MERRILL LYNCH
UTILITY INCOME
FUND, INC.
FUND LOGO
Semi-Annual Report
February 29, 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
<PAGE>
MERRILL LYNCH UTILITY INCOME FUND, INC.
DEAR SHAREHOLDER
Throughout most of the February quarter, it appeared that the US
economy was losing momentum. Consumer spending was barely growing
and the industrial sector was at a virtual standstill. With
inflationary pressures subdued, the Federal Reserve Board responded
to the slowing economy by continued modest monetary policy easing.
However, late in the quarter a series of economic releases began to
suggest that economic activity would not continue to be as sluggish
as originally expected. A surge in auto sales and factory orders,
rising consumer confidence and strong housing starts led some
investors to believe that economic activity was again accelerating
and further easing by the Federal Reserve Board was unlikely. These
concerns were highlighted shortly after the February quarter's close
with the report of a sharp increase in new jobs in February and a
drop in unemployment. In the weeks ahead, it is likely that
investors will continue to monitor economic data releases closely as
they attempt to gauge the US economy's progress.
The impasse between the Clinton Administration and Congress over the
Federal budget continues. However, both sides have made concessions
since the debate began. It appears that investors are currently
focusing on the progress that has been made rather than on the
differences that remain. Initially, President Clinton proposed
deficits of about $190 billion annually through fiscal year 2002. He
now proposes balanced budgets, as do the Republicans. Furthermore,
even without policy changes, it appears that the US Federal budget
deficit could remain stable at about 2% of gross domestic product
for the rest of the decade. This is far better than is the case for
most Group of Seven industrial nations and a great improvement over
the last 15 years. Nevertheless, current indications are that a
piecemeal budget accord is the most likely outcome. Although this
may fall short of investors' best expectations, it appears that the
Federal budget debate over the past year has resulted in a trend
toward a more conservative fiscal policy.
Portfolio Matters
As of February 29, 1996, the S&P Electric Utility Index was selling
at over 2.9 times the yield of the stock market as measured by the
S&P 500 Index. This compares favorably on a historical basis and is
an important indicator of undervaluation of the sector relative to
the overall market. In addition, the current yield on the domestic
electric sector relative to the yield on the 30-year US Treasury
note was 91.5% as of February 29, 1996, also signaling undervaluation.
Throughout the first half of the six-month period ended February 29,
1996, domestic electric utility share prices benefited from a
positive interest rate trend, as long-term interest rates declined.
The recent back-up in interest rates has hindered performance of the
utility sector as investors focused on more cyclical sectors. Any
change in investor sentiment, in terms of valuation levels or
concerns of a slowing economy, is likely to result in positive
performance for the utility sector, given current valuations and the
fundamental outlook for the sector.
<PAGE>
Some of the trends in the domestic electric sector in the past six
months include cost-cutting, domestic mergers and international
acquisitions. These strategies are intended to enhance companies'
cash flows and earnings with limited near-term negative impact, such
as high upfront costs or share issuance. Moreover, there has been a
slowdown in the recent regulatory push to open markets to
competition.
While individual states have varied considerably in terms of their
efforts to restructure the electric utility sector, only California,
Michigan and New Hampshire have adopted restructuring plans.
However, companies in Massachusetts and Vermont were ordered by
their state regulators to file restructuring plans. It appears that
the move to a competitive environment for the domestic electric
sector will be more evolutionary than revolutionary. The issue of
stranded investment (that is, a plant used for generation of
electricity that is no longer competitive) was recently addressed in
President Clinton's Report to Congress. The report indicated that
under rate-of-return regulation, utilities have been limited on the
upside in their rates/profits to no more than a fair return on
investments. Therefore, they should be allowed to recover most
stranded costs as long as the investments were authorized by
regulators from the start.
The performance of the domestic electric utility sector continues to
be the driving force behind the Fund's total rate of return. As of
February 29, 1996, 67.8% of the Fund's net assets was invested in
electric utilities given their high yields and the income objective
of the Fund. The percentage of net assets invested in telecommunications
and natural gas securities was 14.6% and 9.2%, respectively.
A new telecommunications law was signed by President Clinton in
early February 1996, which eventually will allow the local telephone
companies into the long distance market and will allow AT&T Corp.
and cable television companies into the local telephone market.
The natural gas sector was favorably impacted by cold weather
coupled with low storage levels. For the six-month period ended
February 29, 1996, the best-performing utility sector in the S&P
Utility Index was the natural gas group, followed by the electrics
and telecommunications. The three telecommunications stocks held in
the Fund's portfolio had a price appreciation of 15.8% for the six-
month period compared to 10.9% for the 12 companies tracked by the
unmanaged S&P Telecommunications Index.
During the February quarter, we invested approximately $2.2 million
in new holdings along with modest additions to two existing
holdings. We eliminated two investments worth approximately $1.2
million and reduced an existing holding by nearly $1 million. The
net result was that the asset allocation of the Fund went from 64.5%
in electric utility stocks and 10.1% in telecommunication stocks as
of November 30, 1995 to 65.8% in domestic electric utility stocks,
8.2% in telecommunication stocks, and 2.0% in gas stocks as of
February 29, 1996. The Fund's fixed-income portfolio remained
virtually the same, with approximately $7.6 million spread across
seven companies. The cash position was 11.5% of net assets as of
February 29, 1996 compared to 9.9% at November 30, 1995, in each
case exclusive of liabilities in excess of other assets.
<PAGE>
New positions taken during the three-month period ended February 29,
1996 included Enova Holding Corporation, MDU Resources Group, Inc.,
Atlanta Gas Light Co. (as of March 7, 1996 the company's new name is
AGL Resources Inc.) and New Jersey Resources Corp. We added to two
existing holdings, PECO Energy Co. and Texas Utilities Co. We also
eliminated the Fund's holdings in National Power PLC (Part Pay) and
PowerGen PLC (Part Pay) as a result of continued uncertainty
surrounding the regulatory climate in the United Kingdom as well as
the need to put additional capital into the stocks as a result of
the second payments being due. This also caused a decline in their
above-average yields, which made the risk/reward ratios less
attractive relative to alternatives.
Enova Holding Corporation, formerly known as San Diego Gas &
Electric, serves a population of approximately 2.7 million in
Southern California. In terms of customer base and revenues
generated, Enova has only a modest exposure to industrial customers.
Approximately three-quarters of its operating revenues are generated
through the sale of electricity versus nearly 20% from its gas
operations. The remaining revenues are derived from diversified
businesses.
MDU Resources Group, Inc., added to the Fund's domestic electric
utility sector, serves four central US states: North Dakota,
Montana, Wyoming and South Dakota. MDU Resources Group is a
multidimensional natural resources company that provides both
electric and gas service, and also owns a natural gas pipeline and a
coal mining business. The largest source of total company profits is
from the electric sector. In terms of the company's customer base,
only a small portion of electric sales is to industrial customers.
Furthermore, we believe that regulatory changes in terms of open
competition may move more slowly in the region that the company
serves. The stock has an average yield but offers the potential for
dividend growth.
Atlanta Gas Light Co. is one of the largest gas distribution
utilities in the Southeast and serves more than 1.3 million
customers. The company is involved in natural gas vehicle
conversions, and will be able to showcase its skills at the 1996
summer Olympics to be held in Atlanta. Weather normalization
adjustments in rates help to curb wide swings in the company's
financial performance. The stock has an above-average yield for the
natural gas sector and is more in line with the electric sector, but
also offers growth of dividends.
<PAGE>
New Jersey Resources Corp. is the second natural gas company added
to the Fund during the February quarter. New Jersey Resources is a
utility holding company that supplies gas to more than 345,000
customers in Monmouth, Morris, Middlesex and Ocean counties in New
Jersey. The customer base is predominantly residential. The company
is also engaged in the development of cogeneration and independent
power production. Earnings momentum is positive as is the outlook
for the company's dividend.
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
(Walter D. Rogers)
Walter D. Rogers
Vice President and Portfolio Manager
March 25, 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.
<PAGE>
* 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.
* 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.
PERFORMANCE DATA (continued)
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month
2/29/96 11/30/95 2/28/95 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Utility Income Fund Class A Shares $9.67 $9.70 $8.66 +11.66% -0.31%
ML Utility Income Fund Class B Shares 9.66 9.70 8.66 +11.55 -0.41
ML Utility Income Fund Class C Shares 9.65 9.69 8.65 +11.56 -0.41
ML Utility Income Fund Class D Shares 9.68 9.71 8.66 +11.78 -0.31
ML Utility Income Fund Class A Shares--Total Return +18.38(1) +1.92(2)
ML Utility Income Fund Class B Shares--Total Return +17.35(3) +1.62(4)
ML Utility Income Fund Class C Shares--Total Return +17.36(5) +1.61(6)
ML Utility Income Fund Class D Shares--Total Return +18.18(7) +1.85(8)
<PAGE>
<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 $0.550 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.220 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.479 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.201 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.478 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.201 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.525 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.214 per share ordinary
income dividends.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/95 +28.26% +23.13%
Inception (10/29/93)
through 12/31/95 + 5.79 + 3.82
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/95 +27.28% +23.28%
Inception (10/29/93)
through 12/31/95 + 5.01 + 4.14
<PAGE>
[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 12/31/95 +27.35% +26.35%
Inception (10/21/94)
through 12/31/95 +24.47 +24.47
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 12/31/95 +28.07% +22.94%
Inception (10/21/94)
through 12/31/95 +25.22 +21.01
[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**
<C> <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--2/29/96 10.05 9.67 -- 0.177 - 2.06
------
Total $1.210
<PAGE>
Cumulative total return as of 2/29/96: +10.67%**
<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**
<C> <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--2/29/96 10.05 9.66 -- 0.164 - 2.29
------
Total $1.055
Cumulative total return as of 2/29/96: +8.66%**
<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**
<C> <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--2/29/96 10.04 9.65 -- 0.164 - 2.30
------
Total $0.653
Cumulative total return as of 2/29/96: +26.90%**
<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
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**
<C> <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--2/29/96 10.06 9.68 -- 0.173 - 2.10
------
Total $0.709
Cumulative total return as of 2/29/96: +28.07%**
<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>
Telecommunications 25,000 BellSouth Corp. $ 644,500 $ 996,875 2.1%
45,000 GTE Corp. 1,510,200 1,929,375 4.0
20,000 NYNEX Corp. 763,940 1,030,000 2.1
----------- ----------- ------
2,918,640 3,956,250 8.2
<PAGE>
Utilities--Electric 57,500 Allegheny Power System, Inc. 1,293,200 1,674,688 3.5
40,900 American Electric Power Company, Inc. 1,519,871 1,753,588 3.6
24,000 Baltimore Gas & Electric Co. 592,328 681,000 1.4
36,000 Boston Edison Co. 936,373 994,500 2.0
6,000 CILCORP, Inc. 217,735 258,000 0.5
26,000 CINergy Corp. 673,299 776,750 1.6
26,000 Carolina Power & Light Co. 774,899 949,000 2.0
29,100 Consolidated Edison Company of New York 980,888 949,388 2.0
18,400 DTE Energy Co. (a) 595,472 655,500 1.3
20,000 Delmarva Power & Light Co. 411,288 442,500 0.9
20,800 Dominion Resources, Inc. 980,112 821,600 1.7
25,300 Duke Power Co. 1,101,816 1,236,538 2.5
42,200 Edison International (b) 887,436 738,500 1.5
42,000 Enova Holding Corp. 1,033,883 971,250 2.0
18,100 Entergy Corp. 466,075 513,587 1.1
23,500 FPL Group, Inc. 919,184 1,048,687 2.2
20,500 General Public Utilities Corp. 527,875 684,187 1.4
69,600 Houston Industries, Inc. 1,542,820 1,574,700 3.2
10,000 Kansas City Power & Light Co. 228,100 253,750 0.5
11,700 MDU Resources Group, Inc. 239,815 239,850 0.5
23,000 New England Electric System 766,360 888,375 1.8
27,000 New York State Electric & Gas Corp. 780,994 637,875 1.3
35,700 Northeast Utilities Co. 907,836 794,325 1.6
11,000 Northern States Power Co. 479,160 541,750 1.1
24,900 Ohio Edison Co. 559,888 591,375 1.2
21,000 Oklahoma Gas & Electric Co. 757,886 866,250 1.8
26,900 PECO Energy Co. 810,158 759,925 1.6
45,000 Pacific Gas & Electric Co. 1,151,550 1,153,125 2.4
34,800 PacifiCorp 680,713 722,100 1.5
20,000 Public Service Company of Colorado 636,200 705,000 1.5
40,400 Public Service Enterprise Group, Inc. 1,319,991 1,136,250 2.3
88,400 Southern Co. 1,939,156 2,110,550 4.4
31,000 Texas Utilities Co. 1,211,235 1,251,625 2.6
26,600 Unicom Corp. 785,722 851,200 1.8
12,600 Union Electric Co. 513,993 532,350 1.1
20,000 Western Resources Co. 562,500 640,000 1.3
18,400 Wisconsin Energy Corp. 477,204 531,300 1.1
----------- ----------- ------
30,263,015 31,930,938 65.8
Utilities--Gas 40,000 Atlanta Gas Light Co. 732,256 725,000 1.5
7,600 New Jersey Resources Corp. 221,244 221,350 0.5
----------- ----------- ------
953,500 946,350 2.0
Total Stocks 34,135,155 36,833,538 76.0
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Telecommunications $1,000,000 Southwestern Bell Corp., 7.00%
due 7/01/2015 $ 1,034,480 $ 983,700 2.0%
1,000,000 Tele-Communications, Inc., 9.80%
due 2/01/2012 1,263,890 1,164,430 2.4
1,000,000 United Telephone Company of Florida,
6.875% due 7/15/2013 1,019,950 960,310 2.0
----------- ----------- ------
3,318,320 3,108,440 6.4
Utilities--Electric 1,000,000 Public Service Company of Colorado,
6.375% due 11/01/2005 991,300 968,610 2.0
Utilities--Gas 1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,446,495 3.0
1,000,000 El Paso Natural Gas Co., 7.75%
due 1/15/2002 1,090,950 1,059,110 2.2
1,000,000 Enron Corp., 6.75% due 7/01/2005 1,023,800 986,820 2.0
----------- ----------- ------
3,605,780 3,492,425 7.2
Total Corporate Bonds 7,915,400 7,569,475 15.6
Short-Term Securities
Commercial Paper* 2,085,000 General Electric Capital Corp.,
5.42% due 3/01/1996 2,085,000 2,085,000 4.3
US Government & 3,500,000 Federal Home Loan Mortgage Corp., 5.11%
Agency Obligations* due 3/13/1996 3,494,038 3,494,038 7.2
Total Short-Term Securities 5,579,038 5,579,038 11.5
Total Investments $47,629,593 49,982,051 103.1
===========
Liabilities in Excess of Other Assets (1,488,919) (3.1)
----------- ------
Net Assets $48,493,132 100.0%
=========== ======
<PAGE>
<FN>
*Commercial Paper and certain US Government & Agency Obligations are
traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
(a)Formerly Detroit Edison Co.
(b)Formerly SCEcorp.
See Notes to Financial Statements.
</TABLE>
PORTFOLIO INFORMATION
For the Quarter Ended
February 29, 1996
Percent of
Ten Largest Holdings Net Assets
Southern Co. 4.4%
GTE Corp. 4.0
American Electric Power Company, Inc. 3.6
Allegheny Power System, Inc. 3.5
Houston Industries, Inc. 3.2
ENSERCH Corp., 6.375% due 2/01/2004 3.0
Texas Utilities Co. 2.6
Duke Power Co. 2.5
Tele-Communications, Inc., 9.80%
due 2/01/2012 2.4
Pacific Gas & Electric Co. 2.4
Additions
Atlanta Gas Light Co.
Enova Holding Corp.
MDU Resources Group, Inc.
New Jersey Resources Corp.
Deletions
National Power PLC (Part Pay)
National Power PLC (Part Pay) (ADR)
PowerGen PLC (Part Pay)
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of February 29, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$47,629,593) (Note 1a) $49,982,051
Receivables:
Dividends $ 217,880
Interest 77,765
Capital shares sold 54,524
Investment adviser (Note 2) 45,156 395,325
-----------
Deferred organization expenses (Note 1f) 57,380
Prepaid registration fees and other assets (Note 1f) 68,494
-----------
Total assets 50,503,250
-----------
Liabilities: Payables:
Securities purchased 1,623,065
Capital shares redeemed 182,262
Distributor (Note 2) 28,042 1,833,369
-----------
Accrued expenses and other liabilities 176,749
-----------
Total liabilities 2,010,118
-----------
Net Assets: Net assets $48,493,132
===========
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorized $ 29,774
Class B Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 437,043
Class C Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 24,560
Class D Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 10,400
Paid-in capital in excess of par 47,202,659
Undistributed investment income--net 189,521
Accumulated realized capital losses on investments
and foreign currency transactions--net (Note 5) (1,753,105)
Unrealized appreciation on investments and foreign currency
transactions--net 2,352,280
-----------
Net assets $48,493,132
===========
<PAGE>
Net Asset Value: Class A--Based on net assets of $2,878,398 and 297,738
shares outstanding $ 9.67
===========
Class B--Based on net assets of $42,237,757 and 4,370,426
shares outstanding $ 9.66
===========
Class C--Based on net assets of $2,370,374 and 245,600
shares outstanding $ 9.65
===========
Class D--Based on net assets of $1,006,603 and 103,996
shares outstanding $ 9.68
===========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Six Months Ended February 29, 1996
<S> <S> <C> <C>
Investment Dividends (net of $8,435 foreign withholding tax) $ 1,028,404
Income Interest and amortization of premium and discount earned 393,432
(Notes 1d & 1e): -----------
Total income 1,421,836
-----------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 157,064
Investment advisory fees (Note 2) 131,806
Printing and shareholder reports 61,165
Registration fees (Note 1f) 39,957
Accounting services (Note 2) 39,174
Professional fees 35,765
Transfer agent fees--Class B (Note 2) 32,178
Directors' fees and expenses 12,151
Amortization of organization expenses (Note 1f) 8,976
Account maintenance and distribution fees--Class C (Note 2) 7,910
Custodian fees 3,556
Transfer agent fees--Class A (Note 2) 2,048
Transfer agent fees--Class C (Note 2) 1,593
Account maintenance fees--Class D (Note 2) 1,141
Transfer agent fees--Class D (Note 2) 587
Pricing fees 515
Other 3,545
-----------
<PAGE> Total expenses before reimbursement 539,131
Reimbursement of expenses (Note 2) (237,448)
-----------
Total expenses after reimbursement 301,683
-----------
Investment income--net 1,120,153
-----------
Realized & Realized loss from investments:
Unrealized Investments--net (175,700)
Gain (Loss) on Foreign currency transactions--net (2,983) (178,683)
Investments & -----------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 2,993,171
(Notes 1b, 1c, Foreign currency transactions--net 1,535 2,994,706
1e & 3): ----------- -----------
Net realized and unrealized gain on investments and
foreign currency transactions 2,816,023
-----------
Net Increase in Net Assets Resulting from Operations $ 3,936,176
===========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: Feb. 29, 1996 Aug. 31, 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 1,120,153 $ 2,274,267
Realized loss on investments and foreign currency transactions--net (178,683) (1,050,161)
Change in unrealized appreciation/depreciation on investments--net 2,994,706 4,035,399
----------- -----------
Net increase in net assets resulting from operations 3,936,176 5,259,505
----------- -----------
<PAGE>
Dividends to Investment income--net:
Shareholders Class A (112,162) (224,389)
(Note 1g): Class B (1,351,588) (1,561,530)
Class C (62,744) (24,244)
Class D (30,702) (20,641)
----------- -----------
Net decrease in net assets resulting from dividends to shareholders (1,557,196) (1,830,804)
----------- -----------
Capital Share Net increase in net assets derived from capital share transactions 3,428,304 7,624,468
Transactions ----------- -----------
(Note 4):
Net Assets: Total increase in net assets 5,807,284 11,053,169
Beginning of period 42,685,848 31,632,679
----------- -----------
End of period* $48,493,132 $42,685,848
=========== ===========
<FN>
*Undistributed investment income--net $ 189,521 $ 626,564
=========== ===========
<CAPTION>
Financial Highlights
Class A Class B
For the For the For the For the
Six For the Period Six For the Period
The following per share data and ratios have been derived Months Year Oct. 29, Months Year Oct. 29,
from information provided in the financial statements. Ended Ended 1993++ to Ended Ended 1993++ to
Feb. 29, Aug. 31, Aug. 31, Feb. 29, 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 period $ 9.15 $ 8.44 $ 10.00 $ 9.15 $ 8.44 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .29 .60 .40 .22 .49 .35
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net .57 .59 (1.57) .60 .63 (1.57)
------- ------- ------- ------- ------- -------
Total from investment operations .86 1.19 (1.17) .82 1.12 (1.22)
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.34) (.48) (.39) (.31) (.41) (.34)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.67 $ 9.15 $ 8.44 $ 9.66 $ 9.15 $ 8.44
======= ======= ======= ======= ======= =======
<PAGE>
Total Investment Based on net asset value
Return:** per share 9.46%+++ 14.68% (11.84%)+++ 9.00%+++ 13.72% (12.34%)+++
======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .54%* .49% .44%* 1.31%* 1.27% 1.21%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.53%* 1.87% 1.58%* 2.30%* 2.66% 2.35%*
======= ======= ======= ======= ======= =======
Investment income--net 5.39%* 6.60% 5.92%* 4.60%* 5.75% 5.22%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 2,878 $ 3,253 $ 4,238 $42,238 $37,498 $27,395
======= ======= ======= ======= ======= =======
Portfolio turnover 8.34% 12.59% 8.50% 8.34% 12.59% 8.50%
======= ======= ======= ======= ======= =======
Average commission rate paid $ .0235 -- -- $ .0235 -- --
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<PAGE>
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the For the For the
Six Period Six Period
The following per share data and ratios have been derived Months Oct. 21, Months Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
Feb. 29, Aug. 31, Feb. 29, 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 .21 .42 .20 .51
Realized and unrealized gain on investments and
foreign currency transactions--net .61 .90 .66 .85
------- ------- ------- -------
Total from investment operations .82 1.32 .86 1.36
------- ------- ------- -------
Less dividends from investment income--net (.31) (.35) (.33) (.38)
------- ------- ------- -------
Net asset value, end of period $ 9.65 $ 9.14 $ 9.68 $ 9.15
======= ======= ======= =======
Total Investment Based on net asset value per share 8.92%+++ 16.50%+++ 9.43%+++ 17.03%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.38%* 1.32%* .79%* .74%*
Net Assets: ======= ======= ======= =======
Expenses 2.35%* 2.77%* 1.77%* 2.10%*
======= ======= ======= =======
Investment income--net 4.54%* 5.56%* 5.11%* 6.14%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 2,370 $ 1,377 $ 1,007 $ 558
Data: ======= ======= ======= =======
Portfolio turnover 8.34% 12.59% 8.34% 12.59%
======= ======= ======= =======
Average commission rate paid $ .0235 -- $ .0235 --
======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
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. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature.
The Fund 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.
(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.
<PAGE>
(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 trans-actions 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.
* 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.
<PAGE>
(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.
(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
income 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 "Distributor"), 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 six months ended February 29, 1996,
MLAM earned fees of $131,806, all of which was voluntarily waived.
MLAM also voluntarily reimbursed the Fund for additional expenses of
$105,642.
<PAGE>
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:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
NOTES TO FINANCIAL STATEMENTS (concluded)
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
For the six months ended February 29, 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 $ 34 $ 281
Class D $583 $7,845
For the six months ended February 29, 1996, MLPF&S received
contingent deferred sales charges of $76,111 and $1,030 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 six months ended February 29, 1996, Merrill Lynch Utility
Income Fund, Inc. paid Merrill Lynch Security Pricing Service, an
affiliate of MLPF&S, $428 for security price quotations to compute
the net asset value of the Fund.
<PAGE>
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 six months ended February 29, 1996 were $3,624,073 and
$3,684,274, respectively.
Realized and unrealized gains (losses) as of February 29, 1996 were
as follows:
Unrealized
Realized Gains
Losses (Losses)
Long-term investments $ (175,700) $ 2,352,458
Foreign currency
transactions (2,983) (178)
----------- -----------
Total $ (178,683) $ 2,352,280
=========== ===========
As of February 29, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $2,352,458, of which $3,597,825
related to appreciated securities and $1,245,367 related to
depreciated securities. At February 29, 1996, the aggregate cost of
investments for Federal income tax purposes was $47,629,593.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $3,428,304 and $7,624,468 for the six months ended February 29,
1996 and the year ended August 31, 1995, respectively.
Transactions in shares for each class were as follows:
Class A Shares for the
Six Months Ended Dollar
February 29, 1996 Shares Amount
Shares sold 14,768 $ 143,590
Shares issued to shareholders
in reinvestment of dividends 8,274 80,730
----------- -----------
Total issued 23,042 224,320
Shares redeemed (80,800) (788,674)
----------- -----------
Net decrease (57,758) $ (564,354)
=========== ===========
<PAGE>
Class A Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 588,987 $ 5,127,162
Shares issued to shareholders
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)
=========== ===========
Class B Shares for the Six Months Dollar
Ended February 29, 1996 Shares Amount
Shares sold 1,139,325 $11,084,242
Shares issued to shareholders
in reinvestment of dividends 93,417 914,145
----------- -----------
Total issued 1,232,742 11,998,387
Automatic conversion of
shares (1,843) (17,967)
Shares redeemed (956,651) (9,318,806)
----------- -----------
Net increase 274,248 $ 2,661,614
=========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 2,441,589 $20,822,486
Shares issued to shareholders
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
=========== ===========
<PAGE>
Class C Shares for the Six Months Dollar
Ended February 29, 1996 Shares Amount
Shares sold 127,784 $ 1,247,485
Shares issued to shareholders
in reinvestment of dividends 4,393 43,068
----------- -----------
Total issued 132,177 1,290,553
Shares redeemed (37,279) (365,526)
----------- -----------
Net increase 94,898 $ 925,027
=========== ===========
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.
Class D Shares for the
Six Months Ended Dollar
February 29, 1996 Shares Amount
Shares sold 436,646 $ 4,181,149
Automatic conversion of
shares 1,841 17,967
Shares issued to shareholders
in reinvestment of dividends 2,071 20,337
----------- -----------
Total issued 440,558 4,219,453
Shares redeemed (397,538) (3,813,436)
----------- -----------
Net increase 43,020 $ 406,017
=========== ===========
<PAGE>
Class D Shares for the
Period October 21, 1994++ to Dollar
August 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, 1995, the Fund had a net capital loss carryforward of
approximately $950,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
