MUNIYIELD
ARIZONA
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Annual Report
October 31, 1997
This report, including the financial information herein, is transmitted
to the shareholders of MuniYield Arizona Fund, Inc. for their
information. It is not a prospectus, circular or representation intended
for use in the purchase of shares of the Fund or any securities
mentioned in the report. Past performance results shown in this report
should not be considered a representation of future performance. The
Fund has leveraged its Common Stock by issuing Preferred Stock to
provide the Common Stock shareholders with a potentially higher rate of
return. Leverage creates risks for Common Stock shareholders, including
the likelihood of greater volatility of net asset value and market price
of shares of the Common Stock, and the risk that fluctuations in the
short-term dividend rates of the Preferred Stock may affect the yield to
Common Stock shareholders. Statements and other information herein are
as dated and are subject to change.
MuniYield Arizona Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #16792 -- 10/97
[RECYCLE LOGO] Printed on post-consumer recycled paper
MuniYield Arizona Fund, Inc.
TO OUR SHAREHOLDERS
For the year ended October 31, 1997, the Common Stock of MuniYield
Arizona Fund, Inc. earned $0.719 per share income dividends, which
included earned and unpaid dividends of $0.060. This represents a net
annualized yield of 5.28%, based on a month-end net asset value of
$13.61 per share. Over the same period, the total investment return on
the Fund's Common Stock was +10.37%, based on a change in per share net
asset value from $13.06 to $13.61, and assuming reinvestment of $0.719
per share income dividends.
For the six-month period ended October 31, 1997, the total investment
return on the Fund's Common Stock was +8.74%, based on a change in per
share net asset value from $12.87 to $13.61, and assuming reinvestment
of $0.358 per share income dividends.
For the six-month period ended October 31, 1997, the Fund's Auction
Market Preferred Stock had an average yield of 3.22% for Series A and
3.49% for Series B.
The Municipal Market Environment
Long-term interest rates generally declined during the six-month period
ended October 31, 1997. The general financial environment has remained
one of solid economic growth tempered by few or no inflationary
pressures. While economic growth has been conducive to declining bond
yields, it has remained strong enough to suggest that the Federal
Reserve Board (FRB) might find it necessary to raise short-term interest
rates. This would be intended to slow economic growth and ensure that
any incipient inflationary pressures would be curtailed. There were
investor concerns that the FRB would be forced to raise interest rates
prior to year-end, thus preventing an even more dramatic decline in
interest rates. Long-term tax-exempt revenue bonds, as measured by the
Bond Buyer Revenue Bond Index, declined over 50 basis points (0.50%) to
end the six-month period ended October 31, 1997 at 5.60%.
Similarly, long-term US Treasury bond yields generally moved lower
during most of the six-month period ended October 31, 1997. However, the
turmoil in the world's equity markets during the last week in October
has resulted in a significant rally in the Treasury bond market. The US
Treasury bond market was the beneficiary of a flight to quality mainly
by foreign investors whose own domestic markets have continued to be
very volatile. Prior to the initial decline in Asian equity markets,
long-term US Treasury bond yields were essentially unchanged. By the end
of October, US Treasury bond yields declined 80 basis points to 6.15%,
their lowest level of 1997.
The tax-exempt bond market's continued underperformance as compared to
its taxable counterpart has been largely in response to its ongoing
weakening technical position. As municipal bond yields have declined,
municipalities have hurriedly rushed to refinance outstanding higher-
couponed debt with new issues financed at present low rates. During the
last six months, over $118 billion in new long-term tax-exempt issues
were underwritten, an increase of over 25% versus the comparable period
a year ago. As interest rates have continued to decline, these
refinancings have intensified municipal bond issuance. During the past
three months, approximately $60 billion in new long-term municipal
securities were underwritten, an increase of over 34% as compared to the
October 31, 1996 quarter.
The recent trend toward larger and larger bond issues has also
continued. However, issues of such magnitude usually must be
attractively priced to ensure adequate investor interest. Obviously, the
yields of other municipal bond issues are impacted by the yield premiums
such large issuers have been required to pay. Much of the municipal bond
market's recent underperformance can be traced to market pressures that
these large bond issuances have exerted.
In our opinion, the recent correction in world equity markets has
enhanced the near-term prospects for continued low, if not declining,
interest rates in the United States. It is likely that the recent
correction will result in slower US domestic growth in the coming
months. This decline is likely to be generated in part by reduced US
export growth. Additionally, some decline in consumer spending also can
be expected in response to reduced consumer confidence. Perhaps more
importantly, it is likely that barring a dramatic and unexpected
resurgence in domestic growth, the FRB may be unwilling to raise
interest rates until the full impact of the equity market's corrections
can be established.
All of these factors suggest that for at least the near term, interest
rates, including tax-exempt bond yields, are unlikely to rise by any
appreciable amount. It is probable that municipal bond yields will
remain under some pressure as a result of continued strong new-issue
supply. However, the recent pace of municipal bond issuance is likely to
be unsustainable. Continued increases in bond issuance will require
lower tax-exempt bond yields to generate the economic savings necessary
for additional municipal bond refinancing. With tax-exempt bond yields
at already attractive yield ratios relative to US Treasury bonds
(approximately 90% at the end of October), any further pressure on the
municipal market may represent an attractive investment opportunity.
Portfolio Strategy
During the six-month period ended October 31, 1997, we maintained a
neutral to aggressive investment strategy, which benefited the Fund's
performance. The primary investment concern during this period was how
fast the US economy could grow without triggering inflation or an
interest rate hike from the FRB. We did not view inflation to be a
problem and therefore kept the Fund's cash reserves to a minimum level.
The Fund's positive performance during the past year was primarily the
result of a fully invested strategy capturing the positive price
movement from lower long-term interest rates. This strategy resulted in
a greater total return and higher yields than the Lipper Analytical
Services averages for closed-end Arizona leveraged funds.
In October, uncertainty hit the world equity markets, causing a flight
to quality in the US bond market. We believe this worldwide economic
event may likely sideline the FRB from raising interest rates further,
slow US gross domestic product and continue to enhance our strategy of
being fully invested in quality long-duration municipal bonds.
Looking ahead, we will continue to monitor world events to see whether
inflation or noninflation will win out in 1998. We believe that the US
economy may slow and that interest rates may move lower over the next
year. Consequently, we expect to keep our portfolio strategy in place
for the near future.
In Conclusion
We appreciate your ongoing interest in MuniYield Arizona Fund, Inc., and
we look forward to serving your investment needs in the months and years
to come.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/VINCENT R. GIORDANO
Vincent R. Giordano
Senior Vice President
/S/HUGH T. HURLEY III
Hugh T. Hurley III
Vice President and Portfolio Manager
December 3, 1997
MuniYield Arizona Fund, Inc. October 31, 1997
<TABLE>
<CAPTION>
PROXY RESULTS
During the six-month period ended October 31, 1997, MuniYield Arizona Fund, Inc. Common Stock
shareholders voted on the following proposals. The proposals were approved at a shareholders'
meeting on September 17, 1997. The description of each proposal and number of shares voted
are as follows:
Shares Voted Shares Withheld
For From Voting
<S> <C> <C> <C>
1. To elect the Fund's Board of Directors: James H. Bodurtha 4,336,774 69,653
Herbert I. London 4,335,574 70,853
Robert R. Martin 4,334,745 71,682
Arthur Zeikel 4,335,758 70,669
Shares Voted Shares Voted Shares Voted
For Against Abstain
2. To ratify the selection of Deloitte &
Touche LLP as the Fund's independent
auditors for the current fiscal year. 4,319,877 24,705 61,845
During the six-month period ended October 31, 1997, MuniYield Arizona Fund, Inc. Preferred Stock
shareholders (Series A and Series B) voted on the following proposals. The proposals were approved
at a shareholders' meeting on September 17, 1997. The description of each proposal and number of
shares voted are as follows:
Shares Voted Shares Withheld
For From Voting
1. To elect the Fund's Board of Directors:
James H. Bodurtha, Herbert I. London,
Robert R. Martin, Joseph L. May, Andre F. Perold
and Arthur Zeikel as follows:
Series A 516 2
Series B 676 15
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C> <C>
2. To ratify the selection of Deloitte & Touche LLP
as the Fund's independent auditors for the current
fiscal year as follows:
Series A 516 0 2
Series B 687 0 4
</TABLE>
THE BENEFITS AND RISKS OF LEVERAGING
MuniYield Arizona Fund, Inc. utilizes leveraging to seek to enhance the
yield and net asset value of its Common Stock. However, these objectives
cannot be achieved in all interest rate environments. To leverage, the
Fund issues Preferred Stock, which pays dividends at prevailing short-
term interest rates, and invests the proceeds in long-term municipal
bonds. The interest earned on these investments is paid to Common Stock
shareholders in the form of dividends, and the value of these portfolio
holdings is reflected in the per share net asset value of the Fund's
Common Stock. However, in order to benefit Common Stock shareholders,
the yield curve must be positively sloped; that is, short-term interest
rates must be lower than long-term interest rates. At the same time, a
period of generally declining interest rates will benefit Common Stock
shareholders. If either of these conditions change, then the risks of
leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock
capitalization of $100 million and the issuance of Preferred Stock for
an additional $50 million, creating a total value of $150 million
available for investment in long-term municipal bonds. If prevailing
short-term interest rates are approximately 3% and long-term interest
rates are approximately 6%, the yield curve has a strongly positive
slope.
The fund pays dividends on the $50 million of Preferred Stock based on
the lower short-term interest rates. At the same time, the fund's total
portfolio of $150 million earns the income based on long-term interest
rates. Of course, increases in short-term interest rates would reduce
(and even eliminate) the dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term
investments, and therefore the Common Stock shareholders are the
beneficiaries of the incremental yield. However, if short-term interest
rates rise, narrowing the differential between short-term and long-term
interest rates, the incremental yield pickup on the Common Stock will be
reduced or eliminated completely. At the same time, the market value on
the fund's Common Stock (that is, its price as listed on the American
Stock Exchange) may, as a result, decline. Furthermore, if long-term
interest rates rise, the Common Stock's net asset value will reflect the
full decline in the price of the portfolio's investments, since the
value of the fund's Preferred Stock does not fluctuate. In addition to
the decline in net asset value, the market value of the fund's Common
Stock may also decline.
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
Arizona -- 90.2%
Arizona Educational Loan Marketing Corporation, Educational Loan Revenue Bonds,
AMT, Series B:
NR* A $700 7% due 3/01/2002 $750
NR* A 2,920 7% due 3/01/2003 3,189
NR* Aaa 1,810 Arizona Health Facilities Authority, Hospital System Revenue Refunding Bonds
(Saint Luke's Health Systems), 7.25% due 11/01/2003 (h) 2,080
AAA Aaa 325 Arizona State Municipal Financing Program, COP, Series 34, 7.25% due 8/01/2009 (i) 396
AA Aaa 1,400 Arizona State Transportation Board, Highway Revenue Bonds, Sub-Series B,
6.50% due 7/01/2002 (h) 1,550
AA+ Aa1 3,000 Arizona State Wastewater Management Authority, Wastewater Treatment
Financial Assistance Revenue Bonds (City of Phoenix), 6.80% due 7/01/2011 3,341
Chandler, Arizona, Water and Sewer Revenue Bonds (b):
AAA Aaa 1,000 6.50% due 7/01/2006 (h) 1,149
AAA Aaa 1,000 5.25% due 7/01/2016 995
BBB- NR* 1,750 Coconino County, Arizona, Pollution Control Corporation, PCR (Nevada Power Co. Project),
AMT, 6.375% due 10/01/2036 1,847
A1+ P1 2,300 Coconino County, Arizona, Pollution Control Corporation Revenue Bonds
(Arizona Public Service -- Navajo Project), VRDN, AMT, Series A, 3.80% due 10/01/2029 (a) 2,300
AAA Aaa 605 Gilbert, Arizona, Projects of 1988, GO, UT, Series C, 8.50% due 7/01/2005 (b) 745
Glendale, Arizona, IDA, Educational Facilities Revenue Refunding Bonds
(American Graduate School International) (d):
AAA NR* 500 7% due 7/01/2005 (h) 584
AAA NR* 500 7.125% due 7/01/2005 (h) 588
AAA NR* 500 5.875% due 7/01/2015 524
AAA Aaa 2,920 Maricopa County, Arizona, Alhambra Elementary School District Number 68
Refunding Bonds, UT, Series A, 6.80% due 7/01/2011 (g) 3,142
AAA Aaa 1,000 Maricopa County, Arizona, Chandler Unified School District Number 80
Refunding Bonds, 6.25% due 7/01/2011 (c) 1,130
AAA Aaa 2,000 Maricopa County, Arizona, Gilbert Unified School District Number 41 Improvement Bonds,
UT, Series C, 6.10% due 7/01/2004 (c)(h) 2,194
BBB- Baa1 2,505 Maricopa County, Arizona, Hospital Revenue Refunding Bonds (Sun Health Corporation),
6.125% due 4/01/2018 2,604
Maricopa County, Arizona, IDA, Hospital Facility Revenue Refunding Bonds
(Samaritan Health Services Hospital), Series A (b):
AAA Aaa 500 7% due 12/01/2013 545
AAA Aaa 2,400 7% due 12/01/2016 2,935
AAA Aaa 1,000 Maricopa County, Arizona, Mesa Unified School District Number 4,
Project of 1995, UT, Series B, 5% due 7/01/2012 (c) 999
AAA Aaa 2,600 Maricopa County, Arizona, Paradise Valley Unified School District Number 69,
Project of 1994, UT, Series B, 5.25% due 7/01/2015 (b) 2,607
AAA Aaa 1,500 Maricopa County, Arizona, Peoria Unified School District Number 11 Refunding Bonds,
6.10% due 7/01/2010 (g) 1,623
BB+ Ba1 2,500 Maricopa County, Arizona, Pollution Control Corporation, PCR, Refunding
(Public Service Company of New Mexico Project), Series A, 6.30% due 12/01/2026 2,630
AA Aa2 1,825 Maricopa County, Arizona, Scottsdale Unified School District Number 48
Improvement Bonds, UT, 6.60% due 7/01/2012 2,130
AAA Aaa 500 Maricopa County, Arizona, Tempe Elementary School District Number 3,
Refunding and Improvement Bonds, UT, 7.50% due 7/01/2010 (c) 625
AAA Aaa 4,000 Mesa, Arizona, Utilities System Revenue Bonds, 6.125% due 7/01/2013 (c) 4,369
AAA Aaa 1,000 Mohave County, Arizona, IDA, Hospital System Revenue Bonds (Baptist Hospital),
5.50% due 9/01/2021 (b) 1,006
AAA Aaa 2,700 Navajo County, Arizona, Pollution Control Corporation, Revenue Refunding Bonds
(Arizona Public Service Company), Series A, 5.875% due 8/15/2028 (g) 2,815
Phoenix, Arizona, Civic Improvement Corporation, Wastewater System, Lease
Revenue Refunding Bonds:
A Aa3 500 5% due 7/01/2018 483
AAA Aaa 800 5% due 7/01/2018 (b) 773
AA- Aa 1,000 Phoenix, Arizona, Civic Improvement Corporation, Water System Revenue Bonds,
Junior Lien, 6% due 7/01/2019 1,050
Phoenix, Arizona, Refunding Bonds, UT, Series A:
AA+ Aa1 1,485 6% due 7/01/2011 1,645
AA+ Aa1 4,285 5% due 7/01/2019 4,185
AAA Aaa 1,000 Pima County, Arizona, IDA, Revenue Refunding Bonds (Healthpartners), Series A,
5.625% due 4/01/2014 (b) 1,034
AAA Aaa 3,050 Pima County, Arizona, Tucson Unified School District Number 1, Refunding Bonds, LT,
7.50% due 7/01/2009 (c) 3,788
A1+ P1 2,100 Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont Mining Corp.), VRDN,
3.65% due 12/01/2009 (a) 2,100
A1+ P1 1,200 Pinal County, Arizona, IDA, PCR (Newmont Mining Corp.), DATES, 3.65% due 12/01/2009 (a) 1,200
Salt River Project, Arizona, Agricultural Improvement and Power District,
Electric System Revenue Bonds, Series A:
AA Aa2 3,165 6.50% due 1/01/2001 (h) 3,435
A1+ Aa2 2,500 5% due 1/01/2020 2,412
AA+ Aa1 825 Tempe, Arizona, Refunding Bonds, GO, UT, Series A, 5.35% due 7/01/2010 864
AAA Aaa 1,000 Tempe, Arizona, Unified High School District Number 213 Refunding and
Improvement Bonds, UT, 7% due 7/01/2008 (c) 1,192
AAA Aaa 1,000 Tucson, Arizona, GO, UT, Series A, 5.375% due 7/01/2017 (b) 1,009
AAA Aaa 2,000 Tucson, Arizona, Local Business Development Finance Corporation,
Lease Revenue Refunding Bonds, 6.25% due 7/01/2012 (c) 2,169
A+ A1 1,430 Tucson, Arizona, Water Revenue Refunding Bonds, 6.50% due 7/01/2016 1,542
AA A1 1,345 University of Arizona, University Revenue Refunding Bonds, 6.25% due 6/01/2011 1,457
Puerto Rico -- 8.2%
AAA Aaa 2,000 Puerto Rico Commonwealth, YCN, 7.882% due 7/01/2020 (e)(f) 2,160
AAA Aaa 520 Puerto Rico Commonwealth, Highway and Transportation Authority,
Highway Revenue Bonds, Series T, 6.625% due 7/01/2002 (h) 580
Puerto Rico Electric Power Authority, Power Revenue Bonds:
AAA Aaa 2,000 LEVRRS, 8.208% due 7/01/2023 (e)(f) 2,198
BBB+ Aaa 2,250 Series P, 7% due 7/01/2001 (h) 2,511
Total Investments (Cost -- $83,767) -- 98.4% 89,179
Other Assets Less Liabilities -- 1.6% 1,407
----------
Net Assets -- 100.0% $90,586
==========
(a) The interest rate is subject to change periodically based upon prevailing market rates.
The interest rate shown is the rate in effect at October 31, 1997.
(b) MBIA Insured.
(c) FGIC Insured.
(d) Connie Lee Insured.
(e) The interest rate is subject to change periodically and inversely based upon prevailing
market rates. The interest rate shown is the rate in effect at October 31, 1997.
(f) FSA Insured.
(g) AMBAC Insured.
(h) Prerefunded.
(i) BIG Insured.
* Not Rated.
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 below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
IDA Industrial Development Authority
LEVRRS Leveraged Reverse Rate Securities
LT Limited Tax
PCR Pollution Control Revenue Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
YCN Yield Curve Notes
See Notes to Financial Statements.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets, Liabilities and Capital as of October 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $83,767,010) (Note 1a) $89,178,840
Cash 46,150
Receivables:
Interest $1,474,005
Securities sold 55,000 1,529,005
-------------
Deferred organization expenses (Note 1e) 4,059
Prepaid expenses and other assets 2,211
-------------
Total assets 90,760,265
-------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) 58,451
Investment adviser (Note 2) 40,731 99,182
-------------
Accrued expenses 75,097
-------------
Total liabilities 174,279
-------------
Net Assets: Net assets $90,585,986
=============
Capital: Capital Stock (200,000,000 shares authorized)(Note 4):
Preferred Stock, par value $.05 per share (1,212 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) $30,300,000
Common Stock, par value $.10 per share (4,429,326 shares issued
and outstanding) $442,933
Paid-in capital in excess of par 60,342,318
Undistributed investment income -- net 290,600
Accumulated realized capital losses on investments -- net (Note 5) (6,201,695)
Unrealized appreciation on investments -- net 5,411,830
-------------
Total -- Equivalent to $13.61 net asset value per share of
Common Stock (market price -- $12.875) 60,285,986
-------------
Total capital $90,585,986
=============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1997
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $4,981,436
(Note 1d):
Expenses: Investment advisory fees (Note 2) $446,407
Commission fees (Note 4) 76,884
Professional fees 74,108
Accounting services (Note 2) 59,268
Printing and shareholder reports 36,754
Transfer agent fees 35,267
Directors' fees and expenses 23,100
Listing fees 8,500
Pricing fees 6,877
Custodian fees 6,362
Amortization of organization expenses (Note 1e) 4,105
Other 16,720
------------
Total expenses before reimbursement 794,352
Reimbursement of expenses (Note 2) (34,874)
------------
Total expenses after reimbursement 759,478
------------
Investment income -- net 4,221,958
------------
Realized & Realized gain on investments -- net 261,958
Unrealized Change in unrealized appreciation on investments -- net 2,156,135
Gain on ------------
Investments -- Net Net Increase in Net Assets Resulting from Operations $6,640,051
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended
October 31,
--------------------------------
1997 1996
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
Operations: Investment income -- net $4,221,958 $4,371,303
Realized gain (loss) on investments -- net 261,958 (79,557)
Change in unrealized appreciation on investments -- net 2,156,135 (852,369)
------------- -------------
Net increase in net assets resulting from operations 6,640,051 3,439,377
------------- -------------
Dividends to Investment income -- net:
Shareholders: Common Stock (3,186,010) (3,382,627)
(Note 1f): Preferred Stock (1,024,834) (1,016,052)
------------- -------------
Net decrease in net assets resulting from dividends to shareholders (4,210,844) (4,398,679)
------------- -------------
Capital Stock Offering costs from issuance of common stock resulting from reorganization -- (68,551)
Transactions ------------- -------------
(Notes 1e & 4): Net decrease in net assets derived from capital stock transactions -- (68,551)
------------- -------------
Net Assets: Total increase (decrease) in net assets 2,429,207 (1,027,853)
Beginning of year 88,156,779 89,184,632
------------- -------------
End of year* $90,585,986 $88,156,779
============= =============
* Undistributed investment income -- net $290,600 $279,486
============= =============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
The following per share data and ratios have been derived For the
from information provided in the financial statements. Period
Oct. 29,
For the Year 1993+ to
Ended October 31 Oct. 31,
1997 1996 1995 1994 1993
Increase (Decrease) in Net Asset Value: -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $13.06 $13.29 $11.33 $14.11 $14.18
Operating ------- ------- ------- ------- -------
Performance: Investment income -- net .96 .98 1.03 .99 --
Realized and unrealized gain (loss)
on investments -- net .54 (.20) 2.01 (2.68) --
------- ------- ------- ------- -------
Total from investment operations 1.50 .78 3.04 (1.69) --
------- ------- ------- ------- -------
Less dividends to Common Stock shareholders:
Investment income -- net (.72) (.76) (.77) (.75) --
------- ------- ------- ------- -------
Capital charge resulting from issuance
of Common Stock -- (.02) (.05) -- (.07)
------- ------- ------- ------- -------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net (.23) (.23) (.26) (.17) --
Capital charge resulting from issuance
of Preferred Stock -- -- -- (.17) --
------- ------- ------- ------- -------
Total effect of Preferred Stock activity (.23) (.23) (.26) (.34) --
------- ------- ------- ------- -------
Net asset value, end of period $13.61 $13.06 $13.29 $11.33 $14.11
======= ======= ======= ======= =======
Market price per share, end of period $12.875 $12.125 $11.75 $10.375 $15.00
======= ======= ======= ======= =======
Total Investment Based on market price per share 12.46% 9.70% 21.04% (26.55%) .00++++
Return:** ======= ======= ======= ======= =======
Based on net asset value per share 10.37% 4.47% 25.37% (14.73%) (.49%)++++
======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .85% .66% .55% .54% --
Net Assets:*** ======= ======= ======= ======= =======
Expenses .89% .87% .95% 1.09% --
======= ======= ======= ======= =======
Investment income -- net 4.73% 4.93% 5.33% 5.13% .02%*
======= ======= ======= ======= =======
Supplemental Net assets, net of Preferred Stock, end of period
Data: (in thousands) $60,286 $57,857 $58,885 $21,153 $25,506
======= ======= ======= ======= =======
Preferred Stock outstanding, end of period
(in thousands) $30,300 $30,300 $30,300 $12,950 --
======= ======= ======= ======= =======
Portfolio turnover 34.49% 31.75% 75.93% 80.03% --
======= ======= ======= ======= =======
Leverage: Asset coverage per $1,000 $2,990 $2,909 $2,943 $2,633 --
======= ======= ======= ======= =======
Dividends Series A -- Investment income -- net $820 $824 $953 $598 --
Per Share On ======= ======= ======= ======= =======
Preferred Stock Series B -- Investment income -- net $865 $849 $551 -- --
Outstanding: ======= ======= ======= ======= =======
* Annualized.
** Total investment returns based on market value, which can be significantly greater or lesser
than the net asset value,may result in substantially different returns. Total investment
returns exclude the effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on December 2, 1993 (Series A) and March 27, 1995 (Series B).
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
MuniYield Arizona Fund, Inc. October 31, 1997
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 and options thereon, 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 and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund, which
may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the
Fund under the general supervision of the Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the counterparty
does not perform under the contract.
[bullet] 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.
[bullet] Options -- The Fund is authorized to write covered call
options and purchase put options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise
of an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from (or
added to) the proceeds of the security sold. When an option expires (or
the Fund enters into a closing transaction), the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing transaction exceeds
the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision
is required.
(d) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Interest income is recognized on the accrual basis. Discounts
and market premiums are amortized into interest income. Realized gains
and losses on security transactions are determined on the identified
cost basis.
(e) Deferred organization and offering expenses -- Deferred organization
expenses are amortized on a straight-line basis over a five-year period.
Direct expenses relating to the issuance of Common Stock resulting from
the reorganization were charged to capital.
(f) Dividends and distributions -- Dividends from net investment income
are declared and paid monthly. Distributions of capital gains are
recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of the
Fund's average weekly net assets. For the year ended October 31, 1997,
FAM earned fees of $446,407, of which $34,874 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, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended October 31, 1997 were $29,069,417 and $30,550,727,
respectively.
Net realized and unrealized gains as of October 31, 1997 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $261,958 $5,411,830
-------- ----------
Total $261,958 $5,411,830
-------- ----------
As of October 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $5,411,830, of which $5,431,596 related to
appreciated securities and $19,766 related to depreciated securities.
The aggregate cost of investments at October 31, 1997 for Federal income
tax purposes was $83,767,010.
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 holders of Common Stock.
Common Stock
Shares issued and outstanding during the years ended October 31, 1997
and October 31, 1996 remained constant.
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
yields in effect at October 31, 1997 were as follows: Series A, 3.15%
and Series B, 3.59%.
As of October 31, 1997, there were 1,212 AMPS shares authorized, issued
and outstanding, 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, 1997,
Merrill Lynch, Pierce, Fenner & Smith Inc., an affiliate of FAM, earned
$31,828 as commissions.
5. Capital Loss Carryforward:
At October 31, 1997, the Fund had a net capital loss carryforward of
approximately $5,751,000, of which $937,000 expires in 2001, $3,561,000
expires in 2002 and $1,253,000 expires in 2003. This amount will
be available to offset like amounts of any future taxable gains.
6. Subsequent Event:
On November, 6 1997, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of $.059584
per share, payable on November 26, 1997 to shareholders of record as of
November 17, 1997.
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, 1997, the related statements of operations
for the year then ended and changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for each
of the years in the four-year period then ended and for 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
confirmation of securities owned at October 31, 1997 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, 1997, 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 5, 1997
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniYield Arizona
Fund, Inc. during its taxable year ended October 31, 1997 qualify as
tax-exempt interest dividends for Federal income tax purposes.
Additionally, there were no capital gains distributed by the Fund during
the year.
Please retain this information for your records.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
James H. Bodurtha, Director
Herbert I. London, Director
Robert R. Martin, Director
Joseph L. May, Director
Andre F. Perold, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Hugh T. Hurley III, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Philip M. Mandel, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
IBJ Schroder Bank & Trust Company
One State Street
New York, NY 10004
ASE Symbol
MZA
