UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-6180
Name of Fund: Merrill Lynch Utilities and Telecommunications Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Merrill Lynch
Utilities and Telecommunications Fund, Inc., 800 Scudders Mill Road,
Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ
08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 11/30/04
Date of reporting period: 12/01/03 - 05/31/04
Item 1 - Report to Stockholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Merrill Lynch
Utilities and Telecommunications
Fund, Inc.
Semi-Annual Report
May 31, 2004
[LOGO] Merrill Lynch Investment Managers
Merrill Lynch Utilities and Telecommunications Fund, Inc.
Industry Classification* as a Percentage of Equities as of May 31, 2004
A pie graph depicting Industry Classification* as a Percentage of Equities as of
May 31, 2004.
Gas Utilities 6.5%
Media 0.8%
Oil & Gas 3.7%
Wireless Telecommunication Services 6.2%
Multi-Utilities & Unregulated Power 14.5%
Electric Utilities 40.4%
Diversified Telecommunication Services 27.0%
Metals & Mining 0.9%
* For Fund compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease.
Portfolio Information as of May 31, 2004
Percent of
Geographic Allocation Equities
- --------------------------------------------------------------------------------
United States ........................................... 70.6%
Spain ................................................... 7.2
Germany ................................................. 6.2
United Kingdom .......................................... 5.2
Canada .................................................. 4.1
Italy ................................................... 2.0
Mexico .................................................. 1.9
France .................................................. 0.8
Japan ................................................... 0.6
Belgium ................................................. 0.6
Portugal ................................................ 0.5
Hong Kong ............................................... 0.3
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
- --------------------------------------------------------------------------------
Verizon Communications .................................. 3.7%
Dominion Resources, Inc. ................................ 3.3
BellSouth Corporation ................................... 3.2
Iberdrola SA ............................................ 3.0
TXU Corporation ......................................... 2.9
Deutsche Telekom AG (Registered Shares) ................. 2.8
SBC Communications Inc. ................................. 2.8
Exelon Corporation ...................................... 2.8
Constellation Energy Group .............................. 2.6
BCE Inc. ................................................ 2.6
2 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004
A Letter From the President
Dear Shareholder
Equity markets produced positive results for the most recent six-month and
12-month reporting periods. The U.S. stock market, as measured by the Standard &
Poor's 500 Index, returned +6.79% for the six-month period and +18.33% for the
12-month period ended May 31, 2004.
Though equity markets enjoyed favorable returns overall, we did experience an
overdue market correction toward the latter part of the period. This was largely
in response to disappointing employment news (which has improved markedly since
then), terrorist attacks in Madrid and instability in Iraq. Despite the more
recent market skittishness, we continue to observe significant economic strength
in the United States.
In fact, the U.S. economy has continued to benefit from 2003's considerable
fiscal and monetary stimulus, which took the form of low interest rates and tax
cuts. This has opened the door to consumer spending, capital spending, increases
in exports and long-awaited job growth. These developments have supported
continued improvements in corporate earnings -- a positive for stock markets. By
period-end, the Federal Reserve Board appeared poised to raise the Federal Funds
target rate from its 45-year low of 1%, based in part on better-than-expected
employment reports for the months of March, April and May, as well as by rising
producer prices.
The events and efforts of the past year leave us with a much stronger economy
today. Of course, markets will always fluctuate, and there are many
uncertainties -- including the possibility of geopolitical events -- that can
translate into negative market movements. Keeping this in mind, however, we
encourage you to revisit your portfolio and your asset allocation strategy to
ensure you are well positioned to take advantage of the opportunities that lie
ahead. Importantly, your financial advisor can help you develop a strategy most
suitable for your circumstances through all types of market and economic cycles.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
While the Fund underperformed the S&P Utility Index by a narrow margin for
the period, its return was considerably higher than that of the broader market,
as measured by the S&P 500 Index.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended May 31, 2004, the Fund's Class A, Class B, Class
C and Class I Shares had total returns of +8.52%, +8.33%, +8.17% and +8.66%,
respectively. (Fund results shown do not reflect sales charges and would be
lower if sales charges were included. Complete performance information can be
found on pages 6 and 7 of this report to shareholders.) For the same period, the
Fund's benchmarks, the Standard & Poor's (S&P) 500 Index and the S&P Utility
Index, posted respective returns of +6.79% and +9.07%, while its comparable
Lipper category of Utility Funds returned +8.05%. Therefore, the Fund
outperformed the broad market, as measured by the S&P 500 Index, but
underperformed the S&P Utility Index, which consists of only domestic electric
utilities.
For about half of the measured period of performance, the influence of new money
into dividend-yielding stocks was fairly significant. Since Congress enacted
President Bush's proposed legislation to reduce the maximum income tax rate on
qualified dividends from 35% to 15%, we have seen an increase in demand for
companies that pay above-average dividends. For instance, the estimates are that
more than $9 billion in new money was raised between January and March of 2004
for closed-end funds that specialize in dividends or invest in utility stocks.
Of that estimated $9 billion, approximately $4 billion was raised in the month
of March alone. All of this has had a direct influence on the utility equity
market, particularly for integrated utility stocks. Moreover, we watched the
valuation of some of the higher-yielding electric utilities reach new highs in
the range of 15 - 16 times earnings compared to a historical range of about 11 -
13 times. Our belief was that these historically high valuation levels were
unsustainable given underlying company growth rates in the 2% - 4% range. Once
the demand for the securities began to diminish, we believed the stocks would
correct and begin trading closer to historically normal relationships. In fact,
this is taking place. Consequently, the Fund's underperformance compared to the
S&P Utility Index is more the result of short-term trading events rather than a
long-term investment strategy.
In the telecommunications area, the Fund's overall performance benefited from
the significant outperformance of the wireless sector, including our positions
in both AT&T Wireless Services, Inc. and PCS Corp. In addition, the rally in the
European telecommunication services companies in early 2004 also benefited the
Fund, as we captured some of the gains by reducing positions.
The remainder of the stocks held in the portfolio added further diversification.
More specifically, our holdings in a coal company and in some natural gas
companies have been making positive contributions given that electric utilities
need these resources to fuel their plants. In many cases, fuel is a direct
pass-through to the end consumer; therefore, the utility does not have to absorb
the cost of fuel. Remaining holdings in the Fund include local natural gas
distribution companies. They add dividend yields that are, for the most part, in
the 3% range but that have growth of 3% or higher. These companies tend to be
regulated and can pass higher fuel costs on to customers.
What changes were made to the portfolio during the period?
In terms of portfolio diversification, there was basically no change in the
telecommunications sector. However, our weighting in electric utilities declined
and our exposure to the subsector of multi-utilities and unregulated power
increased. The media category decreased in importance and the oil and gas sector
increased in importance. In the Fund's ten largest holdings, Public Service
Enterprise Group Incorporated was replaced with TXU Corporation. The ten largest
holdings represented 29.7% of the Fund's net assets as of May 31, 2004, a
decline from 31.6% at the end of November 2003.
We reduced our position in Public Service Enterprise Group based solely on
valuation. However, we retained a position in the company given its
above-average yield and longer-term positive fundamental outlook. We increased
our weighting in TXU as it became clearer that the company was pursuing a new
chief executive officer who could have the ability to move the company forward
in the current environment. The sale of Comcast Corporation reduced our exposure
to the media sector. We originally bought Comcast as a competitor to the large
incumbent telecommunications companies. New technology would have resulted in
Comcast being a strong competitor in the telecommunications space.
4 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004
Unfortunately, the management of Comcast decided to pursue a strategy that
involved being more content driven, as the company made an unsolicited bid for
Disney Corp. We did not buy Comcast to own television networks or theme parks,
so we sold our shares at a modest gain.
The reduction in the Fund's exposure to electric utilities and the increase in
our position in multi-utilities and unregulated power were primarily the result
of trimming positions in the more traditional electric utilities. The
approximately $9 billion that came into the higher-dividend-paying stocks
provided us with a good opportunity to sell into strength and reduce some
positions where weightings began to exceed our desired level in the portfolio.
Overall, we believe the telecommunication services sector still offers the
potential for growth at reasonable valuation levels; thus, there was basically
no change in portfolio weighting during the period. As the economy improves and
people look for more access lines, whether wireless or wireline, the integrated
companies (those with both wireline and wireless) should benefit. The wireless
space is in a consolidation phase in the United States and may be in the early
stages of consolidation in Europe and the United Kingdom. The bottom line is
that pricing appears to be more rational. The cost of acquisition of a new
subscriber is holding steady to slightly declining as equipment prices continue
to move lower. New technologies that have the potential to compete with the
current wireline technology -- cable television, wireless and power lines --
continue to evolve. Wireless remains the strongest competitor to wireline.
Wireless offers more convenience to customers, but wireline provides more
dependability and quality. Thus, activity in the telecommunication services
sector continues to evolve as opposed to revolutionize, and we remain
comfortable with the majority of our telecommunications holdings being large cap
names and with having the ability to finance new technologies in an effort to
help to level the playing field.
How would you characterize the Fund's position at the close of the period?
The portfolio was well diversified within its sectors as of May 31, 2004, with
more than 75 positions. We believe the Fund's holdings reflect our risk/reward
analysis across the subsectors of the utility and telecommunications sectors and
provide a fairly balanced portfolio. We maintain the Fund's largest weighting in
domestic electric utility stocks. Our emphasis has been on the lower-yielding
names that offer the potential for growth based on underlying fundamentals. We
also have emphasized diversity of fuel sources as we have seen both natural gas
and coal prices climb to new highs and, therefore, look for companies that have
a combination of fuels -- nuclear, natural gas and coal (and, if possible,
hydro). Also attractive, in our view, are those companies that have automatic
fuel cost pass-through to customers but that are responsible enough to reduce
risk of higher fuel costs for customers through careful planning. Lastly,
diversification across regions also has been important, particularly in terms of
regulatory activity.
The telecommunication services sector was the second-largest weighting in the
portfolio during the period. The European telecommunications stocks, which
exhibited some positive momentum during the first couple of months in 2004, came
under pressure as investors overestimated potential returns. The calendar fourth
quarter has never been particularly attractive for the telecommunications area
fundamentally, and this past year proved no different. However, we believe we
are entering a more favorable environment based on historical results and recent
quarterly financials. For that reason, we still believe the European
telecommunications area should regain momentum, and fundamentals appear to be
intact. Consequently, we maintain our current position.
Turning to the U.S. telecommunication services areas, we believe there is enough
going on in terms of regulation to create positive uncertainty and potential
opportunity. First, no one can ever predict with certainty how Washington D.C.
will respond on any issue during a presidential election year. In our view, the
United States cannot afford to have the backbone of the wireline
telecommunications system fail or to deteriorate to a level that makes it
unusable. Clearly, new technologies are presenting faster, better and cheaper
alternatives to the highly capital-intensive fixed line business that currently
exists. It will take time for these new technologies to reach all the markets,
particularly in rural areas. At some point, wireless revenues will exceed
wireline revenue, but we believe that is several years out. Thus, our stock
preference in the United States is for the integrated companies such as Verizon
Communications, SBC Communications Inc. and BellSouth Corporation.
Kathleen M. Anderson
Vice President and Portfolio Manager
June 18, 2004
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004 5
[LOGO] Merrill Lynch Investment Managers
Performance Data
About Fund Performance
Investors are able to purchase shares of the Fund through multiple pricing
alternatives:
o Class A Shares incur a maximum initial sales charge of 4% and an account
maintenance fee of 0.25% (but no distribution fee).
o Class B Shares are subject to a maximum contingent deferred sales charge
of 4% declining to 0% after six years. All Class B Shares purchased prior
to June 1, 2001 will maintain the four-year schedule. 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 A
Shares after approximately ten years. (There is no initial sales charge
for automatic share conversions.)
o 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.
o Class I Shares incur a maximum initial sales charge (front-end load) of 4%
and bear no ongoing distribution or account maintenance fees. Class I
Shares are available only to eligible investors.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain more current performance
information. Performance results do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Figures shown in each of the following tables assume reinvestment of all
dividends and capital gain distributions, if any, 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.
Recent Performance Results
10-Year/
6-Month 12-Month Since Inception
As of May 31, 2004 Total Return Total Return Total Return
====================================================================================================================
ML Utilities and Telecommunications Fund, Inc. Class A Shares* +8.52% +11.54% +101.54%
- --------------------------------------------------------------------------------------------------------------------
ML Utilities and Telecommunications Fund, Inc. Class B Shares* +8.33 +10.99 + 90.26
- --------------------------------------------------------------------------------------------------------------------
ML Utilities and Telecommunications Fund, Inc. Class C Shares* +8.17 +10.87 + 91.32
- --------------------------------------------------------------------------------------------------------------------
ML Utilities and Telecommunications Fund, Inc. Class I Shares* +8.66 +11.81 +105.59
- --------------------------------------------------------------------------------------------------------------------
S&P 500 Index** +6.79 +18.33 +192.63/+184.37
- --------------------------------------------------------------------------------------------------------------------
S&P Utilities Index*** +9.07 +11.04 + 85.36/+ 81.36
- --------------------------------------------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included. Total investment returns are
based on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the ex-dividend date. The Fund's 10-year/since inception total
returns are for 10 years for Class B and Class I Shares and from 10/21/94
for Class A and Class C Shares.
** The S&P 500 Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues). The
unmanaged Index represents about 75% of NYSE market capitalization and 30%
of NYSE issues. Ten-year/since inception total returns are for 10 years
and from 10/21/94.
*** This unmanaged capitalization Index is comprised of all stocks designed to
measure the performance of electric and natural gas utilities within the
S&P 500 Index. Ten-year/since inception total returns are for 10 years and
from 10/31/94.
6 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 5/31/04 +11.54% +7.07%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/04 - 0.59 -1.40
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 5/31/04 + 7.57 +7.11
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 5/31/04 +10.99% +6.99%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/04 - 1.11 -1.31
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/04 + 6.64 +6.64
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
- --------------------------------------------------------------------------------
Return Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 5/31/04 +10.87% +9.87%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/04 - 1.10 -1.10
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 5/31/04 + 6.99 +6.99
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
** Assuming payment of applicable contingent deferred sales charge.
- --------------------------------------------------------------------------------
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class I Shares*
================================================================================
One Year Ended 5/31/04 +11.81% +7.34%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/04 - 0.35 -1.16
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/04 + 7.47 +7.04
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004 7
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments
Value Percent of
Country Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
====================================================================================================================================
Belgium Wireless Telecommunication 11,100 +Mobistar SA $ 694,004 0.5%
Services
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in Belgium 694,004 0.5
====================================================================================================================================
Canada Diversified Telecommunication 165,200 BCE Inc. 3,287,480 2.6
Services 33,000 BCT.Telus Communications Inc. 567,089 0.4
224 BCT.Telus Communications Inc. (A Shares) 3,551 0.0
---------------------------
3,858,120 3.0
--------------------------------------------------------------------------------------------------------------------
Oil & Gas 23,400 EnCana Corp. 917,412 0.7
--------------------------------------------------------------------------------------------------------------------
Wireless Telecommunication 43,500 +Stratos Global Corporation 345,870 0.3
Services
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in Canada 5,121,402 4.0
====================================================================================================================================
France Diversified Telecommunication 28,400 France Telecom SA 682,862 0.5
Services
--------------------------------------------------------------------------------------------------------------------
Multi-Utilities & Unregulated 14,200 Veolia Environment 379,753 0.3
Power
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in France 1,062,615 0.8
====================================================================================================================================
Germany Diversified Telecommunication 217,000 +Deutsche Telekom AG (Registered Shares) 3,640,957 2.8
Services
--------------------------------------------------------------------------------------------------------------------
Electric Utilities 45,100 E.On AG 3,125,443 2.4
--------------------------------------------------------------------------------------------------------------------
Multi-Utilities & Unregulated 21,800 RWE AG 950,372 0.8
Power
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in Germany 7,716,772 6.0
====================================================================================================================================
Hong Kong Electric Utilities 620,000 +China Resources Power Holdings Company
Limited 336,096 0.3
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in Hong Kong 336,096 0.3
====================================================================================================================================
Italy Diversified Telecommunication 327,776 Telecom Italia SpA 1,004,662 0.8
Services 494,800 Telecom Italia SpA--RNC 1,073,104 0.8
---------------------------
2,077,766 1.6
--------------------------------------------------------------------------------------------------------------------
Electric Utilities 56,600 Enel SpA 463,776 0.4
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in Italy 2,541,542 2.0
====================================================================================================================================
Japan Wireless Telecommunication 400 NTT DoCoMo, Inc. 752,771 0.6
Services
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in Japan 752,771 0.6
====================================================================================================================================
Mexico Diversified Telecommunication 35,000 Telefonos de Mexico SA 'L' (ADR)(a) 1,177,400 0.9
Services
--------------------------------------------------------------------------------------------------------------------
Wireless Telecommunication 35,200 America Movil, SA de CV 'L' (ADR)(a) 1,233,760 1.0
Services
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in Mexico 2,411,160 1.9
====================================================================================================================================
Portugal Diversified Telecommunication 61,800 Portugal Telecom SA (Registered Shares) 633,169 0.5
Services
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in Portugal 633,169 0.5
====================================================================================================================================
Spain Diversified Telecommunication 204,700 Telefonica SA 2,969,637 2.3
Services
--------------------------------------------------------------------------------------------------------------------
Electric Utilities 71,200 Endesa SA 1,313,753 1.0
189,700 Iberdrola SA 3,826,895 3.0
---------------------------
5,140,648 4.0
--------------------------------------------------------------------------------------------------------------------
Gas Utilities 72,800 Enagas 816,989 0.6
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in Spain 8,927,274 6.9
====================================================================================================================================
United Kingdom Electric Utilities 74,400 Scottish and Southern Energy PLC 944,630 0.7
287,400 ScottishPower PLC 2,089,291 1.6
---------------------------
3,033,921 2.3
--------------------------------------------------------------------------------------------------------------------
Multi-Utilities & Unregulated 113,775 National Grid Group PLC 901,677 0.7
Power
--------------------------------------------------------------------------------------------------------------------
Wireless Telecommunication 105,700 Vodafone Group PLC (ADR)(a) 2,511,432 2.0
Services
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in the United Kingdom 6,447,030 5.0
====================================================================================================================
8 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004
Schedule of Investments (continued)
Value Percent of
Country Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
====================================================================================================================================
United States Diversified Telecommunication 48,900 ALLTEL Corporation $ 2,475,807 1.9%
Services 39,040 AT&T Corporation 647,283 0.5
165,300 BellSouth Corporation 4,125,888 3.2
42,700 CenturyTel, Inc. 1,276,303 1.0
54,300 +Citizens Communications Company 689,610 0.5
151,400 SBC Communications Inc. 3,588,180 2.8
56,500 Sprint Corporation 1,003,440 0.8
138,800 Verizon Communications 4,799,704 3.7
---------------------------
18,606,215 14.4
--------------------------------------------------------------------------------------------------------------------
Electric Utilities 28,600 Ameren Corporation 1,264,120 1.0
72,700 American Electric Power Company, Inc. 2,309,679 1.8
65,062 Cinergy Corp. 2,440,476 1.9
96,000 Cleco Corporation 1,665,600 1.3
18,400 DTE Energy Company 739,864 0.6
68,900 Edison International 1,663,246 1.3
52,800 Entergy Corporation 2,883,408 2.2
107,400 Exelon Corporation 3,576,420 2.8
17,800 FPL Group, Inc. 1,134,750 0.9
74,200 FirstEnergy Corp. 2,893,800 2.3
60,900 NSTAR 2,879,352 2.2
12,100 OGE Energy Corp. 296,450 0.2
23,000 +PG&E Corporation 655,500 0.5
72,700 PPL Corporation 3,137,005 2.4
37,100 Pepco Holdings, Inc. 682,640 0.5
49,000 Pinnacle West Capital Corporation 1,974,210 1.5
31,400 Progress Energy, Inc. 1,337,954 1.0
72,000 The Southern Company 2,082,240 1.6
100,800 TXU Corporation 3,766,896 2.9
30,100 Wisconsin Energy Corporation 957,481 0.8
---------------------------
38,341,091 29.7
--------------------------------------------------------------------------------------------------------------------
Gas Utilities 35,400 AGL Resources Inc. 998,280 0.8
65,500 KeySpan Corporation 2,318,700 1.8
74,000 New Jersey Resources Corporation 2,905,980 2.3
19,900 NiSource Inc. 403,174 0.3
21,000 UGI Corporation 673,890 0.5
---------------------------
7,300,024 5.7
--------------------------------------------------------------------------------------------------------------------
Media 43,400 +Cablevision Systems Corporation (Class A) 951,328 0.7
--------------------------------------------------------------------------------------------------------------------
Metals & Mining 22,500 Peabody Energy Corporation 1,119,150 0.9
--------------------------------------------------------------------------------------------------------------------
Multi-Utilities & Unregulated 88,700 Constellation Energy Group 3,391,888 2.6
Power 66,837 Dominion Resources, Inc. 4,208,726 3.3
35,600 Energy East Corporation 836,600 0.7
18,100 Equitable Resources, Inc. 876,040 0.7
29,100 National Fuel Gas Company 731,865 0.6
32,000 ONEOK, Inc. 683,840 0.5
65,600 Public Service Enterprise Group
Incorporated 2,765,696 2.2
25,600 Questar Corporation 938,240 0.7
41,400 SCANA Corporation 1,473,012 1.1
---------------------------
15,905,907 12.4
--------------------------------------------------------------------------------------------------------------------
Oil & Gas 7,400 Devon Energy Corporation 439,264 0.3
47,100 EOG Resources, Inc. 2,516,553 2.0
11,800 Kinder Morgan, Inc. 708,000 0.6
---------------------------
3,663,817 2.9
--------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (concluded)
Value Percent of
Country Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
====================================================================================================================================
United States Wireless Telecommunication 59,008 +AT&T Wireless Services, Inc. $ 835,553 0.7%
(concluded) Services 24,900 +NII Holdings Inc. (Class B) 900,633 0.7
18,700 +Western Wireless Corporation (Class A) 512,006 0.4
---------------------------
2,248,192 1.8
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks in the United States 88,135,724 68.5
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost--$101,111,865) 124,779,559 97.0
--------------------------------------------------------------------------------------------------------------------
Face Amount Trust Preferred
====================================================================================================================================
Electric Utilities $1,092,450 AES Trust III, 6.75% due 10/15/2029 894,683 0.7
--------------------------------------------------------------------------------------------------------------------
Total Trust Preferred (Cost--$657,608) 894,683 0.7
--------------------------------------------------------------------------------------------------------------------
Beneficial Interest Short-Term Securities
====================================================================================================================================
$3,129,729 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I (b) 3,129,729 2.4
--------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$3,129,729) 3,129,729 2.4
====================================================================================================================================
Total Investments (Cost--$104,899,202) 128,803,971 100.1
Liabilities in Excess of Other Assets (83,074) (0.1)
---------------------------
Net Assets $128,720,897 100.0%
===========================
* For Fund compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease.
+ Non-income producing security.
(a) American Depositary Receipts (ADR).
(b) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2 (a)(3) of the
Investment Company Act of 1940) are as follows:
--------------------------------------------------------------------------
Interest/
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $(2,011,326) $23,217
Merrill Lynch Liquidity Series, LLC
Money Market Series $(10,479,376) $ 2,795
Merrill Lynch Premier Institutional Fund (4,007,912) $ 900
--------------------------------------------------------------------------
See Notes to Financial Statements.
10 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004
Statement of Assets and Liabilities
As of May 31, 2004
=========================================================================================================================
Assets
- -------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$101,769,473) .................................. $ 125,674,242
Investments in affiliated securities, at value
(identified cost--$3,129,729) .................................... 3,129,729
Foreign cash (cost--$27,330) ...................................... 27,749
Cash .............................................................. 224
Receivables:
Dividends ...................................................... $ 283,008
Interest (including $91 from affiliates) ....................... 13,051
Capital shares sold ............................................ 4,682
Securities lending--net ........................................ 316 301,057
-------------
Prepaid expenses and other assets ................................. 12,599
-------------
Total assets ...................................................... 129,145,600
-------------
=========================================================================================================================
Liabilities
- -------------------------------------------------------------------------------------------------------------------------
Payables:
Capital shares redeemed ........................................ 286,270
Investment adviser ............................................. 58,520
Other affiliates ............................................... 41,661
Distributor .................................................... 36,889 423,340
-------------------------------
Accrued expenses ............................................... 1,363
-------------
Total liabilities ................................................. 424,703
-------------
=========================================================================================================================
Net Assets
- -------------------------------------------------------------------------------------------------------------------------
Net assets ........................................................ $ 128,720,897
=============
=========================================================================================================================
Net Assets Consist of
- -------------------------------------------------------------------------------------------------------------------------
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized ................................................ $ 739,192
Class B Shares of Common Stock, $.10 par value, 100,000,000
shares authorized ................................................ 359,306
Class C Shares of Common Stock, $.10 par value, 100,000,000
shares authorized ................................................ 119,008
Class I Shares of Common Stock, $.10 par value, 100,000,000
shares authorized ................................................ 240,476
Paid-in capital in excess of par .................................. 145,059,301
Undistributed investment income--net .............................. $ 549,568
Accumulated realized capital losses on investments and foreign
currency transactions--net ....................................... (42,252,113)
Unrealized appreciation on investments and foreign currency
transactions--net ................................................ 23,906,159
-------------
Total accumulated losses--net ..................................... (17,796,386)
-------------
Net Assets ........................................................ $ 128,720,897
=============
=========================================================================================================================
Net Asset Value
- -------------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $65,384,653 and 7,391,924
shares outstanding ............................................... $ 8.85
=============
Class B--Based on net assets of $31,676,953 and 3,593,058
shares outstanding ............................................... $ 8.82
=============
Class C--Based on net assets of $10,400,014 and 1,190,076
shares outstanding ............................................... $ 8.74
=============
Class I--Based on net assets of $21,259,277 and 2,404,759
shares outstanding ............................................... $ 8.84
=============
See Notes to Financial Statements.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004 11
[LOGO] Merrill Lynch Investment Managers
Statement of Operations
For the Six Months Ended May 31, 2004
=========================================================================================================================
Investment Income
- -------------------------------------------------------------------------------------------------------------------------
Dividends (net of $81,220 foreign withholding tax) ................ $ 2,185,366
Interest (including $23,217 from affiliates) ...................... 61,380
Securities lending--net ........................................... 3,695
-------------
Total income ...................................................... 2,250,441
-------------
=========================================================================================================================
Expenses
- -------------------------------------------------------------------------------------------------------------------------
Investment advisory fees .......................................... $ 408,501
Account maintenance and distribution fees--Class B ................ 138,312
Account maintenance fees--Class A ................................. 82,105
Transfer agent fees--Class A ...................................... 56,461
Accounting services ............................................... 47,528
Account maintenance and distribution fees--Class C ................ 44,658
Transfer agent fees--Class B ...................................... 37,745
Professional fees ................................................. 32,393
Printing and shareholder reports .................................. 25,148
Registration fees ................................................. 24,387
Directors' fees and expenses ...................................... 21,945
Transfer agent fees--Class I ...................................... 19,338
Custodian fees .................................................... 18,302
Transfer agent fees--Class C ...................................... 11,251
Pricing fees ...................................................... 1,933
Other ............................................................. 17,599
-------------
Total expenses .................................................... 987,606
-------------
Investment income--net ............................................ 1,262,835
-------------
=========================================================================================================================
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net
- -------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ............................................... 1,290,001
Foreign currency transactions--net ............................. (4,758) 1,285,243
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ............................................... 8,799,770
Foreign currency transactions--net ............................. (3,798) 8,795,972
-------------------------------
Total realized and unrealized gain on investments and foreign
currency transactions--net ....................................... 10,081,215
-------------
Net Increase in Net Assets Resulting from Operations .............. $ 11,344,050
=============
See Notes to Financial Statements.
12 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
May 31, November 30,
Increase (Decrease) in Net Assets: 2004 2003
=========================================================================================================================
Operations
- -------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................ $ 1,262,835 $ 3,086,211
Realized gain (loss) on investments and foreign currency
transactions--net ................................................ 1,285,243 (2,026,003)
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net ........................... 8,795,972 16,276,582
-------------------------------
Net increase in net assets resulting from operations .............. 11,344,050 17,336,790
-------------------------------
=========================================================================================================================
Dividends to Shareholders
- -------------------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A ........................................................ (593,800) (1,089,101)
Class B ........................................................ (212,563) (1,305,449)
Class C ........................................................ (66,897) (222,843)
Class I ........................................................ (229,780) (622,798)
-------------------------------
Net decrease in net assets resulting from dividends to shareholders (1,103,040) (3,240,191)
-------------------------------
=========================================================================================================================
Capital Share Transactions
- -------------------------------------------------------------------------------------------------------------------------
Net decrease in net assets derived from capital share transactions (16,486,905) (18,877,279)
-------------------------------
=========================================================================================================================
Net Assets
- -------------------------------------------------------------------------------------------------------------------------
Total decrease in net assets ...................................... (6,245,895) (4,780,680)
Beginning of period ............................................... 134,966,792 139,747,472
-------------------------------
End of period* .................................................... $ 128,720,897 $ 134,966,792
===============================
* Undistributed investment income--net ......................... $ 549,568 $ 389,773
===============================
See Notes to Financial Statements.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004 13
[LOGO] Merrill Lynch Investment Managers
Financial Highlights
Class A
--------------------------------------------------------------
The following per share data and ratios have been derived For the Six For the Year Ended
from information provided in the financial statements. Months Ended November 30,+
May 31, ----------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
=========================================================================================================================
Per Share Operating Performance
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period . $ 8.23 $ 7.40 $ 9.67 $ 11.81 $ 19.17
------------------------------------------------------------
Investment income--net*** ............ .09 .19 .26 .32 .39
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net .................. .61 .85 (2.14) (1.46) .68
------------------------------------------------------------
Total from investment operations ..... .70 1.04 (1.88) (1.14) 1.07
------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............ (.08) (.21) (.28) (.33) (.41)
Realized gain on investments--net . -- -- (.11) (.67) (7.80)
In excess of realized gain on
investments--net ................ -- -- -- -- (.22)
------------------------------------------------------------
Total dividends and distributions .... (.08) (.21) (.39) (1.00) (8.43)
------------------------------------------------------------
Net asset value, end of period ....... $ 8.85 $ 8.23 $ 7.40 $ 9.67 $ 11.81
============================================================
=========================================================================================================================
Total Investment Return**
- -------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ... 8.52%@ 14.26% (19.83%) (10.67%) 4.72%
============================================================
=========================================================================================================================
Ratios to Average Net Assets
- -------------------------------------------------------------------------------------------------------------------------
Expenses ............................. 1.30%* 1.33% 1.26% 1.11% 1.08%
============================================================
Investment income--net ............... 1.99%* 2.42% 3.13% 2.86% 2.34%
============================================================
=========================================================================================================================
Supplemental Data
- -------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) ...................... $65,385 $60,142 $34,038 $36,794 $18,383
============================================================
Portfolio turnover ................... 4.85% 21.20% 31.16% 45.66% 51.79%
============================================================
* Annualized.
** Total investment returns exclude the effect of sales charges.
*** Based on average shares outstanding.
+ Effective April 14, 2003, Class D Shares were redesignated Class A Shares.
@ Aggregate total investment return.
See Notes to Financial Statements.
14 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004
Financial Highlights (continued)
Class B
----------------------------------------------------------------
The following per share data and ratios have been derived For the Six For the Year Ended
from information provided in the financial statements. Months Ended November 30,
May 31, ------------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
=============================================================================================================================
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 8.19 $ 7.37 $ 9.61 $ 11.75 $ 19.10
--------------------------------------------------------------
Investment income--net*** .............. .06 .16 .22 .26 .31
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net .................... .62 .82 (2.13) (1.47) .67
--------------------------------------------------------------
Total from investment operations ....... .68 .98 (1.91) (1.21) .98
--------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.05) (.16) (.22) (.26) (.31)
Realized gain on investments--net ... -- -- (.11) (.67) (7.80)
In excess of realized gain on
investments--net .................. -- -- -- -- (.22)
--------------------------------------------------------------
Total dividends and distributions ...... (.05) (.16) (.33) (.93) (8.33)
--------------------------------------------------------------
Net asset value, end of period ......... $ 8.82 $ 8.19 $ 7.37 $ 9.61 $ 11.75
==============================================================
=============================================================================================================================
Total Investment Return**
- -----------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 8.33%+ 13.47% (20.16%) (11.25%) 4.25%
==============================================================
=============================================================================================================================
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.83%* 1.86% 1.77% 1.63% 1.59%
==============================================================
Investment income--net ................. 1.48%* 2.08% 2.63% 2.40% 1.83%
==============================================================
=============================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 31,677 $ 41,317 $ 74,822 $147,549 $246,279
==============================================================
Portfolio turnover ..................... 4.85% 21.20% 31.16% 45.66% 51.79%
==============================================================
* Annualized.
** Total investment returns exclude the effect of sales charges.
*** Based on average shares outstanding.
+ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004 15
[LOGO] Merrill Lynch Investment Managers
Financial Highlights (continued)
Class C
--------------------------------------------------------------
The following per share data and ratios have been derived For the Six For the Year Ended
from information provided in the financial statements. Months Ended November 30,
May 31, ----------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
===========================================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 8.13 $ 7.31 $ 9.55 $ 11.68 $ 19.04
------------------------------------------------------------
Investment income--net*** .............. .06 .15 .21 .25 .28
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net .................... .60 .83 (2.11) (1.45) .69
------------------------------------------------------------
Total from investment operations ....... .66 .98 (1.90) (1.20) .97
------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.05) (.16) (.23) (.26) (.31)
Realized gain on investments--net ... -- -- (.11) (.67) (7.80)
In excess of realized gain on
investments--net .................. -- -- -- -- (.22)
------------------------------------------------------------
Total dividends and distributions ...... (.05) (.16) (.34) (.93) (8.33)
------------------------------------------------------------
Net asset value, end of period ......... $ 8.74 $ 8.13 $ 7.31 $ 9.55 $ 11.68
============================================================
===========================================================================================================================
Total Investment Return**
- ---------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 8.17%+ 13.62% (20.27%) (11.24%) 4.17%
============================================================
===========================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.87%* 1.91% 1.84% 1.69% 1.65%
============================================================
Investment income--net ................. 1.42%* 1.93% 2.55% 2.31% 1.75%
============================================================
===========================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $10,400 $10,994 $10,545 $10,194 $11,416
============================================================
Portfolio turnover ..................... 4.85% 21.20% 31.16% 45.66% 51.79%
============================================================
* Annualized.
** Total investment returns exclude the effect of sales charges.
*** Based on average shares outstanding.
+ Aggregate total investment return.
See Notes to Financial Statements.
16 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004
Financial Highlights (concluded)
Class I
--------------------------------------------------------------
The following per share data and ratios have been derived For the Six For the Year Ended
from information provided in the financial statements. Months Ended November 30,+
May 31, ----------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
===========================================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 8.22 $ 7.39 $ 9.66 $ 11.81 $ 19.16
------------------------------------------------------------
Investment income--net*** .............. .10 .21 .29 .34 .44
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net .................... .61 .84 (2.15) (1.47) .68
------------------------------------------------------------
Total from investment operations ....... .71 1.05 (1.86) (1.13) 1.12
------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.09) (.22) (.30) (.35) (.45)
Realized gain on investments--net ... -- -- (.11) (.67) (7.80)
In excess of realized gain on
investments--net .................. -- -- -- -- (.22)
------------------------------------------------------------
Total dividends and distributions ...... (.09) (.22) (.41) (1.02) (8.47)
------------------------------------------------------------
Net asset value, end of period ......... $ 8.84 $ 8.22 $ 7.39 $ 9.66 $ 11.81
============================================================
===========================================================================================================================
Total Investment Return**
- ---------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 8.66%@ 14.54% (19.64%) (10.54%) 5.07%
============================================================
===========================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.05%* 1.07% 1.00% .86% .83%
============================================================
Investment income--net ................. 2.25%* 2.77% 3.39% 3.15% 2.59%
============================================================
===========================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $21,259 $22,514 $20,342 $26,700 $32,698
============================================================
Portfolio turnover ..................... 4.85% 21.20% 31.16% 45.66% 51.79%
============================================================
* Annualized.
** Total investment returns exclude the effect of sales charges.
*** Based on average shares outstanding.
+ Effective April 14, 2003, Class A Shares were redesignated Class I Shares.
@ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004 17
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Utilities and Telecommunications Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund's financial
statements are prepared in conformity with U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. 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 multiple
classes of shares. Shares of Class A and Class I 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 A, Class B
and Class C 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. Income, expenses (other than expenses attributable to a specific
class) and realized and unrealized gains and losses on investments and foreign
currency transactions are allocated daily to each class based on its relative
net assets. The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of securities -- Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available ask
price for short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Directors of the Fund.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Directors of the Fund. Short positions traded in the OTC market are valued at
the last available ask price. Portfolio securities that are traded both in the
OTC 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 OTC market, the last ask price.
Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued daily based upon quotations from
market makers. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Fund's Board of Directors. Such
valuations and procedures will be reviewed periodically by the Board of
Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the New York Stock Exchange ("NYSE").
The values of such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Foreign currency exchange rates
also are generally determined prior to the close of business on the NYSE.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and the close of
business on the NYSE that may not be reflected in the computation of the Fund's
net asset value. If events (for example, a company announcement, market
volatility or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Fund's Board of Directors
or by the Investment Adviser using a pricing service and/or procedures approved
by the Fund's Board of Directors.
18 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004
Notes to Financial Statements (continued)
(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 U.S. 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
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Options -- The Fund may purchase and write call options and 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.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Forward foreign exchange contracts -- The Fund may enter into forward
foreign exchange contracts as a hedge against either specific transactions
or portfolio positions. The contract is marked-to-market daily and the
change in market value is recorded by the Fund as an unrealized gain or
loss. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value at the time it was opened
and the value at the time it was closed.
o Foreign currency options and futures -- The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency
futures and related options on foreign currency futures as a short or long
hedge against possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges on non-U.S. dollar
denominated securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
(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, dividends 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).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual 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 dates. Interest income is
recognized on the accrual basis.
(f) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004 19
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
(h) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM 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 FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
MLIM 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
..60%, on an annual basis, of the average daily value of the Fund's net assets.
MLIM has entered into a Sub-Advisory Agreement with Merrill Lynch Asset
Management U.K. Limited ("MLAM U.K."), an affiliate of MLIM, pursuant to which
MLAM U.K. provides investment advisory services to MLIM with respect to the
Fund. There is no increase in the aggregate fees paid by the Fund for these
services.
Pursuant to 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 A ............................ .25% --
Class B ............................ .25% .50%
Class C ............................ .25% .55%
- --------------------------------------------------------------------------------
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 A, Class B and Class C 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 May 31, 2004, FAMD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class A and Class I
Shares as follows:
- --------------------------------------------------------------------------------
FAMD MLPF&S
- --------------------------------------------------------------------------------
Class A ............................ $ 918 $11,764
Class I ............................ $ 7 $ 75
- --------------------------------------------------------------------------------
For the six months ended May 31, 2004, MLPF&S received contingent deferred sales
charges of $15,754 and $984, relating to transactions in Class B Shares and
Class C Shares, respectively.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to MLPF&S or its
affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company
20 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004
Notes to Financial Statements (continued)
managed by MLIM, LLC or in registered money market funds advised by MLIM or its
affiliates. For the six months ended May 31, 2004, MLIM, LLC received $1,506 in
securities lending agent fees.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
In addition, MLPF&S received $4,961 in commissions on the execution of portfolio
security transactions for the Fund for the six months ended May 31, 2004.
For the six months ended May 31, 2004 the Fund reimbursed MLIM $1,434 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, PSI, MLAM U.K., FDS, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period ended May 31, 2004 were $6,381,397 and $20,503,788, respectively.
Net realized gains (losses) for the period ended May 31, 2004 and net unrealized
appreciation as of May 31, 2004 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Appreciation
- --------------------------------------------------------------------------------
Long-term investments .................. $ 1,290,001 $ 23,904,769
Foreign currency transactions .......... (4,758) 1,390
--------------------------------
Total .................................. $ 1,285,243 $ 23,906,159
================================
As of May 31, 2004, net unrealized appreciation for Federal income tax purposes
aggregated $23,793,181, of which $26,147,183 related to appreciated securities
and $2,354,002 related to depreciated securities. The aggregate cost of
investments at May 31, 2004 for Federal income tax purposes was $105,010,790.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$16,486,905 and $18,877,279 for the six months ended May 31, 2004 and the year
ended November 30, 2003, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended May 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 178,630 $ 1,566,692
Automatic conversion of shares ......... 985,486 8,680,578
Shares issued to shareholders
in reinvestment of dividends ......... 53,235 463,584
--------------------------------
Total issued ........................... 1,217,351 10,710,854
Shares redeemed ........................ (1,136,752) (10,033,540)
--------------------------------
Net increase ........................... 80,599 $ 677,314
================================
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended November 30, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 216,661 $ 1,692,130
Automatic conversion of shares ......... 3,693,671 29,072,360
Shares issued to shareholders
in reinvestment of dividends
and distributions .................... 113,083 864,551
--------------------------------
Total issued ........................... 4,023,415 31,629,041
Shares redeemed ........................ (1,311,797) (10,107,680)
--------------------------------
Net increase ........................... 2,711,618 $ 21,521,361
================================
- --------------------------------------------------------------------------------
Class B Shares for the Six Months Dollar
Ended May 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 129,376 $ 1,145,507
Shares issued to shareholders
in reinvestment of dividends ......... 18,445 159,639
--------------------------------
Total issued ........................... 147,821 1,305,146
Automatic conversion of shares ......... (989,048) (8,680,578)
Shares redeemed ........................ (608,148) (5,369,539)
--------------------------------
Net decrease ........................... (1,449,375) $(12,744,971)
================================
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended November 30, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 621,416 $ 4,832,497
Shares issued to shareholders
in reinvestment of dividends
and distributions .................... 133,494 1,004,361
--------------------------------
Total issued ........................... 754,910 5,836,858
Automatic conversion of shares ......... (3,709,417) (29,072,360)
Shares redeemed ........................ (2,161,611) (16,426,853)
--------------------------------
Net decrease ........................... (5,116,118) $(39,662,355)
================================
- --------------------------------------------------------------------------------
Class C Shares for the Six Months Dollar
Ended May 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 62,936 $ 546,309
Shares issued to shareholders
in reinvestment of dividends ......... 6,277 53,925
--------------------------------
Total issued ........................... 69,213 600,234
Shares redeemed ........................ (232,066) (2,034,041)
--------------------------------
Net decrease ........................... (162,853) $ (1,433,807)
================================
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004 21
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended November 30, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 266,906 $ 2,061,541
Shares issued to shareholders
in reinvestment of dividends
and distributions .................... 23,270 174,883
--------------------------------
Total issued ........................... 290,176 2,236,424
Shares redeemed ........................ (379,483) (2,892,318)
--------------------------------
Net decrease ........................... (89,307) $ (655,894)
================================
- --------------------------------------------------------------------------------
Class I Shares for the Six Months Dollar
Ended May 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 114,753 $ 993,784
Shares issued to shareholders
in reinvestment of dividends ......... 22,886 198,951
--------------------------------
Total issued ........................... 137,639 1,192,735
Shares redeemed ........................ (471,569) (4,178,176)
--------------------------------
Net decrease ........................... (333,930) $ (2,985,441)
================================
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended November 30, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 833,742 $ 6,478,377
Shares issued to shareholders
in reinvestment of dividends
and distributions .................... 72,642 552,101
--------------------------------
Total issued ........................... 906,384 7,030,478
Shares redeemed ........................ (918,697) (7,110,869)
--------------------------------
Net decrease ........................... (12,313) $ (80,391)
================================
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by MLIM and its affiliates, is
a party to a $500,000,000 credit agreement with Bank One, N.A. and certain other
lenders. The Fund may borrow under the credit agreement to fund shareholder
redemptions and for other lawful purposes other than for leverage. The Fund may
borrow up to the maximum amount allowable under the Fund's current prospectus
and statement of additional information, subject to various other legal,
regulatory or contractual limits. The Fund pays a commitment fee of .09% per
annum based on the Fund's pro rata share of the unused portion of the credit
agreement. Amounts borrowed under the credit agreement bear interest at a rate
equal to, at each fund's election, the Federal Funds rate plus .50% or a base
rate as determined by Bank One, N.A. On November 28, 2003, the credit agreement
was renewed for one year under the same terms. The Fund did not borrow under the
credit agreement during the period ended May 31, 2004.
6. Capital Loss Carryforward:
On November 30, 2003, the Fund had a net capital loss carryforward of
$43,425,768, of which $40,916,903 expires in 2010 and $2,508,865 expires in
2011. This amount will be available to offset like amounts of any future taxable
gains.
22 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004
Officers and Directors
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Kevin A. Ryan, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Robert C. Doll, Jr., Senior Vice President
Kathleen M. Anderson, Vice President and Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Phillip S. Gillespie, Secretary
Custodian
J.P. Morgan Chase Bank
4 MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site http://www.icsdelivery.com/live and follow the instructions. When you visit
this site, you will obtain a personal identification number (PIN). You will need
this PIN should you wish to update your e-mail address, choose to discontinue
this service and/or make any other changes to the service. This service is not
available for certain retirement accounts at this time.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2004 23
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
Merrill Lynch Utilities and
Telecommunications Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
#11693 -- 5/04
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 10 - Controls and Procedures
10(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
10(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the last fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Merrill Lynch Utilities and Telecommunications Fund, Inc.
By: /s/ Terry K. Glenn
----------------------------
Terry K. Glenn,
President of
Merrill Lynch Utilities and Telecommunications Fund, Inc.
Date: July 19, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Terry K. Glenn
----------------------------
Terry K. Glenn,
President of
Merrill Lynch Utilities and Telecommunications Fund, Inc.
Date: July 19, 2004
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Utilities and Telecommunications Fund, Inc.
Date: July 19, 2004