MERRILL LYNCH
UTILITY INCOME
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Annual Report
August 31, 1997
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
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 #16856 -- 8/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
MERRILL LYNCH UTILITY INCOME FUND, INC.
DEAR SHAREHOLDER
During the quarter ended August 31, 1997, investor perceptions regarding
the prospects for the US economy shifted, creating greater volatility in
the stock and bond markets. As the period began, increasing evidence of
noninflationary economic growth boosted investor confidence when, as
widely expected, the Federal Reserve Board chose to leave monetary
policy unchanged at its July and August meetings. This increased
confidence was reinforced further in late July by the passage of tax-cut
and five-year balanced budget bills.
However, by late August, the consensus outlook had changed, with
forecasts of overheating growth and inflationary expectations. These
concerns were reinforced by a large upward revision in second-quarter
real gross domestic product growth from an original estimate of 2.2% to
3.6%. In contrast, employment data reported for August were weaker than
expected as the United Parcel Service strike dampened job growth.
Although there are few inflationary pressures at present, it remains to
be seen whether economic activity will continue moderate enough to rule
out future Federal Reserve Board monetary policy tightenings later this
year.
Portfolio Matters
For the three months ended August 31, 1997, total returns for Merrill
Lynch Utility Income Fund, Inc.'s Class A, Class B, Class C and Class D
Shares were +4.11%, +3.91%, +3.92% and +4.04%, respectively. (Fund
results shown do not reflect sales charges and would be lower if sales
charges were included. For complete performance information, including
average annual total returns, see pages 3 -- 5 of this report to
shareholders.) The Fund outperformed the +2.86% total return of the
Lipper Utility Funds Average for the August quarter. During the quarter,
we continued to meet our goal of providing high current income.
Several factors influenced the Fund's performance during the August
quarter. The direction of long-term interest rates and investor
sentiment contributed to the performance of the utility sector and
domestic electric utility stocks in particular. Long-term interest
rates, as measured by the yield on the 30-year US Treasury bond, dropped
from 6.9% at the start of the August quarter to 6.6% at August quarter-
end. The broad stock market, as measured by the performance of the
unmanaged Standard & Poor's 500 Index (S&P 500), showed some weakness as
well. For the August quarter, the S&P 500 provided a total return
of +6.46%. However, for the month of August, its total return was -5.62%.
Specific industry-related factors influenced performance of the Fund
during the August quarter as well. New England Electric System, a Fund
holding, received an offer for its non-nuclear assets that it had put up
for sale. After a bidding period, Pacific Gas & Electric Corp. offered
to buy the generating assets for $1.6 billion, approximately 1.45 times
book value. This price was considered too high by the other bidders and
overvalued by some investors and analysts. It remains to be seen how
future generating assets will be valued as more companies attempt to
sell these assets in order to comply with regulatory changes.
A hostile bid was made by CalEnergy Company, Inc. to purchase New York
State Electric & Gas Corp. (NYSE&G), a Fund holding. CalEnergy has since
withdrawn its offer since insufficient shares were tendered in the
initial phase of the proposed purchase, forcing the management of NYSE&G
to be more forthcoming about its future plans to get shareholder
support. While the stock price of NYSE&G has continued to move higher
following the original announcement and subsequent withdrawal of the
bid, as a general rule, hostile mergers in the electric utility industry
have tended to fail. The twist in this case is that NYSE&G's management
has been able to convince investors to give them a chance to put their
plan in place. As the environment in which the domestic electric
industry operates becomes more competitive and as the Federal government
redesigns or repeals the Public Utility Holding Company Act, merger and
acquisition activity may pick up.
Investment Activities
During the August quarter, we added two new holdings to the Fund's
portfolio. We added Nevada Power Co., which supplies electricity to
about 1.2 million residents in southern Nevada, including Las Vegas. The
stock had an above-average yield, and the company offers above-industry
average customer and sales growth given the continuing rapid development
of its region. We also added Washington Water Power Co. to the
portfolio. The company provides electric and related utility services to
almost 300,000 customers and natural gas service to more than 240,000
customers in eastern Washington and northern Idaho. The yield on the
stock is competitive with the yields on our other electric utility
equities, and the company operates in a good regulatory environment.
Finally, we added to two existing positions and reduced our weightings
in several companies. The net result was that at August quarter-end,
approximately 76% of the Fund's net assets was invested in domestic
electric utility stocks spread across 33 companies. Nearly 5% of the
Fund's net assets was invested in two natural gas local distribution
companies, and almost 16% of the Fund's net assets was in utility bonds.
Fiscal Year in Review
For the year ended August 31, 1997, total returns for the Fund's Class
A, Class B, Class C and Class D Shares were +9.36%, +8.39%, +8.48% and
+9.08%, respectively.
During the year, the performance of the utility industry was impacted by
merger and acquisition activity as well as regulatory restructuring.
Public Service Company of Colorado, a Fund holding, merged with
Southwestern Public Service Company to form New Century Energies, Inc.
Houston Industries, Inc. completed its acquisition of the natural gas
company NorAm Energy, and Texas Utilities Company completed its
acquisition of the natural gas company ENSERCH Corp. The proposed merger
between two electric utility companies, Northern States Power Co. and
Wisconsin Energy Corp., was called off after unfavorable regulatory
rulings. The proposed merger between Baltimore Gas & Electric Co. and
Potomac Electric Company is also questionable as a result of unfavorable
regulatory rulings. As of August 31, 1997, it appears as though merger
and acquisition activity involving electric and natural gas companies
gets approved, while domestic electric companies continue to face
significant regulatory hurdles. As the environment becomes more
competitive, mergers and acquisitions may become easier.
Regulatory restructuring has resulted in the sale of non-nuclear
generating assets by New England Electric System, a Fund holding. The
price being paid for the generating assets may be a precursor to prices
paid for these assets as more companies divest generating plants. This,
in turn, may add more of a value basis for electric utility companies'
shares. Generating plants are also up for sale in California as part of
restructuring plans. Texas, Illinois and Pennsylvania may also be
putting generating assets up for sale or closing plants in the near
future. The issue of stranded cost (the difference between what the
company paid for a generating plant and the current market value of the
production from that plant) is currently being addressed in many more
states. The move toward a competitive environment for electric power
continues to evolve at a steady pace.
During the fiscal year ended August 31, 1997, we maintained our
investment strategy of seeking investments in the utility sector that
generate high current income, primarily achieved through the continued
ownership of domestic electric utility equities. To a lesser extent, we
also used utility bonds to generate income. Throughout the fiscal year,
we closely monitored our holdings to seek to enhance income with an
appropriate level of risk.
During the course of the fiscal year, we reduced and eliminated equity
holdings whose current yield had gotten too low as a result of price
appreciation relative to higher-yielding, more attractively valued
companies in the sector. This strategy was successful in securing a high
current yield relative to other utility funds. However, with foreign
utilities significantly outperforming domestic utilities, the total
return of Merrill Lynch Utility Income Fund, Inc. was below the +16.81%
Lipper Utility Fund Average total return for the 12 months ended August
31, 1997.
In Conclusion
We believe that the current composition of the portfolio will support
the objective of the Fund, which is generating high current income. In
the coming fiscal year, we intend to continue to seek high-yielding
utility stocks that have the appropriate balance between yields and
risk/reward ratios.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/WALTER D. ROGERS
Walter D. Rogers
Vice President and Portfolio Manager
October 1, 1997
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select PricingSM System, which offers four pricing alternatives:
[bullet] 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.
[bullet] 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
10 years. (There is no initial sales charge for automatic share
conversions.)
[bullet] 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.
[bullet] 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. Figures shown in the "Average Annual Total Return"
tables as well as the total returns and cumulative total returns in the
Performance Summary" tables assume reinvestment of all dividends and
capital gains distributions at net asset value on the ex-dividend date.
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.
<TABLE>
<CAPTION>
Recent Performance Results*
12 Month 3 Month
8/31/97 5/31/97 8/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Utility Income Fund, Inc. Class A Shares $9.46 $9.21 $9.17 +3.16% +2.71%
ML Utility Income Fund, Inc. Class B Shares 9.45 9.20 9.17 +3.05 +2.72
ML Utility Income Fund, Inc. Class C Shares 9.44 9.19 9.15 +3.17 +2.72
ML Utility Income Fund, Inc. Class D Shares 9.47 9.22 9.18 +3.16 +2.71
ML Utility Income Fund, Inc. Class A Shares -- Total Return +9.36(1) +4.11(2)
ML Utility Income Fund, Inc. Class B Shares -- Total Return +8.39(3) +3.91(4)
ML Utility Income Fund, Inc. Class C Shares -- Total Return +8.48(5) +3.92(6)
ML Utility Income Fund, Inc. Class D Shares -- Total Return +9.08(7) +4.04(8)
* 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 $0.546 per share ordinary income dividends.
(2) Percent change includes reinvestment of $0.127 per share ordinary income dividends.
(3) Percent change includes reinvestment of $0.472 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.109 per share ordinary income dividends.
(5) Percent change includes reinvestment of $0.469 per share ordinary income dividends.
(6) Percent change includes reinvestment of $0.110 per share ordinary income dividends.
(7) Percent change includes reinvestment of $0.522 per share ordinary income dividends.
(8) Percent change includes reinvestment of $0.121 per share ordinary income dividends.
</TABLE>
[GRAPHIC LINE CHART OMITTED: TOTAL RETURN BASED ON A $10,000 INVESTMENT]
Total Return Based on a $10,000 Investment
A line graph depicting growth of an investment in the Fund's Class A
Shares and Class B Shares compared to growth of an investment in the S&P
Electric Utility Index and S&P 500 Index. Beginning and ending values
are:
10/29/93** 8/97
ML Utility Income Fund+
- --Class A Shares* $9,600 $11,316
ML Utility Income Fund+
- --Class B Shares* $10,000 $11,344
S&P Electric Utility Index++ $10,000 $11,253
S&P 500 Index+++ $10,000 $21,076
A line graph depicting growth of an investment in the Fund's Class C
Shares and Class D Shares compared to growth of an investment in the S&P
Electric Utility Index and S&P 500 Index. Beginning and ending values
are:
10/21/94** 8/97
ML Utility Income Fund+
- --Class C Shares* $10,000 $13,352
ML Utility Income Fund+
- --Class D Shares* $9,600 $13,047
S&P Electric Utility Index++ $10,000 $13,443
S&P 500 Index+++ $10,000 $20,636
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of Operations.
+ ML Utility Income Fund, Inc. invests at least 65% of its total assets
in equity and debt securities which are, in the opinion of the
Fund's management, primarily engaged in the ownership or operations
of facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water.
++ This unmanaged market value-weighted Index is comprised of 25
electric utility companies.
+++ This unmanaged broad-based Index is comprised of common stocks.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/97 + 4.34% + 0.17%
Inception (10/29/93)
through 6/30/97 + 4.36 + 3.20
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/97 + 3.53% - 0.41%
Inception (10/29/93)
through 6/30/97 + 3.57 + 3.34
* Maximum contingent deferred sales charge is 4% and is reduced
to 0% after 4 years.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/97 + 3.47% + 2.49%
Inception (10/21/94)
through 6/30/97 +11.06 +11.06
* 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 6/30/97 + 4.08% - 0.09%
Inception (10/21/94)
through 6/30/97 +11.76 +10.08
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Performance Summary -- Class A Shares
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 -- 8/31/97 9.56 9.46 -- 0.379 + 3.04
Total $2.008
Cumulative total return as of 8/31/97: +17.89%**
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class B Shares
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 -- 8/31/97 9.56 9.45 -- 0.329 + 2.39
Total $1.742
Cumulative total return as of 8/31/97: +14.38%***
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class C Shares
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 -- 8/31/97 9.54 9.44 -- 0.328 + 2.48
Total $1.334
Cumulative total return as of 8/31/97: +33.52%***
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class D Shares
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 -- 8/31/97 9.57 9.47 -- 0.363 + 2.87
Total $1.471
Cumulative total return as of 8/31/97: +35.90%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
*** Figures do not reflect deduction of any sales charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch Utility Income Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS
Shares Value Percent of
Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Utilities -- Electric 39,000 Allegheny Power System, Inc. $895,450 $1,133,438 3.3%
28,400 American Electric Power Company, Inc. 1,037,871 1,240,725 3.6
33,000 Baltimore Gas & Electric Co. 844,868 891,000 2.6
40,600 Boston Edison Co. 1,015,336 1,146,950 3.3
11,000 CINergy Corp. 284,857 363,688 1.1
18,000 Carolina Power & Light Co. 536,468 607,500 1.8
29,100 Consolidated Edison Company of New York 980,888 891,188 2.6
31,400 DTE Energy Co. 984,627 930,225 2.7
45,000 Delmarva Power & Light Co. 924,651 807,188 2.3
20,800 Dominion Resources, Inc. 980,112 748,800 2.2
24,200 Edison International 437,106 583,825 1.7
48,000 Enova Corp. 1,165,493 1,152,000 3.3
27,000 Entergy Corp. 704,210 669,938 1.9
34,000 Florida Progress Corp. 1,105,601 1,094,375 3.2
27,500 GPU, Inc. 767,170 924,687 2.7
15,300 Houston Industries, Inc. 296,223 309,825 0.9
40,000 MDU Resources Group, Inc. 852,367 957,500 2.8
26,000 Nevada Power Co. 552,810 549,250 1.6
26,000 New Century Energies, Inc.** 841,935 1,049,750 3.0
23,000 New England Electric System 766,360 879,750 2.6
18,000 New York State Electric & Gas Corp. 520,663 438,750 1.3
19,000 Northern States Power Co. 864,640 914,375 2.7
27,000 OGE Energy Corporation 991,971 1,199,812 3.5
41,900 Ohio Edison Co. 936,783 921,800 2.7
12,900 PECO Energy Co. 373,224 307,181 0.9
35,800 PacifiCorp 706,649 742,850 2.2
29,400 Public Service Enterprise Group, Inc. 947,445 729,487 2.1
43,400 Southern Co. 923,825 914,112 2.7
21,000 Texas Utilities Holding Co. 715,885 732,375 2.1
32,600 Unicom Corp. 954,082 770,175 2.2
22,600 Union Electric Co. 912,093 840,437 2.4
9,000 Washington Water Power Co. 172,012 175,500 0.5
17,000 Western Resources Co. 478,125 569,500 1.7
----------- ----------- ------
25,471,800 26,187,956 76.2
Utilities -- Gas 40,300 AGL Resources Inc. 741,707 763,181 2.2
26,000 New Jersey Resources Corp. 750,192 833,625 2.4
----------- ----------- ------
1,491,899 1,596,806 4.6
Total Stocks 26,963,699 27,784,762 80.8
=========== =========== ======
<CAPTION>
Face
Amount Corporate Bonds
<S> <C> <C> <C> <C> <C>
Telecommunications $1,000,000 Southwestern Bell Corp., 7% due
7/01/2015 1,034,480 987,030 2.9
1,000,000 United Telephone Company of Florida,
6.875% due 7/15/2013 1,019,950 971,950 2.8
----------- ----------- ------
2,054,430 1,958,980 5.7
Utilities -- Electric 1,000,000 Public Service Company of Colorado,
6.375% due 11/01/2005 991,300 971,740 2.8
Utilities -- Gas 1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,456,545 4.3
1,000,000 El Paso Natural Gas Co., 7.75% due
1/15/2002 1,090,950 1,034,380 3.0
----------- ----------- ------
2,581,980 2,490,925 7.3
Total Corporate Bonds 5,627,710 5,421,645 15.8
=========== =========== ======
<CAPTION>
Short-Term Securities
<S> <C> <C> <C> <C> <C>
Commercial Paper* 1,099,000 General Motors Acceptance Corp., 5.69%
due 9/02/1997 1,098,479 1,098,479 3.2
Total Short-Term Securities 1,098,479 1,098,479 3.2
=========== =========== ======
Total Investments $33,689,888 34,304,886 99.8
===========
Other Assets Less Liabilities 67,057 0.2
----------- ------
Net Assets $34,371,943 100.0%
=========== ======
* 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.
** Public Service Company of Colorado merged with Southwestern Public Service Co. to form New Century Energies, Inc.
See Notes to Financial Statements.
</TABLE>
PORTFOLIO INFORMATION
For the Quarter Ended August 31, 1997
Percent of
Ten Largest Holdings Net Assets
ENSERCH Corp., 6.375% due 2/01/2004 4.3%
American Electric Power Company, Inc. 3.6
OGE Energy Corporation 3.5
Enova Corp. 3.3
Boston Edison Co. 3.3
Allegheny Power System, Inc. 3.3
Florida Progress Corp. 3.2
New Century Energies, Inc. 3.0
El Paso Natural Gas Co., 7.75% due
1/15/2002 3.0
Southwestern Bell Corp., 7% due 7/01/2015 2.9
Additions (Equity Investments)
Nevada Power Co.
Washington Water Power Co.
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $33,689,888) (Note 1a) $34,304,886
Cash 479
Receivables:
Dividends $106,135
Interest 58,191
Investment adviser (Note 2) 18,275
Capital shares sold 13,352 195,953
------------
Deferred organization expenses (Note 1f) 21,140
Prepaid registration fees and other assets (Note 1f) 51,537
------------
Total assets 34,573,995
------------
Liabilities: Payables:
Capital shares redeemed 78,402
Distributor (Note 2) 19,445 97,847
------------
Accrued expenses and other liabilities 104,205
------------
Total liabilities 202,052
------------
Net Assets: Net assets $34,371,943
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $14,552
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 288,317
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 43,483
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 17,237
Paid-in capital in excess of par 34,448,049
Undistributed investment income -- net 217,971
Accumulated realized capital losses on investments and foreign
currency transactions -- net (Note 6) (1,272,664)
Unrealized appreciation on investments -- net 614,998
------------
Net assets $34,371,943
============
Net Asset Value: Class A -- Based on net assets of $1,376,182 and 145,521 shares outstanding $9.46
============
Class B -- Based on net assets of $27,259,135 and 2,883,169 shares outstanding $9.45
============
Class C -- Based on net assets of $4,104,244 and 434,832 shares outstanding $9.44
============
Class D -- Based on net assets of $1,632,382 and 172,373 shares outstanding $9.47
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended August 31, 1997
<S> <C> <C> <C>
Investment Dividends (net of $3,238 foreign withholding tax) $1,923,568
Income Interest and amortization of premium and discount earned 474,383
(Notes 1d & 1e): -----------
Total income 2,397,951
-----------
Expenses: Account maintenance and distribution fees -- Class B (Note 2) $239,434
Investment advisory fees (Note 2) 207,552
Registration fees (Note 1f) 75,620
Printing and shareholder reports 64,489
Professional fees 61,175
Accounting services (Note 2) 52,946
Transfer agent fees -- Class B (Note 2) 51,748
Directors' fees and expenses 25,151
Account maintenance and distribution fees -- Class C (Note 2) 18,216
Amortization of organization expenses (Note 1f) 18,120
Custodian fees 6,384
Account maintenance fees -- Class D (Note 2) 4,108
Transfer agent fees -- Class C (Note 2) 3,678
Transfer agent fees -- Class A (Note 2) 2,589
Transfer agent fees -- Class D (Note 2) 2,230
Pricing fees 692
Other 4,522
------------
Total expenses before reimbursement 838,654
Reimbursement of expenses (Note 2) (346,702)
------------
Total expenses after reimbursement 491,952
-----------
Investment income -- net 1,905,999
-----------
Realized & Realized gain (loss) from:
Unrealized Gain Investments -- net (523,176)
(Loss) on Foreign currency transactions -- net 278 (522,898)
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions -- Net Investments -- net 1,806,145
(Notes 1b, 1c, Foreign currency transactions -- net 69 1,806,214
1e & 3): ------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions 1,283,316
-----------
Net Increase in Net Assets Resulting from Operations $3,189,315
===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended
August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $1,905,999 $2,258,055
Realized gain (loss) on investments and foreign currency
transactions -- net (522,898) 816,224
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions -- net 1,806,214 (548,790)
----------- -----------
Net increase in net assets resulting from operations 3,189,315 2,525,489
----------- -----------
Dividends to Investment income -- net:
Shareholders Class A (111,824) (179,490)
(Note 1g): Class B (1,638,691) (2,251,068)
Class C (108,910) (114,861)
Class D (93,142) (66,229)
----------- -----------
Net decrease in net assets resulting from dividends to shareholders (1,952,567) (2,611,648)
----------- -----------
Capital Share Net decrease in net assets derived from capital share transactions (8,197,559) (1,266,935)
Transactions ----------- -----------
(Note 4):
Net Assets: Total decrease in net assets (6,960,811) (1,353,094)
Beginning of year 41,332,754 42,685,848
----------- -----------
End of year* $34,371,943 $41,332,754
=========== ===========
* Undistributed investment income -- net (Note 1h) $217,971 $272,971
=========== ===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Class A
For the
Period
Oct. 29,
The following per share data and ratios have been derived 1993+ to
from information provided in the financial statements. For the Year Ended August 31, Aug. 31,
1997++ 1996 1995 1994
Increase (Decrease) in Net Asset Value:
<S> <C> <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 .55 .60 .60 .40
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net .29 .02 .59 (1.57)
-------- -------- -------- --------
Total from investment operations .84 .62 1.19 (1.17)
-------- -------- -------- --------
Less dividends from investment
income -- net (.55) (.60) (.48) (.39)
-------- -------- -------- --------
Net asset value, end of period $9.46 $9.17 $9.15 $8.44
======== ======== ======== ========
Total Investment Based on net asset value per share 9.36% 6.61% 14.68% (11.84%)++++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .59% .56% .49% .44%*
Net Assets: ======== ======== ======== ========
Expenses 1.51% 1.52% 1.87% 1.58%*
======== ======== ======== ========
Investment income -- net 5.79% 5.56% 6.60% 5.92%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $1,376 $2,108 $3,253 $4,238
Data: ======== ======== ======== ========
Portfolio turnover 5.50% 25.98% 12.59% 8.50%
======== ======== ======== ========
Average commission rate paid+++++ $.0595 $.0395 -- --
======== ======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
++++ 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.
<CAPTION>
Class B
For the
Period
Oct. 29,
The following per share data and ratios have been derived 1993+ to
from information provided in the financial statements. For the Year Ended August 31, Aug. 31,
1997++ 1996 1995 1994
Increase (Decrease) in Net Asset Value:
<S> <C> <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 .47 .46 .49 .35
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net .28 .09 .63 (1.57)
-------- -------- -------- --------
Total from investment operations .75 .55 1.12 (1.22)
-------- -------- -------- --------
Less dividends from investment
income -- net (.47) (.53) (.41) (.34)
-------- -------- -------- --------
Net asset value, end of period $9.45 $9.17 $9.15 $8.44
======== ======== ======== ========
Total Investment Based on net asset value per share 8.39% 5.86% 13.72% (12.34%)++++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.36% 1.34% 1.27% 1.21%*
Net Assets: ======== ======== ======== ========
Expenses 2.28% 2.29% 2.66% 2.35%*
======== ======== ======== ========
Investment income -- net 5.00% 4.79% 5.75% 5.22%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $27,259 $35,702 $37,498 $27,395
Data: ======== ======== ======== ========
Portfolio turnover 5.50% 25.98% 12.59% 8.50%
======== ======== ======== ========
Average commission rate paid+++++ $.0595 $.0395 -- --
======== ======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
++++ 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.
<CAPTION>
Class C
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996 1995
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.15 $9.14 $8.17
Operating -------- -------- --------
Performance: Investment income -- net .47 .43 .42
Realized and unrealized gain on investments
and foreign currency transactions -- net .29 .10 .90
-------- -------- --------
Total from investment operations .76 .53 1.32
-------- -------- --------
Less dividends from investment income -- net (.47) (.52) (.35)
-------- -------- --------
Net asset value, end of period $9.44 $9.15 $9.14
======== ======== ========
Total Investment Based on net asset value per share 8.48% 5.65% 16.50%++++
Return:** ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.42% 1.40% 1.32%*
Net Assets: ======== ======== ========
Expenses 2.30% 2.34% 2.77%*
======== ======== ========
Investment income -- net 4.79% 4.75% 5.56%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $4,104 $2,107 $1,377
Data: ======== ======== ========
Portfolio turnover 5.50% 25.98% 12.59%
======== ======== ========
Average commission rate paid+++++ $.0595 $.0395 --
======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
++++ 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.
<CAPTION>
Class D
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996 1995
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.18 $9.15 $8.17
Operating -------- -------- --------
Performance: Investment income -- net .52 .47 .51
Realized and unrealized gain on investments and
foreign currency transactions -- net .29 .13 .85
-------- -------- --------
Total from investment operations .81 .60 1.36
-------- -------- --------
Less dividends from investment income -- net (.52) (.57) (.38)
-------- -------- --------
Net asset value, end of period $9.47 $9.18 $9.15
======== ======== ========
Total Investment Based on net asset value per share 9.08% 6.46% 17.03%++++
Return:** ======== ======== ========
Ratios to Average Expenses, net of reimbursement .84% .82% .74%*
Net Assets: ======== ======== ========
Expenses 1.76% 1.75% 2.10%*
======== ======== ========
Investment income -- net 5.47% 5.37% 6.14%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $1,633 $1,416 $558
Data: ======== ======== ========
Portfolio turnover 5.50% 25.98% 12.59%
======== ======== ========
Average commission rate paid+++++ $.0595 $.0395 --
======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
++++ 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>
Merrill Lynch Utility Income Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Utility Income Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Fund offers four classes of shares under the
Merrill Lynch Select Pricing sm System. Shares of Class A and Class D
are sold with a front-end sales charge. Shares of Class B and Class C
may be subject to a contingent deferred sales charge. All classes of
shares have identical voting, dividend, liquidation and other rights and
the same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of such
shares, and Class B and Class C Shares also bear certain expenses
related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to its account
maintenance and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments -- Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day
the securities are being valued or, lacking any sales, at the last
available bid price. Securities traded in the over-the-counter market
are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market.
Securities which are traded both in the over-the-counter market and on a
stock exchange are valued according to the broadest and most
representative market. Options written are valued at the last sale price
in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the last asked price. Options purchased
are valued at the last sale price in the case of exchange-traded options
or, in the case of options traded in the over-the-counter market, the
last bid price. Short-term securities are valued at amortized cost,
which approximates market value. Other investments, including futures
contracts and related options, are stated at market value. Securities
and assets for which market value quotations are not available are
valued at their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(b) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at
the exchange rate at the end of the period. Foreign currency
transactions are the result of settling (realized) or valuing
(unrealized) assets or liabilities expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
(c) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the contract or
if the counterparty does not perform under the contract.
[bullet] 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.
[bullet] Options -- The Fund is authorized to write covered call options
and purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset and
an equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
[bullet] Financial futures contracts -- The Fund is authorized to engage
in transactions in stock index futures and financial futures and related
options on such futures. A futures contract is an agreement between two
parties to buy and sell a security or, in the case of an index-based
futures contract, to make and accept a cash settlement for a set price
on a future date. Upon entering into a contract, the Fund deposits
and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract,
the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in value of the contract. Such receipts
or payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
(d) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Therefore, no Federal income tax provision is required.
Under the applicable foreign tax law, a withholding tax may be imposed
on interest and capital gains at various rates.
(e) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Interest income (including amortization of discount) is
recognized on the accrual basis. Realized gains and losses on security
transactions are determined on the identified cost basis. Dividend
income is recorded on the ex-dividend dates. 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.
(h) Reclassification -- Generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, current
year's permanent book/tax differences of $8,432 have been reclassified
between accumulated net realized capital losses and undistributed net
investment income. These reclassifications have no effect on net assets
or net asset values per share.
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 year ended
August 31, 1997, MLAM earned fees of $207,552, all of which was
voluntarily waived. MLAM also voluntarily reimbursed the Fund for
additional expenses of $139,150.
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 Incorporated ("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 year ended August 31, 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 $119 $1,611
Class D $446 $6,167
For the year ended August 31, 1997, MLPF&S received contingent deferred
sales charges of $119,366 and $669 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 year ended August
31, 1997.
During the year ended August 31, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $627 for security
price quotations to compute the net asset value of the Fund.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
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 year ended August 31, 1997 were $2,021,778 and $9,593,302,
respectively.
Realized and unrealized gains (losses) as of August 31, 1997 were as
follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $(523,176) $614,998
Foreign currency
transactions 278 --
---------- ----------
Total $(522,898) $614,998
========== ==========
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $614,998, of which $2,022,663 related to
appreciated securities and $1,407,665 related to depreciated
securities. At August 31, 1997, the aggregate cost of investments for
Federal income tax purposes was $33,689,888.
4. Capital Share Transactions:
A net decrease in net assets derived from capital share transactions was
$8,197,559 and $1,266,935 for the years ended August 31, 1997 and August
31, 1996, respectively.
Transactions in shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 20,399 $187,890
Shares issued to share-
holders in reinvestment
of dividends 8,334 77,642
---------- ----------
Total issued 28,733 265,532
Shares redeemed (113,140) (1,047,248)
---------- ----------
Net decrease (84,407) $(781,716)
========== ==========
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 Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 442,701 $4,126,710
Shares issued to share-
holders in reinvestment
of dividends 113,728 1,060,681
----------- -----------
Total issued 556,429 5,187,391
Automatic conversion
of shares (10,234) (95,906)
Shares redeemed (1,557,581) (14,591,097)
----------- -----------
Net decrease (1,011,386) $(9,499,612)
=========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 1,431,503 $13,804,309
Shares issued to shareholders
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 Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 344,100 $3,206,197
Shares issued to shareholders
in reinvestment of dividends 8,267 77,322
----------- -----------
Total issued 352,367 3,283,519
Shares redeemed (147,723) (1,372,843)
----------- -----------
Net increase 204,644 $1,910,676
=========== ===========
Class C Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 149,094 $1,446,377
Shares issued to shareholders
in reinvestment of dividends 8,192 78,695
----------- -----------
Total issued 157,286 1,525,072
Shares redeemed (77,801) (740,744)
----------- -----------
Net increase 79,485 $784,328
=========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 124,751 $1,173,521
Automatic conversion
of shares 10,218 95,906
Shares issued to shareholders
in reinvestment of dividends 3,969 37,053
----------- -----------
Total issued 138,938 1,306,480
Shares redeemed (120,738) (1,133,387)
----------- -----------
Net increase 18,200 $173,093
=========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 559,217 $5,341,712
Automatic conversion
of shares 1,841 17,967
Shares issued to shareholders
in reinvestment of dividends 3,705 35,703
----------- -----------
Total issued 564,763 5,395,382
Shares redeemed (471,566) (4,498,813)
----------- -----------
Net increase 93,197 $896,569
=========== ===========
5. Subsequent Event:
On September 3, 1997, the Fund's Board of Directors declared an ordinary
income dividend in the amount of $0.040587 per Class A Share, $0.034644
per Class B Share, $0.034494 per Class C Share, and $0.038665 per Class
D Share, payable on September 10, 1997, to shareholders of record as of
September 2, 1997.
6. Capital Loss Carryforward:
On August 31, 1997, the Fund had a net capital loss carryforward of
approximately $1,098,000, of which $750,000 expires in 2003 and $348,000
expires in 2005. This amount will be available to offset like amounts of
any future taxable gains.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders,
Merrill Lynch Utility Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Utility Income
Fund, Inc. as of August 31, 1997, the related statements of operations
for the year then ended and changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for each
of the years in the three-year period then ended and the period October
29, 1993 (commencement of operations) to August 31, 1994. These
financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on
these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
the financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at August 31, 1997 by correspondence
with the custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Utility Income Fund, Inc. as of August 31, 1997, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 3, 1997
IMPORTANT TAX INFORMATION (unaudited)
Of the ordinary income distributions paid monthly by Merrill Lynch
Utility Income Fund, Inc. during its fiscal year ended August 31, 1997,
98.86% qualifies for the dividends received deduction for corporations.
Additionally, there were no long-term capital gains distributions made
by the Fund during the year.
Please retain this information for your records.
