MERRILL LYNCH
UTILITY INCOME
FUND, INC.
FUND LOGO
Semi-Annual Report
February 28, 1997
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.
<PAGE>
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
There was a relatively benign economic environment as 1996 drew to a
close, a trend which continued into the first months of 1997.
Inflation remains low, the pace of economic activity is moderate,
and trends in corporate earnings generally still appear to be
favorable, although the rate of increase in profits will probably be
slower in 1997 than in previous years.
<PAGE>
On balance, US economic fundamentals appear to be the most positive
they have been for many years. However, the dilemma facing investors
is how long the economic expansion can continue at a steady,
noninflationary pace. At this late stage of the current economic
recovery, investor expectations can quickly change from positive to
negative with the release of surprising economic results. This
tendency was illustrated in the stock and bond market volatility
sparked by Federal Reserve Board Chairman Alan Greenspan's Humphrey-
Hawkins testimony before Congress in late February. Investors
interpreted Chairman Greenspan's comments as indicative of a
tightening in monetary policy, although stock and bond prices did
stabilize subsequently. Continued steady, noninflationary economic
growth would be very positive for the stock and bond markets in the
new year, provided that it is not accompanied by successive
preemptive moves by the Federal Reserve Board to raise interest
rates to quell potential inflationary forces.
On the international front, the US dollar continued its strong
advance relative to the yen and the Deutschemark, raising concerns
about the outlook for US trade. In early February, the leading
industrialized nations expressed apparent agreement that it was time
to seek a lower dollar and less volatility in the foreign exchange
markets. It remains to be seen whether these stated intentions will
be acted upon, or if the US dollar continues to rise relative to
other major currencies.
Portfolio Matters
For the three months ended February 28, 1997, total returns for
Merrill Lynch Utility Income Fund, Inc.'s Class A, Class B, Class C
and Class D Shares were, +0.45%, +0.25%, +0.23% and +0.39%,
respectively. The performance of the Fund during the February
quarter reflected a less robust stock market (as measured by the
Standard & Poor's 500 Index) and rising long-term interest rates (as
measured by the 30-year US Treasury bond).
The Fund remained nearly fully invested at the end of the February
quarter, with the portfolio consisting of 35 equity holdings and six
bond holdings. With the principal investment objective of the Fund
being high current income, our emphasis remained on the higher-
yielding domestic electric utility sector for equities. In addition,
we continued to invest in bonds across the various utility sectors
to help us achieve our investment objective. As of February 28,
1997, approximately 36.4% of the Fund's net assets was invested in
domestic electric utility stocks with current yields of 6.5% and
higher. The average market yield on the Fund's bond holdings, which
accounted for 16.7% of net assets, was 7.7% as of February 28, 1997.
Price performance for the February quarter of the unmanaged Standard
& Poor's Electric Index of 26 companies was -0.62%. Utility bonds,
in general, underperformed electric utility equities for the period.
Long-term interest rates, as measured by the 30-year US Treasury
bond, rose in yield from 6.35% on November 30, 1996 to 6.81% on
February 28, 1997. This back-up of long-term interest rates put
pressure on the performance of the stock market overall and, more
significantly, on the performance of domestic electric utility
stocks. In particular, the higher-yielding domestic electric utility
stocks had the most volatility.
<PAGE>
In terms of the Fund's holdings, performance was impacted by rising
interest rates, but it was also affected, to a certain extent, by
company-specific events. For example, Unicom Corp., which was a
stellar performer during the November quarter with price
appreciation of +15.76%, gave all of this performance back in the
February quarter. The stock weakened significantly after the Nuclear
Regulatory Commission (NRC) placed four of the company's nuclear
plants on its "Watch List." The news surprised the company and
investors. In the past, Unicom Corp. had problems with its heavy
nuclear exposure but appeared to have addressed these issues. This
news implies that the NRC is increasing its enforcement of
procedures and rules following the scrutiny it came under regarding
the troubles of Northeast Utilities Co. We met with the management
of Unicom Corp. following the NRC announcement. The company believes
that it has the plans required to address the NRC concerns. In
addition, Unicom Corp. now has a new head of its nuclear operations.
Investors are currently exhibiting a "wait-and-see" attitude toward
Unicom. Although earnings estimates had to be revised downward to
reflect higher operating expenses, we believe that the company's
current dividend rate of $1.60 per share is safe for at least the
near term, given earnings expectations in the range of $2.80 per
share. With the stock currently yielding over 7%, we believe that
downside risk is limited and therefore continue to hold it in the
Fund's portfolio.
During the quarter ended February 28, 1997, we added no new
positions to the portfolio. However, we reduced some overweighted
equity positions and eliminated Echelon International Co., which we
acquired by a spin-off from Florida Progress Corp.
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 our upcoming quarterly shareholder report.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
<PAGE>
(Walter D. Rogers)
Walter D. Rogers
Vice President and Portfolio Manager
April 3, 1997
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
2/28/97 11/30/96 2/29/96 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Utility Income Fund Class A Shares $9.44 $9.57 $9.67 -2.38% -1.36%
ML Utility Income Fund Class B Shares 9.44 9.57 9.66 -2.28 -1.36
ML Utility Income Fund Class C Shares 9.42 9.55 9.65 -2.38 -1.36
ML Utility Income Fund Class D Shares 9.45 9.58 9.68 -2.38 -1.36
ML Utility Income Fund Class A Shares--Total Return +3.50(1) +0.45(2)
ML Utility Income Fund Class B Shares--Total Return +2.79(3) +0.25(4)
ML Utility Income Fund Class C Shares--Total Return +2.63(5) +0.23(6)
ML Utility Income Fund Class D Shares--Total Return +3.24(7) +0.39(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 $0.549 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.172 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.475 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.153 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.470 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.151 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.526 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.166 per share ordinary
income dividends.
</TABLE>
PERFORMANCE DATA (continued)
<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
1996 10.05 9.56 -- 0.596 + 1.24
1/1/97--2/28/97 9.56 9.44 -- 0.131 + 0.12
------
Total $1.760
<PAGE>
Cumulative total return as of 2/28/97: +14.54%**
<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
1996 10.05 9.56 -- 0.522 + 0.46
1/1/97--2/28/97 9.56 9.44 -- 0.118 - 0.02
------
Total $1.531
Cumulative total return as of 2/28/97: +11.69%**
<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
1996 10.04 9.54 -- 0.517 + 0.31
1/1/97--2/28/97 9.54 9.42 -- 0.116 - 0.03
------
Total $1.122
<PAGE>
Cumulative total return as of 2/28/97: +30.24%**
<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>
PERFORMANCE DATA (concluded)
<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
1996 10.06 9.57 -- 0.572 + 0.99
1/1/97--2/28/97 9.57 9.45 -- 0.127 + 0.08
------
Total $1.235
Cumulative total return as of 2/28/97: +32.22%**
<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>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
<PAGE>
Class A Shares*
Year Ended 12/31/96 +1.24% -2.81%
Inception (10/29/93)
through 12/31/96 +4.33 +3.00
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/96 +0.46% -3.35%
Inception (10/29/93)
through 12/31/96 +3.55 +3.27
[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 12/31/96 + 0.31% - 0.64%
Inception (10/21/94)
through 12/31/96 +12.81 +12.81
[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 12/31/96 + 0.99% - 3.05%
Inception (10/21/94)
through 12/31/96 +13.53 +11.44
<PAGE>
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<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 39,000 Allegheny Power System, Inc. $ 895,450 $ 1,194,375 3.2%
28,400 American Electric Power Company, Inc. 1,037,871 1,185,700 3.2
33,000 Baltimore Gas & Electric Co. 844,868 907,500 2.4
34,000 Boston Edison Co. 840,040 909,500 2.4
26,000 CINergy Corp. 673,299 897,000 2.4
26,000 Carolina Power & Light Co. 774,899 965,250 2.6
29,100 Consolidated Edison Company of
New York 980,888 898,462 2.4
31,400 DTE Energy Co. 984,627 949,850 2.5
45,000 Delmarva Power & Light Co. 924,651 871,875 2.3
20,800 Dominion Resources, Inc. 980,112 837,200 2.2
39,200 Edison International 753,006 842,800 2.2
48,000 Enova Corp. 1,165,492 1,074,000 2.9
34,100 Entergy Corp. 887,035 899,388 2.4
34,000 Florida Progress Corp. 1,105,601 1,071,000 2.9
27,500 GPU, Inc. (a) 767,170 962,500 2.6
60,600 Houston Industries, Inc. 1,324,863 1,408,950 3.7
7,500 IPALCO Enterprises, Inc. 204,700 237,188 0.6
40,000 MDU Resources Group, Inc. 852,367 850,000 2.3
23,000 New England Electric System 766,360 802,125 2.1
27,000 New York State Electric & Gas Corp. 780,994 627,750 1.7
19,000 Northern States Power Co. 864,640 904,875 2.4
27,000 OGE Energy Corporation (b) 991,971 1,137,375 3.0
41,900 Ohio Edison Co. 936,783 942,750 2.5
26,900 PECO Energy Co. 810,158 605,250 1.6
44,800 PacifiCorp 883,813 924,000 2.5
26,000 Public Service Company of Colorado 841,935 1,014,000 2.7
40,400 Public Service Enterprise Group, Inc. 1,319,991 1,136,250 3.0
7,500 SCANA Corporation Holding Company 201,075 195,937 0.5
53,400 Southern Co. 1,149,454 1,161,450 3.1
32,600 Unicom Corp. 954,082 725,350 1.9
22,600 Union Electric Co. 912,093 867,275 2.3
17,000 Western Resources Co. 478,125 514,250 1.4
18,400 Wisconsin Energy Corp. 477,204 471,500 1.3
----------- ----------- ------
28,365,617 28,992,675 77.2
<PAGE>
Utilities--Gas 50,300 AGL Resources Inc. 925,172 980,850 2.6
32,000 New Jersey Resources Corp. 924,858 920,000 2.4
----------- ----------- ------
1,850,030 1,900,850 5.0
Total Stocks 30,215,647 30,893,525 82.2
</TABLE>
<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% due
7/01/2015 $ 1,034,480 $ 967,450 2.6%
1,000,000 United Telephone Company of Florida,
6.875% due 7/15/2013 1,019,950 932,400 2.5
----------- ----------- ------
2,054,430 1,899,850 5.1
Utilities--Electric 1,000,000 Public Service Company of Colorado,
6.375% due 11/01/2005 991,300 953,540 2.5
Utilities--Gas 1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,437,540 3.8
1,000,000 El Paso Natural Gas Co., 7.75% due
1/15/2002 1,090,950 1,028,620 2.7
1,000,000 Enron Corp., 6.75% due 7/01/2005 1,023,800 976,750 2.6
----------- ----------- ------
3,605,780 3,442,910 9.1
Total Corporate Bonds 6,651,510 6,296,300 16.7
Short-Term Securities
Commercial Paper* 671,000 General Electric Capital Corp.,
5.38% due 3/03/1997 670,799 670,799 1.8
Total Short-Term Securities 670,799 670,799 1.8
Total Investments $37,537,956 37,860,624 100.7
===========
Liabilities in Excess of Other Assets (262,403) (0.7)
----------- ------
Net Assets $37,598,221 100.0%
=========== ======
<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.
(a)Formerly General Public Utilities Corp.
(b)Formerly Oklahoma Gas & Electric Co.
See Notes to Financial Statements.
</TABLE>
PORTFOLIO INFORMATION
For the Quarter Ended
February 28, 1997
Percent of
Ten Largest Holdings Net Assets
ENSERCH Corp., 6.375% due 2/01/2004 3.8%
Houston Industries, Inc. 3.7
Allegheny Power System, Inc. 3.2
American Electric Power Company, Inc. 3.2
Southern Co. 3.1
OGE Energy Corporation 3.0
Public Service Enterprise Group, Inc. 3.0
Enova Corp. 2.9
Florida Progress Corp. 2.9
El Paso Natural Gas Co., 7.75%
due 1/15/2002 2.7
Deletion (Equity Investments)
Echelon International Co.++
[FN]
++Acquired through a spin-off by Florida Progress Corp.
FINANCIAL INFORMATION
<PAGE>
<TABLE>
Statement of Assets and Liabilities as of February 28, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$37,537,956) (Note 1a) $37,860,624
Cash 409
Receivables:
Dividends $ 151,379
Interest 69,119
Investment adviser (Note 2) 41,415
Capital shares sold 20,995 282,908
-----------
Deferred organization expenses (Note 1f) 39,260
Prepaid registration fees and other assets (Note 1f) 28,088
-----------
Total assets 38,211,289
-----------
Liabilities: Payables:
Capital shares redeemed 453,688
Distributor (Note 2) 20,284 473,972
-----------
Accrued expenses and other liabilities 139,096
-----------
Total liabilities 613,068
-----------
Net Assets: Net assets $37,598,221
===========
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 21,187
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 339,866
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 19,587
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 17,710
Paid-in capital in excess of par 37,655,791
Undistributed investment income--net 146,943
Accumulated realized capital losses on investments and
foreign currency transactions--net (Note 5) (925,584)
Unrealized appreciation on investments and foreign currency
transactions--net 322,721
-----------
Net assets $37,598,221
===========
Net Asset Value: Class A--Based on net assets of $2,000,036 and 211,867
shares outstanding $ 9.44
===========
Class B--Based on net assets of $32,077,769 and 3,398,664
shares outstanding $ 9.44
===========
Class C--Based on net assets of $1,846,091 and 195,873
shares outstanding $ 9.42
===========
Class D--Based on net assets of $1,674,325 and 177,104
shares outstanding $ 9.45
===========
<PAGE>
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Six Months Ended February 28, 1997
<S> <S> <C> <C>
Investment Dividends (net of $1,452 foreign withholding tax) $ 1,011,520
Income Interest and amortization of premium and discount earned 262,278
(Notes 1d & 1e): -----------
Total income 1,273,798
-----------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 129,936
Investment advisory fees (Note 2) 110,876
Registration fees (Note 1f) 37,711
Printing and shareholder reports 35,941
Accounting services (Note 2) 34,361
Transfer agent fees--Class B (Note 2) 30,748
Professional fees 29,946
Directors' fees and expenses 12,734
Amortization of organization expenses (Note 1f) 9,299
Account maintenance and distribution fees--Class C (Note 2) 7,791
Custodian fees 4,375
Account maintenance fees--Class D (Note 2) 2,046
Transfer agent fees--Class C (Note 2) 1,818
Transfer agent fees--Class A (Note 2) 1,581
Transfer agent fees--Class D (Note 2) 1,246
Pricing fees 398
Other 2,272
-----------
Total expenses before reimbursement 453,079
Reimbursement of expenses (Note 2) (188,547)
-----------
Total expenses after reimbursement 264,532
-----------
Investment income--net 1,009,266
-----------
<PAGE>
Realized & Realized gain (loss) from:
Unrealized Investments--net (167,628)
Gain (Loss) on Foreign currency transactions--net 242 (167,386)
Investments & -----------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 1,513,815
(Notes 1b, 1c, Foreign currency transactions--net 122 1,513,937
1e & 3): ----------- -----------
Net realized and unrealized gain on investments and
foreign currency transactions 1,346,551
-----------
Net Increase in Net Assets Resulting from Operations $ 2,355,817
===========
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
February 28, August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 1,009,266 $ 2,258,055
Realized gain (loss) on investments and foreign currency
transactions--net (167,386) 816,224
Change in unrealized appreciation/depreciation on investments--net 1,513,937 (548,790)
----------- -----------
Net increase in net assets resulting from operations 2,355,817 2,525,489
----------- -----------
Dividends to Investment income--net:
Shareholders Class A (65,904) (179,490)
(Note 1g): Class B (964,434) (2,251,068)
Class C (53,787) (114,861)
Class D (51,169) (66,229)
----------- -----------
Net decrease in net assets resulting from dividends to
shareholders (1,135,294) (2,611,648)
----------- -----------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (4,955,056) (1,266,935)
(Note 4): ----------- -----------
<PAGE>
Net Assets: Total decrease in net assets (3,734,533) (1,353,094)
Beginning of period 41,332,754 42,685,848
----------- -----------
End of period* $37,598,221 $41,332,754
=========== ===========
<FN>
*Undistributed investment income--net $ 146,943 $ 272,971
=========== ===========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
For For the
the Six Period
The following per share data and ratios have been derived Months Oct. 29,
from information provided in the financial statements. Ended For the 1993++ to
Feb. 28, Year Ended Aug. 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.17 $ 9.15 $ 8.44 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .28 .60 .60 .40
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .29 .02 .59 (1.57)
------- ------- ------- -------
Total from investment operations .57 .62 1.19 (1.17)
------- ------- ------- -------
Less dividends from investment income--net (.30) (.60) (.48) (.39)
------- ------- ------- -------
Net asset value, end of period $ 9.44 $ 9.17 $ 9.15 $ 8.44
======= ======= ======= =======
Total Investment Based on net asset value per share 6.26%+++ 6.61% 14.68% (11.84%)+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .59%* .56% .49% .44%*
Net Assets: ======= ======= ======= =======
Expenses 1.52%* 1.52% 1.87% 1.58%*
======= ======= ======= =======
Investment income--net 5.73%* 5.56% 6.60% 5.92%*
======= ======= ======= =======
<PAGE>
Supplemental Net assets, end of period (in thousands) $ 2,000 $ 2,108 $ 3,253 $ 4,238
Data: ======= ======= ======= =======
Portfolio turnover 1.04% 25.98% 12.59% 8.50%
======= ======= ======= =======
Average commission rate paid+++++ $ .0600 $ .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. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such conversions may
significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class B
For For the
the Six Period
The following per share data and ratios have been derived Months Oct. 29,
from information provided in the financial statements. Ended For the 1993++ to
Feb. 28, Year Ended Aug. 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.17 $ 9.15 $ 8.44 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .24 .46 .49 .35
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .29 .09 .63 (1.57)
------- ------- ------- -------
Total from investment operations .53 .55 1.12 (1.22)
------- ------- ------- -------
Less dividends from investment income--net (.26) (.53) (.41) (.34)
------- ------- ------- -------
Net asset value, end of period $ 9.44 $ 9.17 $ 9.15 $ 8.44
======= ======= ======= =======
Total Investment Based on net asset value per share 5.84%+++ 5.86% 13.72% (12.34%)+++
Return:** ======= ======= ======= =======
<PAGE>
Ratios to Average Expenses, net of reimbursement 1.36%* 1.34% 1.27% 1.21%*
Net Assets: ======= ======= ======= =======
Expenses 2.30%* 2.29% 2.66% 2.35%*
======= ======= ======= =======
Investment income--net 4.95%* 4.79% 5.75% 5.22%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $32,078 $35,702 $37,498 $27,395
Data: ======= ======= ======= =======
Portfolio turnover 1.04% 25.98% 12.59% 8.50%
======= ======= ======= =======
Average commission rate paid+++++ $ .0600 $ .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. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such conversions may
significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
<PAGE>
For For the For For the
the Six For the Period the Six For the Period
The following per share data and ratios have been derived Months Year Oct. 21, Months Year Oct. 21,
from information provided in the financial statements. Ended Ended 1994++ to Ended Ended 1994++ to
Feb. 28, Aug. 31, Aug. 31, Feb. 28, Aug. 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of
Operating period $ 9.15 $ 9.14 $ 8.17 $ 9.18 $ 9.15 $ 8.17
Performance: ------- ------- ------- ------- ------- -------
Investment income--net .23 .43 .42 .25 .47 .51
Realized and unrealized gain on
investments and foreign currency
transactions--net .30 .10 .90 .31 .13 .85
------- ------- ------- ------- ------- -------
Total from investment operations .53 .53 1.32 .56 .60 1.36
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.26) (.52) (.35) (.29) (.57) (.38)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.42 $ 9.15 $ 9.14 $ 9.45 $ 9.18 $ 9.15
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 5.82%+++ 5.65% 16.50%+++ 6.12%+++ 6.46% 17.03%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.42%* 1.40% 1.32%* .84%* .82% .74%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 2.35%* 2.34% 2.77%* 1.78%* 1.75% 2.10%*
======= ======= ======= ======= ======= =======
Investment income--net 4.92%* 4.75% 5.56%* 5.38%* 5.37% 6.14%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 1,846 $ 2,107 $ 1,377 $ 1,674 $ 1,416 $ 558
======= ======= ======= ======= ======= =======
Portfolio turnover 1.04% 25.98% 12.59% 1.04% 25.98% 12.59%
======= ======= ======= ======= ======= =======
Average commission rate paid+++++ $ .0600 $ .0395 -- $ .0600 $ .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. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such conversions may
significantly affect the rate shown.
<PAGE>
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. 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 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.
* 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.
Dividends from foreign securities where the ex-dividend date may
have passed are subsequently recorded when the Fund has determined
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 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. For the six
months ended February 28, 1997, MLAM earned fees of $110,876, all of
which was voluntarily waived. MLAM also voluntarily reimbursed the
Fund for additional expenses of $77,671.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
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% --
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 28, 1997, 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 $ 55 $ 706
Class D $179 $2,324
For the six months ended February 28, 1997, MLPF&S received
contingent deferred sales charges of $52,641 and $208 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $690 in commissions on the execution of
portfolio security transactions for the Fund for the six months
ended February 28, 1997.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
<PAGE>
During the six months ended February 28, 1997, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, $253 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, MLFD, MLFDS, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended February 28, 1997 were $405,775 and
$4,057,099, respectively.
Realized and unrealized gains (losses) as of February 28, 1997 were
as follows:
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $ (167,628) $ 322,668
Foreign currency
transactions 242 53
---------- ----------
Total $ (167,386) $ 322,721
========== ==========
As of February 28, 1997, net unrealized appreciation for Federal
income tax purposes aggregated $322,668, of which $1,950,370 related
to appreciated securities and $1,627,702 related to depreciated
securities. At February 28, 1997, the aggregate cost of investments
for Federal income tax purposes was $37,537,956.
4. Capital Share Transactions:
A net decrease in net assets derived from capital share transactions
was $4,955,056 and $1,266,935 for the six months ended February 28,
1997 and the year ended August 31, 1996, respectively.
Transactions in shares for each class were as follows:
Class A Shares for the Six Months Dollar
Ended February 28, 1997 Shares Amount
<PAGE>
Shares sold 3,119 $ 29,419
Shares issued to share-
holders in reinvestment of
dividends 4,982 46,591
----------- -----------
Total issued 8,101 76,010
Shares redeemed (26,162) (245,833)
----------- -----------
Net decrease (18,061) $ (169,823)
=========== ===========
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 B Shares for the
Six Months Ended Dollar
February 28, 1997 Shares Amount
Shares sold 176,551 $ 1,665,696
Shares issued to share-
holders in reinvestment of
dividends 66,740 624,192
----------- -----------
Total issued 243,291 2,289,888
Automatic conversion of
shares (8,036) (75,473)
Shares redeemed (731,146) (6,903,566)
----------- -----------
Net decrease (495,891) $(4,689,151)
=========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
<PAGE>
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 C Shares for the
Six Months Ended Dollar
February 28, 1997 Shares Amount
Shares sold 31,894 $ 303,959
Shares issued to share-
holders in reinvestment of
dividends 3,839 35,856
----------- -----------
Total issued 35,733 339,815
Shares redeemed (70,048) (654,666)
----------- -----------
Net decrease (34,315) $ (314,851)
=========== ===========
Class C Shares for the
Year Ended Dollar
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 D Shares for the
Six Months Ended Dollar
February 28, 1997 Shares Amount
<PAGE>
Shares sold 88,455 $ 837,731
Automatic conversion of shares 8,024 75,473
Shares issued to shareholders
in reinvestment of dividends 1,573 14,737
----------- -----------
Total issued 98,052 927,941
Shares redeemed (75,121) (709,172)
----------- -----------
Net increase 22,931 $ 218,769
=========== ===========
Class D Shares for the
Year Ended Dollar
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
=========== ===========
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.
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
<PAGE>
Custodian
State Street Bank and Trust Company
One Heritage Drive, P2N
North Quincy, Massachusetts 02171
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
