89%
--------- ----------- -----
--------- ----------- -----
</TABLE>
- ------------------
(a) No information is presented with respect to AMPS because AMPS are sold at a
fixed liquidation preference of $25,000 per share and investment return is
set at auction; therefore, neither Fund's expenses nor expenses of the
Reorganization will be borne by AMPS holders of either Fund.
(b) Sales load charged in the Fund's initial offering, subject to reductions
for bulk purchases. Shares of Common Stock purchased on the secondary
market are not subject to sales loads, but may be subject to brokerage
commissions or other charges.
(c) No sales load will be charged on the issuance of shares in the
Reorganization. Shares of Common Stock are not available for purchase from
the Funds but may be purchased through a broker-dealer subject to
individually negotiated commission rates.
(d) Before expense reimbursement. Fund Asset Management, L.P., the investment
adviser for each Fund, has voluntarily agreed for an indefinite period of
time to reimburse each Fund for certain expenses. Taking into account such
voluntary reimbursement, the expense ratios for Arizona I and Arizona II as
of October 31, 1994 were 0.66% and 0.54%, respectively. Such voluntary
reimbursement may be reduced or discontinued at any time.
6
<PAGE>
Example:
CUMULATIVE EXPENSES PAID ON SHARES
OF COMMON STOCK FOR THE PERIOD OF:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment,
including the maximum sales load of
$55 and assuming (1) an operating
expense ratio of 0.93% for Arizona I
shares and 1.09% for Arizona II shares
and (2) a 5% annual return throughout
the periods:
Arizona I............................. $64 $83 $104 $163
Arizona II............................ $66 $88 $112 $181
Assuming the Reorganization had taken
place on October 31, 1994, an investor
would pay the following expenses on a
$1,000 investment, including the
maximum sales load of $55 and assuming
(1) an operating expense ratio of
0.89% and (2) a 5% annual return
throughout the periods:
Combined Fund......................... $64 $82 $102 $159
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that an Arizona I or Arizona II Common Stockholder 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 shares of Common Stock were purchased in the initial
offerings and reinvestment of all dividends and distributions and utilizes a 5%
annual rate of return as mandated by Securities and Exchange Commission
regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES
OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
See 'Comparison of the Funds' and 'The Reorganization--Benefits to Arizona I
Common Stockholders and Arizona II Common Stockholders as a Result of the
Reorganization'.
7
<PAGE>
<TABLE>
<S> <C>
BUSINESS OF ARIZONA I Arizona I was incorporated under the
laws of the State of Maryland on June
7, 1993 and commenced operations on
July 30, 1993. Like Arizona II,
Arizona I is a non-diversified,
leveraged, closed-end management
investment company whose investment
objective is to provide stockholders
with as high a level of current income
exempt from Federal and Arizona income
taxes as is consistent with its
investment policies and prudent
investment management. Furthermore,
like Arizona II, Arizona I seeks to
achieve its investment objective by
investing primarily in a portfolio of
Arizona Municipal Bonds. See
'Comparison of the Funds--Investment
Objectives and Policies'.
Like Arizona II, Arizona I has
outstanding both Common Stock and
AMPS. As of October 31, 1994, Arizona
I had net assets of $46,625,004.
BUSINESS OF ARIZONA II Arizona II was incorporated under the
laws of the State of Maryland on
August 24, 1993 and commenced
operations on October 29, 1993. Like
Arizona I, Arizona II is a
non-diversified, leveraged, closed-end
management investment company whose
investment objective is to provide
stockholders with as high a level of
current income exempt from Federal and
Arizona income taxes as is consistent
with its investment policies and
prudent investment management.
Furthermore, like Arizona I, Arizona
II seeks to achieve its investment
objective by investing primarily in a
portfolio of Arizona Municipal Bonds.
Like Arizona I, Arizona II has
outstanding both Common Stock and
AMPS. As of October 31, 1994, Arizona
II had net assets of $34,103,398.
COMPARISON OF THE FUNDS Investment Objectives and
Policies. Arizona I and Arizona II
have virtually identical investment
objectives and policies, except that
Arizona I is required to maintain at
least 80% of its total assets in
Arizona Municipal Bonds while Arizona
II is required to maintain at least
65% of its total assets in Arizona
Municipal Bonds and at least 80% of
its total assets in Arizona Municipal
Bonds and other long-term municipal
obligations exempt from Federal
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
income taxes, but not from Arizona
income taxes. As a practical matter,
since both Funds seek to pay interest
exempt from Arizona income taxes, both
Funds seek to maintain as much of
their respective portfolios invested
in Arizona Municipal Bonds as
possible. As of October 31, 1994, 90%
of Arizona I's net assets and 89% of
Arizona II's net assets were invested
in Arizona Municipal Bonds.
Each Fund intends to maintain at least
75% of its total assets in municipal
obligations which are rated investment
grade or, if unrated, are considered
by the Fund's investment adviser to be
of comparable quality. Each Fund may
invest up to 25% of its total assets
in municipal obligations which are
rated below investment grade or, if
unrated, are considered by the Fund's
investment adviser to be of comparable
quality. Such lower quality municipal
obligations (commonly referred to as
'junk bonds') frequently are traded
only in markets where the number of
potential purchasers and sellers, if
any, is very limited. The same
investment restrictions apply to both
Arizona I and Arizona II. See
'Comparison of the Funds--Investment
Objectives and Policies'.
Capital Stock. Arizona I and Arizona
II each has outstanding both Common
Stock and AMPS. Like Arizona II Common
Stock, Arizona I Common Stock is
traded on the AMEX. As of October 31,
1994, the net asset value per share of
the Arizona I Common Stock was $11.65
and the market price per share was
$10.75, and as of the same date, the
net asset value per share of the
Arizona II Common Stock was $11.33 and
the market price per share was
$10.375. Arizona I AMPS and Arizona II
AMPS have liquidation preferences of
$25,000 per share and are sold
principally at auction. See
'Comparison of the Funds--Capital
Stock'.
The interest rate for the initial
dividend period for the Arizona
I AMPS was set at 2.75% per annum at the
end of the initial public offering of
the AMPS on August 25, 1993. The first
auction for the Arizona I AMPS was held
on Monday, August 29, 1994, and
thereafter auctions have been held and
will be held
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
every seven days, unless
Arizona I elects, subject to certain
limitations, to have a special
dividend period. As of the most recent
auction on December 12, 1994, the
interest rate on the Arizona I AMPS
was 3.44%. The interest rate for the
Arizona II AMPS for the initial
dividend period which ended on
February 16, 1994 was 2.75% per annum,
and since February 16 auctions have
been held and will be held every seven
days, unless Arizona II elects,
subject to certain limitations, to
have a special dividend period. As of
the most recent auction on December
14, 1994 the interest rate on the
Arizona II AMPS was 4.00%.
Advisory Fees. The investment adviser
for both Arizona I and Arizona II is
Fund Asset Management, L.P. ('FAM'),
formerly known as Fund Asset
Management, Inc. FAM is an affiliate
of MLAM, and both FAM and MLAM are
owned and controlled by Merrill Lynch
& Co., Inc. ('ML & Co.'). The
principal business address of FAM is
800 Scudders Mill Road, Plainsboro,
New Jersey 08536. MLAM or FAM acts as
the investment adviser for more than
100 registered investment companies.
FAM also offers portfolio management
and portfolio analysis services to
individuals and institutions.
FAM is responsible for the management
of each Fund's investment portfolio
and for providing administrative
services to each Fund. The same
personnel manage the portfolios of
both Arizona I and Arizona II. Vincent
R. Giordano and Kenneth A. Jacob serve
as the portfolio managers for both
Funds.
Pursuant to separate investment
advisory agreements between each Fund
and FAM, each Fund pays FAM a monthly
fee at the annual rate of 0.50% of
such Fund's average weekly net assets.
Subsequent to the Reorganization, FAM
will continue to receive compensation
at the rate of 0.50% of the average
weekly net assets of the surviving
Fund. See 'Comparison of the
Funds--Management of the Funds'.
Other Significant Fees. The Bank of
New York is the transfer agent,
dividend disbursing agent and
registrar for both Arizona I and
Arizona II in
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
connection with their respective Common
Stock, at the same rate for each Fund.
The Bank of New York also is the
custodian for the assets of Arizona I
and Arizona II, at the same rate for
each Fund. The principal business
addresses of The Bank of New York
are 101 Barclay Street, New York, New
York 10286 (for its transfer agency
services) and 90 Washington Street, New
York, New York 10286 (for its custodial
services).
IBJ Schroder Bank and Trust Company is
the transfer agent, registrar and
auction agent for both Arizona I and
Arizona II in connection with their
respective AMPS, at the same rate for
each Fund. The principal business
address of IBJ Schroder Bank and Trust
Company is One State Street, New York,
New York 10004. See 'Comparison of the
Funds--Management of the Funds'.
Overall Expense Ratio. The overall
operating expense ratio as of October
31, 1994 for Arizona I was 0.93%
(0.66% after voluntary reimbursement
by FAM) and for Arizona II was 1.09%
(0.54% after voluntary reimbursement
by FAM). If the Reorganization had
taken place on October 31, 1994, the
overall operating expense ratio for
the combined fund on a pro forma basis
would have been 0.89%.
Purchases and Sales of Common Stock
and AMPS. Purchase and sale
procedures for both Arizona I Common
Stock and Arizona II Common Stock are
identical, and investors typically
purchase and sell shares of Common
Stock of such Funds through a
registered broker-dealer on the AMEX,
thereby incurring a brokerage
commission set by the broker-dealer.
Alternatively, investors may purchase
or sell shares of Common Stock of such
Funds through privately negotiated
transactions with existing
stockholders.
Purchase and sale procedures for
Arizona I AMPS and Arizona II AMPS
also are identical. Such AMPS
generally are purchased and sold at
separate auctions conducted on a
regular basis by IBJ Schroder Bank and
Trust Company, as the auction agent
for each Fund's AMPS (the 'Auction
Agent'). Unless
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
otherwise permitted by the
Funds, existing and potential holders
of AMPS only may participate in
auctions through their broker-dealers.
Broker-dealers submit the orders of
their respective customers who are
existing and potential holders of AMPS
to the Auction Agent. On or prior to
each auction date for the AMPS (the
business day next preceding the first
day of each dividend period), each
holder may submit orders to buy, sell
or hold AMPS to its broker-dealer.
Outside of these auctions, shares of
Arizona I AMPS or Arizona II 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 actually will be developed and
maintained by the broker-dealers for
either of the AMPS.
Ratings of AMPS. The Arizona I AMPS
and the Arizona II AMPS have each been
assigned a rating of AAA from Standard
& Poor's Ratings Group ('S&P') and Aa1
from Moody's Investors Service, Inc.
('Moody's'). See 'Comparison of the
Funds-- Rating Agency Guidelines';
Exhibit III--'Ratings of Fixed Income
Securities.'
Portfolio Transactions. The portfolio
transactions in which Arizona I and
Arizona II may engage are identical,
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 identical for
Arizona I and Arizona II, both with
respect to the Common Stock and the
AMPS of each Fund. See 'Comparison of
the Funds--Dividends and
Distributions'.
Voting Rights. The corresponding
voting rights of the holders of shares
of Arizona I Common Stock and Arizona
II Common Stock are identical.
Similarly, the corresponding voting
rights of the holders of shares of
Arizona I AMPS and Arizona II AMPS are
identical. See 'Comparison of the
Funds--Capital Stock'.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Stockholder Services. An automatic
dividend reinvestment plan is
available both to the holders of
shares of Arizona I Common Stock and
the holders of shares of Arizona II
Common Stock. The plans are identical
for the two Funds. See 'Comparison of
the Funds--Automatic Dividend
Reinvestment Plan'. Other stockholder
services, including the provision of
annual and semi-annual reports, are
the same for the two Funds.
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING SECURITIES OF ARIZONA I AND ARIZONA II
AS OF OCTOBER 31, 1994
- --------------------------------------------------------------------------------
AMOUNT HELD BY AMOUNT OUTSTANDING
REGISTRANT EXCLUSIVE
FOR ITS OWN OF AMOUNT SHOWN IN
TITLE OF CLASS AMOUNT AUTHORIZED* ACCOUNT PREVIOUS COLUMN
- -------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
ARIZONA I
Common Stock...... 199,999,653 0 2,513,709
AMPS.............. 347 0 347
ARIZONA II
Common Stock...... 199,999,482 0 1,867,043
AMPS.............. 518 0 518
</TABLE>
- ------------------
* The number of authorized shares of capital stock includes both the Common
Stock and the AMPS.
<TABLE>
<S> <C>
TAX CONSIDERATIONS Arizona I and Arizona II have each received a
private letter ruling from the Internal Revenue
Service (the 'IRS') with respect to the
Reorganization to the effect that, among other
things, for Federal income tax purposes Arizona I
stockholders will recognize no gain or loss on the
receipt of shares of Arizona II Common Stock or
Series B AMPS and neither Arizona I nor Arizona II
will recognize gain or loss on the transfer of
Arizona I assets in exchange for Arizona II stock.
The Reorganization will not affect the status of
Arizona II as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the
'Code'). Arizona I will liquidate pursuant to the
Reorganization.
</TABLE>
13
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Since both Arizona I and Arizona II invest primarily in a portfolio of
Arizona Municipal Bonds, any risks inherent in such investments are equally
applicable to both Funds and will be similarly pertinent to the combined fund
after the Reorganization. It is expected that the Reorganization itself will not
adversely affect the rights of holders of shares of Common Stock or AMPS of
either Fund or create additional risks.
SPECIAL CONSIDERATIONS RELATING TO ARIZONA MUNICIPAL BONDS
Arizona I and Arizona II ordinarily invest substantially all of their total
assets in Arizona Municipal Bonds and, therefore, they are more susceptible to
factors adversely affecting issuers of Arizona Municipal Bonds than is a
municipal bond investment company that is not concentrated in issuers of Arizona
Municipal Bonds to this degree. Economic activity in Arizona, as in many other
industrially developed states, tends to be more cyclical than in some other
states and in the nation as a whole. However, diversification of the State's
economy has helped enable the State to maintain a moderate rate of growth. The
ultimate effect of the Chapter 11 bankruptcies of three of the State's major
employers cannot be predicted at this time. FAM does not believe that the
current economic conditions in Arizona will have a significant adverse effect on
either Fund's ability to invest prudently in Arizona Municipal Bonds. See
Exhibit II--'Economic and Financial Conditions in Arizona.'
EFFECTS OF LEVERAGE
Utilization of leverage, through the issuance of AMPS, involves certain
risks to holders of Arizona I Common Stock and Arizona II Common Stock. For
example, each Fund's issuance of AMPS may result in higher volatility of the net
asset value of its Common Stock and potentially more volatility in the market
value of its Common Stock. In addition, fluctuations in the short-term and
medium-term dividend rates on, and the amount of taxable income allocable to,
the AMPS affect the yield to holders of Common Stock. So long as each Fund,
taking into account the costs associated with its AMPS and the Fund's operating
expenses, is able to realize a higher net return on its investment portfolio
than the then current dividend rate on the AMPS, the effect of leverage is to
cause holders of the Fund's Common Stock to realize a higher current rate of
return than if the Fund were not leveraged. Similarly, since a pro rata portion
of each Fund's net realized capital gains on its investment assets generally is
payable to holders of the Fund's Common Stock, if increased net capital gains
are realized by the Fund because of increased capital for investment, the effect
of leverage will be to increase the amount of such gains distributed to holders
of the Fund's Common Stock. However, short-term, medium-term and long-term
interest rates change from time to time as does their relationship 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
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 increase substantially
relative to the long-term obligations in which each Fund may be invested. To the
extent that the current dividend rate on the AMPS approaches the net return on a
Fund's investment portfolio, the benefit of leverage to holders of Common Stock
is reduced, and if the current dividend rate on the AMPS were to exceed the net
return on a Fund's portfolio, the Fund's leveraged capital structure would
result in a lower rate of return to holders of Common Stock than if the Fund
were not leveraged. Similarly, since both the costs associated with the issuance
of AMPS and any decline in the value of a Fund's investments (including
investments purchased with the proceeds from any AMPS offering) are borne
entirely by holders of the Fund's Common Stock, the effect of leverage in a
declining market would result in a greater decrease in net asset value to
holders of Common Stock than if the Fund were not leveraged. Such decrease in
net asset value likely would be reflected in a greater decline in the market
price for shares of Common Stock.
14
<PAGE>
In an extreme case, a decline in net asset value could affect each Fund's
ability to pay dividends on its Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification for the special tax
treatment afforded regulated investment companies under the Code. See 'The
Reorganization--Tax Consequences of the Reorganization.' Each Fund intends,
however, to take all measures necessary to continue to make Common Stock
dividend payments. If a Fund's current investment income were not sufficient to
meet dividend requirements on either the Common Stock or the AMPS, it could be
necessary for the Fund 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 if (i) 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 the Common Stock than that obtainable if the Common Stock
were unleveraged or (ii) the asset coverage (as defined in the Investment
Company Act) for the AMPS declines below 200%. Redemption of the AMPS or
insufficient investment income to make dividend payments may reduce the net
asset value of the Common Stock and require the Fund to liquidate a portion of
its investments at a time when it may be disadvantageous, in the absence of such
extraordinary circumstances, to do so.
PORTFOLIO MANAGEMENT
The portfolio management strategies of Arizona I and Arizona II are the
same. In the event of an increase in short-term or medium-term rates or other
change in market conditions to the point where a Fund's leverage could adversely
affect holders of Common Stock 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 Stock. 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 Articles
Supplementary 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.
RATINGS CONSIDERATIONS
Arizona I and Arizona II have received ratings of their AMPS of AAA from
S&P and Aa1 from Moody's. In order to maintain these ratings, the Funds may be
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 recently 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 on the AMPS are not recommendations to purchase, hold
or sell shares of AMPS, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor, nor do the rating agency
guidelines described above address the likelihood that a holder of shares 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. Neither the Arizona I Common Stock nor the Arizona II Common Stock
has been rated by a nationally recognized statistical rating organization.
The Board of Directors of Arizona I or Arizona II, as the case may be,
without stockholder approval, may amend, alter or repeal any or all of the
various rating agency guidelines described herein 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 shares of AMPS. See Exhibit
III--'Ratings of Fixed Income Securities.'
15
<PAGE>
COMPARISON OF THE FUNDS
FINANCIAL HIGHLIGHTS
ARIZONA I
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors.
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE FOR THE FOR THE PERIOD
BEEN DERIVED YEAR ENDED JULY 30, 1993+
FROM INFORMATION PROVIDED IN THE FINANCIAL OCTOBER 31, TO OCTOBER 31,
STATEMENTS. 1994 1993
- --------------------------------------------- ----------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
- ---------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 14.82 $ 14.18
----------- ---------------
Investment income--net..................... 1.06 .27
Realized and unrealized gain (loss) on
investments--net........................... (3.09) .77
----------- ---------------
Total from investment operations............. (2.03) 1.04
----------- ---------------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net..................... (.88) (.15)
Realized gain on investments--net.......... (.04) --
----------- ---------------
Total dividends and distributions to Common
Stock shareholders......................... (.92) (.15)
----------- ---------------
Capital charge resulting from issuance of
Common Stock............................... -- (.05)
----------- ---------------
Effect of Preferred Stock activity:++
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net................... (.19) (.03)
Realized gain on investments--net........ (.01) --
Capital charge resulting from issuance of
Preferred Stock.......................... (.02) (.17)
----------- ---------------
Total effect of Preferred Stock activity (.22) (.20)
----------- ---------------
Net asset value, end of period............... $ 11.65 $ 14.82
----------- ---------------
Market price per share, end of period........ $ 10.75 $ 14.875
----------- ---------------
TOTAL INVESTMENT RETURN:**...................
Based on market price per share............ (22.48%) .16%++
----------- ---------------
Based on net asset value per share......... (15.98%) 5.56%++
----------- ---------------
RATIOS TO AVERAGE NET ASSETS:***.............
Expenses, net of reimbursement............... .66% --
----------- ---------------
Expenses..................................... .93% 1.09%*
----------- ---------------
Investment income--net....................... 5.24% 5.73%*
----------- ---------------
SUPPLEMENTAL DATA:
Net assets, net of Preferred Stock, end of
period (in thousands)...................... $ 29,275 $ 36,602
----------- ---------------
Preferred Stock outstanding, end of period
(in thousands)............................. $ 17,350 $ 17,350
----------- ---------------
Portfolio turnover........................... 57.28% 16.91%
----------- ---------------
DIVIDENDS PER SHARE ON PREFERRED STOCK
OUTSTANDING:
Investment income--net....................... $ 1,389 $ 237
----------- ---------------
</TABLE>
- ------------------
*Annualized.
**Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, result in substantially different
returns. Total investment returns exclude the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Stock shareholders.
+Commencement of Operations.
++The Fund's Preferred Stock was issued on August 30, 1993.
++Aggregate total investment return.
16
<PAGE>
ARIZONA II
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors.
<TABLE>
<CAPTION>
FOR THE PERIOD
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE FOR THE OCTOBER 29,
BEEN DERIVED YEAR ENDED 1993+
FROM INFORMATION PROVIDED IN THE FINANCIAL OCTOBER 31, TO OCTOBER 31,
STATEMENTS. 1994 1993
- --------------------------------------------- ----------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
- ---------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 14.11 $ 14.18
----------- ---------------
Investment income--net..................... .99 --
Realized and unrealized gain (loss) on
investments--net......................... (2.68) --
----------- ---------------
Total from investment operations............. (1.69) --
----------- ---------------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net..................... (.75) --
----------- ---------------
Capital charge resulting from issuance of
Common Stock............................... -- (.07)
----------- ---------------
Effect of Preferred Stock activity:++
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net..................... (.17) --
Capital charge resulting from issuance of
Preferred Stock............................ (.17) --
----------- ---------------
Total effect of Preferred Stock activity (.34) --
----------- ---------------
Net asset value, end of period............... $ 11.33 $ 14.11
----------- ---------------
Market price per share, end of period $ 10.375 $ 15.00
----------- ---------------
TOTAL INVESTMENT RETURN:**
Based on market price per share.............. (26.55%) 0.00%
----------- ---------------
Based on net asset value per share........... (14.73%) (.49%)++
----------- ---------------
RATIOS TO AVERAGE NET ASSETS:***
Expenses, net of reimbursement............... .54% --
----------- ---------------
Expenses..................................... 1.09% --
----------- ---------------
Investment income--net....................... 5.13% .02%*
----------- ---------------
SUPPLEMENTAL DATA:
Net assets, net of Preferred Stock, end of
period (in thousands)...................... $ 21,153 $ 25,506
----------- ---------------
Preferred Stock outstanding, end of period
(in thousands)............................. $ 12,950 --
----------- ---------------
Portfolio turnover........................... 80.03% --
----------- ---------------
DIVIDENDS PER SHARE ON PREFERRED STOCK
OUTSTANDING:
Investment income--net....................... $ 598 --
----------- ---------------
</TABLE>
- ------------------
*Annualized.
**Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, result in substantially different
returns. Total investment returns exclude the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Stock shareholders.
+Commencement of Operations.
++The Fund's Preferred Stock was issued on December 2, 1993.
++Aggregate total investment return.
17
<PAGE>
PER SHARE DATA FOR ARIZONA I COMMON STOCK
TRADED ON THE AMERICAN STOCK EXCHANGE (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE QUARTER FOR THE QUARTER FOR THE QUARTER FOR THE QUARTER
JULY 30, 1993+ TO ENDED JANUARY ENDED APRIL 30, ENDED JULY 31, ENDED OCTOBER
OCTOBER 31, 1993 31, 1994 1994 1994 31, 1994
---------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
High Sales Price $ 15.50 $ 15.25 $ 15.00 $ 13.50 $ 13.125
High Net Asset Value $ 15.05 $ 14.98 $ 14.92 $ 13.31 $ 12.91
Low Sales Price $ 14.625 $ 13.875 $ 11.50 $ 11.50 $ 10.50
Low Net Asset Value $ 14.12 $ 14.28 $ 11.90 $ 12.22 $ 11.62
</TABLE>
- ------------------
+ Commencement of operations.
PER SHARE DATA FOR ARIZONA II COMMON STOCK
TRADED ON THE AMERICAN STOCK EXCHANGE (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE QUARTER FOR THE QUARTER FOR THE QUARTER
ENDED JANUARY ENDED APRIL 30, ENDED JULY 31, ENDED OCTOBER
31, 1994 1994 1994 31, 1994
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
High Sales Price $ 15.00 $ 14.50 $ 13.50 $ 12.125
High Net Asset Value $ 14.67 $ 14.61 $ 12.97 $ 12.59
Low Sales Price $ 13.25 $ 12.00 $ 11.50 $ 9.875
Low Net Asset Value $ 13.97 $ 11.57 $ 11.81 $ 11.32
</TABLE>
As indicated in the tables above, during the periods since the inception
of the Funds, the Arizona I Common Stock and the Arizona II Common Stock
generally have been traded at prices close to net asset value, with small
premiums or discounts to net asset value being reflected in the market value of
the shares from time to time. Since the termination of share price stabilization
following each Fund's initial public offering, share prices for Arizona I Common
Stock have fluctuated between a maximum premium of 11.34% and a maximum discount
of (13.24%) and share prices for Arizona II Common Stock have fluctuated between
a maximum premium of 15.60% and a maximum discount of (12.77%). Although there
is no reason to believe that this pattern should be affected by the
Reorganization, it is not possible to state 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.
18
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The structure, organization and investment policies of Arizona I and
Arizona II are virtually identical. Each Fund seeks as a fundamental investment
objective as high a level of current income exempt from Federal and Arizona
income taxes as is consistent with the Fund's investment policies and prudent
investment management. The sole technical difference in the investment policies
of the Funds is that Arizona I has adopted as a fundamental policy that, except
during interim periods pending investment of the net proceeds of public
offerings of the Fund's securities and during temporary defensive periods, it
will maintain at least 80% of its total assets in Arizona Municipal Bonds.
Arizona II seeks to achieve the same investment objective but has adopted as a
fundamental policy that, with the same exceptions stated for Arizona I, it will
maintain at least 65% of its total assets in Arizona Municipal Bonds and at
least 80% of its total assets in Arizona Municipal Bonds and other long-term
municipal obligations exempt from Federal income taxes, but not from Arizona
income taxes.
Except for the difference described in the preceding paragraph, the
investment objectives and policies of Arizona I and Arizona II are identical.
Each Fund seeks to achieve its investment objective by investing primarily in a
portfolio of Arizona Municipal Bonds. 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. 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 shares of Common Stock.
Ordinarily, neither Fund intends to realize significant investment income
not exempt from Federal and Arizona income taxes. Each Fund seeks to invest
substantially all of its total assets in Arizona Municipal Bonds, except at
times when, in the judgment of FAM, Arizona Municipal Bonds of sufficient
quality and quantity are unavailable for investment by the Fund. To the extent
that suitable Arizona Municipal Bonds are not available for investment by
Arizona I or Arizona II, as determined by FAM, the Funds may purchase long-term
obligations issued by or on behalf of states, territories and possessions of the
United States and their political subdivisions, agencies and instrumentalities
paying interest which, in the opinion of bond counsel to the issuer, is exempt
from Federal but not Arizona income taxes. Obligations exempt from Federal
income taxes are referred to herein as 'Municipal Bonds.' Unless otherwise
indicated, references to Municipal Bonds shall be deemed to include Arizona
Municipal Bonds.
Each Fund, at all times, except during temporary defensive periods, will
maintain at least 75% of its total assets in Municipal Bonds which are rated
investment grade by a nationally recognized statistical rating organization or,
if unrated, are considered to be of comparable quality by FAM. Additionally,
each Fund may invest up to 25% of its total assets in Municipal Bonds which are
rated below investment grade by a nationally recognized statistical rating
organization or, if unrated, are considered to be of comparable quality by FAM.
Such lower quality Municipal Bonds frequently are traded only in markets where
the number of potential purchasers and sellers, if any, is very limited. Each
Fund may invest in certain tax-exempt securities classified as 'private activity
bonds' (in general, bonds that benefit non-governmental entities) that may
subject certain investors in the Fund to an alternative minimum tax.
The investment grade Municipal Bonds in which each Fund invests are those
Municipal Bonds rated at the date of purchase within the four highest rating
categories of S&P, Moody's or Fitch Investors Service, Inc. ('Fitch') or, if
unrated, are considered to be of comparable quality by FAM. In the case of
long-term debt, the
19
<PAGE>
investment grade rating categories are AAA through BBB for S&P, Aaa through Baa
for Moody's and AAA through BBB for Fitch. In the case of short-term notes, the
investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through
MIG-4 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-l+ through F-3 for Fitch. In
the case of variable rate demand obligations ('VRDOs'), the investment grade
rating categories are A-l+ through A-3 for S&P, VMIG-1 through VMIG-4 for
Moody's and F-1 through F-3 for Fitch. Obligations ranked in the fourth highest
rating category assigned long-term debt or in an equivalent short-term rating
category (BBB, SP-2 and A-3 for S&P; Baa, MIG-4 and Prime-3 for Moody's; and
BBB, F-3 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 Municipal Bonds with respect to the foregoing
requirements, FAM takes into account the nature of any letters of credit or
similar credit enhancement to which particular Municipal Bonds are entitled and
the creditworthiness of the financial institution which provided such credit
enhancement. See Exhibit III--'Ratings of Fixed Income Securities.'
As noted above, each Fund may invest up to 25% of its assets in Municipal
Bonds which are rated below investment grade or, if unrated, are considered to
be of comparable quality by FAM. These high yield bonds commonly are referred to
as 'junk bonds' and are regarded as predominantly speculative as to the issuer's
ability to make payments of principal and interest. Consequently, although such
bonds can be expected to provide higher yields, they may be subject to greater
market price fluctuations and risk of loss of principal than lower yielding,
higher rated fixed-income securities. Such securities are particularly
vulnerable to adverse changes in the issuer's industry and in general economic
conditions. Issuers of high yield bonds may be highly leveraged and may not have
available to them more traditional methods of financing. The risk of loss due to
default by the issuer is significantly greater for the holders of these bonds
because such securities may be unsecured and may be subordinated to other
creditors of the issuer. In addition, while the high yield bonds in which each
Fund may invest normally do not include securities which, at the time of
investment, are in default or the issuers of which are in bankruptcy, there can
be no assurance that such events will not occur after the Fund purchases a
particular security, in which case the Fund may experience losses and incur
costs.
High yield bonds frequently have call or redemption features that permit an
issuer to repurchase such bonds from the Fund, which may decrease the net
investment income to the Fund and dividends to stockholders in the event that
the Fund is required to replace a called security with a lower yielding
security. The Fund may have difficulty disposing of certain high yield bonds
because there may be a thin trading market for such securities. Reduced
secondary market liquidity may have an adverse impact on market price and the
Fund's ability to dispose of particular issues when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. In addition, market
quotations generally are available on many high yield bond issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
The investments of Arizona I and Arizona II also may include 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) which contain a floating
or variable interest rate adjustment formula and an unconditional right of
demand on the part of the holder thereof to receive payment of the unpaid
principal
20
<PAGE>
balance plus accrued interest on a short notice period not to exceed seven days.
Participating VRDOs provide the Fund with a specified undivided interest (up to
100%) of the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDOs from the
financial institution on a specified number of days' notice, not to exceed seven
days. There is, however, the possibility that because of default or insolvency,
the demand feature of VRDOs or Participating VRDOs may not be honored. The Funds
have been advised by their counsel that the Funds should be entitled to treat
the income received on Participating VRDOs as interest from tax-exempt
obligations.
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
shares of common stock 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 each Fund.
On a temporary basis, each Fund may invest in short-term tax-exempt
securities, short-term U.S. Government securities, repurchase agreements or
cash. Such securities or cash will not exceed 20% of each Fund's total assets
except during interim periods pending investment of the net proceeds of public
offerings of the Fund's securities and temporary defensive 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
as a 'regulated investment company' for purposes of the Code. See 'The
Reorganization--Tax Consequences of the Reorganization.' 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 the
Fund's total assets are 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
are invested in the securities (other than U.S. Government securities) of a
single issuer. A fund which 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 Arizona I or Arizona II 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.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations with remaining maturities of
greater than one year issued to obtain funds for various public purposes,
including construction of a wide range of public facilities, refunding of
outstanding obligations and obtaining funds for general operating expenses and
loans to other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities to
finance various privately operated facilities, including pollution control
facilities. For purposes of
21
<PAGE>
this Proxy Statement and Prospectus, such obligations are Municipal Bonds if the
interest paid thereon is exempt from Federal income tax, even though such bonds
may be 'private activity bonds' as discussed below.
The two principal classifications of Municipal Bonds are 'general
obligation' bonds and 'revenue' or 'special obligation' bonds. General
obligation bonds are secured by the issuer's pledge of faith, credit and taxing
power for the payment of principal and interest. Revenue or special obligation
bonds are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source such as from the user of the facility being
financed. Industrial development bonds are in most cases revenue bonds and
generally do not constitute the pledge of the credit or taxing power of the
issuer of such bonds. The payment of the principal and interest on such
industrial development bonds depends solely on the ability of the user of the
facility financed by the bonds to meet its financial obligations and the pledge,
if any, of real and personal property so financed as security for such payment.
Municipal Bonds also may include 'moral obligation' bonds which normally are
issued by special purpose public authorities. If an issuer of moral obligation
bonds is unable to meet its obligations, the repayment of such bonds becomes a
moral commitment but not a legal obligation of the state or municipality in
question.
Each Fund may purchase Municipal Bonds classified as 'private activity
bonds' (in general, bonds that benefit non-governmental entities). Interest
received on certain tax-exempt securities which are classified as 'private
activity bonds' may subject certain investors in the Fund to an alternative
minimum tax. There is no limitation on the percentage of each Fund's assets that
may be invested in Municipal Bonds which may subject certain investors to an
alternative minimum tax. See 'Agreement and Plan of Reorganization--The
Reorganization--Tax Consequences of the Reorganization'. Also included within
the general category of Municipal Bonds are participation certificates issued by
government authorities or entities to finance the acquisition or construction of
equipment, land and/or facilities. The certificates represent participations in
a lease, an installment purchase contract or a conditional sales contract
(hereinafter collectively referred to as 'lease obligations') relating to such
equipment, land or facilities. Although lease obligations do not constitute
general obligations of the issuer for which the issuer's unlimited taxing power
is pledged, a lease obligation frequently is backed by the issuer's covenant to
budget for, appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain 'non-appropriation' clauses which
provide that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although 'non-appropriation' lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a relatively new type of financing
that has not yet developed the depth of marketability associated with more
conventional securities.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Funds.
OTHER INVESTMENT POLICIES
Both Arizona I and Arizona II have adopted certain other policies as set
forth below:
Borrowings. Each Fund is authorized to borrow moneys in 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
22
<PAGE>
excess of 5% of the value of its total assets for the purpose of repurchasing
its Common Stock or redeeming its AMPS. Borrowings by each Fund create an
opportunity for greater total return 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. For so long as shares
of a Fund's AMPS are rated by Moody's or S&P, unless it receives written
confirmation from Moody's or S&P, as the case may be, that such action would not
impair the ratings then assigned to the shares of AMPS by Moody's or S&P, the
issuing Fund will not borrow moneys except for the purpose of clearing portfolio
securities transactions (which borrowings under any circumstances shall be
limited to the lesser of $10 million and an amount equal to 5% of the market
value of the Fund's assets at the time of such borrowings and which borrowings
shall be repaid within 60 days and not
be extended or renewed).
When-Issued Securities and Delayed Delivery Transactions. Arizona I and
Arizona II may purchase or sell 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 Municipal Bonds having a market value at all
times at least equal to the amount of the commitment.
Indexed and Inverse Floating Obligations. Arizona I and Arizona II may
invest in Municipal Bonds the return on which is based on a particular index of
value or interest rates. For example, each Fund may invest in Municipal Bonds
that pay interest based on an index of Municipal Bond interest rates or based on
the value of gold or some other product. The principal amount payable upon
maturity of certain 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 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
rate bonds' 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, by a remarketing agent, or by reference to a short-term
tax-exempt interest rate index). Each Fund may purchase original issue inverse
floating rate bonds in both the primary and secondary markets and also may
purchase in the secondary market synthetically-created inverse floating rate
bonds evidenced by custodial or trust receipts. Generally, interest rates on
inverse floating rate bonds 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 which is a multiple (typically two) of the rate at which fixed-rate,
long-term, tax-exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities generally will be
more volatile than the market values of fixed-rate tax-exempt securities. To
seek to limit the volatility of these securities, the Fund may purchase inverse
floating rate bonds with shorter-term maturities or which contain limitations on
the extent to which the interest rate may vary. FAM believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Funds which allows FAM to vary the degree of investment
leverage relatively efficiently under different market conditions.
Call Rights. Arizona I and Arizona II may purchase a Municipal Bond
issuer's right to call all or a portion of such Municipal Bond for mandatory
tender for purchase (a 'Call Right'). A holder of a Call Right may
23
<PAGE>
exercise such right to require a mandatory tender for the purchase of the
related Municipal Bonds, subject to certain conditions. A Call Right that is not
exercised prior to the maturity of the related Municipal Bond will expire
without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security.
INFORMATION REGARDING FUTURES AND OPTIONS TRANSACTIONS
Each Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of certain financial futures
contracts ('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 its Common Stock, the net asset value of its Common Stock fluctuates.
There can be no assurance that a Fund's hedging transactions will be effective.
For so long as a Fund's AMPS are rated by Moody's and S&P, the Fund's use of
financial futures contracts and options thereon will be subject to certain
limitations mandated by the rating agencies. A Fund only will engage in hedging
activities from time to time and may not necessarily be engaging in hedging
activities when movements in interest rates occur.
Certain Federal income tax requirements may limit a Fund's ability to
engage in hedging transactions. Gains from transactions in financial futures
contracts or options thereon distributed to stockholders are taxable as ordinary
income or, in certain circumstances, as long-term capital gains to stockholders.
In addition, in order to maintain ratings of a Fund's AMPS from Moody's and S&P,
the Fund may be required to limit its use of hedging techniques in accordance
with the specified guidelines of such rating agencies.
The following is a description of the transactions involving financial
futures contracts or options thereon in which each Fund may engage, limitations
on the use of such transactions and risks associated therewith. The investment
policies with respect to the hedging transactions of a Fund are not fundamental
policies and may be modified by the Board of Directors of the Fund without the
approval of the Fund's stockholders.
Writing Covered Call Options. Each Fund is authorized to write (i.e.,
sell) covered call options with respect to Municipal Bonds it owns, thereby
giving the holder of the option the right to buy the underlying security covered
by the option from the Fund at the stated exercise price until the option
expires. 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 is authorized to purchase put options in
connection with its hedging activities. By buying a put the Fund has a right to
sell the underlying security at the exercise price, thus limiting the Fund's
risk of loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid
24
<PAGE>
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 Thereon. Each Fund is authorized
to purchase and sell certain financial futures contracts and options thereon
solely for the purposes of hedging its investments in 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. The purchase or sale of an option on a
financial futures contract is analogous to the purchase or sale of an option on
an individual security. A sale of financial futures contracts or options thereon
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 or options thereon 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 or options.
The purchase or sale of a financial futures contract or option thereon
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 or option thereon fluctuates making the long
and short positions in the financial futures contract or option thereon 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 Municipal Bonds which 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.
Subject to policies adopted by its Board of Directors, each Fund also may
engage in transactions in other financial futures contracts or options thereon,
such as financial futures contracts or options on other municipal bond indices
which may become available, if FAM should determine that there normally is
sufficient correlation between the prices of such financial futures contracts or
options thereon and the Municipal Bonds in which the Fund invests to make such
hedging appropriate.
25
<PAGE>
Over-The-Counter Options. Each Fund is authorized to engage in
transactions involving financial futures contracts or options thereon on
exchanges and in the over-the-counter markets ('OTC options'). In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller.
Restrictions on OTC Options. Each Fund is authorized to engage in
transactions in OTC options only with member banks of the Federal Reserve System
and primary dealers in U.S. Government securities or with affiliates of such
banks or dealers which have capital of at least $50 million or whose obligations
are guaranteed by an entity having capital of at least $50 million. OTC options
and assets used to cover OTC options written by the Funds are considered by the
staff of the Securities and Exchange Commission 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. Utilization of financial futures contracts and options thereon
involves the risk of imperfect correlation in movements in the price of
financial futures contracts and options thereon and movements in the price of
the security which is the subject of the hedge. If the price of the financial
futures contract or option thereon 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
which 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 or options thereon have different maturities,
ratings, geographic compositions or other characteristics than the security
being hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as a basis for a financial futures
contract or option thereon. 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 financial futures contracts or options 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's 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
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed 5%
of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
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
short-term, high-grade, fixed-income 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.
26
<PAGE>
Although certain risks are involved in financial futures contracts and
options thereon, FAM believes that, because each Fund will engage in
transactions involving financial futures contracts and options thereon only for
hedging purposes, the options and futures portfolio strategies of a Fund will
not subject the Fund to certain risks frequently associated with speculation in
financial futures contracts and options thereon. A Fund may be restricted in
engaging in transactions involving financial futures contracts and options
thereon due to the requirement that less than 30% of its gross income in each
taxable year be derived from the sale or other disposition of securities held
for less than three months.
The volume of trading in the exchange markets with respect to 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.
Each Fund intends to enter into financial futures contracts and options
thereon, on an exchange or in the over-the-counter market, only if there appears
to be a liquid secondary market for such financial futures contracts or options.
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 a financial futures
contract position or the related option. The inability to close financial
futures contract positions or the related options 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 a financial
futures contract or the related option.
The liquidity of a secondary market in a financial futures contract or
option thereon may be adversely affected by 'daily price fluctuation limits'
established by commodity exchanges which limit the amount of fluctuation in a
financial futures contract or option price during a single trading day. Once the
daily limit has been reached in the financial futures contract or option, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open financial futures contract positions or the related options.
Prices in the past have reached or exceeded the daily limit on a number of
consecutive trading days.
If it is not possible to close a financial futures contract position or the
related option 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 interest rates remain stable during the period
in which a financial futures contract or option thereon is held by a Fund or
moves in a direction opposite to that anticipated, the Fund may realize a loss
on the hedging transaction which 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.
INVESTMENT RESTRICTIONS
Other than as noted above under 'Investment Objectives and Policies',
Arizona I and Arizona II have identical investment restrictions. The following
are fundamental investment restrictions of each Fund and may not be changed
without the approval of the holders of a majority of the outstanding shares of
Common Stock and
27
<PAGE>
the outstanding shares of AMPS and any other preferred stock, voting as a single
class, and a majority of the outstanding shares of AMPS and any other preferred
stock, voting separately as a class (which for this purpose and under the
Investment Company Act means for each such class the lesser of (i) 67% of the
shares of each class of capital stock represented at a meeting at which more
than 50% of the outstanding shares of each class of capital stock are
represented or (ii) more than 50% of the outstanding shares of each class of
capital stock). Each Fund may not:
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, however,
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.
4. Issue senior securities other than preferred stock 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 shares of Common Stock or redeeming shares of preferred
stock.
5. Underwrite securities of other issuers except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in
selling portfolio securities.
6. Make loans to other persons, except that the Fund may purchase
Municipal Bonds and other debt securities in accordance with its
investment objective, policies and limitations.
7. 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, however, that for purposes of this
restriction, states, municipalities and their political subdivisions
are not considered to be part of any industry.
Additional investment restrictions adopted by each Fund, which may be
changed by the Board of Directors, provide that the Fund may not:
1. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund
except as may be necessary in connection with borrowings mentioned in
investment restriction (4) above or except as may be necessary in
connection with transactions in financial futures contracts and
options thereon.
2. Purchase any securities on margin, except that (subject to
investment restriction (4) above) 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
28
<PAGE>
with financial futures contracts and options thereon is not considered
the purchase of a security on margin).
3. 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 Municipal Bonds,
U.S. Government obligations and related indices or otherwise in
connection with bona fide hedging activities and may purchase and sell
Call Rights to require mandatory tender for the purchase of related
Municipal Bonds.
For so long as shares of a Fund's AMPS are rated by Moody's, the Fund will
not change these additional investment restrictions unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the rating then assigned to the shares of AMPS by Moody's.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
RATING AGENCY GUIDELINES
Each Fund intends that, so long as shares of 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 their
date of original issue of at least Aa1 from Moody's and AAA from S&P. Moody's
and S&P, nationally recognized statistical rating organizations, issue ratings
for various securities reflecting the 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 stocks, 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 stock 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 shares of 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 Articles Supplementary of each Fund, the
Board of Directors, without stockholder approval, may modify certain definitions
or restrictions which have been adopted by the Fund pursuant to the rating
agency guidelines, provided the Board of Directors 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 'Agreement and Plan of
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, the Fund will not buy or sell financial futures contracts,
write, purchase or sell call options on financial futures contracts or purchase
put options on financial 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
29
<PAGE>
impair the ratings then assigned to the shares of AMPS by Moody's or S&P, as the
case may be, except that the Fund may engage in certain hedging transactions
subject to the limitations determined by Moody's or S&P.
PORTFOLIO COMPOSITION
Although the investment portfolios of both 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 two investment portfolios. Of the Municipal Bonds owned by Arizona I as
of October 31, 1994, 42% are rated in the highest grade by Moody's or S&P, 62%
are rated in the highest two grades, 85% are rated in the highest three grades,
94% are rated in the highest four grades, and 0% are unrated. The comparable
percentages for Arizona II are 33% in the highest grade, 60% in the highest two
grades, 84% in the highest three grades, 94% in the highest four grades and 0%
unrated.
There are small differences in concentration among the categories of
issuers of the Municipal Bonds held in the portfolios of the Funds. For Arizona
I, as of October 31, 1994, the highest concentration of Municipal Bonds was in
the general obligation, IDB/PCR and hospital categories, accounting for 35%,
18%, and 16% of the Fund's portfolio, respectively, whereas for Arizona II, the
highest concentration was in the general obligation, pollution control and other
revenue categories, accounting for 37%, 21% and 12% of the Fund's portfolio.
ARIZONA I
As of October 31, 1994, approximately 98.9% of the market value of Arizona
I's portfolio was invested in long-term municipal obligations and approximately
1.1% of the market value of Arizona I's portfolio was invested in short-term
municipal obligations. The following table sets forth certain information with
respect to the composition of Arizona I's long-term municipal obligation
investment portfolio as of October 31, 1994.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
- ---- --------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 15 $ 18,456 40.3%
AA Aa 9 9,644 21.0
A A 7 9,972 21.8
BBB Baa 1 4,110 9.0
BB Ba 2 3,097 6.8
B B -- -- --
CCC Caa -- -- --
CC Ca -- -- --
C C -- -- --
--
-------------- -------
Total 34 $ 45,279 98.9%
-- -------------- -------
-- -------------- -------
</TABLE>
- ------------------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's municipal
obligations. S&P's rating categories may be modified further by a plus (+) or
minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating categories may be
modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings. See Exhibit
III--'Ratings of Fixed Income Securities.'
30
<PAGE>
ARIZONA II
As of October 31, 1994, approximately 97.6% of the market value of Arizona
II's portfolio was invested in long-term municipal obligations and approximately
2.4% of the market value of Arizona II's portfolio was invested in short-term
municipal obligations. The following table sets forth certain information with
respect to the composition of Arizona II's long-term municipal obligation
investment portfolio as of October 31, 1994.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
- ---- ------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 9 $ 10,945 32.8%
AA Aa 6 8,808 26.4
A A 7 7,822 23.4
BBB Baa 1 3,206 9.6
BB Ba 2 1,810 5.4
B B -- -- --
CCC Caa -- -- --
CC Ca -- -- --
C C -- -- --
--
-------------- -------
Total 25 $ 32,591 97.6%
-- -------------- -------
-- -------------- -------
</TABLE>
- ------------------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's municipal
obligations. S&P's rating categories may be modified further by a plus (+) or
minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating categories may be
modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings. See Exhibit
III--'Ratings of Fixed Income Securities.'
PORTFOLIO TRANSACTIONS
The procedures for engaging in portfolio transactions are the same for both
Arizona I and Arizona II. Subject to policies established by the Board of
Directors 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, Arizona I and Arizona II do not
necessarily pay the lowest commission or spread available.
Neither Fund 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 which provide supplemental investment
research to FAM, including Merrill Lynch, Pierce, Fenner & Smith Incorporated
('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.
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<PAGE>
The securities in which each Fund primarily invests are 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, a
Fund will 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.
Arizona I and Arizona II also may make loans to tax-exempt borrowers in
individually negotiated transactions with the borrower. 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.
The Boards of Directors of Arizona I and Arizona II have 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 Funds to FAM. After considering all factors deemed relevant, the
Directors made a determination not to seek such recapture. The Directors will
reconsider this matter from time to time.
Periodic auctions are conducted for the Arizona I AMPS and the Arizona II
AMPS 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
1/4 of 1%, 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, neither Arizona I nor Arizona II purchases securities for
short-term trading profits. However, either Fund 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. While it is not possible
to predict turnover rates with any certainty, at present it is anticipated that
each Fund's annual portfolio turnover rate, under normal circumstances, will be
less than 100%. (The portfolio turnover rate is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by the monthly average of the value of the portfolio securities owned by 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.)
CAPITAL STOCK
Arizona I and Arizona II each has outstanding both Common Stock and AMPS.
Arizona I Common Stock and Arizona II Common Stock both are traded on the AMEX.
The shares of Arizona I Common Stock commenced trading on the AMEX on August 16,
1993. As of October 31, 1994, the net asset value per share of the Arizona I
Common Stock was $11.65 and the market price per share was $10.375. The shares
of Arizona II
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<PAGE>
Common Stock commenced trading on the AMEX on November 15, 1993. As of October
31, 1994, the net asset value per share of the Arizona II Common Stock was
$11.33 and the market price per share was $10.75.
Each Fund is authorized to issue 200,000,000 shares of capital stock, all
of which shares initially were classified as Common Stock. The Board of
Directors of each Fund is authorized to classify or reclassify any unissued
shares of capital stock by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption. In connection with each
Fund's offering of shares of AMPS, Arizona I reclassified 694 shares of unissued
Common Stock as AMPS, and Arizona II reclassified 518 shares of unissued Common
Stock as AMPS.
Common Stock
Holders of a Fund's Common Stock are entitled to share equally in dividends
declared by the Fund's Board of Directors payable to holders of the Common Stock
and in the net assets of the Fund available for distribution to holders of the
Common Stock after payment of the preferential amounts payable to holders of any
outstanding preferred stock. Holders of a Fund's Common Stock do not have
preemptive or conversion rights and shares of a Fund's Common Stock are not
redeemable. The outstanding shares of Common Stock of each Fund are fully paid
and nonassessable.
So long as any shares of a Fund's AMPS or any other preferred stock are
outstanding, holders of the Fund's Common Stock will not be entitled to receive
any dividends of or other distributions from the Fund unless all accumulated
dividends on outstanding shares of the Fund's AMPS and any other preferred stock
have been paid, and unless asset coverage (as defined in the Investment Company
Act) with respect to such AMPS and any other preferred stock would be at least
200% after giving effect to such distributions.
Preferred Stock
Arizona I AMPS are structured identically to Arizona II AMPS. The AMPS of
each Fund are shares of preferred stock of the Fund that entitle their holders
to receive dividends when, as and if declared by the Board of Directors, out of
funds legally available therefor, at a rate per annum that may vary for the
successive dividend periods. Arizona I AMPS and Arizona II AMPS both have
liquidation preferences of $25,000 per share; neither 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.
The interest rate for the initial dividend period for the Arizona I AMPS was set
at 2.75% per annum in the initial public offering of the AMPS on August 25,
1993. The first auction for the Arizona I AMPS was held on Monday, August 29,
1994, and thereafter auctions have been held and will be held every seven days,
unless Arizona I elects, subject to certain limitations, to have a special
dividend period. The interest rate for the initial dividend period for the
Arizona II AMPS was set at 2.75% per annum in the initial public offering of the
AMPS on November 29, 1993. The first auction for the Arizona II AMPS was held on
Wednesday, February 16, 1994, and thereafter auctions have been held and will be
held every seven days, unless Arizona II elects, subject to certain limitations,
to have a special dividend period. As of December 14, 1994, the dividend rate
for the Arizona I AMPS was 3.44% and the dividend rate for the Arizona II AMPS
was 4.00%.
Under the Investment Company Act, each Fund is permitted to have
outstanding more than one series of preferred stock 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 stock do not have
preemptive rights to purchase
33
<PAGE>
any shares of AMPS or any other preferred stock that might be issued. The net
asset value per share of a Fund's AMPS equals its original purchase price per
share plus accumulated dividends per share.
Certain Provisions of the Charter
Each Fund's Charter 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 Directors and could have the effect
of depriving stockholders 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 Director may be removed from office with or
without cause by a vote of the holders of at least 66 2/3% of the votes entitled
to be voted on the matter. A Director elected by the holders of Common Stock,
AMPS and any other preferred stock may be removed only by action of such
holders, and a Director elected by the holders of AMPS and any other preferred
stock may be removed only by action of the holders of AMPS and any other
preferred stock.
In addition, the Charter of each Fund requires the affirmative 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:
(i) a merger or consolidation or statutory share exchange of the Fund
with any other corporation,
(ii) 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
(iii) 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 Directors fixed in accordance
with the Fund's by-laws, in which case the affirmative vote of a majority of all
of the votes entitled to be cast by stockholders 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 the holders of a majority of shares of
preferred stock 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 Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to stockholders. Such an amendment would require the affirmative vote
of the holders of at least 66 2/3% of the Fund's outstanding shares of capital
stock (including the AMPS and any other preferred stock) 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 Directors fixed in accordance with the Fund's by-laws),
and, the affirmative vote of a majority of votes entitled to be cast by holders
of shares of preferred stock (including the AMPS), voting separately as a class.
Such a vote also would satisfy a separate requirement in the Investment Company
Act that the change be approved by the stockholders. Stockholders of an open-end
investment company may require the company to redeem their shares of common
stock 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 Stock no longer would be listed on a stock exchange.
Conversion to an open-end investment company also would require redemption of
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all outstanding shares of preferred stock (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 Directors of each Fund has determined that the 66 2/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the Investment Company Act, are in the best interests of
stockholders generally. Reference should be made to the Charter of each Fund on
file with the Securities and Exchange Commission for the full text of these
provisions.
MANAGEMENT OF THE FUNDS
Directors and Officers. The Boards of Directors of Arizona I and Arizona
II currently consist of the same six persons, five of whom are not 'interested
persons', as defined in the Investment Company Act, of either Fund. The
Directors are responsible for the overall supervision of the operations of
Arizona I and Arizona II and perform the various duties imposed on the directors
of investment companies by the Investment Company Act and under applicable
Maryland law. Arizona I and Arizona II also have the same officers. For further
information regarding the Directors and officers of each Fund, see 'Election of
Directors'.
Management and Advisory Arrangements. FAM serves as the investment adviser
for both Arizona I and Arizona II pursuant to separate investment advisory
agreements that, except for their termination dates, are identical. FAM is an
affiliate of MLAM, which is an indirect, wholly-owned subsidiary of ML & Co. FAM
provides each Fund with the same investment advisory and management services.
FAM or MLAM acts as the investment adviser for over 100 registered investment
companies. FAM also offers portfolio management and portfolio analysis services
to individuals and institutions. As of November 30, 1994, FAM and MLAM had a
total of approximately $167.5 billion in investment company and other portfolio
assets under management (approximately $29.0 billion of which were invested in
municipal securities), including accounts of certain affiliates of FAM. The
principal business address of FAM is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536. The unaudited balance sheet of FAM as of September 30, 1994 is
attached hereto on page F-25, and the audited balance sheet of FAM as of
December 31, 1993 is attached hereto on page F-26.
Each Fund's investment advisory agreement with FAM provides that, subject
to the direction of the Board of Directors 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 Directors of the Fund.
FAM provides the portfolio management for Arizona I and Arizona II. 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 each Fund's investment advisory
agreement, the Fund pays a monthly fee at an annual rate of .50 of 1% of the
Fund's average weekly net assets (i.e., the average weekly value of the total
assets of the Fund, minus the sum of accrued liabilities of the Fund and
accumulated dividends on its shares of AMPS). 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.
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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 Directors 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, stock
certificates and stockholder reports, charges of the custodian and the transfer
agent, dividend disbursing agent and registrar, fees and expenses with respect
to the issuance of AMPS, Securities and Exchange Commission fees, fees and
expenses of unaffiliated Directors, 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 Arizona I and FAM initially will remain in effect until May
31, 1995, and then will continue from year to year thereafter if approved
annually (a) by the Board of Directors of Arizona I or by a majority of the
outstanding shares of Arizona I Common Stock and Arizona I AMPS, voting together
as a single class, and (b) by a majority of the Directors of Arizona I 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 stockholders of Arizona I.
Similarly, unless earlier terminated as described below, the investment
advisory agreement between Arizona II and FAM initially will remain in effect
until September 30, 1995, and then will continue from year to year thereafter if
approved annually (a) by the Board of Directors of Arizona II or by a majority
of the outstanding shares of Arizona II Common Stock and Arizona II AMPS, voting
together as a single class, and (b) by a majority of the Directors of Arizona II
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 stockholders of Arizona II.
VOTING RIGHTS
Voting rights are identical for the holders of shares of Arizona I Common
Stock and the holders of shares of Arizona II Common Stock. Holders of each
Fund's Common Stock are entitled to one vote for each share held and will vote
with the holders of any outstanding shares of the Fund's AMPS or other preferred
stock on each matter submitted to a vote of holders of Common Stock, except as
set forth below.
Stockholders of each Fund are entitled to one vote for each share held. The
shares of each Fund's Common Stock, AMPS and any other preferred stock do not
have cumulative voting rights, which means that the holders of more than 50% of
the shares of a Fund's Common Stock, AMPS and any other preferred stock voting
for the election of Directors can elect all of the Directors standing for
election by such holders, and, in such event, the holders of the remaining
shares of a Fund's Common Stock, AMPS and any other preferred stock will not be
able to elect any of such Directors.
Voting rights of the holders of Arizona I AMPS are identical to voting
rights of the holders of Arizona II AMPS. Except as otherwise indicated below,
and except as otherwise required by applicable law, holders of
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shares of a Fund's AMPS will be entitled to one vote per share on each matter
submitted to a vote of the Fund's stockholders and will vote together with the
holders of shares of the Fund's Common Stock as a single class.
In connection with the election of a Fund's Directors, holders of shares of
a Fund's AMPS and any other preferred stock, voting separately as a class, shall
be entitled at all times to elect two of the Fund's Directors, and the remaining
Directors will be elected by holders of shares of the Fund's Common Stock and
shares of the Fund's AMPS and any other preferred stock, voting together as a
single class. In addition, if at any time dividends on outstanding shares of a
Fund's AMPS shall be unpaid in an amount equal to at least two full years'
dividends thereon or if at any time holders of any shares of a Fund's preferred
stock are entitled, together with the holders of shares of the Fund's AMPS, to
elect a majority of the Directors of the Fund under the Investment Company Act,
then the number of Directors constituting the Board of Directors automatically
shall be increased by the smallest number that, when added to the two Directors
elected exclusively by the holders of shares of AMPS and any other preferred
stock as described above, would constitute a majority of the Board of Directors
as so increased by such smallest number, and at a special meeting of
stockholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Directors are to be elected, the holders of shares
of the Fund's AMPS and any other preferred stock, voting separately as a class,
will be entitled to elect the smallest number of additional Directors that,
together with the two Directors which such holders in any event will be entitled
to elect, constitutes a majority of the total number of Directors of the Fund as
so increased. The terms of office of the persons who are Directors 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 shares
of AMPS and any other preferred stock for all past dividend periods, the
additional voting rights of the holders of shares of AMPS and any other
preferred stock as described above shall cease, and the terms of office of all
of the additional Directors elected by the holders of shares of AMPS and any
other preferred stock (but not of the Directors with respect to whose election
the holders of shares of Common Stock were entitled to vote or the two Directors
the holders of shares of AMPS and any other preferred stock have the right to
elect in any event) will terminate automatically.
STOCKHOLDER INQUIRIES
Stockholder inquiries with respect to Arizona I and Arizona II may be
addressed to either Fund by telephone at (609) 282-2000 or at the address set
forth on the cover page of this Proxy Statement and Prospectus.
DIVIDENDS AND DISTRIBUTIONS
Arizona I's current policy with respect to dividends and distributions
relating to shares of the Arizona I Common Stock is identical to Arizona II's
policy with respect to shares of the Arizona II Common Stock. Each Fund intends
to distribute substantially all of its net investment income. Dividends from
such net investment income are declared and paid monthly to holders of a Fund's
Common Stock. Monthly distributions to holders of a Fund's Common Stock normally
consist of substantially all of the net investment income remaining after the
payment of dividends on the Fund's AMPS. All net realized long-term or
short-term capital gains, if any, are distributed at least annually, pro rata to
holders of shares of a Fund's Common Stock and AMPS. While any shares of a
Fund's AMPS are outstanding, the Fund may not declare any cash dividend or other
distribution on the Fund's Common Stock, unless at the time of such declaration,
(1) all accumulated dividends on the Fund's AMPS have been paid, and (2) the net
asset value of the Fund's portfolio (determined after deducting the amount of
such dividend or other distribution) is at least 200% of the liquidation value
of the Fund's outstanding shares
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of AMPS. This limitation on a Fund's ability to make distributions on its Common
Stock under certain circumstances could impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company. See
'The Reorganization--Tax Consequences of the Reorganization'.
Similarly, Arizona I's current policy with respect to dividends and
distributions relating to shares of the Arizona I AMPS is identical to Arizona
II's current policy with respect to shares of the Arizona II AMPS. The holders
of shares of a Fund's AMPS are entitled to receive, when, as and if declared by
the Board of Directors of the Fund, out of funds legally available therefor,
cumulative cash dividends on their shares. Dividends on a Fund's shares of 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 Stock, 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 the Arizona I
AMPS and the Arizona II AMPS are paid through The Depository Trust Company
('DTC') (or a successor securities depository) on each dividend payment date.
DTC's normal procedures provide for it to distribute dividends in next-day funds
settled through the New York Clearing House 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. The current
broker-dealers for the AMPS of each Fund have indicated to the Funds that they,
or their affiliates, will make such dividend payments available in same-day
funds to customers that use such broker-dealers or affiliates as agent members.
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. Neither Fund 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 the shares of a Fund's AMPS which may be in arrears.
Dividends paid by each Fund, to the extent paid from tax-exempt income
earned on Arizona Municipal Bonds, are exempt from Federal and Arizona income
taxes, subject to the possible application of the alternative minimum tax.
However, each Fund is required to allocate net capital gains and other income
subject to regular Federal income taxes, if any, proportionately between shares
of its Common Stock and shares of its AMPS in accordance with the current
position of the IRS described herein. 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 shares of 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. In limited
circumstances, 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 shares of 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 holders of each Fund's Common Stock may be reinvested automatically in shares
of the Fund's Common Stock, see 'Automatic Dividend Reinvestment Plan' below.
Dividends and distributions may be taxable to stockholders under certain
circumstances as discussed below, whether they are reinvested in shares of a
Fund or received in cash.
If Arizona I or Arizona II, as the case may be, retroactively allocates any
net capital gains or other income subject to regular Federal 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 the outstanding shares of its AMPS or the
liquidation of the Fund, the Fund will make certain payments to holders of
shares of its AMPS to which such allocation was made to offset substantially the
tax
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effect thereof. In no other instances will the Fund be required to make payments
to holders of shares 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, the
'Plan'), unless a holder of a Fund's Common Stock elects otherwise, all dividend
and capital gains distributions are reinvested automatically by The Bank of New
York, as agent for stockholders in administering the Plan (the 'Plan Agent'), in
additional shares of the Fund's Common Stock. Holders of a Fund's Common Stock
who elect not to participate in the Plan receive all distributions in cash paid
by check mailed directly to the stockholder of record (or, if the shares are
held in street or other nominee name, then to such nominee) by The Bank of New
York, as dividend paying agent. Such stockholders 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, 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 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 shares of the Fund's Common Stock. 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 shares of the Fund's Common Stock from the Fund ('newly-issued
shares') or (ii) by purchase of outstanding shares of the Fund's Common Stock on
the open market ('open-market purchases'), on the AMEX or elsewhere. If on the
payment date for the dividend, the net asset value per share of the Fund's
Common Stock is equal to or less than the market price per share of the Fund's
Common Stock 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 Stock 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 Stock 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 shares, resulting in the acquisition of fewer shares
than if the dividend had been paid in newly-issued shares on the dividend
payment date. Because of the foregoing difficulty with respect to open-market
purchases, the Plan
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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 stockholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by stockholders 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 stockholder'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 stockholders 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 stockholders as representing the total amount registered in the record
stockholder'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
Arizona I or Arizona II 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 'The Reorganization--Tax
Consequences of the Reorganization'.
Stockholders participating in the Plan may receive benefits not available
to stockholders not participating in the Plan. If the market price plus
commissions of a Fund's shares of Common Stock is above the net asset value,
participants in the Plan receive shares of the Fund's Common Stock 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 below the net asset value,
participants receive distributions in shares with a net asset value greater than
the value of any cash distribution they would have received on their shares.
However, there may be insufficient shares available in the market to make
distributions in shares at prices below the net asset value. Also, since neither
Fund normally redeems its shares, the price on resale may be more or less than
the net asset value.
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.
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LIQUIDATION RIGHTS OF HOLDERS OF AMPS
Upon any liquidation, dissolution or winding up of Arizona I or Arizona II,
as the case may be, whether voluntary or involuntary, the holders of shares of
the Fund's AMPS will be entitled to receive, out of the assets of the Fund
available for distribution to stockholders, before any distribution or payment
is made upon any shares of the Fund's Common Stock 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 stock 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 shares 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
shares 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.
TAX RULES APPLICABLE TO ARIZONA I, ARIZONA II AND THEIR STOCKHOLDERS
The tax consequences associated with investment in shares of Arizona I
Common Stock are identical to the tax consequences associated with investment in
shares of Arizona II Common Stock. Similarly, the tax consequences associated
with investment in shares of Arizona I AMPS are identical to the tax
consequences associated with investment in shares of Arizona II AMPS. Arizona I
and Arizona II have qualified for the special tax treatment afforded regulated
investment companies ('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 (but not their
stockholders) are not subject to Federal income tax to the extent that they
distribute their net investment income and net realized capital gains. Similar
rules apply to the Funds if their income is subject to Arizona tax, except that
the Funds may be subject to the Arizona minimum corporate income tax of $50.
Neither Fund has been subject to Arizona tax (except for application of the
Arizona minimum corporate income tax) and each Fund has distributed
substantially all of its income.
If, at any time when shares of a Fund's AMPS are outstanding the Fund does
not meet the asset coverage requirements of the Investment Company Act, the Fund
is required to suspend distributions to holders of shares of its Common Stock
until the asset coverage is restored. This can prevent the Fund from
distributing at least 90% of its net income and therefore can jeopardize the
Fund's qualification for taxation as a regulated investment company. Upon any
failure to meet the asset coverage requirements, the Funds may, and under
certain circumstances are required to, redeem shares of AMPS in order to
maintain or restore the requisite asset coverage and avoid the adverse
consequences of failing to qualify as a RIC.
Each Fund is qualified to pay 'exempt-interest dividends' as defined in
Section 852(b)(5) of the Code. Under such section, if, at the close of each
quarter of its taxable year, at least 50% of the value of a Fund's total assets
consists of obligations exempt from Federal income tax ('tax-exempt
obligations') under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund is qualified to pay
exempt-interest dividends to its stockholders. Exempt-interest dividends are
dividends or any part thereof paid by
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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 stockholders within 60 days after the close of its taxable year. To the
extent that the dividends distributed to a Fund's stockholders 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
stockholder'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 stockholder would be treated as a 'substantial
user' or 'related person' under Code Section 147(a) with respect to property
financed with the proceeds of an issue of 'industrial development bonds' or
'private activity bonds,' if any, held by a Fund.
The portion of exempt-interest dividends paid from interest received by
each Fund from Arizona Municipal Bonds also is exempt from Arizona personal and
corporate income tax. Stockholders subject to income taxation by states other
than Arizona may realize a lower after-tax rate of return than Arizona residents
since the dividends distributed by a Fund generally are not exempt, to any
significant degree, from income taxation by such other states. Each Fund informs
its stockholders annually as to the portion of the Fund's distributions which
constitutes exempt-interest dividends and the portion which is exempt from
Arizona personal and corporate income taxes. Interest on indebtedness incurred
or continued to purchase or carry a Fund's shares is not deductible for Arizona
personal or corporate income tax purposes.
The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the Arizona I AMPS and the
Arizona II AMPS are substantially similar, but not identical, to the AMPS
discussed in the revenue ruling, and in the opinion of Brown & Wood, counsel to
both Funds, the shares of each Fund's AMPS constitute stock and distributions
with respect to shares of such AMPS (other than distributions in redemption of
shares of AMPS subject to Section 302(b) of the Code) constitute dividends to
the extent of current and accumulated earnings and profits as calculated for
Federal income tax purposes. Nevertheless, the IRS could take a contrary
position, asserting, for example, that the shares of AMPS constitute debt. If
this position is upheld, the discussion of the treatment of distributions below
will not apply to holders of shares of AMPS. Instead, distributions by each Fund
to holders of shares of its AMPS will constitute interest, whether or not they
exceed the earnings and profits of the Fund, will 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, is 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 and Arizona income tax purposes.
Such distributions are not eligible for the dividends received deduction for
corporations. Distributions, if any, of net long-term capital gains from the
sale of securities or from certain transactions in futures or options ('capital
gain dividends') are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the stockholder has owned Fund
shares, and are taxable as ordinary income for Arizona tax purposes. Under the
Revenue Reconciliation Act of 1993, 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. This rule may increase
the amount of ordinary income dividends received by stockholders. Any loss upon
the sale or exchange of Fund shares held for six months or less is treated as
long-term capital loss to the extent of
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<PAGE>
capital gain dividends received by the stockholder. In addition, such loss is
disallowed to the extent of any exempt-interest dividends received by the
stockholder. 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 stockholders
of record on a specified date in one of such months, then such dividend is
treated for tax purposes as paid by the Fund and received by its stockholders 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
classes of shares it may designate distributions made to each class in any year
as consisting of no more than such class' proportionate share of particular
types of income, including exempt-interest dividends and capital gain dividends.
Thus, each Fund is required to allocate a portion of its net capital gains and
other taxable income to the shares of its AMPS. Each Fund generally notifies 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 shares of AMPS
constitute exempt-interest dividends. The amount of net capital gains and
ordinary income allocable to shares of 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 shares of its Common Stock and
shares of its AMPS during a taxable year, but the taxable distribution generally
is not significant.
In the opinion of Brown & Wood, counsel to both Funds, under current law
the manner in which each Fund allocates items of tax-exempt income, net capital
gains, and other taxable income, if any, between shares of its Common Stock and
shares of its AMPS will be respected for Federal income tax purposes. However,
the tax treatment of additional dividends may affect a Fund's calculation of
each class' allocable share of capital gains and other taxable income. In
addition, there is currently no direct guidance from the IRS or other sources
specifically addressing whether a Fund's method for allocating tax-exempt
income, net capital gains, and other taxable income between shares of its Common
Stock and shares of its 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 stockholders 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
any reallocated taxable income. Brown & Wood has advised each Fund that, in its
opinion, if the IRS were to challenge in court the Fund's allocations of income
and gain, the IRS would be unlikely to prevail. The opinion of Brown & Wood,
however, represents only its best legal judgment and is not binding on the IRS
or the courts.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
it does not distribute 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 regulated
investment company. The excise tax, therefore, generally does not apply to the
tax-exempt income of RICs, such as the Funds, that pay exempt-interest
dividends.
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The Code subjects interest received on certain otherwise tax-exempt
securities to an 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
stockholders of the Funds, to an increased alternative minimum tax. Each Fund
purchases such 'private activity bonds' and reports to stockholders within 60
days after its fiscal 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 an
alternative minimum tax based, in part, on certain differences between taxable
income as adjusted for other tax preferences and the corporation's 'adjusted
current earnings' which more closely reflect a corporation's economic income.
Because an exempt-interest dividend paid by a Fund is included in adjusted
current earnings, a corporate stockholder may be required to pay an alternative
minimum tax on exempt-interest dividends paid by such Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets
of 36% and 39.6% for individuals and has created a graduated structure of 26%
and 28% for the alternative minimum tax applicable to individual taxpayers.
These rate increases affect the after-tax return from an investment in the Funds
as compared with a return from taxable investments.
Under certain provisions of the Code, some stockholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ('backup withholding'). Generally,
stockholders subject to backup withholding will be those for whom no taxpayer
identification number is on file with the Funds or who, to the Funds' 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
stockholder is not otherwise subject to backup withholding.
Ordinary income dividends paid by a Fund to stockholders 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.
A loss realized on a sale or exchange of shares of a Fund is disallowed 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.
The Code provides that every stockholder 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.
THE REORGANIZATION
GENERAL
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
I), Arizona II will acquire substantially all of the assets, and will assume
substantially all of the liabilities, of Arizona I, in exchange solely for an
equal aggregate value of Arizona II Common Stock and Arizona II Series B AMPS to
be issued by Arizona II. Upon receipt by Arizona I of such shares, Arizona I
will distribute the shares of Arizona II Common Stock to the holders of Arizona
I Common Stock and the shares of Arizona II Series B AMPS to the holders of
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<PAGE>
Arizona I AMPS in exchange for their proportionate interests in the assets and
liabilities of Arizona I. Articles Supplementary to the Articles of
Incorporation of Arizona II establishing the powers, rights and preferences of
the Arizona II Series B AMPS will have been filed with the Department of
Assessments and Taxation of the State of Maryland prior to the closing of the
Reorganization. As soon as practicable after the closing of the Reorganization,
Articles of Amendment to the Articles of Incorporation of Arizona II will be
filed with the State Department of Assessments and Taxation of Maryland (the
'SDAT'), reflecting a change in the name of the surviving fund to 'MuniYield
Arizona Fund, Inc.' In addition, Arizona I will file Articles of Dissolution
with the SDAT to effect the formal dissolution.
As soon as practicable after the Exchange Date (as defined below), Arizona
I would dissolve and distribute the shares of Arizona II Common Stock and
Arizona II Series B AMPS, respectively, received by it pro rata to its holders
of record of Arizona I Common Stock and Arizona I AMPS, respectively, in
exchange for such stockholders' proportional interests in Arizona I. Such
dissolution and distribution would be accomplished by opening new accounts on
the books of Arizona II in the names of the common and preferred stockholders of
Arizona I and transferring to those stockholder accounts the Arizona II Common
Stock and Arizona II Series B AMPS previously credited on those books to the
account of Arizona I. Each newly-opened account on the books of Arizona II for
the previous holders of Arizona I Common Stock would represent the respective
pro rata number of shares of Arizona II Common Stock (rounded down, in the case
of fractional shares, to the next largest number of whole shares) due such
holder of Arizona I Common Stock. No fractional shares of Arizona I Common Stock
or Arizona II Common Stock will be issued. In lieu thereof, Arizona I's transfer
agent, The Bank of New York, will aggregate all fractional shares of Arizona I
Common Stock and sell the resulting whole shares on the AMEX for the account of
all holders of fractional interests, and each such holder will be entitled to
his or her pro rata share of the proceeds of such sale upon surrender of his or
her Arizona I Common Stock certificates. Similarly, each newly-opened account on
the books of Arizona II for the previous holders of Arizona I AMPS would
represent the respective pro rata number of shares of Arizona I AMPS due such
holder of Arizona I AMPS. See 'Surrender and Exchange of Arizona I Stock
Certificates' below for a description of the procedures to be followed by
Arizona I stockholders to obtain their Arizona II Common Stock (and cash in lieu
of fractional shares, if any) or Arizona II Series B AMPS, as the case may be.
Accordingly, as a result of the Reorganization, every holder of Arizona I
Common Stock would own shares of Arizona II Common Stock 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 stockholder's Arizona I Common Stock immediately prior to the
Exchange Date. Since the Arizona II Common Stock would be issued at net asset
value in exchange for the net assets of Arizona I having a value equal to the
aggregate net asset value of those shares of Arizona I Common Stock, the net
asset value per share of Arizona II Common Stock should remain virtually
unchanged by the Reorganization. Similarly, since the Arizona II Series B AMPS
would be issued at a liquidation preference per share equal to the liquidation
preference of the Arizona I AMPS, the liquidation preference per share of the
Arizona II AMPS will remain unchanged by the Reorganization. Thus, the
Reorganization will result in no dilution of net asset value of the Arizona II
Common Stock, other than to reflect the costs of the Reorganization, and will
result in no dilution of liquidation preference of the Arizona II AMPS. However,
as a result of the Reorganization, a stockholder of either Fund likely will hold
a reduced percentage of ownership in the larger combined entity than he or she
did in either of the constituent Funds.
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<PAGE>
PROCEDURE
On June 17, 1994, the Boards of Directors of Arizona I and Arizona II,
including all of the Directors who are not 'interested persons', as defined by
the Investment Company Act, of Arizona I and Arizona II deemed advisable the
Agreement and Plan of Reorganization.
On the same date, the Board of Directors of Arizona II approved (i) a
change in the name of the surviving fund to 'MuniYield Arizona Fund, Inc.', to
be effected by the filing of Articles of Amendment to Arizona II's Articles of
Incorporation; and (ii) the filing of Articles Supplementary to Arizona II's
Articles of Incorporation establishing the powers, rights and preferences of the
Arizona II Series B AMPS in order that they may be given to holders of Arizona I
AMPS as part of the Reorganization.
As a result of such Board approvals, Arizona I and Arizona II jointly will
file a proxy statement with the Securities and Exchange Commission soliciting a
vote of the stockholders of Arizona I and Arizona II to approve the
Reorganization. The costs of such solicitation are to be paid by Arizona II
after the Reorganization so as to be borne equally and exclusively by the
holders of Arizona I Common Stock and Arizona II Common Stock. It is anticipated
that special meetings of stockholders of Arizona I and Arizona II will be held
on or about January 25, 1995. If the stockholders of both Arizona I and Arizona
II approve the Reorganization, the Reorganization will take place on or about
January 26, 1995.
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 I.
Valuation of Assets and Liabilities. The respective assets of Arizona I
and Arizona II will be valued on the business day prior to the date on which the
Reorganization will take place (the 'Exchange Date'). The valuation procedures
are the same for both Funds: Net asset value per share of the Arizona I Common
Stock and the Arizona II Common Stock will be determined at 4:00 P.M., New York
time, on the Exchange Date. For the purpose of determining the net asset value
of a share of the Arizona I Common Stock or the Arizona II Common Stock, 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 shares of AMPS of the issuing Fund is divided by the total number of
shares of Common Stock of the issuing Fund outstanding at such time. Daily
expenses, including the fees payable to FAM, will accrue on the Exchange Date.
The Arizona Municipal Bonds in which each Fund invests are traded primarily
in the over-the-counter markets. In determining net asset value on the Exchange
Date, each Fund will utilize the valuations of portfolio securities furnished by
a pricing service approved by the Boards of Directors of the Funds. The pricing
service typically values portfolio securities at the bid price or the yield
equivalent when quotations are readily available. 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 Directors of Arizona I and Arizona II 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 Exchange 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
Directors.
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<PAGE>
Distribution of Arizona II Common Stock and Arizona II Series B AMPS. On
the Exchange Date, Arizona II will issue to Arizona I a number of shares of
Arizona II Common Stock the aggregate net asset value of which will equal the
aggregate net asset value of shares of Arizona I Common Stock on the Exchange
Date. Each holder of Arizona I Common Stock will receive the number of shares of
Arizona II Common Stock corresponding to his or her proportionate interest in
the aggregate net asset value of the Arizona I Common Stock.
On the Exchange Date, Arizona II also will issue to Arizona I a number of
shares of Arizona II Series B AMPS the aggregate liquidation preference of which
will equal the aggregate liquidation preference of Arizona I AMPS on the
Exchange Date. Each holder of Arizona I AMPS will receive the number of shares
of Arizona II Series B AMPS corresponding to his or her proportionate interest
in the aggregate liquidation preference of the Arizona I AMPS. No sales charge
or fee of any kind will be charged to Arizona I stockholders in connection with
their receipt of Arizona II Common Stock and Arizona II Series B AMPS in the
Reorganization. The Arizona II Series B AMPS will follow the same auction
schedule and procedures as those presently followed by the Arizona I AMPS.
Expenses. Arizona II 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 Directors, expenses incurred in connection
with the preparation of the Agreement and Plan of Reorganization and a
registration statement on Form N-14, Securities and Exchange Commission and
state securities commission filing fees and legal and audit fees in connection
with the Reorganization, 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 and 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 by the holders of the Arizona I Common Stock and
the Arizona II Common Stock. Neither Arizona I nor Arizona II shall pay any
expenses of its respective stockholders arising out of or in connection with the
Reorganization.
Required Approvals. Under Arizona I's Articles of Incorporation (as
amended to date and including Articles Supplementary establishing the powers,
rights and preferences of the Arizona I AMPS), relevant Maryland law and the
rules of the AMEX, stockholder approval of the Agreement and Plan of
Reorganization requires the affirmative vote of stockholders representing more
than 50% of the outstanding shares of Arizona I Common Stock and Arizona I AMPS,
voting together as a single class, and of the Arizona I AMPS, voting separately
as a class. Similarly, under Arizona II's Articles of Incorporation (as amended
to date and including Articles Supplementary establishing the powers, rights and
preferences of the Arizona II AMPS), relevant Maryland law and the rules of the
AMEX, stockholder approval of the Agreement and Plan of Reorganization requires
the affirmative vote of stockholders representing more than 50% of the
outstanding shares of Arizona II Common Stock and Arizona II AMPS, voting
together as a single class, and of the Arizona II AMPS, voting separately as a
class.
Deregistration and Dissolution. Following the transfer of the assets and
liabilities of Arizona I to Arizona II and the distribution of shares of Arizona
II Common Stock and Arizona II Series B AMPS to Arizona I stockholders, Arizona
I will terminate its registration under the Investment Company Act and its
incorporation under Maryland law.
47
<PAGE>
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 Arizona I and Arizona II 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 Securities
and Exchange Commission, approval of the Reorganization by the requisite number
of shares of stockholders of Arizona I and Arizona II being given, an IRS ruling
as to tax matters being received, an opinion of counsel as to securities matters
being received and the continuing accuracy of various representations and
warranties of Arizona I and Arizona II being confirmed by the respective
parties.
BENEFITS TO ARIZONA I COMMON STOCKHOLDERS AND ARIZONA II COMMON STOCKHOLDERS AS
A RESULT OF THE REORGANIZATION
In approving the Reorganization, the Board of Directors of each Fund
identified certain benefits that are likely to result from combining the Funds,
including lower expenses per share of Common Stock, greater efficiency and
flexibility in portfolio management and a more liquid trading market for the
shares of Common Stock of the combined 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 Municipal Bonds and the costs involved in a transaction
such as the Reorganization. The Boards noted the many similarities between the
Funds, including their virtually identical investment objectives and investment
policies, their common management and their similar portfolios of Municipal
Bonds. Based on these factors, the Boards concluded that the Reorganization (i)
presents no significant risks that would outweigh the benefits discussed above
and (ii) involves minimal costs (including relatively minor legal, accounting
and administrative costs, most of which already have been incurred in evaluating
and analyzing the Reorganization).
The surviving fund that would result from the Reorganization would have a
much larger asset base than either Fund 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 stockholders of
the combined fund and higher earnings per common share. In particular, certain
fixed costs, such as costs of printing stockholder reports and proxy statements,
legal expenses, audit fees, registration 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, on
October 31, 1994, the total operating expense ratio for Arizona I was 0.93%
(0.66% after voluntary reimbursement by FAM) (based on average net assets of
approximately $50.7 million), and the total operating expense ratio for Arizona
II was 1.09% (0.54% after voluntary reimbursement by FAM) (based on average net
assets of approximately $35.7 million). If the Reorganization had taken place on
that date, the total operating expense ratio for the combined fund would have
been 0.89% (based on average net assets of approximately $80.7 million).
Management projections estimate that Arizona II will have net assets in
excess of $80.7 million upon completion of the Reorganization. A larger asset
base should provide benefits in portfolio management. After the Reorganization,
Arizona II should be able to purchase large amounts of Municipal Bonds at more
favorable prices than either of the Funds separately and, with this greater
purchasing power, request improvements in the terms of the Municipal Bonds
(e.g., added indenture provisions covering call protection, sinking funds and
audits for the benefit of large holders) prior to purchase.
In approving the Reorganization, the Board of Directors of each Fund
determined that, with respect to net asset value and liquidation preference, the
interests of existing stockholders of the Fund would not be diluted as a
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result of the Reorganization. Although the Reorganization is expected to result
in a reduction in net asset value per share of the Arizona II Common Stock of
approximately $0.05 as a result of the estimated costs of the Reorganization,
management of each Fund advised its Board that it expects that such costs would
be recovered within 18 months after the Exchange Date.
It is not anticipated that the Reorganization directly would benefit the
holders of shares of Arizona I AMPS or Arizona II AMPS; however, the
Reorganization will not adversely affect the holders of shares of AMPS of either
Fund and the expenses of the Reorganization will not be borne by the holders of
shares of AMPS of either Fund.
SURRENDER AND EXCHANGE OF ARIZONA I STOCK CERTIFICATES
After the Exchange Date, each holder of an outstanding certificate or
certificates formerly representing shares of Arizona I Common Stock or Arizona I
AMPS, as the case may be, will be entitled to receive, upon surrender of his or
her certificate or certificates, a certificate or certificates representing the
number of shares of Arizona II Common Stock or Arizona II Series B AMPS
distributable with respect to such holder's shares of Arizona I Common Stock or
Arizona I AMPS, together with cash in lieu of any fractional shares. Promptly
after the Exchange Date, the transfer agent for the Arizona II Common Stock or
the Arizona II Series B AMPS, as the case may be, will mail to each holder of
certificates formerly representing shares of Arizona I Common Stock or Arizona I
AMPS, as the case may be, a letter of transmittal for use in surrendering his or
her certificates for certificates representing shares of Arizona II Common Stock
or Arizona II Series B AMPS, as the case may be, and cash in lieu of any
fractional shares.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. UPON
CONSUMMATION OF THE REORGANIZATION, ARIZONA I COMMON AND PREFERRED STOCKHOLDERS
WILL BE FURNISHED WITH INSTRUCTIONS FOR EXCHANGING THEIR ARIZONA I STOCK
CERTIFICATES FOR ARIZONA II STOCK CERTIFICATES AND, IF APPLICABLE, CASH IN LIEU
OF FRACTIONAL SHARES.
From and after the Exchange Date, certificates formerly representing shares
of Arizona I Common Stock or Arizona I AMPS, as the case may be, will be deemed
for all purposes to evidence ownership of the number of full shares of Arizona
II Common Stock or Arizona II Series B AMPS distributable with respect to such
shares of Arizona I in the Reorganization, provided, that until such Arizona I
stock certificates have been so surrendered, no dividends payable to the holders
of record of Arizona II Common Stock or Arizona II Series B AMPS, as the case
may be, as of any date subsequent to the Exchange Date will be paid to the
holders of such outstanding Arizona I stock certificates. Dividends payable to
holders of record of shares of Arizona II Common Stock or Arizona II 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 Arizona I stockholder will be paid to such
stockholder, without interest, at the time such stockholder surrenders his or
her Arizona I stock certificates for exchange.
From and after the Exchange Date, there will be no transfers on the stock
transfer books of Arizona I. If, after the Exchange Date, certificates
representing shares of Arizona I Common Stock or Arizona I AMPS are presented to
Arizona II, they will be cancelled and exchanged for certificates representing
Arizona II Common Stock or Arizona II Series B AMPS, as the case may be, and the
cash in lieu of fractional shares, if any, distributable with respect to such
Arizona I Common Stock or Arizona I AMPS in the Reorganization.
TAX CONSEQUENCES OF THE REORGANIZATION
General. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(D) of the Code. Arizona I and Arizona II each has elected to
qualify as a regulated investment company under the Code, and Arizona II intends
to continue to so qualify after the Reorganization. Arizona I and Arizona II
have each received a private letter ruling from the IRS
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<PAGE>
to the effect that for Federal income tax purposes: (i) the Reorganization, as
described, will constitute a reorganization within the meaning of Section
368(a)(1)(D) of the Code; (ii) in accordance with Section 354(a)(1) of the Code,
no gain or loss will be recognized by the stockholders of Arizona I upon the
receipt of Arizona II Common Stock and Arizona II Series B AMPS in the
Reorganization; (iii) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the Arizona II Common Stock and
Arizona II Series B AMPS received by the stockholders of Arizona I in the
Reorganization will be equal, in the aggregate, to the tax basis of the shares
of Arizona I surrendered in exchange; (iv) in accordance with Section 1223 of
the Code, the holding period of the Arizona II Common Stock and the Arizona II
Series B AMPS received by stockholders of Arizona I in the Reorganization for
purposes of calculating long-term capital gains will include the holding period
of the shares of Arizona I immediately prior to the liquidation of Arizona I
(provided that at the time of the Reorganization the shares of Arizona I were
held as capital assets); (v) in accordance with Section 361(a) of the Code, no
gain or loss will be recognized by Arizona I in the Reorganization; (vi) under
Section 1032 of the Code, no gain or loss will be recognized by Arizona II on
the exchange of its Common Stock and Series B AMPS for Arizona I assets; (vii)
in accordance with Section 362(b) of the Code, the tax basis of the assets of
Arizona I in the hands of Arizona II will be the same as the tax basis of such
assets in the hands of Arizona I immediately prior to the Reorganization; (viii)
in accordance with Section 1223 of the Code, the holding period of the assets of
Arizona I transferred to Arizona II for purposes of the Code will include the
holding period of such assets in the hands of Arizona I; and (ix) the taxable
year of Arizona I will end on the effective date of the Reorganization and
pursuant to Section 381(a) of the Code and regulations thereunder, Arizona II
will succeed to and take into account certain tax attributes of Arizona I, such
as earnings and profits, capital loss carryovers and method of accounting.
As noted in the discussion under 'Comparison of the Funds--Tax Rules Applicable
to Arizona I, Arizona II and Their Stockholders', a Fund must distribute
annually at least 90% of its net taxable and tax-exempt income. A distribution
only will be counted for this purpose if it qualifies for the dividends paid
deduction under the Code. In the opinion of Brown & Wood, the issuance of Series
B AMPS pursuant to the Reorganization in addition to the already existing Series
A AMPS will not cause distributions on either series of AMPS to be treated as
preferential dividends ineligible for the dividends paid deduction. It is
possible that the IRS may assert that, because there are two 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, Arizona II could lose
the special tax treatment afforded RICs. In this case, dividends on the shares
of AMPS would not be exempt from Federal income tax. Additionally, Arizona II
would be subject to the alternative minimum tax.
Stockholders 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, stockholders also should
consult their tax advisers as to the foreign, state and local tax consequences
of the Reorganization.
Status as a Regulated Investment Company. Both Arizona I and Arizona II
have elected to be taxed as regulated investment companies under Sections
851-855 of the Code, and after the Reorganization Arizona II intends to continue
to operate so as to qualify as a regulated investment company.
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CAPITALIZATION
The following table sets forth as of October 31, 1994 (i) the
capitalization of Arizona I, (ii) the capitalization of Arizona II and (iii) the
pro forma capitalization of Arizona II as adjusted to give effect to the
Reorganization.
PRO FORMA CAPITALIZATION OF ARIZONA II AS OF OCTOBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
ARIZONA II
ARIZONA I ARIZONA II AS ADJUSTED*
---------- ---------- -------------
<S> <C> <C> <C>
Total Net Assets................... $46,625,004 $34,103,398 $ 80,728,402
Shares Outstanding:
Common Stock..................... 2,513,709 1,867,043 4,380,752
AMPS
Series A...................... 347** 518 865***
Series B...................... 0
Net Asset Value Per Common Share... $ 11.65 $ 11.33 $ 11.51
</TABLE>
- ------------------
* Total Net Assets includes the aggregate value of the Arizona I Common Stock
and the Arizona I AMPS which would have been transferred to Arizona II had
the Reorganization been consummated on October 31, 1994. Net Asset Value Per
Common Share includes the per share value of the Arizona I Common Stock
which would have been transferred to Arizona II had the Reorganization been
consummated on October 31, 1994. Data does not take into account expenses
incurred in connection with the Reorganization or the actual number of
shares that would have been issued. No assurance can be given as to how many
shares of Arizona II Common Stock and Arizona II Series B AMPS Arizona I
stockholders will receive on the date the Reorganization takes place, and
the foregoing should not be relied upon to reflect the number of shares of
Arizona II Common Stock and Arizona II Series B AMPS that actually will be
received on or after such date.
** A 2-for-1 stock split of the Arizona I AMPS occurred on December 1, 1994,
thereby increasing to 694 the number of shares of Arizona I AMPS
outstanding.
*** There will be 1,212 shares of Arizona II AMPS outstanding after taking into
account the aforementioned 2-for-1 stock split.
ELECTION OF DIRECTORS
At the Meetings, the same Board of Directors for both Arizona I and Arizona
II will be elected to serve until the next Annual Meeting of Stockholders and
until their successors are elected and qualified. If the stockholders of both
Arizona I and Arizona II approve the Reorganization, then the Board of Directors
elected at the Meetings will serve as the Board of Arizona II until its next
Annual Meeting of Stockholders. If the stockholders of either Arizona I or
Arizona II vote against the Reorganization, then the Board of Directors of each
Fund elected at the
51
<PAGE>
Meetings will continue to serve until the next Annual Meeting of Stockholders of
each Fund. It is intended that all properly executed proxies will be voted
(unless such authority has been withheld in the proxy) as follows:
With respect to the proxies of Arizona I stockholders:
(1) All such proxies of the holders of shares of Arizona I AMPS,
voting separately as a class, in favor of the two persons designated
as Directors to be elected by the holders of shares of Arizona I AMPS;
and
(2) All such proxies of the holders of shares of Arizona I Common
Stock and Arizona I AMPS, voting together as a single class, in favor
of the four persons designated as Directors to be elected by the
holders of Arizona I Common Stock and Arizona I AMPS.
With respect to the proxies of Arizona II stockholders:
(1) All such proxies of the holders of shares of Arizona II AMPS,
voting separately as a class, in favor of the two persons designated
as Directors to be elected by the holders of shares of Arizona II
AMPS; and
(2) All such proxies of the holders of shares of Arizona II
Common Stock and Arizona II AMPS, voting together as a single class,
in favor of the four persons designated as Directors to be elected by
the holders of shares of Arizona II Common Stock and Arizona II AMPS.
The Boards of Directors of Arizona I and Arizona II know 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 Boards of Directors may recommend.
Certain information concerning the nominees, including their designated
classes, is set forth below.
52
<PAGE>
TO BE ELECTED BY HOLDERS OF AMPS, VOTING SEPARATELY AS A CLASS
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AT
DECEMBER 14,
1994
PRINCIPAL OCCUPATIONS DURING THE ----------------
PAST FIVE YEARS AND PUBLIC DIRECTOR COMMON
NAME AND ADDRESS OF NOMINEE AGE DIRECTORSHIPS(1) SINCE STOCK AMPS
- -------------------------------------- ---- -------------------------------------- --------- ------ ----
<S> <C> <C> <C> <C> <C>
Kenneth S. Axelson (1)(2) ............ 72 Executive Vice President and Director, 1993 0 0
75 Jameson Point Road J.C. Penney Company, Inc. until
Rockland, Maine 04841 1982; Director, UNUM Corporation,
Protection Mutual Insurance Company,
and, until 1994, Grumman Corporation
and Zurn Industries, Inc., and,
until 1992, Central Maine Power
Company and Key Trust Company of
Maine; Trustee, The Chicago Dock and
Canal Trust.
Joseph L. May (1)(2) ................. 65 Attorney in private practice since 1993 0 0
424 Church Street, Suite 2000 1984; President, May and Athens
Nashville, Tennessee 37219 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.
</TABLE>
53
<PAGE>
TO BE ELECTED BY HOLDERS OF AMPS AND COMMON STOCK,
VOTING TOGETHER AS A SINGLE CLASS
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AT
DECEMBER 14,
1994
PRINCIPAL OCCUPATIONS DURING THE ----------------
PAST FIVE YEARS AND PUBLIC DIRECTOR COMMON
NAME AND ADDRESS OF NOMINEE AGE DIRECTORSHIPS(1) SINCE STOCK AMPS
- -------------------------------------- ---- -------------------------------------- --------- ------ ----
<S> <C> <C> <C> <C> <C>
Herbert I. London (1)(2) ............. 55 Dean, Gallatin Division of New York 1993 0 0
113-115 University Place University from 1978 to 1993 and
New York, New York 10003 Director from 1975 to 1976; John M.
Olin Professor of Humanities, New
York University since 1993;
Professor, New York University since
1973; Distinguished Fellow, Herman
Kahn Chair, Hudson Institute from
1984 to 1985; Trustee, Hudson
Institute since 1980; Overseer,
Center for Naval Analyses from 1983
to 1993; Director, Damon Corporation
since 1991.
Robert R. Martin (1)(2) .............. 67 Chairman and Chief Executive Officer, 1993 0 0
513 Grand Hill Kinnard Investments, Inc. from 1990
St. Paul, Minnesota 55102 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. since 1994;
Trustee, Northland College since
1992.
Andre F. Perold (1)(2) ............... 42 Professor, Harvard Business School 1993 0 0
Morgan Hall, Soldiers Field since 1989 and Associate Professor
Boston, Massachusetts 02163 from 1983 to 1989; Trustee, The
Common Fund, since 1989; Director,
Quantec Investment Technology (a
private United Kingdom company).
</TABLE>
54
<PAGE>
TO BE ELECTED BY HOLDERS OF AMPS AND COMMON STOCK,
VOTING TOGETHER AS A SINGLE CLASS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AT
DECEMBER 14,
1994
PRINCIPAL OCCUPATIONS DURING THE ----------------
PAST FIVE YEARS AND PUBLIC DIRECTOR COMMON
NAME AND ADDRESS OF NOMINEE AGE DIRECTORSHIPS(1) SINCE STOCK AMPS
- -------------------------------------- ---- -------------------------------------- --------- ------ ----
<S> <C> <C> <C> <C> <C>
Arthur Zeikel (1)(3) ................. 62 President and Chief Investment Officer 1993 0 0
800 Scudders Mill Road of FAM and its predecessor since
Plainsboro, New Jersey 08536 1977; President of MLAM and its
predecessor since 1977 and Chief
Investment Officer thereof since
1976; President and Director of
Princeton Services, Inc. ('Princeton
Services') since 1993; Executive
Vice President of ML & Co. since
1990; Executive Vice President of
Merrill Lynch since 1990 and Senior
Vice President thereof from 1986 to
1990; Director of Merrill Lynch
Funds Distributor, Inc. ('MLFD').
</TABLE>
- ------------------
(1) Each of the nominees is a director, trustee or member of an advisory board
of certain other investment companies for which FAM or MLAM acts as
investment adviser. See 'Merrill Lynch Investment Company Board
Directorships' below.
(2) Member of the Audit Committee of the Board of Directors.
(3) Interested person, as defined in the Investment Company Act, of the Funds.
COMMITTEE AND BOARD MEETINGS
The Board of Directors of each Fund has a standing Audit Committee, which
consists of the Directors who are not 'interested persons', as defined in the
Investment Company Act, of the Fund. The principal purpose of the Audit
Committee is to review the scope of the annual audit conducted by each Fund's
independent auditors and the evaluation by such auditors of the accounting
procedures followed by the Fund. The non-interested Directors have retained
independent legal counsel to assist them in connection with these duties.
Neither Board of Directors has a nominating committee. During the fiscal year
ended October 31, 1994, the Board of Directors and the Audit Committee of
Arizona I and Arizona II each held four quarterly 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
'Securities Exchange Act'), requires each Fund's officers, Directors 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
55
<PAGE>
Securities and Exchange Commission and the AMEX. Officers, Directors and greater
than ten percent stockholders are required by Securities and Exchange Commission
regulations to furnish the Fund with copies of all Forms 3, 4 and 5 that 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 Forms 5 with respect to the most recent fiscal
year, each Fund believes that all of its officers, Directors, greater than ten
percent beneficial owners and other persons subject to Section 16 of the
Securities 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 to be an 'interested person' of the Fund
within the meaning of Section 2(a)(19) of the Investment Company Act as a result
of the position he holds with FAM and its affiliates. Mr. Zeikel is the
President of each Fund, the President of FAM and the President of MLAM.
COMPENSATION OF DIRECTORS
FAM, the investment adviser for both Funds, pays all compensation of all
officers of each Fund and all Directors of each Fund who are affiliated with ML
& Co. or its subsidiaries. Each Fund pays each Director who is not affiliated
with FAM a fee of $2,500 per year plus $250 per meeting attended, together with
such Director's actual out-of-pocket expenses relating to attendance at
meetings. Each Fund also pays each member of its Audit Committee, which consists
of all of the non-affiliated Directors, a fee of $500 per year plus $125 per
meeting attended, together with such Director's out-of-pocket expenses relating
to attendance at meetings. These fees and expenses for the fiscal year ended
October 31, 1994 aggregated $23,162 for Arizona I and $22,980 for Arizona II.
MERRILL LYNCH INVESTMENT COMPANY BOARD DIRECTORSHIPS
FAM or MLAM acts as the investment adviser for more than 100 registered
companies. Mr. Zeikel is a director or trustee of each of these companies except
for Merrill Lynch Series Fund, Inc., Merrill Lynch Institutional Intermediate
Fund and Merrill Lynch Funds for Institutions Series. In addition to being a
Director of Arizona I and Arizona II, each of the nominees is a director or
trustee of the following other funds: Convertible Holdings, Inc., Merrill Lynch
Balanced Fund for Investment and Retirement, Merrill Lynch California Municipal
Series Trust, Merrill Lynch Consults International Portfolio, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Growth Fund for Investment and
Retirement, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch World Income
Fund, Inc., MuniEnhanced Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Michigan Fund, Inc., MuniYield New York Insured Fund,
Inc., MuniYield New York Insured Fund II, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield Quality Fund, Inc. and MuniYield Quality Fund II, Inc.
Mr. Zeikel is also a director of certain funds which are neither registered
under the Investment Company Act nor offered in the United States.
56
<PAGE>
OFFICERS OF THE FUNDS
The Boards of Directors of Arizona I and Arizona II have elected the same
seven officers of each Fund. The principal business address of each officer is
800 Scudders Mill Road, Plainsboro, New Jersey 08536. The following sets forth
information concerning each of these officers:
<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
- -------------------------------------------------- ---------- --- ----------
<S> <C> <C> <C>
Arthur Zeikel .................................... President 62 1993
President and Chief Investment Officer of FAM
(which term, as used herein, includes its
corporate predecessor) since 1977; President of
MLAM (which term, as used herein, includes its
corporate predecessor) since 1977 and Chief
Investment Officer thereof since 1976; President
and Director of Princeton Services since 1993;
Executive Vice President of ML & Co. and of
Merrill Lynch since 1990 and Senior Vice
President thereof from 1985 to 1990; Director of
MLFD.
Terry K. Glenn ................................... Executive 54 1993
Executive Vice President of FAM and of MLAM Vice
since 1983; Executive Vice President and President
Director of Princeton Services since 1993;
President of MLFD since 1986 and Director
thereof since 1991; President of Princeton
Administrators.
Vincent R. Giordano .............................. Senior 50 1993
Senior Vice President of FAM and of MLAM since Vice
1984 and Vice President of MLAM from 1980 to President
1984; Portfolio Manager of MLAM since 1977;
Senior Vice President of Princeton Services
since 1993.
Kenneth A. Jacob ................................. Vice 43 1993
Vice President of FAM and of MLAM since 1984; President
employed by MLAM since 1978.
Donald C. Burke .................................. Vice 34 1993
Vice President and Director of Taxation of MLAM President
since 1990; Employee at Deloitte & Touche LLP
from 1982 to 1990.
Gerald M. Richard ................................ Treasurer 45 1993
Senior Vice President and Treasurer of FAM and
of MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993;
Treasurer of MLFD since 1984 and Vice President
thereof since 1981.
Mark B. Goldfus .................................. Secretary 48 1993
Vice President of FAM and of MLAM since 1985;
attorney in private practice from 1981 to 1985.
</TABLE>
57
<PAGE>
SELECTION OF INDEPENDENT AUDITORS
The Boards of Directors of Arizona I and Arizona II, including a majority
of the Directors who are not 'interested persons', as defined in the Investment
Company Act, of the Funds, have selected the firm of Deloitte & Touche LLP as
independent auditors, to audit the financial statements of each Fund for the
current fiscal year. The Funds know of no direct or indirect financial interest
of such firm in the Funds. Such appointment is subject to ratification or
rejection by the stockholders of the Funds. If the stockholders of both Arizona
I and Arizona II approve the Reorganization, then the independent auditors
selected at the Meetings will serve as the independent auditors of Arizona II
until its next Annual Meeting of Stockholders. If the stockholders of either
Arizona I or Arizona II vote against the Reorganization, then the independent
auditors of each Fund selected at the Meetings will continue to serve until the
next Annual Meeting of Stockholders of each Fund. Unless a contrary
specification is made, the accompanying proxy will be voted in favor of
ratification of the selection of such auditors.
Deloitte & Touche LLP also acts as independent auditors for ML & Co. and
all of its subsidiaries and for most other investment companies for which FAM or
MLAM acts as investment adviser. The fees received by Deloitte & Touche LLP from
these other entities are substantially greater, in the aggregate, than the total
fees received by it from the Funds. The Boards of Directors of Arizona I and
Arizona II considered the fact that Deloitte & Touche LLP has been retained as
the independent auditors of ML & Co. and the other entities described above in
its evaluation of the independence of Deloitte & Touche LLP with respect to the
Funds.
Representatives of Deloitte & Touche LLP are expected to be present at the
Meetings and will have the opportunity to make a statement if they so desire and
to respond to questions from stockholders.
INFORMATION CONCERNING THE SPECIAL MEETINGS
DATE, TIME AND PLACE OF MEETINGS
The Meetings will be held on January 25, 1995 at the offices of MLAM, 800
Scudders Mill Road, Plainsboro, New Jersey at 9:00 A.M., New York time (for
Arizona I) and 9:30 A.M., New York time (for Arizona II).
SOLICITATION, REVOCATION AND USE OF PROXIES
A stockholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy or by submitting
a notice of revocation to the Secretary of Arizona I or Arizona II, as the case
may be. Although mere attendance at the Meetings will not revoke a proxy, a
stockholder present at the Meetings may withdraw his 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, (ii)
the election of Directors and (iii) the ratification of the selection of
Deloitte & Touche LLP as independent accountants. Shares represented by proxies
on which no direction is indicated, however, will not be voted for the approval
of proposal 2, the election of directors, unless (i) in the judgment of the
Board of Directors of each Fund, there has been no material adverse change in
the financial condition of FAM between September 30, 1994, the date of the
unaudited balance
58
<PAGE>
sheet set forth on page F-25 and the most recently completed quarter, and (ii)
each Fund shall have received a certificate of the Chairman, the President or a
Senior Vice President of FAM, dated the day on which such vote is to be taken,
that, to the knowledge of such officer, since the date of the most recently
completed quarter there has been no material adverse change in the financial
condition of FAM unless such material adverse change has been disclosed to
shareholders in additional proxy solicitation materials.
It is not anticipated that any matters other than (i) the adoption of the
Agreement and Plan of Reorganization, (ii) the election of Directors and (iii)
the ratification of the selection of Deloitte & Touche LLP 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 shares of Arizona I Common Stock, shares of
Arizona I AMPS, shares of Arizona II Common Stock and shares of Arizona II AMPS
at the close of business on December 14, 1994 (the 'Record Date') are entitled
to vote at the Meetings or any adjournment thereof. At the close of business on
the Record Date, there were 2,513,709 shares of Arizona I Common Stock, 694
shares of Arizona I AMPS, 1,867,043 shares of Arizona II Common Stock and 518
shares of Arizona II AMPS issued and outstanding and entitled to vote.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ARIZONA I AND
ARIZONA II
To the knowledge of Arizona I and Arizona II, at the date hereof, no person
or entity owns beneficially 5% or more of the shares of either the Arizona I
Common Stock, the Arizona I AMPS, the Arizona II Common Stock or the Arizona II
AMPS.
At December 14, 1994, the Directors and officers of Arizona I as a group
(12 persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares
of Arizona I Common Stock and Arizona I AMPS.
At December 14, 1994, the Directors and officers of Arizona II as a group
(12 persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares
of Arizona II Common Stock and Arizona II AMPS.
At December 14, 1994, the Directors and officers of each Fund owned an
aggregate of less than 1/4 of 1% of the outstanding shares of Common Stock of ML
& Co.
VOTING RIGHTS AND REQUIRED VOTE
For purposes of this Proxy Statement and Prospectus, each share of Arizona
I Common Stock, Arizona I AMPS, Arizona II Common Stock and Arizona II AMPS is
entitled to one vote. Approval of the Agreement and Plan of Reorganization
requires the affirmative vote of stockholders representing more than 50% of the
outstanding shares of Arizona I Common Stock and Arizona I AMPS, voting together
as a single class, and the Arizona I AMPS, voting separately as a class, as well
as the affirmative vote of stockholders representing more than 50% of the
outstanding shares of Arizona II Common Stock and Arizona II AMPS, voting
together as a single class, and the Arizona II AMPS, voting separately as a
class.
Under Maryland law, stockholders of a registered investment company whose
shares are traded publicly on a national securities exchange, such as Arizona I,
are not entitled to demand the fair value of their shares upon a transfer of
assets; therefore, the Arizona I common stockholders will be bound by the terms
of the
59
<PAGE>
Reorganization. However, any common stockholder of Arizona I may sell his or her
shares of Common Stock at any time on the AMEX. Conversely, since the Arizona I
AMPS are not traded publicly on a national securities exchange, shareholders of
Arizona I AMPS will be entitled to appraisal rights upon the consummation of the
Reorganization. As stockholders of the corporation acquiring Arizona I's assets,
neither holders of Arizona II Common Stock nor holders of Arizona II AMPS are
entitled to appraisal rights under Maryland law.
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 Arizona II, the surviving fund after the Reorganization, so as to be
borne equally and exclusively by the holders of Arizona I Common Stock and
Arizona II Common Stock.
Arizona II likewise will reimburse banks, brokers and others for their
reasonable expenses in forwarding proxy solicitation materials to the beneficial
owners of shares of Arizona I and Arizona II and certain persons that Arizona I
or Arizona II may employ for their reasonable expenses in assisting in the
solicitation of proxies from such beneficial owners of shares of capital stock
of Arizona I or Arizona II.
In order to obtain the necessary quorum at the Meetings (i.e., a majority
of the shares of each class of each Fund's securities entitled to vote at the
Meetings, present in person or by proxy), supplementary solicitation may be made
by mail, telephone, telegraph or personal interview by officers of the Fund. The
Funds also may hire proxy solicitors at the expense of Arizona II. It is
anticipated that the cost of such supplementary solicitation, if any, will be
nominal.
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
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 a Board of Directors of each Fund to serve for the ensuing year (proposal 2)
and the ratification of the selection of Deloitte & Touche LLP as independent
auditors for each Fund for the current fiscal year (proposal 3) if no
instructions have been received prior to the date specified in the broker-dealer
firm's request for voting instructions. 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 (proposal
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 which are returned but which are marked 'abstain'
or on which a broker-dealer has declined to vote on any proposal ('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 exercise discretion over
shares held in its name for which no instructions have been received by voting
such shares on proposals 2 and 3 in the same proportion as it has voted such
shares for which it has received instructions. However, abstentions and broker
non-votes will not be counted as votes cast. Abstentions and broker non-votes
will not have an effect on the vote on proposals 2 and 3; however, abstentions
and broker non-votes will have the same effect as a vote against proposal 1.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statements and the exhibits relating thereto which
Arizona I and Arizona II, respectively, have filed with the
60
<PAGE>
Securities and Exchange Commission, under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Arizona I and Arizona II both are subject to the informational requirements
of the Securities Exchange Act, and in accordance therewith they file reports
and other information with the Securities and Exchange Commission. Reports,
proxy statements, registration statements and other information filed by Arizona
I and Arizona II can be inspected and copied at the public reference facilities
of the Securities and Exchange Commission in Washington, D.C. and at the New
York Regional Office of the Securities and Exchange Commission at Seven World
Trade Center, New York, New York 10048. Copies of such materials also can be
obtained by mail from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Washington, D.C.
20549, at prescribed rates.
CUSTODIAN
The Bank of New York acts as the custodian for cash and securities of
Arizona I and Arizona II. The principal business address of The Bank of New York
in such capacity is 90 Washington Street, 12th Floor, New York, New York 10286.
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 Arizona I Common Stock and the Arizona
II Common Stock, at the same rate for each Fund, 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,
12W, New York, New York 10286.
IBJ Schroder Bank and Trust Company serves as the transfer agent, registrar
and auction agent to Arizona I and Arizona II, in connection with their
respective AMPS, at the same rate for each Fund, pursuant to separate registrar,
transfer agency and service agreements with each of the Funds. The principal
business address of IBJ Schroder Bank and Trust Company is One State Street, New
York, New York 10004.
LEGAL PROCEEDINGS
There are no material legal proceedings to which Arizona I or Arizona II is
a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for Arizona I, Arizona II and Merrill Lynch by Brown & Wood, New York, New
York. Brown & Wood will rely as to matters of Maryland law on the opinion of
Galland, Kharasch, Morse & Garfinkle, P.C., Washington, D.C.
EXPERTS
The financial statements as of October 31, 1994 of Arizona I and Arizona
II, as well as the balance sheet as of December 31, 1993 for FAM, included in
this Proxy Statement and Prospectus have been so included in reliance on the
reports of Deloitte & Touche LLP, independent auditors, given on their authority
as experts in
61
<PAGE>
auditing and accounting. The principal business address of Deloitte & Touche LLP
is 117 Campus Drive, Princeton, New Jersey 08540.
STOCKHOLDER PROPOSALS
If a stockholder of either Fund intends to present a proposal at the 1996
Annual Meeting of Stockholders of either Fund, which is anticipated to be held
in January, 1996, and desires to have the proposal included in the Fund's proxy
statement and form of proxy for that meeting, the stockholder must deliver the
proposal to the offices of the Fund by September 27, 1995.
By Order of the Boards of Directors
MARK B. GOLDFUS
Secretary
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements for Arizona I for the Fiscal Year Ended
October 31, 1994.................................................... F-2
Audited Financial Statements for Arizona II for the Fiscal Year Ended
October 31, 1994.................................................... F-10
Unaudited Financial Statements for the Combined Fund on a Pro Forma
Basis as of October 31, 1994........................................ F-19
Unaudited Balance Sheet for FAM for the Nine-Month Period Ended
September 30, 1994.................................................. F-25
Audited Consolidated Balance Sheet for FAM for the Fiscal Year Ended
December 31, 1993................................................... F-26
</TABLE>
F-1
<PAGE>
MuniYield Arizona Fund, Inc. October 31, 1994
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arizona--88.6%
<S> <C> <C> <C> <C>
Arizona Educational Loan Marketing Corporation, Educational
Loan Revenue Bonds, AMT:
NR* A $ 700 Series B, 7% due 3/01/2002 $ 723
NR* A 1,000 Subordinate Series, 5.70% due 12/01/2008 926
Arizona Health Facilities Authority, Hospital System Revenue Refunding Bonds:
NR* Ba 1,000 (Saint Luke's Health System), 7.25% due 11/01/2014 951
AAA Aaa 1,000 (Samaritan Health System), 5.625% due 12/01/2015 (b) 874
AAA Aaa 1,180 Arizona State Power Authority, Power Resource Revenue Refunding Bonds
(Hoover Uprating Project), 5.375% due 10/01/2013 (b) 1,018
AA Aaa 500 Arizona State Transportation Board, Highway Revenue Bonds, Sub-Series A, 6.50%
due 7/01/2001 (g) 530
Arizona State University, Revenue Refunding Bonds, Series A:
AA A1 1,000 5.75% due 7/01/2012 907
AA A1 1,000 5.50% due 7/01/2019 853
AA+ Aa 1,500 Arizona State Wastewater Management Authority, Wastewater Treatment Financial
Assistance Revenue Bonds, 6.80% due 7/01/2011 1,528
AAA Aaa 1,000 Chandler, Arizona, Street and Highway User Revenue Refunding Bonds,
5.50% due 7/01/2010 (c) 903
AAA Aaa 1,815 Chandler, Arizona, Water and Sewer Revenue Refunding Bonds, 6.25%
due 7/01/2013 (c) 1,768
A A3 2,500 Greenlee County, Arizona, IDA, PCR, Refunding Bonds (Phelps Dodge
Corporation Project), 5.45% due 6/01/2009 2,218
AAA Aaa 1,000 Maricopa County, Arizona, Chandler Unified School District Number 80 Refunding
Bonds, 6.25% due 7/01/2011 (c) 985
AAA Aaa 5,500 Maricopa County, Arizona, IDA, Health Facilities Revenue Insured Bonds
(Catholic Health Care West), Series A, 5.625% due 7/01/2023 (b) 4,658
A1+ VMIG1 100 Maricopa County, Arizona, IDA, Hospital Facility Revenue Bonds (Samaritan Health
Service Hospital), VRDN, Series B2, 3.60% due 12/01/2008 (a)(b) 100
AAA Aaa 1,500 Maricopa County, Arizona, Peoria Unified School District Number 11 Refunding
Bonds, 6.10% due 7/01/2010 (e) 1,463
BB Ba2 2,500 Maricopa County, Arizona, Pollution Control Corporation, PCR, Refunding Bonds
(Public Service Company--Palo Verde), Series A, 6.375% due 8/15/2023 2,146
AA- NR* 1,000 Maricopa County, Arizona, Scottsdale Unified School District Number 48 Revenue
Bonds, UT, 6% due 7/01/2002 (g) 1,025
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield Arizona Fund, Inc.'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)
COP Certificates of Participation
GO General Obligation Bonds
IDA Industrial Development Authority
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
YCN Yield Curve Notes
F-2
<PAGE>
MuniYield Arizona Fund, Inc. October 31, 1994
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arizona (concluded)
<S> <C> <C> <C> <C>
BBB Baa2 $5,000 Navajo County, Arizona, Pollution Control Corporation, Revenue Refunding Bonds
(Arizona Public Service Company), Series A, 5.875% due 8/15/2028 $ 4,110
AA+ Aa 1,300 Phoenix, Arizona, Civic Improvement Corporation, Excise Tax Revenue Bonds
(Senior Lien--New City Hall Project), 5.10% due 7/01/2018 1,044
A1+ Aa 400 Pima County, Arizona, IDA, M/F Housing Revenue Bonds (Quail Ridge Apartments),
VRDN, AMT, Series B, 3.55% due 6/01/2034 (a) 400
AAA Aaa 1,050 Pima County, Arizona, Unified School District Number 1 Revenue Refunding Bonds
(Tucson), 7.50% due 7/01/2009 (c) 1,173
Salt River Project, Arizona, Agricultural Improvement and Power District,
Electric System Revenue Bonds:
AA Aa 2,000 Series A, 6.50% due l/01/2022 1,962
AA Aa 500 Series C, 6.25% due 1/01/2019 477
AAA Aaa 1,000 Santa Cruz County, Arizona, Unified School District Number 1 Revenue Bonds
(Nogales), Series A, 5.80% due 7/01/2013 (d) 920
AAA Aaa 1,000 Scottsdale, Arizona, IDA, Hospital Revenue Bonds (Scottsdale Memorial Hospital),
5.25% due 9/01/2018 (e) 812
A NR* 500 Scottsdale, Arizona, Mountain Community Facilities District Revenue Bonds, UT,
Series A, 6.20% due 7/01/2017 468
A NR* 1,500 Tatum Ranch, Arizona, Community Facilities District Revenue Bonds, UT, Series A,
6.875% due 7/01/2016 1,522
AAA Aaa 500 Tempe, Arizona, Unified High School District Number 213, Revenue Refunding and
Improvement Bonds, UT, 7% due 7/01/2008 (c) 540
AAA Aaa 300 Tucson, Arizona, GO, Refunding Bonds, 6.10% due 7/01/2012 (c) 289
AAA Aaa 1,000 Tucson, Arizona, Local Development, Business Development Finance Corporation,
Lease Revenue Refunding Bonds, 6.25% due 7/01/2012 (c) 980
A+ A1 1,400 Tucson, Arizona, Water Revenue Refunding Bonds, Series A, 5.75% due 7/01/2018 1,228
AAA Aaa 500 University of Arizona, COP (Administrative and Parking Facility Project),
Series B, 6% due 7/15/2016 (b) 466
AA A1 1,345 University of Arizona, University Revenue Refunding Bonds, 6.25% due 6/01/2011 1,318
<CAPTION>
Puerto Rico--9.6%
<S> <C> <C> <C> <C>
Puerto Rico Commonwealth, GO:
AAA Aaa 2,000 RIB, YCN, 8.132% due 7/01/2020 (d)(f) 1,607
A Baa1 3,000 UT, 6.50% due 7/01/2023 2,887
Total Investments (Cost--$50,490)--98.2% 45,779
Other Assets Less Liabilities--1.8% 846
-------
Net Assets--100.0% $46,625
=======
<FN>
* Not Rated.
(a) The interest rate is subject to change periodically
based upon the prevailing market rate. The interest
rates shown are the rates in effect at October 31, 1994.
(b) MBIA Insured.
(c) FGIC Insured.
(d) FSA Insured.
(e) AMBAC Insured.
(f) The interest rate is subject to change periodically and inversely
based upon the prevailing market rate. The interest rates shown
are the rates in effect at October 31, 1994.
(g) Prerefunded.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
F-3
<PAGE>
MuniYield Arizona Fund, Inc. October 31, 1994
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets, Liabilities and Capital as of October 31, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$50,490,397)(Note 1a) $45,779,197
Cash 59,179
Interest receivable 965,435
Deferred organization expenses (Note 1e) 12,833
Prepaid expenses and other assets 11,716
-----------
Total assets 46,828,360
-----------
Liabilities: Payables:
Dividends payable to shareholders (Note 1g) $ 80,364
Investment adviser (Note 2) 9,383 89,747
-----------
Accrued expenses 113,609
-----------
Total liabilities 203,356
-----------
Net Assets: Net assets $46,625,004
===========
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (347
shares of AMPS* issued and outstanding at $50,000 per share
liquidation preference) $17,350,000
Common Stock, par value $.10 per share (2,513,709 shares
issued and outstanding) $ 251,371
Paid-in capital in excess of par 34,765,706
Undistributed investment income--net 190,937
Accumulated realized capital losses--net (Note 5) (1,221,810)
Unrealized depreciation on investments--net (4,711,200)
-------------
Total--Equivalent to $11.65 net asset value per share of
Common Stock (market price--$10.75) 29,275,004
-----------
Total capital $46,625,004
===========
* Auction Market Preferred Stock.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1994
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $ 2,985,585
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 252,642
Professional fees 75,182
Accounting services (Note 2) 31,559
Transfer agent fees 26,654
Directors' fees and expenses 23,162
Printing and shareholder reports 22,757
Commission fees (Note 4) 7,589
Listing fees 7,115
Custodian fees 4,655
Pricing fees 4,316
Amortization of organization expenses (Note 1e) 3,429
Other 11,644
-------------
Total expenses before reimbursement 470,704
Reimbursement of expenses (Note 2) (137,460)
-------------
Total expenses after reimbursement 333,244
-----------
Investment income--net 2,652,341
-----------
Realized & Realized loss on investments--net (1,221,747)
Unrealized Loss Change in unrealized appreciation/depreciation on investments--net (6,515,206)
on Investments-- -----------
Net (Notes 1d Net Decrease in Net Assets Resulting from Operations $(5,084,612)
& 3): ===========
See Notes to Financial Statements.
</TABLE>
F-4
<PAGE>
MuniYield Arizona Fund, Inc. October 31, 1994
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
For the
Period
For the July 30,
Year Ended 1993++ to
October 31, October 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <C> <C> <C>
Operations: Investment income--net $ 2,652,341 $ 663,406
Realized gain (loss) on investments--net (1,221,747) 107,520
Change in unrealized appreciation/depreciation
on investments--net (6,515,206) 1,804,006
----------- -----------
Net increase (decrease) in net assets resulting from operations (5,084,612) 2,574,932
----------- -----------
Dividends & Investment income--net:
Distributions Common Stock (2,195,165) (365,402)
to Shareholders Preferred Stock (482,073) (82,170)
(Note 1g): Realized gain on investments--net:
Common Stock (94,265) --
Preferred Stock (13,318) --
----------- -----------
Net decrease in net assets resulting from dividends and
distributions to shareholders (2,784,821) (447,572)
----------- -----------
Capital Stock Net proceeds from issuance of Common Stock -- 34,593,338
Transactions Proceeds from issuance of Preferred Stock -- 17,350,000
(Notes 1e & 4): Offering and underwriting costs resulting from the issuance of
Common Stock 2,373 --
Offering and underwriting costs resulting from the issuance of
Preferred Stock (39,316) (426,956)
Value of shares issued to Common Stock shareholders in
reinvestment of dividends and distributions 579,370 208,263
----------- -----------
Net increase in net assets derived from capital stock transactions 542,427 51,724,645
----------- -----------
Net Assets: Total increase (decrease) in net assets (7,327,006) 53,852,005
Beginning of period 53,952,010 100,005
----------- -----------
End of period* $46,625,004 $53,952,010
=========== ===========
<FN>
* Undistributed investment income--net $ 190,937 $ 215,834
=========== ===========
++ Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
F-5
<PAGE>
MuniYield Arizona Fund, Inc. October 31, 1994
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (concluded)
Financial Highlights
For the
Period
The following per share data and ratios have been derived For the July 30,
from information provided in the financial statements. Year Ended 1993++ to
October 31, October 31,
Increase (Decrease) in Net Asset Value: 1994 1993
<S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 14.82 $ 14.18
Operating ----------- -----------
Performance: Investment income--net 1.06 .27
Realized and unrealized gain (loss) on investments--net (3.09) .77
----------- -----------
Total from investment operations (2.03) 1.04
----------- -----------
Less dividends and distributions to Common Stock shareholders:
Investment income--net (.88) (.15)
Realized gain on investments--net (.04) --
----------- -----------
Total dividends and distributions to Common Stock shareholders (.92) (.15)
----------- -----------
Capital charge resulting from issuance of Common Stock -- (.05)
----------- -----------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred Stock shareholders:
Investment income--net (.19) (.03)
Realized gain on investments--net (.01) --
Capital charge resulting from issuance of Preferred Stock (.02) (.17)
----------- -----------
Total effect of Preferred Stock activity (.22) (.20)
----------- -----------
Net asset value, end of period $ 11.65 $ 14.82
=========== ===========
Market price per share, end of period $ 10.75 $ 14.875
=========== ===========
Total Based on market price per share (22.48%) .16%+++
Investment =========== ===========
Return:** Based on net asset value per share (15.68%) 5.56%+++
=========== ===========
Ratios to Expenses, net of reimbursement .66% --
Average =========== ===========
Net Assets:*** Expenses .93% 1.09%*
=========== ===========
Investment income--net 5.24% 5.73%*
=========== ===========
Supplemental Net assets, net of Preferred Stock, end of period
Data: (in thousands) $ 29,275 $ 36,602
=========== ===========
Preferred Stock outstanding, end of period
(in thousands) $ 17,350 $ 17,350
=========== ===========
Portfolio turnover 57.28% 16.91%
=========== ===========
Dividends Per Investment income--net $ 1,389 $ 237
Share on =========== ===========
Preferred Stock
Outstanding:
<FN>
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, result in
substantially different returns. Total investment returns exclude
the effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
++ Commencement of Operations.
++++ The Fund's Preferred Stock was issued on August 30, 1993.
+++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
F-6
<PAGE>
MuniYield Arizona Fund, Inc. October 31, 1994
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Arizona Fund, Inc. (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 Stock on a weekly basis. The Fund's Common Stock is listed
on the American Stock Exchange under the symbol MZA. 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, which are traded on
exchanges, are valued at their closing prices as of the close of such exchanges.
Options, which are traded on exchanges, are valued at their last sale price as
of the close of such exchanges or, lacking any sales, at the last available bid
price. Securities with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities 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 Directors of
the Fund.
(b) Financial futures contracts--The Fund may purchase or sell interest rate
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.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses and offering expenses--Deferred organization
expenses are amortized on a straight-line basis over a five-year period. Direct
expenses relating to the public offering of the Common and Preferred Stock were
charged to capital at the time of issuance.
(f) Non-income producing investments--Written and purchased options are
non-income producing investments.
(g) 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"). Effective January 1, 1994, the investment advisory
business of FAM was reorganized from a corporation to a limited partnership.
Both prior to and after the reorganization, ultimate control of FAM was vested
with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of ML &
Co. The limited partners are ML & Co. and Fund Asset Management, Inc. ("FAMI"),
which is also an indirect wholly-owned subsidiary of ML & Co.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
F-7
<PAGE>
MuniYield Arizona Fund, Inc. October 31, 1994
NOTES TO FINANCIAL STATEMENTS (concluded)
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. For the year
ended October 31, 1994, FAM earned fees of $252,642, of which $137,460 was
voluntarily waived.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, FAMI, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), and/or ML
& Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1994 were $29,541,309 and $27,433,841, respectively.
Net realized and unrealized gains (losses) as of October 31, 1994 were as
follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $ (842,546) $(4,711,200)
Short-term investments (425,826) --
Financial futures contracts 46,625 --
----------- -----------
Total $(1,221,747) $(4,711,200)
=========== ===========
As of October 31, 1994, net unrealized depreciation for Federal income tax
purposes aggregated $4,711,200, all of which related to depreciated securities.
The aggregate cost of investments at October 1994 for Federal income tax
purposes was $50,490,397.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of the holders
of Common Stock.
Common Stock
For the year ended October 31,1994, shares issued and outstanding increased by
43,583 to 2,513,709 as a result of dividend reinvestment. At October 31, 1994,
total paid-in capital amounted to $35,017,077.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund 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,
1994 was 3.1625%.
In connection with the offering of AMPS, the Board of Directors reclassified 347
shares of unissued capital stock as AMPS. For the year ended October 31, 1994,
there were 347 AMPS shares authorized, issued and outstanding with a liquidation
preference of $50,000 per share, plus accumulated and unpaid dividends of
$7,481. Effective December 1, 1994, as a result of a two-for-one stock split,
there will be 694 AMPS shares with a liquidation preference of $25,000 per
share.
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, 1994, MLPF&S, an affiliate of FAMI,
earned $7,516 as commissions.
5. Capital Loss Carryforward:
At October 31, 1994, the Fund had a capital loss carryforward of approximately
$1,222,000, all of which expires in 2002. This amount will be available to
off-set like amounts of any future taxable gains.
6. Subsequent Event:
On November 8, 1994, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.071661 per share,
payable on November 29, 1994 to shareholders of record as of November 18, 1994.
7. Reorganization Plan:
On June 17, 1994, the Board of Directors approved a plan of reorganization,
subject to shareholder approval and certain other conditions, whereby MuniYield
Arizona Fund II, Inc. would acquire substantially all of the assets and
liabilities of the Fund in exchange for newly issued shares of MuniYield Arizona
Fund II, Inc. MuniYield Arizona Fund II, Inc. is a registered, non-diversified,
closed-end management investment company, with a similar investment objective to
the Fund, and is managed by FAM.
F-8
<PAGE>
MuniYield Arizona Fund, Inc. October 31, 1994
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
MuniYield Arizona Fund, Inc.:
We have audited the accompanying statement of assets, liabilities, and capital,
including the schedule of investments, of MuniYield Arizona Fund, Inc. as of
October 31, 1994, the related statements of operations for the year then ended
and changes in net assets, and the financial highlights for the year then ended
and for the period July 30, 1993 (commencement of operations) to October 31,
1993. 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, 1994 by correspondence with the custodian. 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 Arizona
Fund, Inc. as of October 31, 1994, 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 6, 1994
</AUDIT-REPORT>
F-9
MUNIYIELD ARIZONA FUND II, INC.
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arizona--87.3%
<S> <C> <C> <C> <C>
AAA VMIG1 $ 600 Arizona Educational Loan Marketing Corp., Educational Loan Revenue Bonds, VRDN,
AMT, Series A, 3.55% due 3/01/2015 (b) $ 600
NR* Ba 1,000 Arizona Health Facilities Authority, Hospital System Revenue Refunding Bonds
(Saint Luke's Health System), 7.25% due 11/01/2014 951
AAA Aaa 850 Arizona State University, COP, Refunding Bonds (West Campus Project), 5.375% due
7/15/2009 (a) 756
AA A1 2,500 Arizona State University, Revenue Refunding Bonds, Series A, 5.50% due 7/01/2019 2,132
AA+ Aa 1,500 Arizona State Wastewater Management Authority, Wastewater Treatment Financial
Assistance Revenue Bonds, 6.80% due 7/01/2011 1,529
AAA Aaa 605 Gilbert, Arizona, Projects of 1988, UT, Series C, 8.50% due 7/01/2005 (a) 719
A A3 3,250 Greenlee County, Arizona, IDA, PCR, Refunding (Phelps Dodge Corporation Project),
5.45% due 6/01/2009 2,883
AAA Aaa 2,000 Maricopa County, Arizona, IDA, Health Facilities Revenue Insured Bonds (Catholic
Health Care West), Series A, 5.625% due 7/01/2023 (a) 1,694
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield Arizona
Fund II, Inc.'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)
COP Certificates of Participation
GO General Obligation Bonds
IDA Industrial Development Authority
LEVRRS Leveraged Reverse Rate Securities
PCR Pollution Control Revenue Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
F-10
<PAGE>
MuniYield Arizona Fund II, Inc. October 31, 1994
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arizona (concluded)
<S> <C> <C> <C> <C>
Maricopa County, Arizona, IDA, Hospital Facilities Revenue Bonds (Samaritan Health
Service Hospital) (a):
AAA Aaa $1,400 Refunding, Series A, 7% due 12/01/2016 $ 1,468
A1+ VMIG1 200 VRDN, Series B2, 3.45% due 12/01/2008 (b) 200
BB Ba2 1,000 Maricopa County, Arizona, Pollution Control Corporation, PCR, Refunding (Public
Service Company-Palo Verde), Series A, 6.375% due 8/15/2023 859
BBB Baa2 3,900 Navajo County, Arizona, Pollution Control Corporation, Revenue Refunding Bonds
(Arizona Public Service Company), Series A, 5.875% due 8/15/2028 3,206
A A1 500 Phoenix, Arizona, Civic Improvement Corporation, Wastewater System, Lease Revenue
Refunding Bonds, 5% due 7/01/2018 388
AA+ Aa 2,150 Phoenix, Arizona, Civic Plaza Building Corporation, Excise Tax Revenue Bonds
(Senior Lien), 6% due 7/01/2014 2,022
AA+ Aa 1,750 Phoenix, Arizona, Refunding Bonds, UT, Series B, 5.50% due 7/01/2016 1,508
AAA Aaa 2,000 Pima County, Arizona, Unified School District Number 1, Refunding Bonds (Tucson),
7.50% due 7/01/2009(c) 2,234
Salt River Project, Arizona, Agricultural Improvement and Power District Revenue
Bonds (Electric System):
AA Aa 1,065 Series A, 6.50% due 1/01/2022 1,045
AA Aa 600 Series C, 6.25% due 1/01/2019 572
A NR* 1,425 Tatum Ranch, Arizona, Community Facilities District, UT, Series A, 6.875% due
7/01/2016 1,446
AAA Aaa 500 Tempe, Arizona, Unified High School District Number 213, Refunding and Improvement
Bonds, UT, 7% due 7/01/2008 (c) 540
AAA Aaa 1,000 Tucson, Arizona, Local Development, Business Development Finance Corporation,
Lease Revenue Refunding Bonds, 6.25% due 7/01/2012 (c) 980
A+ A1 1,300 Tucson, Arizona, Water Revenue Refunding Bonds, Series A, 5.75% due 7/01/2018 1,140
AAA Aaa 1,000 University of Arizona, COP (Residence Life Project), Series A, 5.80% due
9/01/2013 (d) 914
<CAPTION>
Puerto Rico--10.6%
<S> <C> <C> <C> <C>
A Baa1 1,000 Puerto Rico Commonwealth, GO, UT, 6.50% due 7/01/2023 962
Puerto Rico Commonwealth, Highway and Transportation Authority, Highway Revenue
Bonds:
A Baa1 500 Refunding, Series V, 6.625% due 7/01/2012 495
A Baa1 520 Series T, 6.625% due 7/01/2018 508
AAA Aaa 2,000 Puerto Rico Electric Power Authority, Power Revenue Bonds, LEVRRS, 8.788% due
7/01/2023 (e)(f) 1,640
Total Investments (Cost--$36,872)--97.9% 33,391
Other Assets Less Liabilities--2.1% 712
-------
Net Assets--100.0% $34,103
=======
<FN>
* Not Rated.
(a) MBIA Insured.
(b) The interest rate is subject to change periodically based on
prevailing market rates. The interest rates shown are those in
effect at October 31, 1994.
(c) FGIC Insured.
(d) Capital Guaranty.
(e) The interest rate is subject to change periodically and inversely
to the prevailing market rate. The interest rate shown is the rate
in effect at October 31, 1994.
(f) FSA Insured.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
F-11
<PAGE>
MuniYield Arizona Fund II, Inc. October 31, 1994
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets, Liabilities and Capital as of October 31, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$36,871,812) (Note 1a) $33,391,352
Cash 120,594
Receivables:
Interest $ 680,646
Investment adviser (Note 2) 16,696 697,342
-----------
Deferred organization expenses (Note 1e) 17,385
Prepaid expenses 11,727
-----------
Total assets 34,238,400
-----------
Liabilities: Dividend payable 37,172
Accrued expenses and other liabilities 97,830
-----------
Total liabilities 135,002
-----------
Net Assets: Net assets $34,103,398
===========
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (518 shares of AMPS*
issued and outstanding at $25,000 per liquidation preference) $12,950,000
Common Stock, par value $.10 per share (1,867,043 shares issued
and outstanding) $ 186,704
Paid-in capital in excess of par 25,800,159
Undistributed investment income--net 132,918
Accumulated realized capital loss--net (Note 5) (1,485,923)
Unrealized depreciation on investments--net (3,480,460)
-----------
Total--Equivalent to $11.33 net asset value per share of
Common Stock (market price--$10.375) 21,153,398
-----------
Total capital $34,103,398
===========
<FN>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
F-12
<PAGE>
MuniYield Arizona Fund II, Inc. October 31, 1994
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (continued)
Statement of Operations
For the Year Ended
October 31, 1994
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $ 2,022,637
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 179,126
Professional fees 52,891
Accounting services (Note 2) 27,867
Printing and shareholder reports 25,676
Transfer agent fees 24,387
Commission fees (Note 4) 23,112
Directors' fees and expenses 22,980
Custodian fees 4,685
Amortization of organization expenses (Note 1e) 4,355
Pricing fees 4,046
Listing fees 2,500
Other 17,129
-----------
Total expenses before reimbursement 388,754
Reimbursement of expenses (Note 2) (195,774)
-----------
Total expenses after reimbursement 192,980
-----------
Investment income--net 1,829,657
-----------
Realized & Realized loss on investments (1,485,923)
Unrealized Change in unrealized appreciation/depreciation on investments--net (3,487,450)
Loss on -----------
Investments-- Net Decrease in Net Assets Resulting from Operations $(3,143,716)
Net (Notes ===========
1d & 3):
See Notes to Financial Statements.
</TABLE>
F-13
<PAGE>
MuniYield Arizona Fund II, Inc. October 31, 1994
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
For the
Period
For the October 29,
Year Ended 1993++ to
October 31, October 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <C> <C> <C>
Operations: Investment income--net $ 1,829,657 $ 4,896
Realized loss on investments--net (1,485,923) --
Change in unrealized appreciation/depreciation on investments--net (3,487,450) 6,990
----------- -----------
Net increase (decrease) in net assets resulting from operations (3,143,716) 11,886
----------- -----------
Dividends & Investment income--net:
Distributions Common Stock (1,391,922) --
to Share- Preferred Stock (309,713) --
holders ----------- -----------
(Note 1g): Net decrease in net assets resulting from dividends and distributions
to shareholders (1,701,635) 0
----------- -----------
Capital Stock Net proceeds from issuance of Common Stock -- 25,515,000
Transactions Proceeds from issuance of Preferred Stock 12,950,000 --
(Notes 1e & 4): Offering and underwriting costs resulting from the issuance of
Preferred Stock (318,750) --
Offering and underwriting costs resulting from the issuance of
Common Stock -- (121,238)
Value of shares issued to Common Stock shareholders in reinvestment of
dividends and distributions 811,846 --
----------- -----------
Net increase in net assets derived from capital stock transactions 13,443,096 25,393,762
----------- -----------
Net Assets: Total increase in net assets 8,597,745 25,405,648
Beginning of period 25,505,653 100,005
----------- -----------
End of period* $34,103,398 $25,505,653
=========== ===========
<FN>
* Undistributed investment income--net $ 132,918 $ 4,896
=========== ===========
++ Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
F-14
<PAGE>
MuniYield Arizona Fund II, Inc. October 31, 1994
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (concluded)
Financial Highlights
For the
Period
The following per share data and ratios have been derived For the October 29,
from information provided in the financial statements. Year Ended 1993++ to
October 31, October 31,
Increase (Decrease) in Net Asset Value: 1994 1993
<S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 14.11 $ 14.18
Operating ----------- -----------
Performance: Investment income--net .99 --
Realized and unrealized gain (loss) on investments--net (2.68) --
----------- -----------
Total from investment operations (1.69) --
----------- -----------
Less dividends and distributions to Common Stock shareholders:
Investment income--net (.75) --
----------- -----------
Capital charge resulting from issuance of Common Stock -- (.07)
----------- -----------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred Stock shareholders:
Investment income--net (.17) --
Capital charge resulting from issuance of Preferred Stock (.17) --
----------- -----------
Total effect of Preferred Stock activity (.34) --
----------- -----------
Net asset value, end of period $ 11.33 $ 14.11
=========== ===========
Market price per share, end of period $ 10.375 $ 15.00
=========== ===========
Total Based on market price per share (26.55%) 0.00%+++
Investment =========== ===========
Return:** Based on net asset value per share (14.73%) (.49%)+++
=========== ===========
Ratios to Expenses, net of reimbursement .54% --
Average =========== ===========
Net Assets:*** Expenses 1.09% --
=========== ===========
Investment income--net 5.13% .02%*
=========== ===========
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 21,153 $ 25,506
Data: =========== ===========
Preferred Stock outstanding, end of period (in thousands) $ 12,950 $ --
=========== ===========
Portfolio turnover 80.03% --
=========== ===========
Dividends Per Investment income--net $ 598 $ --
Share on =========== ===========
Preferred Stock
Outstanding:
<FN>
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value,
result in substantially different returns. Total investment returns
exclude the effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
++ Commencement of Operations.
++++ The Fund's Preferred Stock was issued on December 2, 1993.
+++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
F-15
<PAGE>
MuniYield Arizona Fund II, Inc. October 31, 1994
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Arizona Fund II, Inc. (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 Stock on a weekly basis. The Fund's Common Stock is listed
on the American Stock Exchange under the symbol MZT. 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, which are traded on
exchanges, are valued at their closing prices as of the close of such exchanges.
Options, which are traded on exchanges, are valued at their last sale price as
of the close of such exchanges or, lacking any sales, at the last available bid
price. Securities with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities 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 Directors of
the Fund.
(b) Financial futures contracts--The Fund may purchase or sell interest rate
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.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses and offering expenses--Deferred organization
expenses are amortized on a straight-line basis over a five-year period. Direct
expenses relating to the public offering of the Common and Preferred Stock were
charged to capital at the time of issuance.
(f) Non-income producing investments--Written and purchased options are
non-income producing investments.
(g) 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"). Effective January 1, 1994, the investment advisory
business of FAM was reorganized from a corporation to a limited partnership.
Both prior to and after the reorganization, ultimate control of FAM was vested
with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of ML &
Co. The limited partners are ML & Co. and Fund Asset Management, Inc. ("FAMI"),
which is also an indirect wholly-owned subsidiary of ML & Co.
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. For the year
ended October 31, 1994, FAM earned fees of $179,126, of which $156,019 was
voluntarily waived. FAM also reimbursed the Fund $39,755 for additional
expenses.
F-16
<PAGE>
MuniYield Arizona Fund II, Inc. October 31, 1994
NOTES TO FINANCIAL STATEMENTS (concluded)
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, FAMI, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), and/or ML
& Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1994 were $57,033,812 and $25,297,633, respectively.
Net realized and unrealized gains (losses) as of October 31, 1994 were as
follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $(1,535,995) $(3,480,460)
Short-term investments 185 --
Financial futures contracts 49,887 --
----------- -----------
Total $(1,485,923) $(3,480,460)
=========== ===========
As of October 31, 1994, net unrealized depreciation for Federal income tax
purposes aggregated $3,480,460, all of which related to depreciated securities.
The aggregate cost of investments at October 31, 1994 for Federal income tax
purposes was $36,871,812.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of the holders
of Common Stock.
Common Stock
For the year ended October 31, 1994, shares issued and outstanding increased by
59,988 to 1,867,043 as a result of dividend reinvestment. At October 31, 1994,
total paid-in capital amounted to $25,986,863.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund 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,
1994 was 3.125%.
In connection with the offering of AMPS, the Board of Directors reclassified 518
shares of unissued capital stock as AMPS. For the year ended October 31, 1994,
there were 518 AMPS shares authorized, issued and outstanding with a liquidation
preference of $25,000 per share, plus accumulated and unpaid dividends of
$5,764.
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, 1994, MLPF&S, an affiliate of FAMI,
earned $22,963 as commissions.
5. Capital Loss Carryforward:
At October 31, 1994, the Fund had a capital loss carry-forward of approximately
$1,486,000, all of which expires in 2002. This amount will be available to
offset like amounts of any future taxable gains.
6. Subsequent Event:
On November 8, 1994, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.068105 per share,
payable on November 29, 1994 to shareholders of record as of November 18, 1994.
7. Reorganization Plan:
On June 17, 1994, the Board of Directors approved an Agreement and Plan of
Reorganization between the Fund and MuniYield Arizona Fund, Inc., pursuant to
which the Fund would acquire substantially all of the assets and liabilities of
MuniYield Arizona Fund, Inc. MuniYield Arizona Fund, Inc. is a registered,
non-diversified, closed-end management investment company, with a similar
investment objective to the Fund, and is managed by FAM.
F-17
<PAGE>
MuniYield Arizona Fund II, Inc. October 31, 1994
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
MuniYield Arizona Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniYield Arizona Fund II, Inc. as of
October 31, 1994, the related statements of operations for the year then ended
and changes in net assets, and the financial highlights for the year then ended
and the period October 29, 1993 (commencement of operations) to October 31,
1993. 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 the confirmation of securities owned at
October 31, 1994 by correspondence with the custodian. 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 Arizona
Fund II, Inc. as of October 31, 1994, 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 6, 1994
</AUDIT-REPORT>
F-18
<PAGE>
<PAGE>
FINANCIAL STATEMENTS OF MUNIYIELD ARIZONA FUND, INC.,
MUNIYIELD ARIZONA FUND II, INC. AND THE COMBINED FUND ON A PRO FORMA BASIS
(UNAUDITED)
- --------------------------------------------------------------------------------
COMBINED SCHEDULE OF INVESTMENTS AS OF OCTOBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- ----------------------------------------------------------------------------------------------------------------------
VALUE
S&P MOODY'S FACE (IN THOUSANDS)
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- ----------------------------------------------------------------------------------------------------------------------
ARIZONA--88.6%
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arizona Educational Loan Marketing Corporation, Educational Loan
Revenue Bonds, AMT:
NR* A $ 700 Series B, 7.00% due 3/01/2002 $ 723
NR* A 1,000 Subordinate Series, 5.70% due 12/01/2008 926
NR* A 600 VRDN, Series A, 3.55% due 3/01/2015 (a) 600
- ----------------------------------------------------------------------------------------------------------------------
Arizona Health Facilities Authority, Hospital System Revenue
Refunding Bonds:
NR* Ba 2,000 (Saint Luke's Health System), 7.25% due 11/01/2014 1,902
AAA Aaa 1,000 (Samaritan Health System), 5.625% due 12/01/2015 (b) 874
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,180 Arizona State Power Authority, Power Resource Revenue Refunding Bonds 1,018
(Hoover Uprating Project), 5.375% due 10/01/2013 (b)
- ----------------------------------------------------------------------------------------------------------------------
AA Aaa 500 Arizona State Transportation Board, Highway Revenue Bonds, Sub-Series 530
A, 6.50% due 7/01/2001 (f)
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 850 Arizona State University, COP, Refunding Bonds (West Campus Project), 756
5.375% due 7/15/2009 (b)
- ----------------------------------------------------------------------------------------------------------------------
Arizona State University, Revenue Refunding Bonds, Series A:
AA A1 1,000 5.75% due 7/01/2012 907
AA A1 3,500 5.50% due 7/01/2019 2,985
- ----------------------------------------------------------------------------------------------------------------------
AA+ Aa 3,000 Arizona State Wastewater Management Authority, Wastewater Treatment 3,057
Financial Assistance Revenue Bonds, 6.80% due 7/01/2011
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Chandler, Arizona, Street and Highway User Revenue Refunding Bonds, 903
5.50% due 7/01/2010 (c)
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,815 Chandler, Arizona, Water and Sewer Revenue Refunding Bonds, 6.25% due 1,768
7/01/2013 (c)
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 605 Gilbert, Arizona, Projects of 1988, UT, Series C, 8.50% due 7/01/2005 719
(b)
- ----------------------------------------------------------------------------------------------------------------------
A A3 5,750 Greenlee County, Arizona, IDA, PCR, Refunding Bonds (Phelps Dodge 5,101
Corporation Project), 5.45% due 6/01/2009
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Maricopa County, Arizona, Chandler Unified School District Number 80 985
Refunding Bonds, 6.25% due 7/01/2011 (c)
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 7,500 Maricopa County, Arizona, IDA, Health Facilities Revenue Insured 6,352
Bonds (Catholic Health Care West), Series A, 5.625% due 7/01/2023 (b)
- ----------------------------------------------------------------------------------------------------------------------
Maricopa County, Arizona, IDA, Hospital Facility Revenue Bonds
(Samaritan Health Services Hospital) (b):
AAA Aaa 1,400 Refunding, Series A, 7% due 12/01/2016 1,468
A1+ VMIG1 300 VRDN, Series B2, 3.60% due 12/01/2008 (a) 300
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,500 Maricopa County, Arizona, Peoria Unified School District Number 11 1,463
Refunding Bonds, 6.10% due 7/01/2010(e)
- ----------------------------------------------------------------------------------------------------------------------
BB Ba2 3,500 Maricopa County, Arizona, Pollution Control Corporation, PCR, 3,005
Refunding Bonds (Public Service Company-Palo Verde), Series A, 6.375%
due 8/15/2023
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
VALUE
S&P MOODY'S FACE (IN THOUSANDS)
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- ----------------------------------------------------------------------------------------------------------------------
ARIZONA (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AA- NR* $1,000 Maricopa County, Arizona, Scottsdale Unified School District Number $ 1,025
48 Revenue Bonds, UT, 6% due 7/01/2002 (f)
- ----------------------------------------------------------------------------------------------------------------------
BBB Baa2 8,900 Navajo County, Arizona, Pollution Control Corporation, Revenue 7,316
Refunding Bonds (Arizona Public Service Company), Series A, 5.875%
due 8/15/2028
- ----------------------------------------------------------------------------------------------------------------------
AA+ Aa 1,300 Phoenix, Arizona, Civic Improvement Corporation, Excise Tax Revenue 1,044
Bonds
(Senior Lien-New City Hall Project), 5.10% due 7/01/2018
- ----------------------------------------------------------------------------------------------------------------------
A A1 500 Phoenix, Arizona, Civic Improvement Corporation, Wastewater System, 388
Lease Revenue Refunding Bonds, 5% due 7/01/2018
- ----------------------------------------------------------------------------------------------------------------------
AA+ Aa 2,150 Phoenix, Arizona, Civic Plaza Building Corporation, Excise Tax 2,022
Revenue Bonds (Senior Lien), 6% due 7/01/2014
- ----------------------------------------------------------------------------------------------------------------------
AA+ Aa 1,750 Phoenix, Arizona, Revenue Refunding Bonds, UT, Series B, 5.50% due 1,508
7/01/2016
- ----------------------------------------------------------------------------------------------------------------------
A1+ Aa 400 Pima County, Arizona, IDA, M/F Housing Revenue Bonds (Quail Ridge 400
Apartments), VRDN, AMT, Series B, 3.55% due 6/01/2034 (a)
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,050 Pima County, Arizona, Unified School District Number 1 Revenue 3,407
Refunding Bonds (Tucson), 7.50% due 7/01/2009 (c)
- ----------------------------------------------------------------------------------------------------------------------
Salt River Project, Arizona, Agricultural Improvement and Power
District, Electric System Revenue Bonds:
AA Aa 3,065 Series A, 6.50% due 1/01/2022 3,007
AA Aa 1,100 Series C, 6.25% due 1/01/2019 1,049
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Santa Cruz County, Arizona, Unified School District Number 1 Revenue 920
Bonds (Nogales), Series A, 5.80% due 7/01/2013 (d)
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Scottsdale, Arizona, IDA, Hospital Revenue Bonds (Scottsdale Memorial 812
Hospital), 5.25% due 9/01/2018 (e)
- ----------------------------------------------------------------------------------------------------------------------
A NR* 500 Scottsdale, Arizona, Mountain Community Facilities District Revenue 468
Bonds, UT, Series A, 6.20% due 7/01/2017
- ----------------------------------------------------------------------------------------------------------------------
A NR* 2,925 Tatum Ranch, Arizona, Community Facilities District Revenue Bonds, 2,968
UT, Series A, 6.875% due 7/01/2016
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Tempe, Arizona, Unified High School District Number 213, Revenue 1,080
Refunding and Improvement Bonds, UT, 7% due 7/01/2008 (c)
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 300 Tucson, Arizona, GO, Refunding Bonds, 6.10% due 7/01/2012 (c) 289
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Tucson, Arizona, Local Development, Business Development Finance 1,960
Corporation, Lease Revenue Refunding Bonds, 6.25% due 7/01/2012 (c)
- ----------------------------------------------------------------------------------------------------------------------
A+ A1 2,700 Tucson, Arizona, Water Revenue Refunding Bonds, Series A, 5.75% due 2,368
7/01/2018
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 500 University of Arizona, COP (Administrative and Parking Facility 466
Project), Series B, 6% due 7/15/2016 (b)
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 University of Arizona, COP (Residence Life Project), Series A, 5.80% 914
due 9/0l/2013 (h)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
VALUE
S&P MOODY'S FACE (IN THOUSANDS)
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- ----------------------------------------------------------------------------------------------------------------------
ARIZONA (CONCLUDED)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AA A1 $1,345 University of Arizona, University Revenue Refunding Bonds, 6.25% due $ 1,318
6/01/2011
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
PUERTO RICO--10.1%
- ----------------------------------------------------------------------------------------------------------------------
Puerto Rico Commonwealth, GO:
AAA Aaa 2,000 RIB, YCN, 8.132% due 7/01/2020 (d)(g) 1,607
A Baa1 4,000 UT, 6.50% due 7/01/2023 3,849
- ----------------------------------------------------------------------------------------------------------------------
Puerto Rico Commonwealth, Highway and Transportation Authority,
Highway Revenue Bonds:
A Baa1 500 Refunding, Series V, 6.625% due 7/01/2012 495
A Baa1 520 Series T, 6.625% due 7/01/2018 508
- ----------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Puerto Rico Electric Power Authority, Power Revenue Bonds, LEVRRS, 1,640
8.788% due 7/01/2023 (d)(f)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$87,362)--98.7% 79,170
OTHER ASSETS LESS LIABILITIES--1.3% 1,035
NET ASSETS--100.0% $80,205
-------
-------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Not rated.
(a) The interest rate is subject to change periodically based upon the
prevailing market rate. The interest rates shown are the rates in effect at
October 31, 1994.
(b) MBIA Insured.
(c) FGIC Insured.
(d) FSA Insured.
(e) AMBAC Insured.
(f) The interest rate is subject to change periodically and inversely based
upon the prevailing market rate. The interest rates shown are the rates in
effect at October 31, 1994.
(g) Prerefunded.
(h) Capital Guaranty.
</TABLE>
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
PORTFOLIO ABBREVIATIONS
- --------------------------------------------------------------------------------
To simplify the listings of MuniYield Arizona Fund, Inc.'s portfolio holdings in
the Combined Schedule of Investments, we have abbreviated the names of many of
the securities according to the list below and at right.
<TABLE>
<S> <C>
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
IDA Industrial Development Authority
LEVRRS Leveraged Reverse Rate Securities
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
YCN Yield Curve Notes
</TABLE>
F-21
COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL AS OF OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNIYIELD ARIZONA MUNIYIELD ARIZONA
FUND, INC. FUND, INC. ADJUST- PRO FORMA FOR
('ARIZONA I') ('ARIZONA II') MENTS COMBINED FUND
------------------------- ------------------------- --------- ------------------------
<S> <C> <C> <C> <C>
ASSETS:
- -----------------------------
Investments, at value (Note
1a).......................... $45,779,197 $33,391,352 $79,170,549
Cash......................... 59,179 120,594 179,773
Receivables:
Interest................... 965,435 680,646 1,646,081
Investment adviser (Note
2)....................... -- 16,696 16,696
Deferred organization
expenses (Note 1e)........... 12,833 17,385 30,218
Prepaid expenses and other
assets....................... 11,716 11,727 $ (11,716) 11,727
----------- ----------- --------- -----------
Total assets................. 46,828,360 34,238,400 (11,716) 81,055,044
----------- ----------- --------- -----------
LIABILITIES:
Dividends payable to
shareholders (Note 1g)....... 80,364 37,172 323,855 (1) 441,391
Accrued expenses and other
liabilities.................. 122,992 97,830 200,000 (2) 420,822
----------- ----------- --------- -----------
Total liabilities............ 203,356 135,002 523,855 862,213
----------- ----------- --------- -----------
NET ASSETS:
Net assets................... $46,625,004 $34,103,398 $(535,571) $80,192,831
----------- ----------- --------- -----------
----------- ----------- --------- -----------
CAPITAL:
Capital Stock (200,000,000
shares of each Fund
authorized: 400,000,000
shares as adjusted);
Preferred Stock, par value
$.10 per share (347 shares of
Arizona I AMPS* issued and
outstanding at $50,000 per
share liquidation preference;
518 shares of Arizona II
Series A AMPS* issued and
outstanding at $25,000 per
share liquidation preference;
1,212 Shares of AMPS* for the
combined Fund at $25,000 per
share liquidation
preference).................. $17,350,000 $12,950,000 $30,300,000
Common Stock, par value $.10
per share (2,513,709 shares
of Arizona I Common Stock and
1,867,043 shares of Arizona
II Common Stock issued and
outstanding; 4,380,752 shares
for the combined Fund as
adjusted).................... $ 251,371 $ 186,704 $ 6,954 $ 445,029
Paid-in capital in excess of
par.......................... 34,765,706 25,800,159 (218,670)(2) 60,347,195
Undistributed investment
income--net.................. 190,937 132,918 (323,855)(1) --
Undistributed realized
capital gains--net........... (1,221,810) (1,485,923) -- (2,707,733)
Unrealized depreciation on
investments--net............. (4,711,200) (3,480,460) -- (8,191,660)
----------- ----------- --------- -----------
Total--equivalent to $11.65
net asset value per share of
Arizona I Common Stock and
$11.33 net asset value per
share of Arizona II Common
Stock........................ 29,275,004 21,153,398 (535,571) 49,892,831
----------- ----------- --------- -----------
Total capital................ $46,625,004 $34,103,398 $(535,571) $80,192,831
----------- ----------- --------- -----------
----------- ----------- --------- -----------
</TABLE>
* Auction Market Preferred Stock
(1) Assumes the distribution of undistributed investment income.
(2) Reflects the charge for estimated reorganization expenses of $200,000.
- --------------------------------------------------------------------------------
See Notes to the Financial Statements.
F-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
MuniYield Arizona Fund, Inc. ('Arizona I') and MuniYield Arizona Fund II,
Inc. ('Arizona II') (collectively, the 'Funds') are registered under the
Investment Company Act of 1940 as non-diversified, closed-end management
investment companies. The Funds determine and make available for publication the
net asset value of their Common Stock on a weekly basis. The Common Stock of
Arizona I and Arizona II are listed on the American Stock Exchange under the
symbols MZA and MZT, respectively. The following is a summary of significant
accounting policies followed by the Funds.
(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 Funds' pricing service from dealers that make
markets in such securities. Financial futures contracts, which are traded on
exchanges, are valued at their closing prices as of the close of such exchanges.
Options, which are traded on exchanges, are valued at their last sale price as
of the close of such exchanges or, lacking any sales, at the last available bid
price. Securities with remaining maturities of sixty days or less are valued at
amortized cost. Securities 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 Boards of Directors of the Funds.
(b) Financial futures contracts--The Funds may purchase or sell interest
rate 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, a 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.
(c) Income taxes--It is the policy of the Funds to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of their taxable income to their
shareholders. Therefore, no Federal income tax provision is required.
(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 and offering expenses--Deferred
organization expenses of each Fund are amortized on a straight-line basis over a
five-year period. Direct expenses relating to the public offering of the Common
and Preferred Stock of each Fund were charged to capital at the time of
issuance. The deferred organization expenses of Arizona I were written off as
part of the adjustments included in the Funds' combined statement of assets,
liabilities and capital.
(f) Non-income producing investments--Written and purchased options are
non-income producing investments.
F-23
<PAGE>
(g) 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:
Each Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ('FAM'). The general partner of FAM is Princeton Services,
Inc., an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ('ML &
Co.'). The limited partners of FAM are ML & Co. and Fund Asset Management, Inc.
('FAMI'), which is also an indirect, wholly-owned subsidiary of ML & Co.
FAM is responsible for the management of each Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Funds. For such services, each Fund pays a
monthly fee at an annual rate of .50% of the Fund's average weekly net assets.
For the year ended October 31, 1994, FAM earned fees of (i) $252,642 of which
$137,460 was voluntarily waived from Arizona I and (ii) $179,126 of which
$156,019 was voluntarily waived from Arizona II. In addition, FAM voluntarily
reimbursed Arizona II $39,755 for additional expenses.
Accounting services are provided to the Funds by FAM at cost.
Certain officers and/or directors of the Funds are officers and/or
directors of FAM, FAMI, Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or ML & Co.
F-24
<PAGE>
FUND ASSET MANAGEMENT, L.P.
BALANCE SHEET
AS OF SEPTEMBER 30, 1994
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $ 1,698,082
Fund Management Fees Receivable............................. 25,543,234
Receivable from Affiliates.................................. 136,530,387
Investment in Affiliates.................................... 19,224,312
Investment in Subsidiaries.................................. 10
Other Assets................................................ 126,363
-------------
TOTAL ASSETS................................................ $ 183,122,388
-------------
-------------
LIABILITIES & OWNER'S EQUITY
Liabilities --
Payable to Affiliates....................................... $ 987,919
-------------
Total Liabilities........................................... 987,919
-------------
Owner's Equity --
General Partner Capital..................................... 11,414,000
Limited Partner Capital..................................... 26,550,925
Retained Earnings........................................... 144,169,544
-------------
Total Owner's Equity........................................ 182,134,469
-------------
TOTAL LIABILITIES & OWNER'S EQUITY.......................... $ 183,122,388
-------------
-------------
</TABLE>
F-25
<PAGE>
FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY
<TABLE>
<S> <C>
CONSOLIDATED BALANCE SHEET DECEMBER
31, 1993
ASSETS
- ------------------------------------------------------------
Cash........................................................ $ 996,680
Receivable from affiliated companies:
Lease transactions........................................ 24,501,523
Sale of leased investment................................. 48,312,532
Fund management fees receivable............................. 28,927,938
Investments in leases:
Leveraged leases.......................................... 57,431,668
Sales-type lease.......................................... 3,362,521
Investments in affiliated investment companies
(market: $19,731,088)....................................... 18,181,262
Investment in affiliated limited partnership................ 31,109,264
-------------
TOTAL ASSETS................................................ $ 212,823,388
-------------
-------------
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------
Payable to Merrill Lynch & Co., Inc.
and affiliates.............................................. $ 21,554,955
Deferred income taxes:
Arising from leveraged leases............................. 52,938,886
Arising from sales-type lease............................. 1,351,622
Other..................................................... 15,838,124
Other....................................................... 8,501
-------------
Total liabilities........................................... 91,692,088
-------------
STOCKHOLDER'S EQUITY:
- ------------------------------------------------------------
Common stock, par value $1.00 per share--authorized 25,000
shares; outstanding 1,000 shares............................ 1,000
Additional paid-in capital.................................. 686,215,876
Retained earnings........................................... 119,029,472
Proceeds receivable from Merrill Lynch & Co., Inc. from sale
of subsidiary............................................... (684,115,048)
-------------
Total stockholder's equity.................................. 121,131,300
-------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $ 212,823,388
-------------
-------------
</TABLE>
See notes to consolidated balance sheet.
F-26
<PAGE>
FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993
- --------------------------------------------------------------------------------
ORGANIZATION
Fund Asset Management, Inc. and subsidiary (the 'Company'), a wholly-owned
subsidiary of Merrill Lynch Investment Management, Inc. (the 'Parent'), or
'MLIM', which is an indirect, wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ('ML & Co.'), serves as an investment adviser to various registered
open-end investment companies. The Company is also a lessor participant in
certain leveraged and sales-type lease agreements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes--The results of the operations of the Company are included in
the consolidated Federal and combined state and local income tax returns filed
by ML & Co. It is the policy of ML & Co. to allocate the tax associated with
such operating results to each respective subsidiary in a manner which
approximates the separate company method. In 1992, ML & Co. adopted Statement of
Financial Accounting Standards No. 109, 'Accounting for Income Taxes' ('SFAS
109'), which requires an asset and liability method in recording income taxes on
all transactions that have been recognized in the financial statements. SFAS 109
provides that deferred taxes be adjusted to reflect tax rates at which future
tax liabilities or assets are expected to be settled or realized.
TRANSACTIONS WITH AFFILIATES
The Company serves as an investment adviser for certain affiliated
investment companies. The Company maintains investments in certain of these
investment companies. Such investments are carried at the lower of cost or
market value. Market value is determined based upon quoted market prices.
The Company has an arrangement with Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('MLPF&S'), an affiliate, which provides that the Company, which
receives revenue as investment adviser to certain investment companies (the
'Funds'), reimburse MLPF&S for certain costs incurred in processing transactions
involving shares of the Funds.
ML & Co. is the holder of the Company's excess cash, which is available on
demand to meet current liabilities. ML & Co. credits the Company for interest,
at a floating rate approximating ML & Co.'s average borrowing rate, based on the
Company's average daily balances due to/from ML & Co.
The 'Receivable from affiliated companies' arising from lease transactions
is summarized as follows:
<TABLE>
<S> <C>
Monies advanced to fund lease transactions.................. $(103,476,954)
Tax benefits allocated to the Company by ML & Co............ 88,699,254
Other....................................................... 39,279,223
-------------
Total....................................................... $ 24,501,523
-------------
-------------
</TABLE>
F-27
<PAGE>
FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993--(CONTINUED)
- --------------------------------------------------------------------------------
TRANSACTIONS WITH AFFILIATES--(CONTINUED)
The Company has a 49 percent limited partnership interest in ML Plainsboro
Limited Partnership ('MLP'), whose general partner is an affiliate. Profits and
losses are allocated to the Company based on its percentage interest.
During 1992, the Company sold its investment in Merrill Lynch Interfunding,
Inc., and Merlease Leasing Corp. to an affiliate at book value, resulting in a
receivable from ML & Co. This receivable is reflected as a reduction to
stockholder's equity.
INVESTMENTS IN LEASES
The Company is a lessor participant in leveraged leases.
Pertinent information relating to the Company's investments in leveraged
leases is summarized as follows:
<TABLE>
<CAPTION>
LENGTH OF ESTIMATED RESIDUAL
LEASE EQUITY VALUE OF LEASED
TYPE OF PROPERTY (YEARS) INVESTMENT PROPERTY
- ----------------------------------- --------- ---------- ------------------
<S> <C> <C> <C>
Generating plant................... 24-25 34.06% 15.0%
</TABLE>
Financing beyond the Company's equity interest in the purchase price of the
properties was furnished by outside parties in the form of long-term debt that
provides for no recourse against the Company and is secured by a first lien on
the properties and related rentals. At the end of the respective lease terms,
ownership of the properties remains with the Company.
The Company's net investment in leveraged leases is summarized as follows:
<TABLE>
<S> <C>
Rentals receivable (net of principal and interest on
nonrecourse debt)......................................... $ 66,075,030
Estimated residual values of leased assets.................. 18,964,143
Less:
Unearned and deferred income.............................. (26,617,505)
Allowance for uncollectibles.............................. (990,000)
-------------
Investment in leveraged leases.............................. 57,431,668
Less deferred taxes arising from leveraged leases........... (52,938,886)
-------------
Net investment in leveraged leases.......................... $ 4,492,782
-------------
-------------
</TABLE>
During 1993, the Company sold its equity interest in the chemical tanker
previously accounted for as a leveraged lease. The sale resulted in an after-tax
gain of $112,000.
F-28
<PAGE>
FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993--(CONTINUED)
- --------------------------------------------------------------------------------
INVESTMENTS IN LEASES--(CONTINUED)
The Company's investment in the sales-type leases consisted of the
following elements at December 31, 1993:
<TABLE>
<S> <C>
Minimum lease payments receivable........................... $ 3,672,000
Less:
Unearned income........................................... (59,479)
Allowance for uncollectibles.............................. (250,000)
-------------
Investment in sales-type leases............................. $ 3,362,521
-------------
-------------
</TABLE>
At December 31, 1993 minimum lease payments receivable are $3,672,000 for
1994.
For Federal income tax purposes, the Company receives the investment tax
credit and has the benefit of tax deductions for (i) depreciation on the entire
amount of leased assets and (ii) interest on the outstanding long-term debt. For
state and local tax purposes, the Company also receives the benefits of tax
deductions from (i) and (ii) above. Since, during the early years of the leases,
those deductions exceed the Company's lease rental income, substantial excess
deductions are available to be applied against the Company's other income and
the consolidated income of ML & Co. In the later years of these leases, rental
income will exceed the related deductions and taxes will be payable (to the
extent that net deductions arising from additional leveraged lease transactions
do not offset such net lease income). Deferred taxes have been provided to
reflect these temporary differences.
INCOME TAXES
As part of the consolidated group, the Company transfers its current
Federal and state tax liabilities to MLIM. No such amounts were due to MLIM at
December 31, 1993.
PENSION PLAN
The Company participates in the ML & Co. Comprehensive Retirement Program
(the 'Program'), consisting of the Retirement Accumulation Plan (the 'RAP') and
the Employee Stock Ownership Plan (the 'ESOP'). Under the Program, cash
contributions made by the Company and the ML & Co. stock held by the ESOP will
be allocated quarterly to participants' accounts. Allocations will be based on
years of service, age and eligible compensation. Actuarial data regarding the
Company's Plan participants is not separately available.
NAME CHANGE
Effective December 28, 1991, the Company's parent, through an amendment of
its certificate of incorporation, changed its name to Merrill Lynch Investment
Management, Inc. ('MLIM'). MLIM does business under the name 'Merrill Lynch
Asset Management'.
F-29
<PAGE>
FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993--(CONTINUED)
- --------------------------------------------------------------------------------
SUBSEQUENT EVENT
Effective January 1, 1994, Fund Asset Management, Inc. contributed certain
net investment advisory assets to Fund Asset Management, L.P., a newly formed
Delaware limited partnership, in exchange for a 99% limited partnership
interest. The general partner, Princeton Services, Inc. (a wholly-owned
subsidiary of ML & Co.), contributed 1% of the value of the net investment
advisory assets in exchange for its 1% general partnership interest. The
partnership's profits and losses are to be allocated in proportion to the
capital contributions of the partners.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
FUND ASSET MANAGEMENT, INC.:
We have audited the accompanying consolidated balance sheet of Fund Asset
Management, Inc. and subsidiary (the 'Company') as of December 31, 1993. This
balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on the balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such consolidated balance sheet presents fairly, in all material
respects, the financial position of the Company at December 31, 1993 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 28, 1994
F-31
<PAGE>
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this 'Agreement') is made as of
the 4th day of January, 1995, by and between MuniYield Arizona Fund, Inc., a
Maryland corporation ('Arizona I'), and MuniYield Arizona Fund II, Inc., a
Maryland corporation ('Arizona II').
PLAN OF REORGANIZATION
The reorganization will comprise (a) the acquisition by Arizona II of
substantially all of the assets, and the assumption of substantially all of the
liabilities, of Arizona I in exchange solely for an equal aggregate value of
Arizona II's shares of (i) common stock, with a par value of $.10 per share
('Arizona II Common Stock'), and (ii) auction market preferred stock, 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) ('Arizona II
Series B AMPS'), and the subsequent distribution to Arizona I stockholders in
liquidation of Arizona I of (x) all of the Arizona II Common Stock received in
exchange for their corresponding shares of common stock of Arizona I, with a par
value of $.10 per share ('Arizona I Common Stock') and (y) all of the Arizona II
Series B AMPS received in exchange for their corresponding shares of auction
market preferred stock, 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) ('Arizona I AMPS'); and (b) a change in the name of the
surviving fund to 'MuniYield Arizona Fund, Inc.', all upon and subject to the
terms hereinafter set forth (the 'Reorganization').
In the course of the Reorganization, Arizona II Common Stock and Arizona II
Series B AMPS will be distributed to Arizona I stockholders as follows: (i) each
holder of Arizona I Common Stock will be entitled to receive the number of
shares of Arizona II Common Stock to be received by Arizona I equal to the
aggregate net asset value of the Arizona I Common Stock owned by such
stockholder on the Exchange Date (as defined in Section 7 of this Agreement);
and (ii) each holder of Arizona I AMPS will be entitled to receive the number of
shares of Arizona II Series B AMPS to be received by Arizona I equal to the
aggregate liquidation preference of the Arizona I AMPS owned by such stockholder
on the Exchange Date. In consideration therefor, on the Exchange Date Arizona II
shall assume all of Arizona I's obligations and liabilities then existing,
whether absolute, accrued, contingent or otherwise. It is intended that the
Reorganization described in this Plan shall be a reorganization within the
meaning of Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended
(the 'Code'), and any successor provision.
Articles Supplementary to Arizona II's Articles of Incorporation
establishing the powers, rights and preferences of the Arizona II Series B AMPS
will have been filed with the Department of Assessments and Taxation of the
State of Maryland prior to the closing of the Reorganization. As soon as
practicable after the closing of the Reorganization and upon the liquidation and
dissolution of Arizona I, Articles of Amendment to Arizona II's Articles of
Incorporation will be filed with the State Department of Assessments and
Taxation of Maryland to reflect the change in the name of Arizona II to
'MuniYield Arizona Fund, Inc.' As promptly as practicable after the liquidation
of Arizona I pursuant to the Reorganization, Arizona I shall be dissolved in
accordance with the laws of the State of Maryland and will terminate its
registration under the Investment Company Act of 1940, as amended (the '1940
Act').
I-1
<PAGE>
AGREEMENT
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, Arizona I and Arizona II hereby agree as follows:
1. Representations and Warranties of Arizona I.
Arizona I represents and warrants to, and agrees with, Arizona II that:
(a) Arizona I is a corporation duly organized, validly existing and in
good standing in conformity with the laws of the State of Maryland, and has
the power to own all of its assets and to carry out this Agreement. Arizona
I 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) Arizona I is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No.
811-7806), and such registration has not been revoked or rescinded and is
in full force and effect. Arizona I 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 for its taxable year ending upon the
liquidation of Arizona I.
(c) As used in this Agreement, the term 'Investments' shall mean (i)
the investments of Arizona I shown on the schedule of its investments as of
the Valuation Time (as defined in Section 3(c) of this Agreement) furnished
to Arizona II, with such additions thereto and deletions therefrom as may
have arisen in the course of Arizona I's business up to the Valuation Time;
and (ii) all other assets owned by Arizona I or liabilities incurred as of
the Valuation Time. Any unexpended portion of the foregoing funds retained
by Arizona I shall be disbursed by Arizona I pro rata to its stockholders
upon dissolution of the fund as a final liquidating dividend.
(d) Arizona I 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 Directors, 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) Arizona II has been furnished with a statement of assets,
liabilities and capital and a schedule of investments of Arizona I, each as
of October 31, 1994, said financial statements having been audited by
Deloitte & Touche LLP, independent public accountants. An unaudited
statement of assets, liabilities and capital of Arizona I and an unaudited
schedule of investments of Arizona I, each as of the Valuation Time, will
be furnished to Arizona II at or prior to the Exchange Date for the purpose
of determining the number of shares of Arizona II Common Stock and shares
of Arizona II Series B AMPS to be issued pursuant to Section 4 of this
Agreement; and each will fairly present the financial position of Arizona I
as of the Valuation Time in conformity with generally accepted accounting
principles applied on a consistent basis.
(f) Arizona II has been furnished with Arizona I's Annual Report to
Stockholders for the year ended October 31, 1994, and the audited financial
statements appearing therein fairly present the financial position
I-2
<PAGE>
of Arizona I as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(g) Arizona II has been furnished with (i) the prospectus of Arizona
I, dated July 23, 1993, relating to the Arizona I Common Stock (the
'Arizona I Common Stock Prospectus') and (ii) the prospectus of Arizona I,
dated August 25, 1993, relating to the Arizona I AMPS (the 'Arizona I AMPS
Prospectus'); and said prospectuses do 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.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Arizona I, threatened against Arizona I
which assert liability on the part of Arizona I or which materially affect
its financial condition or its ability to consummate the Reorganization.
Arizona I 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 Arizona I is
a party that have not been disclosed in the N-14 Registration Statement (as
defined in subsection (p) below) or will not otherwise be disclosed to
Arizona II prior to the Valuation Time.
(j) Arizona I is not a party to or obligated under any provision of
its Articles of Incorporation, as amended, or its by-laws, as amended, or
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.
(k) Arizona I 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,
1993, and those incurred in connection with the Reorganization. As of the
Valuation Time, Arizona I will advise Arizona II 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.
(l) Arizona I 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 Arizona I have adequately been provided
for on its books, and no tax deficiency or liability of Arizona I 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, Arizona I will
have full right, power and authority to sell, assign, transfer and deliver
the Investments. At the Exchange Date, subject only to the delivery of the
Investments as contemplated by this Agreement, Arizona I will have good and
marketable title to all of the Investments, and Arizona II will acquire all
of the Investments free and clear of any encumbrances, liens or security
interests and without any restrictions upon the transfer thereof (except
those
I-3
<PAGE>
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 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 Arizona I of the
Reorganization, except such as may be required under the Securities Act of
1933, as amended (the 'Securities 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).
(o) The registration statement filed by Arizona II on Form N-14
relating to the Arizona II Common Stock and the Arizona II Series B AMPS to
be issued pursuant to this Agreement, and any supplement or amendment
thereto or to the documents therein (as amended, the 'N-14 Registration
Statement'), on the effective date of the N-14 Registration Statement, at
the time of the stockholders' meetings referred to in Section 6(a) of this
Agreement and on the Exchange Date, insofar as it relates to Arizona I (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
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 Arizona I for
use in the N-14 Registration Statement as provided in Section 7 of this
Agreement.
(p) Arizona I is authorized to issue 200,000,000 shares of capital
stock, of which 694 shares have been designated as AMPS, par value $.05 per
share, and 199,999,306 shares have been designated as Common Stock, par
value $.10 per share, each outstanding share of which is fully paid,
nonassessable and has full voting rights.
(q) All of the issued and outstanding shares of Arizona I Common Stock
and Arizona I AMPS were offered for sale and sold in conformity with all
applicable Federal and state securities laws.
(r) The books and records of Arizona I made available to Arizona II
and/or its counsel are substantially true and correct and contain no
material misstatements or omissions with respect to the operations of
Arizona I.
(s) Arizona I will not sell or otherwise dispose of any of the shares
of Arizona II to be received in the Reorganization, except in distribution
to the stockholders of Arizona I.
2. Representations and Warranties of Arizona II.
Arizona II represents and warrants to, and agrees with, Arizona I that:
(a) Arizona II is a corporation duly organized, validly existing and
in good standing in conformity with the laws of the State of Maryland, and
has the power to own all of its assets and to carry out this Agreement.
Arizona I 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.
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(b) Arizona II is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No.
811-7083), and such registration has not been revoked or rescinded and is
in full force and effect. Arizona II 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 both
until consummation of the Reorganization and thereafter.
(c) Arizona I has been furnished with a statement of assets,
liabilities and capital and a schedule of investments of Arizona II, each
as of October 31, 1994, said financial statements having been audited by
Deloitte & Touche LLP, independent public accountants. An unaudited
statement of assets, liabilities and capital of Arizona II and an unaudited
schedule of investments of Arizona II, each as of the Valuation Time, will
be furnished to Arizona I at or prior to the Exchange Date for the purpose
of determining the number of shares of Arizona II Common Stock and shares
of Arizona II Series B AMPS to be issued pursuant to Section 4 of this
Agreement; each will fairly present the financial position of Arizona II as
of the Valuation Time in conformity with generally accepted accounting
principles applied on a consistent basis.
(d) Arizona I has been furnished with (i) the prospectus of Arizona
II, dated October 22, 1993, relating to the Arizona II Common Stock (the
'Arizona II Common Stock Prospectus') and (ii) the prospectus of Arizona
II, dated November 29, 1993, relating to the shares of Auction Market
Preferred Stock, Series A of Arizona II ('Arizona II AMPS') (the 'Arizona
II AMPS Prospectus'); and said prospectuses do 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.
(e) Arizona II 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 Directors and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(f) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Arizona II, threatened against Arizona II
which assert liability on the part of Arizona II or which materially affect
its financial condition or its ability to consummate the Reorganization.
Arizona II is not charged with or, to the best of its knowledge, threatened
with any violation or investigation of any possible violation of any
provisions of any Federal, state or local law or regulation or
administrative ruling relating to any aspect of its business.
(g) Arizona II is not a party to or obligated under any provision of
its Articles of Incorporation, as amended, or its by-laws, as amended, or
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.
(h) There are no material contracts outstanding to which Arizona II is
a party that have not been disclosed in the N-14 Registration Statement or
will not otherwise be disclosed to Arizona I prior to the Valuation Time.
(i) Arizona II has no known liabilities of a material amount,
contingent or otherwise, other than those shown on Arizona II's statements
of assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since October 29,
1993 and those incurred in
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connection with the Reorganization. As of the Valuation Time, Arizona II
will advise Arizona I in writing of all known liabilities, contingent or
otherwise, whether or not incurred in the ordinary course of business,
existing or accrued as of such time.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Arizona II of
the Reorganization, except such as may be required under the 1933 Act, the
1934 Act, the 1940 Act or state securities laws.
(k) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meetings referred to in Section 6(a) of this
Agreement and at the Exchange Date, insofar as it relates to Arizona II (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
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 Arizona II
for use in the N-14 Registration Statement as provided in Section 7 of this
Agreement.
(l) Arizona II is authorized to issue 200,000,000 shares of capital
stock, of which 518 shares have been designated as AMPS, and 199,999,482
shares have been designated as Common Stock, par value $.10 per share,
each outstanding share of which is fully paid, nonassessable and has
full voting rights.
(m) The Arizona II Common Stock and Arizona II Series B AMPS to be
issued to Arizona I 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 stockholder of Arizona II will have
any preemptive right of subscription or purchase in respect thereof.
(n) At or prior to the Exchange Date, the Arizona II Common Stock and
Arizona II Series B AMPS to be transferred to Arizona I 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 Arizona II presently are
qualified, and there are a sufficient number of such shares registered
under the 1933 Act and with each pertinent state securities commission to
permit the transfers contemplated by this Agreement to be consummated.
(o) At or prior to the Exchange Date, Arizona II will have obtained
any and all regulatory, Director and stockholder approvals necessary to
issue the Arizona II Common Stock and Arizona II Series B AMPS to Arizona
I.
3. The Reorganization.
(a) Subject to the requisite approvals of the stockholders of each of
Arizona I and Arizona II being given, and to the other terms and conditions
contained herein, Arizona I agrees to convey, transfer and deliver to
Arizona II for the benefit of Arizona II, and Arizona II agrees to acquire
from Arizona I for the benefit of Arizona II, on the Exchange Date all of
the Investments (including interest accrued as of the Valuation Time on
debt instruments) of Arizona I, and assume substantially all of the
liabilities of Arizona I, in exchange solely for that number of shares of
Arizona II Common Stock and Arizona II Series B AMPS provided in Section 4
of this Agreement. Pursuant to this Agreement, as soon as practicable
Arizona I will
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distribute all Arizona II Common Stock and Arizona II Series B AMPS
received by it to its stockholders in exchange for their corresponding
Arizona I Common Stock and Arizona I AMPS. Such distribution shall be
accomplished by the opening of stockholder accounts on the stock ledger
records of Arizona II in the amounts due the stockholders of Arizona I
based on their respective holdings in Arizona I as of the Valuation Time.
(b) Arizona I will pay or cause to be paid any interest it receives on
or after the Exchange Date with respect to the Investments transferred to
Arizona II hereunder.
(c) The Valuation Time shall be 4:00 P.M., New York time, on January
25, 1995, or such earlier or later day and time as mutually may be agreed
upon in writing (the 'Valuation Time').
(d) Arizona II will acquire substantially all of the assets of, and
assume substantially all of the known liabilities of, Arizona I, except
that recourse for such liabilities will be limited to Arizona II. The known
liabilities of Arizona I as of the Valuation Time shall be confirmed in
writing to Arizona II by Arizona I pursuant to Section 1(g) of this
Agreement.
(e) Arizona II will file Articles Supplementary to its Articles of
Incorporation establishing the powers, rights and preferences of the
Arizona II Series B AMPS with the State Department of Assessments and
Taxation of Maryland prior to the closing of the Reorganization.
(f) Arizona II will file Articles of Amendment to its Articles of
Incorporation with the State Department of Assessments and Taxation of
Maryland, reflecting a change in the name of the fund to 'MuniYield Arizona
Fund, Inc.', as soon as practicable after the closing of the
Reorganization.
4. Issuance and Valuation of Arizona II Common Stock and Arizona II Series
B AMPS in the Reorganization.
Full shares of Arizona II Common Stock and Arizona II 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
Arizona I acquired determined as hereinafter provided, reduced by the amount of
liabilities assumed by Arizona II, shall be issued by Arizona II in exchange for
such assets of Arizona I. The assets of Arizona I and Arizona II shall be
determined in accordance with the procedures described in the Arizona II Common
Stock Prospectus and the Arizona II AMPS Prospectus as of the Valuation Time,
and no formula will be used to adjust the net asset value so determined of
either Arizona I or Arizona II 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 Investments of Arizona I to be transferred to
Arizona II shall be determined by Arizona II pursuant to the procedures utilized
by Arizona II in valuing its own assets and determining its own liabilities for
purposes of the Reorganization. Such valuation and determination shall be made
by Arizona II in cooperation with Arizona I and shall be confirmed in writing to
Arizona II by Arizona I. The net asset value per share of the Arizona II Common
Stock and the liquidation preference per share of the Arizona II Series B AMPS
shall be determined in accordance with such procedures and Arizona II shall
certify the computations involved. Arizona II shall issue to Arizona I separate
certificates or share deposit receipts for the Arizona II Common Stock and the
Arizona II Series B AMPS, each registered in the name of Arizona I. Arizona I
then shall distribute the Arizona II Common Stock and the Arizona II Series B
AMPS to its corresponding stockholders of Arizona I Common Stock and Arizona I
AMPS by redelivering the certificates or share deposit receipts evidencing
ownership of (i) the Arizona II Common Stock to The Bank of New York, as the
transfer agent and registrar for the Arizona II
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Common Stock and (ii) the Arizona II Series B AMPS to IBJ Schroder Bank and
Trust Company, as the transfer agent and registrar for the Arizona II Series B
AMPS. With respect to any Arizona I stockholder holding certificates evidencing
ownership of either the Arizona I Common Stock or the Arizona II Series B AMPS
as of the Exchange Date, and subject to Arizona II being informed thereof in
writing by Arizona I, Arizona II will not permit such stockholder to receive new
certificates evidencing ownership of the Arizona II Common Stock or Arizona II
Series B AMPS, exchange Arizona II Common Stock or Arizona II Series B AMPS
credited to such stockholder's account for shares of other investment companies
managed by Merrill Lynch Asset Management, L.P. or any of its affiliates, or
pledge or redeem such Arizona II Common Stock or Arizona II Series B AMPS, in
any case, until notified by Arizona I or its agent that such stockholder has
surrendered his or her outstanding certificates evidencing ownership of the
Arizona I Common Stock or the Arizona I AMPS or, in the event of lost
certificates, posted adequate bond. Arizona I, at its own expense, will request
its stockholders to surrender their outstanding certificates evidencing
ownership of the Arizona I Common Stock or the Arizona I AMPS, as the case may
be, or post adequate bond therefor.
5. Payment of Expenses.
(a) Arizona II 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 the
N-14 Registration Statement and the fees of special counsel to the
Reorganization. Such fees and expenses shall include legal, accounting and
state securities or blue sky fees, printing costs, filing fees, stock
exchange fees, rating agency fees, portfolio transfer taxes (if any), and
any similar expenses incurred in connection with the Reorganization.
Neither Arizona I nor Arizona II shall pay any expenses of its respective
stockholders arising out of or 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.
6. Covenants of Arizona I and Arizona II.
(a) Arizona I and Arizona II each agrees to call a special meeting of
its respective stockholders 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. As a condition to the
obligations of each of the parties hereto, the holders of (i) more than
fifty percent of the shares of Arizona I Common Stock and Arizona I AMPS,
voting together as a single class, (ii) more than fifty percent of the
shares of Arizona I AMPS, voting separately as a class, (iii) more than
fifty percent of the shares of Arizona II Common Stock and Arizona II AMPS,
voting together as a single class and (iv) more than fifty percent of the
shares of Arizona II AMPS, voting separately as a class, in each case
issued and outstanding and entitled to vote thereon, shall have approved
this Agreement at such a meeting at or prior to the Valuation Time.
(b) Arizona I and Arizona II each covenants to operate its respective
business as presently conducted between the date hereof and the Exchange
Date.
(c) Arizona I agrees that following the consummation of the
Reorganization, it will liquidate and dissolve in accordance with the laws
of the State of Maryland and any other applicable law, it will not make any
distributions of any Arizona II Common Stock and Arizona II Series B AMPS
other than to the stockholders of Arizona I and without first paying or
adequately providing for the payment of all of Arizona
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<PAGE>
I's liabilities not assumed by Arizona II, if any, and on and after the
Exchange Date it shall not conduct any business except in connection with
its liquidation and dissolution.
(d) Arizona I 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 Arizona I has ceased to be a registered investment
company.
(e) Arizona I and Arizona II jointly will file the N-14 Registration
Statement with the Securities and Exchange Commission (the 'Commission')
and will use their best efforts to provide that the N-14 Registration
Statement becomes effective as promptly as practicable. Arizona I and
Arizona II agree to cooperate fully with each other, and each will furnish
to the other 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 or
blue sky laws.
(f) Arizona II agrees to advise Arizona I promptly in writing if at
any time prior to the Exchange Date the assets of Arizona I include any
assets which Arizona II is not permitted, or reasonably believes to be
unsuitable for it, to acquire, including without limitation any security
which, prior to its acquisition by Arizona I, Arizona II has informed
Arizona I is unsuitable for Arizona II to acquire. Moreover, Arizona II has
no plan or intention to sell or otherwise dispose of the assets of Arizona
I to be acquired in the Reorganization, except for dispositions made in the
ordinary course of business.
(g) Arizona I and Arizona II each 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. Arizona II 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 Arizona I for its 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, Arizona I
shall prepare, or cause its agents to prepare, any Federal, state or local
tax returns, including any Forms 1099, required to be filed by Arizona I
with respect to Arizona I's 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 Arizona I (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 Arizona I to the
extent such expenses have been accrued by Arizona I 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) Arizona I and Arizona II each agrees to mail to each of its
respective stockholders of record entitled to vote at the special meeting
of stockholders 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
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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, Arizona II
expects to stay in existence and continue its business as a closed-end
management investment company registered under the 1940 Act.
7. Exchange Date.
(a) Delivery of the assets of Arizona I to be transferred, together
with any other Investments, and the Arizona II Common Stock and Arizona II
Series B AMPS to be issued, shall be made at the offices of Brown & Wood,
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 Arizona I and Arizona II, 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 Investments, for any reason, are
not transferable on the Exchange Date, Arizona I shall cause such
Investments to be transferred to Arizona II's account with The Bank of New
York at the earliest practicable date thereafter.
(b) Arizona I will deliver to Arizona II on the Exchange Date
confirmations or other adequate evidence as to the tax basis of each of the
Investments delivered to Arizona II hereunder, certified by Deloitte &
Touche LLP.
(c) Arizona II shall have made prior arrangements for the delivery on
the Exchange Date of the Investments to The Bank of New York as the
custodian for Arizona II.
(d) As soon as practicable after the close of business on the Exchange
Date, Arizona I shall deliver to Arizona II a list of the names and
addresses of all of the stockholders of record of Arizona I on the Exchange
Date and the number of shares of Arizona I Common Stock and/or Arizona I
AMPS owned by each such stockholder, certified by its transfer agent for
the Arizona I Common Stock or the Arizona I AMPS, as applicable or by its
President to the best of their knowledge and belief.
8. Arizona I Conditions.
The obligations of Arizona I 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 the
holders of (i) more than fifty percent of the Arizona I Common Stock and
Arizona I AMPS, voting together as a single class, and (ii) more than fifty
percent of the Arizona I AMPS, voting separately as a class, in each case
issued and outstanding and entitled to vote thereon; and that Arizona II
shall have delivered to Arizona I a copy of the resolution approving this
Agreement adopted by Arizona II's Board of Directors, certified by the
Secretary of Arizona II.
(b) That Arizona II shall have furnished to Arizona I a statement of
Arizona II's assets, liabilities and capital, with values determined as
provided in Section 4 of this Agreement, together with a schedule of its
investments, all as of the Valuation Time, certified on Arizona I's behalf
by its President (or any Vice President) and its Treasurer, and a
certificate signed by Arizona II'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 Arizona II since October 31,
1994, other than changes in its portfolio securities since that date or
changes in the market value of its portfolio securities.
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(c) That Arizona II shall have furnished to Arizona I a certificate
signed by Arizona II's President (or any Vice President) and its Treasurer,
dated as of the Exchange Date, certifying that all representations and
warranties of Arizona II made in this Agreement are true and correct in all
material respects with the same effect as if made at and as of the Exchange
Date, and that Arizona II 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 date.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That Arizona I shall have received an opinion of Galland,
Kharasch, Morse & Garfinkle, P.C., Maryland counsel to Arizona I, in form
satisfactory to Arizona I and dated the Exchange Date, to the effect that
(i) Arizona II is a corporation duly organized, validly existing and in
good standing in conformity with the laws of the State of Maryland; (ii)
the Arizona II Common Stock and Arizona II Series B AMPS to be delivered to
Arizona I stockholders as provided for by this Agreement are duly
authorized and, upon delivery, will be validly issued and outstanding and
fully paid and nonassessable by Arizona II, and no stockholder of Arizona
II has any preemptive right to subscription or purchase in respect thereof
(pursuant to the Articles of Incorporation, as amended, or the by-laws of
Arizona II or, to the best of such counsel's knowledge, otherwise); (iii)
this Agreement has been duly authorized, executed and delivered by Arizona
II, and represents 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;
provided, that 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 did not, and the
consummation of the Reorganization will not, violate the Articles of
Incorporation, as amended, or the by-laws of Arizona II; (v) no consent,
approval, authorization or order of any Maryland court or governmental
authority is required for the consummation by Arizona I of the
Reorganization, except such as have been obtained under Maryland law; and
(vi) such opinion is solely for the benefit of Arizona I and its Directors
and officers. In giving the opinion set forth above, Galland, Kharasch,
Morse & Garfinkle, P.C. may state that it is relying on certificates of
officers of Arizona I and Arizona II with regard to matters of fact and
certain certificates and written statements of government officials with
respect to the good standing of Arizona I and Arizona II.
(f) That Arizona I shall have received an opinion of Brown & Wood, as
counsel to Arizona I, in form satisfactory to Arizona I and dated the
Exchange Date, to the effect that (i) no consent, approval, authorization
or order of any United States Federal court or governmental authority is
required for the consummation by Arizona I and Arizona II 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 or
blue sky 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) such counsel do not know of any
statutes, legal or
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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; (v) the execution and delivery of this
Agreement does not, and the consummation of the Reorganization will not,
violate any material provision of any agreement (known to such counsel) to
which either Arizona I or Arizona II is a party or by which either Arizona
I or Arizona II is bound; (vi) neither Arizona I nor Arizona II, 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 or blue sky laws, and except where each has so qualified or the
failure so to qualify would not have a material adverse effect on Arizona
I, Arizona II, or their respective stockholders; (vii) such counsel does
not have actual knowledge of any material suit, action or legal or
administrative proceeding pending or threatened against Arizona I or
Arizona II, the unfavorable outcome of which would materially and adversely
affect Arizona I or Arizona II; and (viii) all corporate actions required
to be taken by Arizona I and Arizona II to authorize this Agreement and to
effect the Reorganization have been duly authorized by all necessary
corporate actions on the part of Arizona I and Arizona II. Such opinion
also shall state that (x) while such counsel cannot make any representation
as to the accuracy or completeness of statements of fact in the N-14
Registration Statement or any amendment or supplement thereto, nothing has
come to their attention that would lead them to believe that, on the
respective effective dates of the N-14 Registration Statement and any
amendment or supplement thereto, (1) the N-14 Registration Statement or any
amendment or supplement thereto contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (2)
the prospectus included in the N-14 Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (y) such counsel do not
express any opinion or belief as to the financial statements, other
financial data, statistical data or information relating to Arizona I or
Arizona II contained or incorporated by reference in the N-14 Registration
Statement. In giving the opinion set forth above, Brown & Wood may state
that it is relying on certificates of officers of Arizona I and Arizona II
with regard to matters of fact and certain certificates and written
statements of governmental officials with respect to the good standing of
Arizona I and Arizona II and on the opinion of Galland, Kharasch, Morse &
Garfinkle, P.C. as to matters of Maryland law.
(g) That Arizona I shall have received a private letter ruling from
the Internal Revenue Service, to the effect that for Federal income tax
purposes (i) the transfer of substantially all of the Investments of
Arizona I to Arizona II in exchange solely for Arizona II Common Stock and
Arizona II Series B AMPS as provided in this Agreement will constitute a
reorganization within the meaning of Section 368(a)(1)(D) of the Code; (ii)
in accordance with Section 361(a) of the Code, no gain or loss will be
recognized to Arizona I as a result of the Reorganization; (iii) under
Section 1032 of the Code, no gain or loss will be recognized to Arizona II
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
stockholders of Arizona I on the receipt of Arizona II Common Stock and
Arizona II Series B AMPS in exchange for their corresponding Arizona I
Common Stock and Arizona I AMPS; (v) in accordance with Section 362(b) of
the Code, the tax basis of the Arizona I assets in the hands of Arizona II
will be the same as the tax basis of such assets in the hands of Arizona I
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 Arizona II Common Stock and Arizona II
Series B AMPS received by the stockholders of Arizona I in the
Reorganization will be equal, in the aggregate, to the tax basis of the
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shares of Arizona I surrendered in exchange; (vii) in accordance with
Section 1223 of the Code, a stockholder's holding period for the Arizona II
Common Stock and Arizona II Series B AMPS will be determined by including
the period for which he or she held the Arizona I Common Stock and Arizona
I AMPS exchanged therefor, provided, that such Arizona I shares were held
as a capital asset; (viii) in accordance with Section 1223 of the Code,
Arizona II's holding period with respect to the Arizona I assets
transferred will include the period for which such assets were held by
Arizona I; and (ix) the taxable year of Arizona I will end on the effective
date of the Reorganization and pursuant to Section 381(a) of the Code and
regulations thereunder, Arizona II will succeed to and take into account
certain tax attributes of Arizona I, such as earnings and profits, capital
loss carryovers and method of accounting.
(h) That all proceedings taken by Arizona II and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to Arizona I.
(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 Arizona II, contemplated by
the Commission.
(j) That Arizona I shall have received from Deloitte & Touche LLP a
letter dated as of the effective date of the N-14 Registration Statement
and a similar letter dated within five days prior to the Exchange Date, in
form and substance satisfactory to Arizona I, to the effect that (i) they
are independent public accountants with respect to Arizona II 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 Arizona II 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 Arizona
I and Arizona II 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 Arizona II included in the N-14 Registration
Statement, and inquiries of certain officials of Arizona II 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 Arizona I and Arizona II
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the information relating to Arizona
II appearing in the N-14 Registration Statement, which information is
expressed in dollars (or percentages derived from such dollars) concerning
Arizona II (with the exception of performance comparisons, if any), if any,
has been obtained from the accounting records of Arizona II or from
schedules prepared by officials of Arizona II having responsibility for
financial and reporting matters and such information is in agreement with
such records, schedules or computations made therefrom.
(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
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Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of Arizona II or would
prohibit the Reorganization.
(l) That Arizona I shall have received from the Commission such orders
or interpretations as Brown & Wood, as counsel to Arizona I, 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.
9. Arizona II Conditions.
The obligations of Arizona II 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 the
holders of (i) more than fifty percent of the Arizona II Common Stock and
Arizona II AMPS, voting together as a single class, and (ii) more than
fifty percent of the Arizona II AMPS, voting separately as a class, in each
case issued and outstanding and entitled to vote thereon; and that Arizona
I shall have delivered to Arizona II a copy of the resolution approving
this Agreement adopted by Arizona I's Board of Directors, certified by the
Secretary of Arizona I.
(b) That Arizona I shall have furnished to Arizona II a statement of
Arizona I's assets, liabilities and capital, with values determined as
provided in Section 4 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 Arizona I's behalf by its President
(or any Vice President) and its Treasurer, and a certificate of both such
officers, dated the Exchange Date, certifying that there has been no
material adverse change in the financial position of Arizona I since
October 31, 1994, other than changes in the Investments since that date or
changes in the market value of the Investments.
(c) That Arizona I shall have furnished to Arizona II a certificate
signed by Arizona I'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 Arizona I made in
this Agreement are true and correct in all material respects as if made at
and as of such date and Arizona I 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 Arizona I shall have delivered to Arizona II 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 Arizona I for the period ended October 31, 1994 (which returns
originally were prepared and filed by Arizona I), 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 Arizona I for the
period covered thereby; and that for the period from October 31, 1994 to
and including the Exchange Date and for any taxable year of Arizona I
ending upon the liquidation of Arizona I, 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
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 October 31, 1994 to and including the Exchange Date and
for any taxable
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year of Arizona I ending upon the liquidation of Arizona I or that Arizona
I would not continue to qualify as a regulated investment company for
Federal income tax purposes.
(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(f) That Arizona II shall have received an opinion of Galland,
Kharasch, Morse & Garfinkle, P.C., Maryland counsel to Arizona II, in form
satisfactory to Arizona II and dated the Exchange Date, to the effect that
(i) Arizona I is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland; (ii) this
Agreement has been duly authorized, executed and delivered by Arizona I,
and represents 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, provided, that
such counsel shall express no opinion with respect to the application of
equitable principles in any proceeding, whether at law or in equity; (iii)
Arizona I 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, Arizona I will have duly
transferred such assets and liabilities in accordance with this Agreement;
(iv) the execution and delivery of this Agreement does not, and the
consummation of the Reorganization will not, violate the Articles of
Incorporation, as amended, or the by-laws of Arizona I; (v) no consent,
approval, authorization or order of any Maryland court or governmental
authority is required for the consummation by Arizona I of the
Reorganization, except such as have been obtained under Maryland law; and
(vi) such opinion is solely for the benefit of Arizona II and its Directors
and officers. In giving the opinion set forth above, Galland, Kharasch,
Morse & Garfinkle, P.C. may state that it is relying on certificates of
officers of Arizona I and Arizona II with regard to matters of fact and
certain certificates and written statements of government officials with
respect to the good standing of Arizona I and Arizona II.
(g) That Arizona II shall have received an opinion of Brown & Wood, as
counsel to Arizona II, in form satisfactory to Arizona II and dated the
Exchange Date, with respect to the matters specified in Section 8(f) of
this Agreement and such other matters as Arizona II reasonably may deem
necessary or desirable.
(h) That Arizona II shall have received a private letter ruling from
the Internal Revenue Service with respect to the matters specified in
Section 8(g) of this Agreement.
(i) That Arizona II shall have received from Deloitte & Touche LLP a
letter dated as of the effective date of the N-14 Registration Statement
and a similar letter dated within five days prior to the Exchange Date, in
form and substance satisfactory to Arizona II, to the effect that (i) they
are independent public accountants with respect to Arizona I 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 Arizona I 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 Arizona
I and Arizona II 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 Arizona I included in the N-14 Registration
Statement, and inquiries of certain officials of Arizona I 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
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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 Arizona I and Arizona II
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the information relating to Arizona
I appearing in the N-14 Registration Statement, which information is
expressed in dollars (or percentages derived from such dollars) concerning
Arizona I (with the exception of performance comparisons, if any), has been
obtained from the accounting records of Arizona I or from schedules
prepared by officials of Arizona I having responsibility for financial and
reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(j) That the Investments to be transferred to Arizona II shall not
include any assets or liabilities which Arizona II, by reason of charter
limitations 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 Arizona I, 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 Arizona I or would
prohibit the Reorganization.
(m) That Arizona II shall have received from the Commission such
orders or interpretations as Brown & Wood, as counsel to Arizona II, 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 Arizona I and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to Arizona II.
(o) That prior to the Exchange Date, Arizona I shall have declared a
dividend or dividends which, together with all such previous dividends,
shall have the effect of distributing to its stockholders all of its net
investment company taxable income for the period from November 1, 1994 to
and including the Exchange Date, if any (computed without regard to any
deduction or dividends paid), and all of its net capital gain, if any,
realized for the period from November 1, 1994 to and including the Exchange
Date.
10. 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 stockholders
of each of Arizona I and Arizona II) prior to the Exchange Date, or the
Exchange Date may be postponed, (i) by mutual consent of the Boards of
Directors of Arizona I and Arizona II; (ii) by the Board of Directors of
Arizona I if any condition of Arizona I's obligations set forth in Section
8 of this Agreement
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has not been fulfilled or waived by such Board; or (iii) by the Board of
Directors of Arizona II if any condition of Arizona II's obligations set
forth in Section 9 of this Agreement has not been fulfilled or waived by
such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by March 31, 1995, this Agreement automatically shall terminate
on that date, unless a later date is mutually agreed to by the Boards of
Directors of Arizona I and Arizona II.
(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 either Arizona I or
Arizona II or persons who are their directors, trustees, officers, agents
or stockholders 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 Directors of
either Arizona I or Arizona II, respectively (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 stockholders of their
respective fund, on behalf of which such action is taken. In addition, the
Boards of Directors of Arizona I and Arizona II 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 Arizona I and Arizona II to do so.
(e) The respective representations and warranties contained in
Sections 1 and 2 of this Agreement shall expire with, and be terminated by,
the consummation of the Reorganization, and neither Arizona I nor Arizona
II nor any of their officers, directors or trustees, agents or stockholders
shall have any liability with respect to such representations or warranties
after the Exchange Date. This provision shall not protect any officer,
director or trustee, agent or stockholder of Arizona I or Arizona II
against any liability to the entity for which that officer, director or
trustee, agent or stockholder so acts or to its stockholders to which that
officer, director or trustee, agent or stockholder otherwise would be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Exchange Date and shall impose any
terms or conditions which are determined by action of the Boards of
Directors of Arizona I and Arizona II to be acceptable, such terms and
conditions shall be binding as if a part of this Agreement without further
vote or approval of the stockholders of Arizona I and Arizona II, unless
such terms and conditions shall result in a change in the method of
computing the number of shares of Arizona II Common Stock and Arizona II
Series B AMPS to be issued to Arizona I in which event, unless such terms
and conditions shall have been included in the proxy solicitation materials
furnished to the stockholders of Arizona I and Arizona II prior to the
meetings at which the Reorganization shall have been approved, this
Agreement shall not be consummated and shall terminate unless Arizona I and
Arizona II promptly shall call special meetings of stockholders at which
such conditions so imposed shall be submitted for approval.
11. Indemnification.
(a) Arizona I hereby agrees to indemnify and hold Arizona II harmless
from all loss, liability and expense (including reasonable counsel fees and
expenses in connection with the contest of any claim) which Arizona II may
incur or sustain by reason of the fact that (i) Arizona II shall be
required to pay any
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corporate obligation of Arizona I, whether consisting of tax deficiencies
or otherwise, based upon a claim or claims against Arizona I which were
omitted or not fairly reflected in the financial statements to be delivered
to Arizona II in connection with the Reorganization; (ii) any
representations or warranties made by Arizona I in this Agreement should
prove to be false or erroneous in any material respect; (iii) any covenant
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 not
misleading or (b) the Proxy Statement and Prospectus delivered to the
stockholders of Arizona I 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 insofar as such claim is based on written information furnished to
Arizona I by Arizona II.
(b) Arizona II hereby agrees to indemnify and hold Arizona I harmless
from all loss, liability and expenses (including reasonable counsel fees
and expenses in connection with the contest of any claim) which Arizona I
may incur or sustain by reason of the fact that (i) any representations or
warranties made in this Agreement should prove false or erroneous in any
material respect, (ii) any covenant 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 Proxy Statement and
Prospectus delivered to the stockholders of Arizona II 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 insofar as such claim is based on written
information furnished to Arizona II by Arizona I.
(c) In the event that any claim is made against Arizona II in respect
of which indemnity may be sought by Arizona II from Arizona I under Section
11(a) of this Agreement, or in the event that any claim is made against
Arizona I in respect of which indemnity may be sought by Arizona I from
Arizona II under Section 11(b) of this Agreement, then the party seeking
indemnification (the 'Indemnified Party'), with reasonable promptness and
before payment of such claim, shall give written notice of such claim to
the other party (the 'Indemnifying Party'). If no objection as to the
validity of the claim is made in writing to the Indemnified Party by the
Indemnifying Party within thirty (30) days after the giving of notice
hereunder, then the Indemnified Party may pay such claim and shall be
entitled to reimbursement therefor, pursuant to this Agreement. If, prior
to the termination of such thirty-day period, objection in writing as to
the validity of such claim is made to the Indemnified Party, the
Indemnified Party shall withhold payment thereof until the validity of such
claim is established (i) to the satisfaction of the Indemnifying Party, or
(ii) by a final determination of a court of competent jurisdiction,
whereupon the Indemnified Party may pay such claim and shall be entitled to
reimbursement thereof, pursuant to this Agreement, or (iii) with respect to
any tax claims, within seven (7) calendar days following the earlier of (A)
an agreement between Arizona I and Arizona II 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 11, 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
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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.
12. 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), Arizona II 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 ARIZONA FUND II, INC. (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 Arizona
II's transfer agent with respect to such shares. Arizona I will provide
Arizona II on the Exchange Date with the name of any Arizona I stockholder
who is to the knowledge of Arizona I an affiliate of it 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 deemed to have
been given if delivered or mailed, first class postage prepaid, addressed
to Arizona I or Arizona II, in either case at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, Attn: Arthur Zeikel, 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) Copies of the Articles of Incorporation, as amended, of Arizona I
and Arizona II are on file with the State Department of Assessments and
Taxation of Maryland and notice is hereby given that this instrument is
executed on behalf of the Directors of each fund.
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This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MUNIYIELD ARIZONA FUND, INC.
By: /s/ ARTHUR ZEIKEL
Name: Arthur Zeikel
Title: President
Attest:
/s/ MARK B. GOLDFUS
Name: Mark B. Goldfus
Title: Secretary
MUNIYIELD ARIZONA FUND II, INC.
By: /s/ ARTHUR ZEIKEL
Name: Arthur Zeikel
Title: President
Attest:
/s/ MARK B. GOLDFUS
Name: Mark B. Goldfus
Title: Secretary
I-20
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EXHIBIT II
ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA
The information set forth below is derived from official statements of the
State of Arizona (the 'State') and other sources that generally are available to
investors. Such information constitutes only a brief summary of the complex
factors affecting the financial situation in the State and does not purport to
be complete. Neither Arizona I nor Arizona II has independently verified this
information.
The State's population at the end of 1993 totalled approximately 3,953,000,
ranking it in the top half of all states by population. From 1980 to 1992, the
State's population increased by 43.31%, growing an additional 2.4% in 1993. With
expected growth of approximately 2.4% in 1994, the State's population should
surpass the 4 million mark. The U.S. Census Bureau ranked the State third among
states in percentage of population growth between 1980 and 1990, and its overall
growth rate is expected to continue to exceed the national average through the
turn of the century.
Over the last several decades, the State's economy has grown faster than
that of states in most other regions of the country, as measured by nearly every
major indicator of economic growth, including aggregate personal income growth,
employment growth, gross state product and job creation. From 1987 to 1992, the
State's aggregate personal income grew nearly 38.2% to approximately $66.916
billion; the 1993 growth rate of 7.0% enabled this figure to exceed $71 billion.
During the same 1987-92 period, the State's total secondary assessed valuation
of property, the basis for real property tax assessments to pay debt service on
general obligation indebtedness, increased by 13.4%.
Although the rate of economic growth slowed considerably in the late 1980s
and early 1990s, diversification of the State's economy helped it make moderate
advances during this period and prepared the way for an upswing in the 1993-1994
period. While jobs in industries such as mining and agriculture have diminished
in relative importance to the State's economy over the past two decades,
substantial growth has occurred in the areas of aerospace, high technology,
light manufacturing, finance and insurance. Jobs in the construction and real
estate sectors have also seen substantial growth in the past 20 years. Though
employment in these sectors declined in the late 1980s-early 1990s period due to
the real estate contraction, it has increased recently, with employment in the
construction industry experiencing 11.18% growth in 1993 and employment in the
real estate industry experiencing more than 5.0% growth. The State's 1993
overall employment growth rate of 3.6% was the 11th best nationwide, causing its
jobless rate to fall 1.2% from 1992's rate, finishing the year at 6.2%.
Importantly, nearly all sectors have contributed to the currently strong
economy. Manufacturing, construction, trade, finance, insurance, real estate,
services and government were all up in 1993, with only mining, transportation,
communication and public utilities failing to show improvement.
Much of the attention on the State's overall economic condition in the
recent past focused on the sharp declines in the real estate and construction
industries between 1985 and 1991. This downturn was caused by a number of
factors, including overbuilding in virtually every category of real property and
the effect of the Tax Reform Act of 1986 on real estate investments. Large real
estate-related losses, coupled with a slowed rate of economic growth, severely
affected the financial services industry during this time as well. Most of the
State's savings and loan associations in operation in 1986, as well as several
smaller banks, were placed in Federal conservatorship and/or receivership and
forced to operate under the supervision of agencies of the Federal
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government. Many of these institutions, however, have now been sold to other
financial institutions, including large out-of-state banks, allowing them to
stabilize their situations and return to profitability. The State's real estate
markets began to rebound in 1990, and throughout 1993 and into 1994 showed
improvement in construction, office vacancy rates and other related indicators.
In addition, financial difficulties encountered by three of the State's largest
employers--America West Airlines, Inc., Circle K Corporation, and Tucson
Electric Power Company--have been resolved. America West Airlines emerged from
Chapter 11 bankruptcy proceedings in August 1994 and reported the highest
quarterly profit in its history for the second quarter of 1994. Circle K
Corporation completed its Chapter 11 reorganization in June 1993 and, in April
1994, reported its first profitable year since 1989. Tucson Electric Power
underwent a major financial restructuring in 1992 and, in 1993, achieved its
strongest financial results in four years.
The State government's fiscal situation has improved in recent years. After
experiencing several years of budget shortfalls, requiring mid-year adjustments,
the State had budget surpluses of $86 million for fiscal year 1992-93 and
approximately $110 million for fiscal year 1993-94, based on total state budgets
of $3.7 billion and $3.8 billion, respectively. The Legislature enacted a
personal income tax reduction of approximately $107 million in 1994, in part
owing to the improved fiscal picture.
The Phoenix Metropolitan Statistical Area ('MSA') has mirrored the State's
current economic upturn. The Phoenix MSA lies within Maricopa County--which
contains a majority of the State's population, non-agricultural employment, and
aggregate personal income--and includes the City of Phoenix, the State's largest
city and the ninth largest in the United States, as well as the cities of
Scottsdale, Tempe, Mesa, Chandler and Peoria, and the Towns of Paradise Valley
and Gilbert. Good transportation facilities, a substantial pool of available
labor, a variety of support industries and a warm climate have helped make the
Phoenix MSA a major business center in the southwestern United States. The site
of many of the State's leading advanced technology companies, the Metro-Phoenix
area has experienced recent growth in population (building upon an increase of
approximately 49.3% between 1980 and the fourth quarter of 1992), employment
(fifth in the nation for all of 1993 among top metro markets), housing
construction (up over 30% from 1993 through the first half of 1994), industrial
construction (nearly 1 million square feet currently being developed), office
occupancy rates, and retail sales (up 7.9% from 1993 through the first half of
1994).
Offsetting the favorable economic developments in the private sector,
however, are the recent financial problems affecting Maricopa County. As a
result of expenditures in excess of budgeted amounts, the County had a
cumulative budget shortfall of $64.2 million as of June 30, 1994, the end of its
1993-94 fiscal year, and is expected to raise property taxes or reduce its staff
and services, or both, and to refinance some of its outstanding indebtedness in
the near future. Its bonded indebtedness was recently downgraded to 'A' by
Moody's and Standard & Poor's.
In addition, the State Supreme Court recently declared the State's system
of funding for public schools primarily with local property taxes to be
'unequal', and therefore unconstitutional, because of disparities in the
assessed values of property in the local districts, notwithstanding a State
equalization payment program that was implemented in 1980. The Supreme Court has
directed the State Legislature to develop and submit to the courts a more
equitable system within a reasonable time, but specifically ruled that school
district bonds presently outstanding and those issued prior to the enactment of
legislative revisions would continue to be valid and enforceable. No information
is currently available regarding the nature or timing of any legislative
response.
II-2
<PAGE>
EXHIBIT III
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MUNICIPAL BOND RATINGS OF MOODY'S INVESTORS SERVICE, INC.
('MOODY'S'):
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are
referred to as 'gilt-edge.' Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally
are known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as with 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 with Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
BAA Bonds which are rated Baa are considered 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.
</TABLE>
III-1
<PAGE>
NOTE: Moody's applies numerical modifiers, 1, 2 and 3, in each generic
rating classification from Aa through B in its municipal bond rating system. The
modifier 1 indicates that the bond ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its rating category.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It always should be borne in mind that
preferred stocks occupy a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
AAA An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
AA An issue which is rated 'aa' is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and assets protections will remain relatively well maintained
in the foreseeable future.
A An issue which is rated 'a' is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the 'aaa' and 'aa' classifications, earnings and assets protections,
nevertheless, are expected to be maintained at adequate levels.
BAA An issue which is rated 'baa' is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings
and assets protections appear adequate at present but may be
questionable over any great length of time.
BA An issue which is rated 'ba' is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and assets protections may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
B An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be small.
CAA An issue which is rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
CA An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payment.
C This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
</TABLE>
NOTE: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from 'aa' through 'b' in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its
III-2
<PAGE>
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF MUNICIPAL BOND RATINGS OF STANDARD & POOR'S RATINGS GROUP
('STANDARD & POOR'S'):
<TABLE>
<S> <C>
AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher-rated issues only in small
degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in
higher-rated categories.
BB Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest payments and
principal repayments. The BB rating also is used for bonds
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
B Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions likely will impair
capacity or willingness to pay interest or repay principal. The B
rating category also is used for bonds subordinated to senior debt
that is assigned an actual or implied BB or BB-rating.
CCC Bonds rated CCC have a currently identifiable vulnerability to
default, and are dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial or economic
conditions, they are not likely to have the capacity to pay interest
and repay principal. The CCC rating also is used for bonds
subordinated to senior debt that is assigned an actual or implied B or
B-rating.
CC The rating CC typically is applied to bonds subordinated to senior
debt that is assigned an actual or implied CCC rating.
C The rating C typically is applied to bonds subordinated to senior debt
that is assigned an actual or implied CCC-rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI The CI rating is reserved for income bonds on which no interest is
being paid.
</TABLE>
III-3
<PAGE>
<TABLE>
<S> <C>
D Bonds rated D are in payment default. The D rating is used when
interest payments or principal repayments 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 if debt service payments are jeopardized.
NR Not rated.
</TABLE>
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 PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol normally will not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
<TABLE>
<S> <C>
I. Likelihood of payment--capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation;
II. Nature of, and provisions of, the issue; and
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity
to pay the preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated
'AAA.'
A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to make payments for a preferred stock in this category than for
issues in the 'A' category.
</TABLE>
III-4
<PAGE>
<TABLE>
<S> <C>
BB,B, Preferred stock rated 'BB,' 'B,' and 'CCC' are regarded, on balance,
CCC as predominately speculative with respect to the issuer's capacity to
pay preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest degree of speculation. While such
issues likely will have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer in
default on debt instruments.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
</TABLE>
PLUS(+) OR MINUS(-): To provide more detailed indications of preferred stock
quality, 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.
A preferred stock rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. 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. Standard & Poor's does not perform an audit in
connection with any rating and, on occasion, may 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.
DESCRIPTION OF MUNICIPAL BOND RATINGS OF FITCH INVESTORS SERVICE, INC.
('FITCH'):
<TABLE>
<S> <C>
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'.
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
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.
</TABLE>
III-5
<PAGE>
<TABLE>
<S> <C>
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely repayment of principal and payment of interest
reflect 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
repayment of principal seems probable over time.
C Bonds are in imminent default in payment of interest or repayment of
principal.
DDD, DD Bonds are in default on interest payments and/or principal repayments.
AND D 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.
NR Indicates that Fitch does not rate the specific issue.
</TABLE>
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', 'DDD', 'DD' or 'D' categories.
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 12 months.
CREDITTREND: Credit trend indicators show whether credit fundamentals are
improving, stable, declining or uncertain, as follows:
Improving Stable Declining Uncertain .
DESCRIPTION OF FITCH'S PREFERRED STOCK RATINGS
Preferred stock ratings should be viewed in the universe of equity
(preferred and preference) and not in relationship to bonds. Although certain
preferred stock issues may carry the same rating as an issuer's bond
obligations, preferred stocks by definition are junior to debt obligations. The
rating of a preferred stock issue is an indication of the company's ability to
pay the preferred dividends and any sinking fund obligations on a timely basis.
Preferred dividends are payable only when declared; they are not contractually
guaranteed.
III-6
<PAGE>
<TABLE>
<S> <C>
AAA Preferred stocks assigned this rating are the highest quality. Strong
asset protection, conservative balance sheet ratios and positive
indications of continued protection of preferred dividend requirements
are prerequisites for an 'AAA' rating.
AA Preferred or preference issues assigned this rating are very high
quality. Maintenance of asset protection and dividend paying ability
appears assured but not quite to the extent of the 'AAA' rating.
A Preferred or preference issues assigned this rating are good quality.
Asset protection and coverage of preferred dividends are considered
adequate and are expected to be maintained.
BBB Preferred or preference issues assigned this rating are reasonably
safe but lack the protections of the 'A' to 'AAA' categories. Current
results should be watched for possible signs of deterioration.
BB Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide
fluctuations. The longer term financial capabilities of the
enterprises cannot be predicted with assurance.
B Issues assigned this rating are considered highly speculative. While
earnings should normally cover dividends, directors may reduce or omit
payment due to unfavorable developments, inability to finance or wide
fluctuations in earnings.
CCC Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend
payments may be in arrears with the status of the current dividend
uncertain.
CC Dividends are not currently being paid and may be in arrears. The
outlook for future payments cannot be assured.
C Dividends are not currently being paid and may be in arrears.
Prospects for future payments are remote.
D Issuer is in default on its debt obligations and has filed for
reorganization or liquidation under the bankruptcy law.
</TABLE>
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', 'CCC', 'CC', 'C' and 'D'
categories.
III-7
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, Article VI of the
Registrant's By-Laws and the Registrant's Investment Advisory Agreement with
Fund Asset Management, Inc. (now known as Fund Asset Management, L.P.; the
'Investment Adviser') provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be provided to directors,
officers and controlling persons of each Fund, pursuant to the foregoing
provisions or otherwise, each Fund has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and, therefore, is unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by a Fund of expenses incurred or paid by a director, officer or
controlling person of the Registrant 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
Registrant, unless in the opinion of its counsel the matter has been settled by
controlling precedent, will submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Reference is made to (i) Section Six of the Purchase Agreement relating to
the Registrant's Common Stock, a form of which previously was filed as an
exhibit to the Common Stock Registration Statement (as defined below), and (ii)
Section Seven of the Purchase Agreement relating to the Registrant's AMPS, a
form of which previously was filed as an exhibit to the AMPS Registration
Statement (as defined below), for provisions relating to the indemnification of
the underwriter.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C> <C>
(1)(a) -- Articles of Incorporation of the Registrant*
(b) -- Articles Supplementary creating the Series A AMPS**
(c) -- Form of Articles Supplementary creating the Series B AMPS*****
(2) -- By-Laws of the Registrant*
(3) -- Not applicable
(4) -- Form of Agreement and Plan of Reorganization between the
Registrant and MuniYield Arizona Fund, Inc.*****
(5)(a) -- Form of Certificate for Common Stock****
(b) -- Form of Certificate for AMPS**
(c) -- Portions of the Articles of Incorporation and the By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant***
(6) -- Form of Investment Advisory Agreement between the Registrant and
the Investment Adviser*
(7)(a) -- Form of Purchase Agreement between the Registrant and the
Investment Adviser and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('Merrill Lynch') relating to the Registrant's
Common Stock*
(b) -- Form of Purchase Agreement between the Registrant and the
Investment Adviser and Merrill Lynch relating to the
Registrant's AMPS**
(c) -- Merrill Lynch Standard Dealer Agreement*
(8) -- Not applicable
(9) -- Custody Agreement between the Registrant and The Bank of New
York****
(10) -- Not applicable
</TABLE>
C-1
<PAGE>
<TABLE>
<S> <C> <C>
(11) -- Opinion and Consent of Brown & Wood, counsel for the Registrant
(12) -- Private Letter Ruling from the Internal Revenue Service*****
(13)(a) -- Registrar, Transfer Agency and Service Agreement between the
Registrant and The Bank of New York****
(b) -- Form of Auction Agent Agreement**
(c) -- Form of Broker-Dealer Agreement**
(d) -- Form of Letter of Representations**
(14) -- Consents of Deloitte & Touche LLP, independent auditors for the
Registrant
(15) -- Not applicable
(16) -- Included on the signature page of this Registration Statement
</TABLE>
- ------------------
* Incorporated by reference to the Registrant's registration statement on
Form N-2 relating to the Registrant's Common Stock (File Nos. 33-50171
and 811-7083), filed with the Securities and Exchange Commission (the
'Commission') on September 3, 1993 (the 'Common Stock Registration
Statement').
** Incorporated by reference to the Registrant's registration statement on
Form N-2 relating to the Registrant's Series A AMPS (File Nos. 33-50975
and 811-7083) filed with the Commission on November 9, 1993 (the 'AMPS
Registration Statement').
*** Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article IX, Article X, Article XI, Article XII
and Article XIII of the Registrant's Articles of Incorporation, filed
herewith as Exhibit (a) to the Registration Statement; and to Article II,
Article III (sections 1, 3, 5 and 17), Article VI, Article VII, Article
XII, Article XIII and Article XIV of the Registrant's By-Laws, filed
herewith as Exhibit (b) to the Registration Statement.
**** Incorporated by reference to Pre-Effective Amendment No. 2 to the Common
Stock Registration Statement filed with the Commission on October 22,
1993.
***** Previously filed.
ITEM 17. UNDERTAKINGS.
(a) The Registrant undertakes to suspend offering of the shares of Common
Stock covered hereby until it amends its Prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of Common Stock declines more than 10 percent from its net asset
value per share of Common Stock as of the effective date of this Registration
Statement, or (2) its net asset value per share of Common Stock increases to an
amount greater than its net proceeds as stated in the Prospectus contained
herein.
(b) The Registrant undertakes that:
(1) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 497(h) under the
Securities Act shall be deemed to be a part of the registration statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the Township of Plainsboro and State
of New Jersey, on the 3rd day of January, 1995.
MUNIYIELD ARIZONA FUND II, INC.
(Registrant)
/s/ ARTHUR ZEIKEL
________________________________________
(Arthur Zeikel, President)
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn and Gerald M. Richard, or any of them, as attorney-in-fact, to
sign on his behalf, individually and in each capacity stated below, any
amendments to this Registration Statement (including post-effective amendments)
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission.
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
/s/ ARTHUR ZEIKEL President (Principal January 3, 1995
(Arthur Zeikel) Executive Officer) and
Director
/s/ GERALD M. RICHARD Treasurer (Principal January 3, 1995
(Gerald M. Richard) Financial and Accounting
Officer)
/s/ KENNETH S. AXELSON Director January 3, 1995
(Kenneth S. Axelson)
/s/ HERBERT I. LONDON Director January 3, 1995
(Herbert I. London)
/s/ ROBERT R. MARTIN Director January 3, 1995
(Robert R. Martin)
/s/ JOSEPH L. MAY Director January 3, 1995
(Joseph L. May)
/s/ ANDRE F. PEROLD Director January 3, 1995
(Andre F. Perold)
</TABLE>
C-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION
- -------- --------------------------------------------------------------------
<S> <C>
(11) Opinion and Consent of Brown & Wood, counsel for the Registrant
Consents of Deloitte & Touche LLP, independent auditors for the
(14) Registrant
</TABLE>
BROWN & WOOD
One World Trade Center
New York, New York 10048-0557
Telephone: (212) 839-5300
Facsimile: (212) 839-5599
January 3, 1995
MuniYield Arizona Fund II, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
We have acted as counsel for MuniYield Arizona Fund II, Inc.
(the "Fund") in connection with the proposed acquisition by the
Fund of substantially all of the assets of MuniYield Arizona
Fund, Inc. ("Arizona I"), in exchange for newly-issued shares of
common stock and auction market preferred stock of the Fund (the
"Acquisition"). This opinion is furnished in connection with the
Fund's Registration Statement on Form N-14 under the Securities
Act of 1933, as amended (the "Registration Statement"), relating
to shares of common stock and auction market preferred stock of
the Fund, each par value $0.10 per share (the "Shares"), to be
issued in the Acquisition.
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 Articles of
Incorporation of the Fund, as amended and supplemented, 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 and Arizona I set forth in the
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 shares of common stock or auction market preferred
stock, as the case may be, of the Fund.
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 parts thereof.
Very truly yours,
/s/ BROWN & WOOD
INDEPENDENT AUDITORS' CONSENT
MuniYield Arizona Fund, Inc.:
We consent to the use in this Registration Statement on Form
N-14 of our report dated December 6, 1994 appearing in the Proxy
Statement and Prospectus, which is a part of such Registration
Statement, and to the reference to us under the caption "Experts"
also appearing in such Proxy Statement and Prospectus.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Princeton, New Jersey
December 28, 1994
INDEPENDENT AUDITORS' CONSENT
MuniYield Arizona Fund II, Inc.:
We consent to the use in this Registration Statement on Form
N-14 of our report dated December 6, 1994 appearing in the Proxy
Statement and Prospectus, which is a part of such Registration
Statement, and to the reference to us under the caption "Experts"
also appearing in such Proxy Statement and Prospectus.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Princeton, New Jersey
December 28, 1994
INDEPENDENT AUDITORS' CONSENT
Fund Asset Management, Inc.:
We consent to the use in this Registration Statement on Form
N-14 of our report dated February 28, 1994 appearing in the
Proxy Statement and Prospectus, which is a part of such
Registration Statement, and to the reference to us under the
caption "Experts" also appearing in such Proxy Statement and
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Parsippany, New Jersey
December 28, 1994
