MERRILL LYNCH
UTILITY INCOME
FUND, INC.
FUND LOGO
Annual Report
August 31, 1996
Officers and Directors
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Walter D. Rogers, Vice President and
Portfolio Manager
Gerald M. Richard, Treasurer
Thomas D. Jones III, Secretary
Custodian
State Street Bank and Trust Company
One Heritage Drive, P2N
North Quincy, MA 02171
<PAGE>
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch
Utility Income Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH UTILITY INCOME FUND, INC.
DEAR SHAREHOLDER
<PAGE>
During the quarter ended August 31, 1996, economic crosscurrents led
to continued stock and bond market volatility. The US economy has
demonstrated surprising resilience thus far this year. As a result,
when economic data releases during the August quarter appeared to
indicate that the US economy was expanding at a stronger-than-
expected (and potentially inflationary) rate, investors focused on
the increasing possibility of monetary policy tightening by the
Federal Reserve Board. During these periods, stock prices declined
and long-term interest rates moved higher. However, when economic
results were at or below expectations, investors' concerns about an
overheating economy and monetary policy tightening subsided, and
stock and bond prices improved.
The shifts in perceptions were exemplified by investors' reactions
to the release of recent employment reports. Inflationary concerns
were heightened further with the report of a stronger-than-expected
employment report for June. Unemployment fell to a six-year low, and
hourly wages rose sharply. This mounting evidence of a tighter labor
market and rising labor costs suggested to many investors that the
Federal Reserve Board would be forced to raise short-term interest
rates in the coming months. However, more subdued job growth and
decelerating hourly wage gains were subsequently reported for the
month of July. Although the employment report for August (released
in early September) showed that unemployment had dropped to its
lowest level since 1989, these results were generally in line with
expectations and were received favorably by investors.
Investors will continue to monitor economic data releases to
determine the potential for monetary policy tightening by the
Federal Reserve Board. The potential outcome of the upcoming
November election will also increasingly influence investor
psychology in the weeks ahead.
<PAGE>
Portfolio Matters
For the three months ended August 31, 1996, total returns for the
Fund's Class A, Class B, Class C and Class D Shares were +0.92%,
+0.72%, +0.71% and +0.85%, respectively. (Results shown do not
reflect sales charges and would be lower if sales charges were
included. For complete performance information, including average
annual total returns, see pages 3--5 of this report to
shareholders.) The Fund outperformed the unmanaged Lipper Utility
Funds Average total return for the August quarter, which was -0.07%.
Performance of the domestic electric utility sector was influenced
by several factors during the quarter ended August 31, 1996. First,
long-term interest rates, as measured by the 30-year US Treasury
bond, remained in the 7% range but showed a fair amount of
volatility around this level. Second, the broad market, as measured
by the unmanaged S&P 500 Composite Index and S&P 400 Industrial
Index, had price declines of 2.6% and 3.4%, respectively. Third,
there were more announcements of proposed mergers and acquisitions
in the industry. However, there was a new twist to the recent
acquisition announcements in that they were not between two electric
utility companies but between electric and gas companies. Enron
Corp., which is principally a natural gas pipeline company,
announced its intention to acquire Portland General Corp., an Oregon-
based electric utility company. Houston Industries, Inc. is
proposing to acquire NorAm Energy, a Houston-based gas distribution
company. We expect that the current trend of 'one-stop shopping' for
consumers to be a prevailing theme going forward in a more
deregulated and marketing-driven utility environment. This, in turn,
may increase the attractiveness of companies that already have both
gas and electric customers as well as natural gas companies.
During the August quarter, we completed the sales of our lower-
yielding domestic electric utility stocks with the elimination of
Texas Utilities Co. Early in the August quarter, we sold our
position in Pacific Gas & Electric Co. because of increased
regulatory uncertainty. In addition to these two sales in the
quarter, we eliminated our position in the telecommunications
company, NYNEX Corp. Increased concerns surrounding the
implementation of the 1996 Telecommunications Act, coupled with the
issue's relative current valuation, resulted in the sale of this
portfolio holding.
<PAGE>
Fiscal Year in Review
For the year ended August 31, 1996, total returns for the Fund's
Class A, Class B, Class C and Class D Shares were +6.61%, +5.86%,
+5.65% and +6.46%, respectively. The results lagged the +8.18%
return for the unmanaged S&P Electric Utility Index. The most
significant change in the Fund's portfolio was the elimination of
its telecommunications stocks. This sector had accounted for over
10% of the Fund's net assets as of the close of the fiscal year
ended August 31, 1995. The stocks were initially purchased at what
we believed were depressed price levels and relatively high yields.
As the stock prices rose and the yields declined, combined with the
increased risks associated with the sector's fundamental outlook, we
began eliminating our telecommunications stock holdings.
While we eliminated our telephone holdings during the year, we
initiated purchases of two natural gas stocks. The two additions
offered competitive yields along with prospects for growth.
Moreover, they help to further diversify the portfolio, and may
benefit from the joining of forces by electric and gas companies in
a new and more competitive environment.
There was little change in the asset allocation of the Fund during
the fiscal year. Bond holdings remained at around 17% of net assets;
equities finished the fiscal year at 78% of net assets as compared
to 80% as of August 31, 1995; and the cash and cash reserves level
increased from 2.5% of net assets to 4.5% during the year.
Our actions taken during the fiscal year supported the investment
objective of the Fund, which is generating high current income.
During periods of rising long-term interest rates, the higher-
yielding electric utility stocks tend to underperform the broad
stock market averages and other utility stocks. We believe that, at
current valuation levels, this group offers a positive investment
outlook. In the coming fiscal year, we intend to continue to seek
high-yielding utility stocks that have the right balance between
yields and risk/reward ratios.
In Conclusion
We thank you for your investment in Merrill Lynch Utility Income
Fund, Inc., and we look forward to reviewing our future prospects
with you in upcoming shareholder reports.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
<PAGE>
(Walter D. Rogers)
Walter D. Rogers
Vice President and Portfolio Manager
September 27, 1996
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.50% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 10 years. (There is no initial
sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.55% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<PAGE>
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month
8/31/96 5/31/96 8/31/95 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Utility Income Fund Class A Shares $9.17 $9.21 $9.15 +0.22% -0.43%
ML Utility Income Fund Class B Shares 9.17 9.21 9.15 +0.22 -0.43
ML Utility Income Fund Class C Shares 9.15 9.19 9.14 +0.11 -0.44
ML Utility Income Fund Class D Shares 9.18 9.22 9.15 +0.33 -0.43
ML Utility Income Fund Class A Shares--Total Return +6.61(1) +0.92(2)
ML Utility Income Fund Class B Shares--Total Return +5.86(3) +0.72(4)
ML Utility Income Fund Class C Shares--Total Return +5.65(5) +0.71(6)
ML Utility Income Fund Class D Shares--Total Return +6.46(7) +0.85(8)
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.596 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.126 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.528 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.108 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.519 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.107 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.572 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.120 per share ordinary
income dividends.
</TABLE>
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
A line graph depicting growth of an investment in the Fund's
Class A Shares and Class B Shares compared to growth of an
investment in the S&P Electric Utility Index and S&P 500 Index.
Beginning and ending values are:
<PAGE>
10/29/93** 8/96
ML Utility Income Fund, Inc.++
- --Class A Shares* $ 9,600 $10,347
ML Utility Income Fund, Inc.++
- --Class B Shares* $10,000 $10,000
S&P Electric Utility Index++++ $10,000 $10,000
S&P 500 Index++++++ $10,000 $14,999
A line graph depicting growth of an investment in the Fund's
Class C Shares and Class D Shares compared to growth of an
investment in the S&P Electric Utility Index and S&P 500 Index.
Beginning and ending values are:
10/21/94** 8/96
ML Utility Income Fund, Inc.++
- --Class C Shares* $10,000 $12,308
ML Utility Income Fund, Inc.++
- --Class D Shares* $10,000 $11,961
S&P Electric Utility Index++++ $10,000 $12,484
S&P 500 Index++++++ $10,000 $14,683
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++ML Utility Income Fund, Inc. invests at least 65% of its total
assets in equity and debt securities which are, in the opinion of
the Fund's management, primarily engaged in the ownership or
operations of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
++++This unmanaged market-value weighted Index is comprised of 25
electric utility companies.
++++++This unmanaged broad-based Index is comprised of common stocks.
Past performance is not predictive of future performance.
<PAGE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/96 +13.47% +8.94%
Inception (10/29/93)
through 6/30/96 + 4.36 +2.78
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/96 +12.67% +8.67%
Inception (10/29/93)
through 6/30/96 + 3.59 +2.90
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced
to 0% after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/96 +12.46% +11.46%
Inception (10/21/94)
through 6/30/96 +15.78 +15.78
[FN]
*Maximum contingent deferred sales charge is 1% and is
reduced to 0% after 1 year.
**Assuming payment of applicable contingent deferred sales
charge.
<PAGE>
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/96 +13.30% + 8.77%
Inception (10/21/94)
through 6/30/96 +16.54 +13.77
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/29/93--12/31/93 $10.00 $ 9.81 -- $0.043 - 1.46%
1994 9.81 8.28 -- 0.496 -10.59
1995 8.28 10.05 -- 0.494 +28.26
1/1/96--8/31/96 10.05 9.17 -- 0.429 - 4.61
------
Total $1.462
Cumulative total return as of 8/31/96: +7.79%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/29/93--12/31/93 $10.00 $ 9.80 -- $0.037 - 1.63%
1994 9.80 8.28 -- 0.429 -11.19
1995 8.28 10.05 -- 0.425 +27.28
1/1/96--8/31/96 10.05 9.17 -- 0.379 - 5.10
------
Total $1.270
<PAGE>
Cumulative total return as of 8/31/96: +5.53%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<TABLE>
Performance Summary--Class C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $ 8.17 $ 8.27 -- $0.062 + 1.99%
1995 8.27 10.04 -- 0.427 +27.35
1/1/96--8/31/96 10.04 9.15 -- 0.377 - 5.24
------
Total $0.866
Cumulative total return as of 8/31/96: +23.08%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<TABLE>
Performance Summary--Class D Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $ 8.17 $ 8.28 -- $0.065 + 2.15%
1995 8.28 10.06 -- 0.471 +28.07
1/1/96--8/31/96 10.06 9.18 -- 0.413 - 4.76
------
Total $0.949
Cumulative total return as of 8/31/96: +24.59%**
<PAGE>
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Value Percent of
Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Utilities--Electric 57,500 Allegheny Power System, Inc. $ 1,293,200 $ 1,703,438 4.1%
40,900 American Electric Power Company, Inc. 1,519,871 1,697,350 4.1
33,000 Baltimore Gas & Electric Co. 844,868 858,000 2.1
54,000 Boston Edison Co. 1,387,453 1,248,750 3.0
26,000 CINergy Corp. 673,299 780,000 1.9
26,000 Carolina Power & Light Co. 774,899 906,750 2.2
29,100 Consolidated Edison Company of New York 980,888 760,238 1.8
31,400 DTE Energy Co. 984,627 894,900 2.2
45,000 Delmarva Power & Light Co. 924,651 922,500 2.2
20,800 Dominion Resources, Inc. 980,112 777,400 1.9
57,200 Edison International 1,132,086 993,850 2.4
48,000 Enova Corporation 1,165,493 1,098,000 2.7
34,100 Entergy Corp. 887,035 865,287 2.1
34,000 Florida Progress Corp. 1,136,351 1,177,250 2.9
27,500 General Public Utilities Corp. 767,170 866,250 2.1
69,600 Houston Industries, Inc. 1,542,820 1,513,800 3.7
40,000 MDU Resources Group, Inc. 852,367 875,000 2.1
23,000 New England Electric System 766,360 750,375 1.8
27,000 New York State Electric & Gas Corp. 780,994 580,500 1.4
19,000 Northern States Power Co. 864,640 866,875 2.1
41,900 Ohio Edison Co. 936,783 879,900 2.1
27,000 Oklahoma Gas & Electric Co. 991,971 1,093,500 2.7
26,900 PECO Energy Co. 810,158 632,150 1.5
44,800 PacifiCorp 883,813 901,600 2.2
27,000 Public Service Company of Colorado 873,745 961,875 2.3
40,400 Public Service Enterprise Group, Inc. 1,319,991 1,095,850 2.7
88,400 Southern Co. 1,939,156 2,000,050 4.8
32,600 Unicom Corp. 954,082 749,800 1.8
22,600 Union Electric Co. 912,093 844,675 2.0
20,000 Western Resources Co. 562,500 587,500 1.4
18,400 Wisconsin Energy Corp. 477,204 506,000 1.2
----------- ----------- ------
30,920,680 30,389,413 73.5
<PAGE>
Utilities--Gas 50,300 AGL Resources Inc. 925,172 1,018,575 2.5
32,000 New Jersey Resources Corp. 924,858 916,000 2.2
----------- ----------- ------
1,850,030 1,934,575 4.7
Total Stocks 32,770,710 32,323,988 78.2
<CAPTION>
Face
Amount Corporate Bonds
Telecommunications $1,000,000 Southwestern Bell Corp., 7% due 7/01/2015 1,034,480 945,000 2.3
1,000,000 Tele-Communications, Inc., 9.80%
due 2/01/2012 1,263,890 1,048,680 2.5
1,000,000 United Telephone Company of Florida,
6.875% due 7/15/2013 1,019,950 903,940 2.2
----------- ----------- ------
3,318,320 2,897,620 7.0
Utilities--Electric 1,000,000 Public Service Company of Colorado, 6.375%
due 11/01/2005 991,300 927,240 2.2
Utilities--Gas 1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,381,695 3.3
1,000,000 El Paso Natural Gas Co., 7.75%
due 1/15/2002 1,090,950 1,015,120 2.5
1,000,000 Enron Corp., 6.75% due 7/01/2005 1,023,800 949,300 2.3
----------- ----------- ------
3,605,780 3,346,115 8.1
Total Corporate Bonds 7,915,400 7,170,975 17.3
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Commercial Paper* $ 975,000 General Electric Capital Corp., 5.30%
due 9/03/1996 $ 974,569 $ 974,569 2.4%
Total Short-Term Securities 974,569 974,569 2.4
Total Investments $41,660,679 40,469,532 97.9
===========
Other Assets Less Liabilities 863,222 2.1
----------- ------
Net Assets $41,332,754 100.0%
=========== ======
<PAGE>
<FN>
*Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
See Notes to Financial Statements.
</TABLE>
PORTFOLIO INFORMATION (unaudited)
For the Quarter Ended
August 31, 1996
Percent of
Ten Largest Holdings Net Assets
Southern Co. 4.8%
Allegheny Power System, Inc. 4.1
American Electric Power Company, Inc. 4.1
Houston Industries, Inc. 3.7
ENSERCH Corp., 6.375% due 2/01/2004 3.3
Boston Edison Co. 3.0
Florida Progress Corp. 2.9
Enova Corporation 2.7
Public Service Enterprise Group, Inc. 2.7
Oklahoma Gas & Electric Co. 2.7
Deletions
NYNEX Corp.
Pacific Gas & Electric Co.
Texas Utilities Co.
IMPORTANT TAX INFORMATION (unaudited)
Of the ordinary income distributions paid monthly by Merrill Lynch
Utility Income Fund, Inc. during its fiscal year ended August 31,
1996, 89.92% qualifies for the dividends received deduction for
corporations.
Additionally, there were no long-term capital gains distributed by
the Fund during the year.
<PAGE>
Please retain this information for your records.
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$41,660,679) (Note 1a) $40,469,532
Cash 192
Receivables:
Securities sold $ 858,772
Dividends 173,415
Interest 78,390
Capital shares sold 55,873
Investment adviser (Note 2) 28,029 1,194,479
-----------
Deferred organization expenses (Note 1f) 39,260
Prepaid registration fees and other assets (Note 1f) 28,088
-----------
Total assets 41,731,551
-----------
Liabilities: Payables:
Capital shares redeemed 277,159
Distributor (Note 2) 24,349 301,508
-----------
Accrued expenses and other liabilities 97,289
-----------
Total liabilities 398,797
-----------
Net Assets: Net assets $41,332,754
===========
Net Assets Class A Shares of Common Stock, $.10 par value, 100,000,000
Consist of: shares authorized $ 22,993
Class B Shares of Common Stock, $.10 par value, 100,000,000
shares authorized 389,456
Class C Shares of Common Stock, $.10 par value, 100,000,000
shares authorized 23,019
Class D Shares of Common Stock, $.10 par value, 100,000,000
shares authorized 15,417
Paid-in capital in excess of par 42,558,312
Undistributed investment income--net 272,971
Accumulated realized capital losses on investments and foreign
currency transactions--net (Note 5) (758,198)
Unrealized depreciation on investments and foreign currency
transactions--net (1,191,216)
-----------
Net assets $41,332,754
===========
<PAGE>
Net Asset Value: Class A--Based on net assets of $2,108,433 and 229,928 shares
outstanding $ 9.17
===========
Class B--Based on net assets of $35,701,671 and 3,894,555 shares
outstanding $ 9.17
===========
Class C--Based on net assets of $2,107,082 and 230,188 shares
outstanding $ 9.15
===========
Class D--Based on net assets of $1,415,568 and 154,173 shares
outstanding $ 9.18
===========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operation for the Year Ended August 31, 1996
<S> <S> <C> <C>
Investment Dividends (net of $8,435 foreign withholding tax) $ 2,120,397
Income Interest and amortization of premium and discount earned 732,666
(Notes 1d & 1e): -----------
Total income 2,853,063
-----------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 302,457
Investment advisory fees (Note 2) 255,399
Registration fees (Note 1f) 103,103
Accounting services (Note 2) 77,300
Professional fees 75,160
Printing and shareholder reports 69,651
Transfer agent fees--Class B (Note 2) 66,857
Directors' fees and expenses 26,586
Amortization of organization expenses (Note 1f) 18,120
Account maintenance and distribution fees--Class C (Note 2) 16,943
Custodian fees 8,614
Transfer agent fees--Class A (Note 2) 3,967
Transfer agent fees--Class C (Note 2) 3,672
Account maintenance fees--Class D (Note 2) 2,960
Transfer agent fees--Class D (Note 2) 1,655
Pricing fees 1,097
Other 4,155
-----------
Total expenses before reimbursement 1,037,696
Reimbursement of expenses (Note 2) (442,688)
-----------
Total expenses after reimbursement 595,008
-----------
Investment income--net 2,258,055
-----------
<PAGE>
Realized & Realized gain (loss) from:
Unrealized Investments--net 819,207
Gain (Loss) on Foreign currency transactions--net (2,983) 816,224
Investments & -----------
Foreign Currency Change in unrealized depreciation on:
Transactions--Net Investments--net (550,434)
(Notes 1b, 1c, Foreign currency transactions--net 1,644 (548,790)
1e & 3): ----------- -----------
Net realized and unrealized gain on investments and
foreign currency transactions 267,434
-----------
Net Increase in Net Assets Resulting from Operations $ 2,525,489
===========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 2,258,055 $ 2,274,267
Realized gain (loss) on investments and foreign currency
transactions--net 816,224 (1,050,161)
Change in unrealized appreciation/depreciation on investments
--net (548,790) 4,035,399
----------- -----------
Net increase in net assets resulting from operations 2,525,489 5,259,505
----------- -----------
Dividends to Investment income--net:
Shareholders Class A (179,490) (224,389)
(Note 1g): Class B (2,251,068) (1,561,530)
Class C (114,861) (24,244)
Class D (66,229) (20,641)
----------- -----------
Net decrease in net assets resulting from dividends to
shareholders (2,611,648) (1,830,804)
----------- -----------
Capital Share Net increase (decrease) in net assets derived from capital
Transactions share transactions (1,266,935) 7,624,468
(Note 4): ----------- -----------
<PAGE>
Net Assets: Total increase (decrease) in net assets (1,353,094) 11,053,169
Beginning of year 42,685,848 31,632,679
----------- -----------
End of year* $41,332,754 $42,685,848
=========== ===========
<FN>
*Undistributed investment income--net $ 272,971 $ 626,564
=========== ===========
</TABLE>
<TABLE>
Financial Highlights
<CAPTION>
Class A Class B
For the For the
Period Period
The following per share data and ratios have been derived Oct. 29, Oct. 29,
from information provided in the financial statements. For the Year 1993++ to For the Year 1993++ to
Ended Aug. 31, Aug. 31, Ended Aug. 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of
Operating period $ 9.15 $ 8.44 $ 10.00 $ 9.15 $ 8.44 $ 10.00
Performance: ------- ------- ------- ------- ------- -------
Investment income--net .60 .60 .40 .46 .49 .35
Realized and unrealized gain
(loss)on investments and foreign
currency transactions--net .02 .59 (1.57) .09 .63 (1.57)
------- ------- ------- ------- ------- -------
Total from investment operations .62 1.19 (1.17) .55 1.12 (1.22)
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.60) (.48) (.39) (.53) (.41) (.34)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.17 $ 9.15 $ 8.44 $ 9.17 $ 9.15 $ 8.44
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 6.61% 14.68% (11.84%)+++ 5.86% 13.72% (12.34%)+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .56% .49% .44%* 1.34% 1.27% 1.21%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.52% 1.87% 1.58%* 2.29% 2.66% 2.35%*
======= ======= ======= ======= ======= =======
Investment income--net 5.56% 6.60% 5.92%* 4.79% 5.75% 5.22%*
======= ======= ======= ======= ======= =======
<PAGE>
Supplemental Net assets, end of period
Data: (in thousands) $ 2,108 $ 3,253 $ 4,238 $35,702 $37,498 $27,395
======= ======= ======= ======= ======= =======
Portfolio turnover 25.98% 12.59% 8.50% 25.98% 12.59% 8.50%
======= ======= ======= ======= ======= =======
Average commission rate paid+++++ $ .0395 -- -- $ .0395 -- --
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
+++++For fiscal years beginning on or after September 1, 1995,the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
Aug. 31, Aug. 31, Aug. 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.14 $ 8.17 $ 9.15 $ 8.17
Operating ------- ------- ------- -------
Performance: Investment income--net .43 .42 .47 .51
Realized and unrealized gain on investments
and foreign currency transactions--net .10 .90 .13 .85
------- ------- ------- -------
Total from investment operations .53 1.32 .60 1.36
------- ------- ------- -------
Less dividends from investment income--net (.52) (.35) (.57) (.38)
------- ------- ------- -------
Net asset value, end of period $ 9.15 $ 9.14 $ 9.18 $ 9.15
======= ======= ======= =======
Total Investment Based on net asset value per share 5.65% 16.50%+++ 6.46% 17.03%+++
Return:** ======= ======= ======= =======
<PAGE>
Ratios to Average Expenses, net of reimbursement 1.40% 1.32%* .82% .74%*
Net Assets: ======= ======= ======= =======
Expenses 2.34% 2.77%* 1.75% 2.10%*
======= ======= ======= =======
Investment income--net 4.75% 5.56%* 5.37% 6.14%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 2,107 $ 1,377 $ 1,416 $ 558
Data: ======= ======= ======= =======
Portfolio turnover 25.98% 12.59% 25.98% 12.59%
======= ======= ======= =======
Average commission rate paid+++++ $ .0395 -- $ .0395 --
======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
+++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Utility Income Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
<PAGE>
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c) 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 equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to enter
into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters into such contracts. Premium
or discount is amortized over the life of the contracts.
<PAGE>
* 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.
* Financial futures contracts--The Fund is authorized to engage in
transactions in stock index futures and financial futures and
related options on such futures. A futures contract is an agreement
between two parties to buy and sell a security or, in the case of an
index-based futures contract, to make and accept a cash settlement
for a set price on a future date. 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.
(d) 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 all of its taxable income to
its shareholders. Therefore, no Federal income tax provision is
required. Under the applicable foreign tax law, a withholding tax
may be imposed on interest and capital gains at various rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified
cost basis. Dividend income is recorded on the ex-dividend date,
except that if the ex-dividend date has passed, certain dividends
from foreign securities are recorded as soon as the Fund is informed
of the ex-dividend date.
<PAGE>
(f) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense over a five-
year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(g) Dividends and distributions--Dividends from net investment are
declared and paid monthly. Distribution of capital gains are
recorded on the ex-dividend date.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distrib-utor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operation of the Fund. For such
services, the Fund pays a monthly fee of 0.55%, on an annual basis,
of the average daily value of the Fund's net assets. The most
restrictive annual expense limitation requires that MLAM reimburse
the Fund to the extent the Fund's expenses (excluding interest,
taxes, distribution fees, brokerage fees and commissions, and
extraordinary items) exceed 2.5% of the Fund's first $30 million of
average daily net assets, 2.0% of the next $70 million of average
daily net assets, and 1.5% of the average daily net assets in excess
thereof. MLAM's obligation to reimburse the Fund is limited to the
amount of the investment advisory fee. No fee payment will be made
to MLAM during any fiscal year which will cause such expenses to
exceed the most restrictive expense limitation applicable at the
time of such payment. For the year ended August 31, 1996, MLAM
earned fees of $255,399, all of which was voluntarily waived. MLAM
also voluntarily reimbursed the Fund for additional expenses of
$187,289.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
<PAGE>
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended August 31, 1996, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $104 $ 1,195
Class D $976 $12,053
For the year ended August 31, 1996, MLPF&S received contingent
deferred sales charges of $159,510 and $2,585 relating to
transactions in Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
During the year ended August 31, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $349 for security
price quotations to compute the net asset value of the Fund.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, MLPF&S, MLFD, MLFDS, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1996 were $11,100,204 and $13,519,760,
respectively.
<PAGE>
Realized and unrealized gains (losses) as of August 31, 1996 were as
follows:
Realized Gains Unrealized
(Losses) Losses
Long-term investments $ 819,210 $(1,191,147)
Short-term investments (3) --
Foreign currency
transactions (2,983) (69)
----------- -----------
Total $ 816,224 $(1,191,216)
=========== ===========
As of August 31, 1996, net unrealized depreciation for Federal
income tax purposes aggregated $1,191,147, of which $1,419,786
related to appreciated securities and $2,610,933 related to
depreciated securities. At August 31, 1996, the aggregate cost of
investments for Federal income tax purposes was $41,660,679.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $(1,266,935) and $7,624,468 for the years ended
August 31, 1996 and August 31, 1995, respectively.
Transactions in shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 26,483 $ 251,820
Shares issued to share-
holders in reinvestment of
dividends 13,415 128,999
----------- -----------
Total issued 39,898 380,819
Shares redeemed (165,465) (1,575,950)
----------- -----------
Net decrease (125,567) $(1,195,131)
=========== ===========
Class A Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 588,987 $ 5,127,162
Shares issued to share-
holders in reinvestment of
dividends 17,911 151,496
----------- -----------
Total issued 606,898 5,278,658
Shares redeemed (753,319) (6,544,085)
----------- -----------
Net decrease (146,421) $(1,265,427)
=========== ===========
<PAGE>
Class B Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 1,431,503 $13,804,309
Shares issued to share-
holders in reinvestment of
dividends 158,467 1,525,503
----------- -----------
Total issued 1,589,970 15,329,812
Automatic conversion of
shares (1,843) (17,967)
Shares redeemed (1,789,750) (17,064,546)
----------- -----------
Net decrease (201,623) $(1,752,701)
=========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 2,441,589 $20,822,486
Shares issued to share-
holders in reinvestment of
dividends 118,910 1,011,809
----------- -----------
Total issued 2,560,499 21,834,295
Automatic conversion of
shares (475) (3,229)
Shares redeemed (1,708,842) (14,750,314)
----------- -----------
Net increase 851,182 $ 7,080,752
=========== ===========
Class C Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 149,094 $ 1,446,377
Shares issued to shareholders
in reinvestment of dividends 8,192 78,695
----------- -----------
Total issued 157,286 1,525,072
Shares redeemed (77,801) (740,744)
----------- -----------
Net increase 79,485 $ 784,328
=========== ===========
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 204,953 $ 1,771,501
Shares issued to shareholders
in reinvestment of dividends 2,011 17,541
----------- -----------
Total issued 206,964 1,789,042
Shares redeemed (56,261) (500,479)
----------- -----------
Net increase 150,703 $ 1,288,563
=========== ===========
[FN]
++Commencement of Operations.
<PAGE>
Class D Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 559,217 $ 5,341,712
Automatic conversion of shares 1,841 17,967
Shares issued to shareholders
in reinvestment of dividends 3,705 35,703
----------- -----------
Total issued 564,763 5,395,382
Shares redeemed (471,566) (4,498,813)
----------- -----------
Net increase 93,197 $ 896,569
=========== ===========
Class D Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 279,017 $ 2,424,080
Automatic conversion of shares 374 3,229
Shares issued to shareholders
in reinvestment of dividends 1,874 16,144
----------- -----------
Total issued 281,265 2,443,453
Shares redeemed (220,289) (1,922,873)
----------- -----------
Net increase 60,976 $ 520,580
=========== ===========
[FN]
++Commencement of Operations.
5. Capital Loss Carryforward:
At August 31, 1996, the Fund had a net capital loss carryforward of
approximately $749,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Utility Income Fund, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
Utility Income Fund, Inc. as of August 31, 1996, 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 two-year
period then ended and the period October 29, 1993 (commencement of
operations) to August 31, 1994. 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.
<PAGE>
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 August
31, 1996 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
Merrill Lynch Utility Income Fund, Inc. as of August 31, 1996, 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
September 30, 1996
</AUDIT-REPORT>
