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 811-06180
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: Robert C. Doll, Jr., Chief Executive
Officer, 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: 11/30/05
Date of reporting period: 12/01/04 - 05/31/05
Item 1 - Report to Stockholders
Merrill Lynch Utilities and
Telecommunications
Fund, Inc.
Semi-Annual Report
May 31, 2005
Merrill Lynch Utilities and Telecommunications Fund, Inc.
Industry* Classification as a Percentage of Total Investments as of May 31, 2005
A pie graph depicting Industry Classification* as a Percentage of Total
Investments as of May 31, 2005.
Electric Utilities 34.4%
Diversified Telecommunication Services 23.3%
Multi-Utilities 10.7%
Independent Power Producers & Energy Traders 9.0%
Gas Utilities 8.1%
Oil, Gas & Consumable Fuels 7.2%
Wireless Telecommunication Services 4.1%
Media 0.9%
Other** 2.3%
* 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.
** Includes portfolio holdings in short-term investments.
Portfolio Information as of May 31, 2005
Percent of
Geographical Allocation Equities
- --------------------------------------------------------------------------------
United States ........................................... 71.2%
Canada .................................................. 7.2
Spain ................................................... 5.7
United Kingdom .......................................... 5.5
Germany ................................................. 2.8
Italy ................................................... 2.8
Brazil .................................................. 1.7
France .................................................. 1.5
Mexico .................................................. 1.1
Portugal ................................................ 0.5
- --------------------------------------------------------------------------------
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
- --------------------------------------------------------------------------------
TXU Corporation ................................................... 5.4%
Dominion Resources, Inc. .......................................... 3.2
Exelon Corporation ................................................ 3.2
Verizon Communications ............................................ 2.9
PPL Corporation ................................................... 2.7
Entergy Corporation ............................................... 2.6
BellSouth Corporation ............................................. 2.6
BCE Inc. .......................................................... 2.5
Telus Corp. ....................................................... 2.4
SBC Communications Inc. ........................................... 2.3
- --------------------------------------------------------------------------------
2 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
A Letter From the President
Dear Shareholder
After expanding at an annualized rate of 4.4% in 2004, U.S. gross domestic
product grew at an estimated 3.5% in the first quarter of 2005. The slowdown was
not entirely unexpected given last year's healthy growth and the evolution of
the economic cycle. The Federal Reserve Board -- with one eye firmly affixed on
the economic indicators and the other on inflationary measures -- has increased
the federal funds rate by 25 basis points (.25%) at each of its eight meetings
since June 2004. At period-end, the target short-term interest rate stood at 3%.
U.S. equity markets ended 2004 in a strong rally, but have struggled to record
meaningful gains in 2005. The potential for slowing economic and corporate
earnings growth, as well as volatile energy prices, have intermittently hampered
equity market progress. On the positive side, corporate transactions, such as
mergers and acquisitions, stock buy-backs and dividend payouts, have all
increased. In Asia, equities have continued to benefit from higher economic
growth prospects and valuations that appear inexpensive relative to other parts
of the world.
In the bond market, the yield curve flattening "conundrum" continued as
short-term and long-term yields moved still closer together. Over the past year,
the two-year Treasury yield increased 106 basis points while the 10-year
Treasury yield declined 66 basis points. At May 31, 2005, the two-year Treasury
note yielded 3.60% and the 10-year Treasury note yielded 4%. The falling
long-term rates may be partly attributed to foreign interest in U.S. assets and
increased issuance of short-term Treasury bonds to finance the federal deficit.
Notably, the government is considering the reissuance of the 30-year Treasury,
which was suspended in August 2001. This would allow the U.S. Treasury to adopt
a more flexible approach to borrowing, while providing investors with another
long-term fixed income option.
Amid these conditions, the major benchmarks posted six-month and 12-month
returns as follows:
Total Returns as of May 31, 2005 6-month 12-month
=========================================================================================
U.S. equities (Standard & Poor's 500 Index) +2.42% + 8.24%
- -----------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) -2.10% + 9.82%
- -----------------------------------------------------------------------------------------
International equities (MSCI Europe, Australasia and Far East Index) +1.81% +14.62%
- -----------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) +2.90% + 6.82%
- -----------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +3.51% + 7.96%
- -----------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) +0.60% + 9.97%
- -----------------------------------------------------------------------------------------
While the environment is likely to remain somewhat challenging, we believe
opportunities exist for investors. With this in mind, we encourage you to meet
with your financial advisor to review your goals and asset allocation and to
rebalance your portfolio, as necessary, to ensure it remains aligned with your
objectives and risk tolerance. As always, 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/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Director
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005 3
A Discussion With Your Fund's Portfolio Manager
The Fund's return, although trailing that of the S&P Utility Index,
significantly outpaced the broad-market S&P 500 Index and was in line with the
Lipper Utility Funds average for the period.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended May 31, 2005, Merrill Lynch Utilities and
Telecommunications Fund, Inc.'s Class A, Class B, Class C and Class I Shares had
total returns of +8.22%, +7.95%, +7.94% and +8.46%, 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 +2.42% and +11.77%, while its comparable Lipper category of Utility
Funds had an average return of +8.19%. (Funds in this Lipper category invest
primarily in utility shares.)
During the period, the portfolio's investments within the domestic electric
utility sector had a favorable effect on Fund performance. However, stock
selection in the telecommunication services sector -- particularly
large-capitalization companies -- hindered relative returns for the period.
These companies faced competitive threats from technology substitution -- that
is, using wireless rather than wireline telephone services and using digital
subscriber lines (DSL) rather than having multiple fixed telephone lines -- and
were forced to spend capital to enhance the current telephone networks in order
to deploy more services at ever-faster speeds.
Conversely, the domestic electric sector benefited from the low interest rate
environment and investor demand for relatively high dividend yields. These
companies tend to be fairly stable given the regulated environment in which they
operate. Although capital expenditures are on the rise for many companies due to
clean-air requirements and the need for some new electricity generation and
transmission lines, it is expected that they will seek regulatory approval
before increasing spending. Therefore, we believe the domestic electric utility
sector remains fairly quiet on a fundamental basis, and that this appeals to
investors in the current economic environment. The group does not appear to be
inexpensive based on historical valuation metrics, but the general view that
these companies offer relatively stable earnings growth and competitive yields
has been enough to attract investors to stocks in this sector.
What changes were made to the portfolio during the period?
We trimmed our exposure to the European utility and telecommunications sector.
The reduction was primarily driven by changes in the underlying fundamentals of
the sector. Most notably, we sharply reduced our position in Deutsche Telekom
AG. The stock had performed well in 2004, as the company returned to financial
health and announced that it would resume paying an annual dividend in 2005.
Labor issues continue to weigh on the company as the employment situation in
Germany has not improved. We believe this factor, coupled with the potential for
higher capital expenditures in the company's U.S. wireless operations, may hold
back the relative performance of the stock. More recently, we eliminated our
holding in Mobistar S.A., a Belgian wireless company. Competition within the
wireless market in Belgium is expected to increase sharply in the coming months,
as Belgacom announced weak results and issued a statement that it would pursue
market share more aggressively. Mobistar always has been a good and profitable
competitor. However, the company is limited to just this one market, and
Belgacom's financial strength may lead to an extremely challenging environment
for Mobistar. In addition, the shares of Mobistar were selling at a premium to
its peer group.
We eliminated our holdings in Hong Kong and Japan based on fundamentals and
valuations, and we also trimmed several other individual positions in various
sectors. We made these reductions primarily to raise money to reinvest into
several new holdings that we view as more compelling on a relative basis.
To that end, we added approximately 12 new holdings to the portfolio during the
period. Several of the new purchases were prompted by the fact that prices for
electric power plant assets have stabilized and possibly are on the upswing
given recent transactions, primarily indicative of the mergers and acquisitions
(M&A) theme in the domestic electric utility sector. Moreover, we are getting
closer to the 2007 - 2008 time frame, when supply and demand of power is
expected to be more at equilibrium, and we believe valuations also appear to be
relatively attractive. The new additions also included two telecommunications
companies in Brazil, which we purchased based on their attractive valuations.
Finally, we increased our position in the energy sector with the additions of
ConocoPhillips, Duke Energy Corp. and James River Coal Co.
4 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
How would you characterize the Fund's position at the close of the period?
As of May 31, 2005, the portfolio consisted of 87 different holdings across 10
countries. The Fund's largest sector and market positions were in electric
utilities and the United States, respectively. Diversified telecommunication
services comprises the second-largest sector in the portfolio. The Fund
continues to seek capital appreciation and total return, and the majority of the
stocks in the portfolio pay dividends.
M&A activity has been increasing in both the electric and telecommunication
services sectors. In the fourth quarter of 2004, Exelon Corp. announced that it
was buying Public Service Electric & Gas Company. The Fund holds positions in
both companies, and we believe the deal has been structured so that it will
benefit both sets of shareholders. Dividends at both companies have been
adjusted so that investors will continue to receive payments until the
reorganization is completed. In addition, their shareholders will not see any
decline in the dividend level at the combined company.
Duke Energy announced late in the period that it was purchasing Cinergy Corp.
Cinergy has an inadequate supply of electricity and may purchase additional
energy from Duke, which has a surplus. We believe this is the first of several
deals that Duke Energy will announce. We continue to emphasize strong companies
in the portfolio and, therefore, anticipate that other Fund holdings also may be
part of future M&A activity within the sector. Although we do not expect to see
large premiums paid for companies, M&A effectively place floors on some of the
stock prices, thereby reducing downside risk.
Announcements of transactions in the telecommunications sector were made earlier
in the period, and the regulatory approval process is generally not as
complicated or as long as it is for electric utilities. Alltel Corp. announced
that it is buying Western Wireless Corp., and Sprint Corp. indicated that it
intends to purchase Nextel Communications, Inc. We believe this change in
control of Nextel should prompt Nextel Partners, Inc. to take some action
because the company has a put option, which gives it the right to sell Nextel
Communications shares at a fixed price. This may force Nextel/Sprint to buy the
company out. Thus, we anticipate that our positions in Western Wireless, Nextel
Communications and Nextel Partners will be eliminated from the portfolio.
Although not Fund holdings, the purchases of MCI Communications and AT&T
Wireless by Verizon Communications, Inc. and Cingular Wireless, respectively,
also will add to the decline in the number of telecommunications companies
available for purchase in the United States. We believe this activity, which is
shrinking the number of individual stocks in the U.S. telecommunication services
sector, may lead more investors to consider purchasing shares of
telecommunication services companies outside of the United States. There is a
friendlier competitive environment in some of these markets, as cable television
is not as strong or penetrated as it is in the United States. We believe
continued consolidation in the industry generally may result in more rational
pricing trends and less customer churning, and the Fund is positioned to benefit
from these trends.
Investors' appetite for current yield generally remains strong. This has been
evident in the performance of the domestic electric utility sector since the
start of the 2005 calendar year. We have continued to look for opportunities to
add to the portfolio in keeping with this theme. We have added several positions
despite some valuation levels that may be nearing historic highs, as indicated
by basic parameters such as price/earnings ratios. However, because these stocks
have yields that are comparable to the 10-year U.S. Treasury note and offer the
prospect of further dividend growth, we believe they have some additional upside
potential. In our view, the Fund is appropriately positioned with stocks that
should show better-than-average price appreciation within their industries as a
result of improving fundamentals, and stocks that have dividend yields above the
group average and offer the opportunity for modest growth.
Kathleen M. Anderson
Vice President and Portfolio Manager
June 13, 2005
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005 5
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 (front-end load) of 4%
and an account maintenance fee of 0.25% per year (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 maintain a four-year schedule. In addition, Class B Shares
are subject to a distribution fee of 0.50% per year and an account
maintenance fee of 0.25% per year. 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% per year and an
account maintenance fee of 0.25% per year. 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 performance data current to the
most recent month-end. 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
6-Month 12-Month 10-Year
As of May 31, 2005 Total Return Total Return Total Return
===============================================================================================================
ML Utilities and Telecommunications Fund, Inc. Class A Shares* + 8.22% +28.46% +139.60%
- ---------------------------------------------------------------------------------------------------------------
ML Utilities and Telecommunications Fund, Inc. Class B Shares* + 7.95 +27.85 +128.06
- ---------------------------------------------------------------------------------------------------------------
ML Utilities and Telecommunications Fund, Inc. Class C Shares* + 7.94 +27.76 +127.41
- ---------------------------------------------------------------------------------------------------------------
ML Utilities and Telecommunications Fund, Inc. Class I Shares* + 8.46 +28.92 +146.34
- ---------------------------------------------------------------------------------------------------------------
S&P 500(R) Index** + 2.42 + 8.24 +163.54
- ---------------------------------------------------------------------------------------------------------------
S&P Utilities Index*** +11.77 +32.40 +104.51
- ---------------------------------------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included. Cumulative 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 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.
*** 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.
S&P 500 is a registered trademark of the McGraw-Hill Companies.
6 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 5/31/05 +28.46% +23.32%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/05 + 2.45 + 1.61
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/05 + 9.13 + 8.69
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 5/31/05 +27.85% +23.85%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/05 + 1.92 + 1.70
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/05 + 8.59 + 8.59
- --------------------------------------------------------------------------------
* 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 5/31/05 +27.76% +26.76%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/05 + 1.92 + 1.92
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/05 + 8.56 + 8.56
- --------------------------------------------------------------------------------
* 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 5/31/05 +28.92% +23.77%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/05 + 2.72 + 1.88
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/05 + 9.43 + 8.99
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005 7
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses related
to transactions, including sales charges, redemption fees and exchange fees; and
(b) operating expenses including advisory fees, distribution fees including
12(b)-1 fees, and other Fund expenses. The following example (which is based on
a hypothetical investment of $1,000 invested on December 1, 2004 and held
through May 31, 2005) is intended to assist shareholders both in calculating
expenses based on an investment in the Fund and in comparing these expenses with
similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during the
period covered by this report, shareholders can divide their account value by
$1,000 and then multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders ongoing
costs only and do not reflect any transactional expenses, such as sales charges,
redemption fees or exchange fees. Therefore, the second table is useful in
comparing ongoing expenses only, and will not help shareholders determine the
relative total expenses of owning different funds. If these transactional
expenses were included, shareholder expenses would have been higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value December 1, 2004 to
December 1, 2004 May 31, 2005 May 31, 2005
===========================================================================================================
Actual
===========================================================================================================
Class A $1,000 $1,082.20 $6.49
- -----------------------------------------------------------------------------------------------------------
Class B $1,000 $1,079.50 $9.18
- -----------------------------------------------------------------------------------------------------------
Class C $1,000 $1,079.40 $9.44
- -----------------------------------------------------------------------------------------------------------
Class I $1,000 $1,084.60 $5.20
===========================================================================================================
Hypothetical (5% annual return before expenses)**
===========================================================================================================
Class A $1,000 $1,018.70 $6.29
- -----------------------------------------------------------------------------------------------------------
Class B $1,000 $1,016.11 $8.90
- -----------------------------------------------------------------------------------------------------------
Class C $1,000 $1,015.86 $9.15
- -----------------------------------------------------------------------------------------------------------
Class I $1,000 $1,019.95 $5.04
- -----------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (1.25% for Class A, 1.77% for Class B, 1.82% for Class
C and 1.00% for Class I), multiplied by the average account value over the
period, multiplied by 182/365 (to reflect the one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most recent fiscal half-year divided by 365.
8 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
Schedule of Investments
Value
Country Industry* Shares Held Common Stocks (in U.S. dollars)
====================================================================================================================================
Brazil--1.7% Diversified Telecommunication 18,000 Brasil Telecom Participacoes SA (b) $ 597,420
Services--0.4%
--------------------------------------------------------------------------------------------------------------
Electric Utilities--1.0% 56,600 CPFL Energia SA (b) 1,381,040
--------------------------------------------------------------------------------------------------------------
Wireless Telecommunication 90,900 Telesp Celular Participacoes SA (a)(b) 460,863
Services--0.3%
--------------------------------------------------------------------------------------------------------------
Total Common Stocks in Brazil 2,439,323
====================================================================================================================================
Canada--6.9% Diversified Telecommunication 156,900 BCE, Inc. 3,608,700
Services--4.9% 106,724 Telus Corp. 3,488,451
------------
7,097,151
--------------------------------------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels--2.0% 44,600 EnCana Corp. 1,546,944
42,000 Talisman Energy, Inc. 1,397,340
------------
2,944,284
--------------------------------------------------------------------------------------------------------------
Total Common Stocks in Canada 10,041,435
====================================================================================================================================
France--1.4% Diversified Telecommunication 24,700 France Telecom SA 709,697
Services--0.5%
--------------------------------------------------------------------------------------------------------------
Multi-Utilities--0.9% 31,000 Suez SA 836,359
14,200 Veolia Environnement 537,401
------------
1,373,760
--------------------------------------------------------------------------------------------------------------
Total Common Stocks in France 2,083,457
====================================================================================================================================
Germany--2.8% Diversified Telecommunication 46,300 Deutsche Telekom AG 863,251
Services--0.6%
--------------------------------------------------------------------------------------------------------------
Electric Utilities--1.8% 29,700 E.On AG 2,580,616
--------------------------------------------------------------------------------------------------------------
Multi-Utilities--0.4% 9,000 RWE AG 551,748
--------------------------------------------------------------------------------------------------------------
Total Common Stocks in Germany 3,995,615
====================================================================================================================================
Italy--2.7% Diversified Telecommunication 327,776 Telecom Italia SpA 1,056,324
Services--1.6% 494,800 Telecom Italia SpA (RNC) 1,313,553
------------
2,369,877
--------------------------------------------------------------------------------------------------------------
Electric Utilities--1.1% 166,600 Enel SpA 1,501,679
--------------------------------------------------------------------------------------------------------------
Total Common Stocks in Italy 3,871,556
====================================================================================================================================
Mexico--1.1% Diversified Telecommunication 32,600 Telefonos de Mexico, SA de CV (b) 608,316
Services--0.4%
--------------------------------------------------------------------------------------------------------------
Wireless Telecommunication 17,700 America Movil, SA de CV (b) 1,003,236
Services--0.7%
--------------------------------------------------------------------------------------------------------------
Total Common Stocks in Mexico 1,611,552
====================================================================================================================================
Portugal--0.4% Diversified Telecommunication 61,800 Portugal Telecom SGPS SA Registered Shares 633,353
Services--0.4%
--------------------------------------------------------------------------------------------------------------
Total Common Stocks in Portugal 633,353
====================================================================================================================================
Spain--5.5% Diversified Telecommunication 192,200 Telefonica SA 3,229,913
Services--2 .2%
--------------------------------------------------------------------------------------------------------------
Electric Utilities--3.3% 67,900 Endesa SA 1,481,445
128,200 Iberdrola SA 3,284,622
------------
4,766,067
--------------------------------------------------------------------------------------------------------------
Total Common Stocks in Spain 7,995,980
==============================================================================================================
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005 9
Schedule of Investments (continued)
Value
Country Industry* Shares Held Common Stocks (in U.S. dollars)
====================================================================================================================================
United Kingdom--5.3% Electric Utilities--2.6% 83,200 International Power Plc $ 293,363
70,800 Scottish & Southern Energy Plc 1,266,498
264,600 Scottish Power Plc 2,235,221
------------
3,795,082
--------------------------------------------------------------------------------------------------------------
Gas Utilities--0.2% 81,000 Centrica Plc 342,495
--------------------------------------------------------------------------------------------------------------
Multi-Utilities--0.8% 113,775 National Grid Transco Plc 1,114,567
--------------------------------------------------------------------------------------------------------------
Wireless Telecommunication 97,900 Vodafone Group Plc (b) 2,465,122
Services--1.7%
--------------------------------------------------------------------------------------------------------------
Total Common Stocks in the United Kingdom 7,717,266
====================================================================================================================================
United States--68.6% Diversified Telecommunication 46,900 Alltel Corp. 2,728,173
Services--12.1% 139,900 BellSouth Corp. 3,743,724
17,400 CenturyTel, Inc. 570,546
50,900 Citizens Communications Co. 694,276
144,900 SBC Communications, Inc. 3,387,762
96,500 Sprint Corp. 2,286,085
118,300 Verizon Communications, Inc. 4,185,454
------------
17,596,020
--------------------------------------------------------------------------------------------------------------
Electric Utilities--24.5% 26,700 Ameren Corp. 1,457,286
52,700 American Electric Power Co., Inc. 1,880,863
50,662 Cinergy Corp. 2,088,794
69,200 Cleco Corp. 1,445,588
23,200 DPL, Inc. 587,192
16,700 DTE Energy Co. 793,918
67,100 Edison International 2,465,925
52,800 Entergy Corp. 3,792,624
100,000 Exelon Corp. 4,685,000
32,800 FPL Group, Inc. 1,333,320
46,600 FirstEnergy Corp. 2,064,380
56,700 NSTAR 3,319,218
41,000 PG&E Corp. 1,466,570
68,600 PPL Corp. 3,945,186
31,800 Pinnacle West Capital Corp. 1,403,016
37,100 Reliant Energy, Inc. (a) 456,330
72,000 The Southern Co. 2,444,400
------------
35,629,610
--------------------------------------------------------------------------------------------------------------
Gas Utilities--7.8% 33,100 AGL Resources, Inc. 1,166,444
17,100 Equitable Resources, Inc. 1,086,876
38,000 KeySpan Corp. 1,510,120
27,100 National Fuel Gas Co. 758,800
60,400 New Jersey Resources Corp. 2,724,040
19,900 NiSource, Inc. 479,590
32,000 Oneok, Inc. 987,200
24,300 Questar Corp. 1,531,872
42,000 UGI Corp. 1,113,420
------------
11,358,362
--------------------------------------------------------------------------------------------------------------
Independent Power Producers & 59,300 Constellation Energy Group, Inc. 3,169,585
Energy Traders--9.0% 28,000 Duke Energy Corp. 769,440
21,200 NRG Energy, Inc. (a) 757,900
31,000 Ormat Technologies, Inc. (a) 530,410
97,500 TXU Corp. 7,827,300
------------
13,054,635
--------------------------------------------------------------------------------------------------------------
Media--0.9% 53,000 Cablevision Systems Corp. Class A (a) 1,355,740
--------------------------------------------------------------------------------------------------------------
10 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
Schedule of Investments (concluded)
Value
Country Industry* Shares Held Common Stocks (in U.S. dollars)
====================================================================================================================================
United States Multi-Utilities--7.8% 66,837 Dominion Resources, Inc. $ 4,699,309
(concluded) 15,800 Energy East Corp. 442,400
12,100 OGE Energy Corp. 335,775
42,900 Public Service Enterprise Group, Inc. 2,380,950
41,400 SCANA Corp. 1,744,182
19,500 Sempra Energy 773,565
28,600 Wisconsin Energy Corp. 1,038,180
------------
11,414,361
--------------------------------------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels--5.1% 5,500 ConocoPhillips 593,120
13,800 Devon Energy Corp. 633,420
31,900 EOG Resources, Inc. 1,591,491
10,800 James River Coal Co. (a) 355,320
11,000 Kinder Morgan, Inc. 854,810
42,600 Peabody Energy Corp. 2,033,724
71,800 Williams Cos., Inc. 1,321,838
------------
7,383,723
--------------------------------------------------------------------------------------------------------------
Wireless Telecommunication 30,000 Nextel Communications, Inc. Class A (a) 905,400
Services--1.4% 28,400 Nextel Partners, Inc. Class A (a) 674,500
11,300 Western Wireless Corp. Class A (a) 449,853
------------
2,029,753
--------------------------------------------------------------------------------------------------------------
Total Common Stocks in the United States 99,822,204
==============================================================================================================
Total Common Stocks
(Cost--$93,201,126)--96.4% 140,211,741
==============================================================================================================
Face Amount Trust Preferred
====================================================================================================================================
United States--0.7% Multi-Utilities--0.7% $1,092,450 AES Trust III, 6.75% due 10/15/2029 995,127
--------------------------------------------------------------------------------------------------------------
Total Trust Preferred (Cost--$660,665)--0.7% 995,127
==============================================================================================================
Beneficial Interest Short-Term Securities
====================================================================================================================================
$3,301,497 Merrill Lynch Liquidity Series, LLC Cash
Sweep Series I (c) 3,301,497
--------------------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$3,301,497)--2.3% 3,301,497
====================================================================================================================================
Total Investments (Cost--$97,163,288**)--99.4% 144,508,365
Other Assets Less Liabilities--0.6% 944,297
------------
Net Assets--100.0% $145,452,662
============
* 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.
** The cost and unrealized appreciation (depreciation) of investments as of
May 31, 2005, as computed for federal income tax purposes, were as
follows:
Aggregate cost ........................................... $97,274,876
===========
Gross unrealized appreciation ............................ $47,757,099
Gross unrealized depreciation ............................ (523,610)
-----------
Net unrealized appreciation .............................. $47,233,489
===========
(a) Non-income producing security.
(b) Depositary Receipts.
(c) 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) were as follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $(1,245,455) $37,151
--------------------------------------------------------------------------
See Notes to Financial Statements.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005 11
Statement of Assets and Liabilities
As of May 31, 2005
======================================================================================================================
Assets
- ----------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$93,861,791) ............................ $ 141,206,868
Investments in affiliated securities, at value
(identified cost--$3,301,497) ............................. 3,301,497
Foreign cash (cost--$29,415) ............................... 28,059
Receivables:
Securities sold ......................................... $ 1,248,720
Dividends ............................................... 279,365
Capital shares sold ..................................... 36,700
Interest (including $8,893 from affiliates) ............. 19,427 1,584,212
-------------
Prepaid expenses ........................................... 22,201
-------------
Total assets ............................................... 146,142,837
-------------
======================================================================================================================
Liabilities
- ----------------------------------------------------------------------------------------------------------------------
Payables:
Securities purchased .................................... 292,027
Capital shares redeemed ................................. 202,505
Investment adviser ...................................... 59,107
Other affiliates ........................................ 53,503
Distributor ............................................. 45,842 652,984
-------------
Accrued expenses and other liabilities ..................... 37,191
-------------
Total liabilities .......................................... 690,175
-------------
======================================================================================================================
Net Assets
- ----------------------------------------------------------------------------------------------------------------------
Net assets ................................................. $ 145,452,662
=============
======================================================================================================================
Net Assets Consist of
- ----------------------------------------------------------------------------------------------------------------------
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized ......................................... $ 689,544
Class B Shares of Common Stock, $.10 par value, 100,000,000
shares authorized ......................................... 272,612
Class C Shares of Common Stock, $.10 par value, 100,000,000
shares authorized ......................................... 123,109
Class I Shares of Common Stock, $.10 par value, 100,000,000
shares authorized ......................................... 223,729
Paid-in capital in excess of par ........................... 130,570,222
Undistributed investment income--net ....................... $ 669,097
Accumulated realized capital losses--net ................... (34,437,403)
Unrealized appreciation--net ............................... 47,341,752
-------------
Total accumulated gains--net ............................... 13,573,446
-------------
Net Assets ................................................. $ 145,452,662
=============
======================================================================================================================
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $76,769,733 and 6,895,444
shares outstanding ........................................ $ 11.13
=============
Class B--Based on net assets of $30,252,970 and 2,726,121
shares outstanding ........................................ $ 11.10
=============
Class C--Based on net assets of $13,534,284 and 1,231,089
shares outstanding ........................................ $ 10.99
=============
Class I--Based on net assets of $24,895,675 and 2,237,292
shares outstanding ........................................ $ 11.13
=============
See Notes to Financial Statements.
12 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
Statement of Operations
For the Six Months Ended May 31, 2005
======================================================================================================================
Investment Income
- ----------------------------------------------------------------------------------------------------------------------
Dividends (net of $106,848 foreign withholding tax) ........ $ 2,330,531
Interest (including $37,151 from affiliates) ............... 75,700
-------------
Total income ............................................... 2,406,231
-------------
======================================================================================================================
Expenses
- ----------------------------------------------------------------------------------------------------------------------
Investment advisory fees ................................... $ 429,068
Account maintenance and distribution fees--Class B ......... 117,116
Account maintenance fees--Class A .......................... 93,338
Transfer agent fees--Class A ............................... 51,892
Account maintenance and distribution fees--Class C ......... 51,500
Accounting services ........................................ 48,298
Registration fees .......................................... 29,677
Professional fees .......................................... 28,923
Transfer agent fees--Class B ............................... 25,670
Printing and shareholder reports ........................... 23,920
Directors' fees and expenses ............................... 21,659
Transfer agent fees--Class I ............................... 16,851
Custodian fees ............................................. 16,229
Transfer agent fees--Class C ............................... 10,422
Pricing fees ............................................... 1,857
Other ...................................................... 12,638
-------------
Total expenses ............................................. 979,058
-------------
Investment income--net ..................................... 1,427,173
-------------
======================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- ----------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ........................................ 2,865,768
Foreign currency transactions--net ...................... (8,713) 2,857,055
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ........................................ 6,970,795
Foreign currency transactions--net ...................... (5,797) 6,964,998
-------------------------------
Total realized and unrealized gain--net .................... 9,822,053
-------------
Net Increase in Net Assets Resulting from Operations ....... $ 11,249,226
=============
See Notes to Financial Statements.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005 13
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
May 31, November 30,
Increase (Decrease) in Net Assets: 2005 2004
======================================================================================================================
Operations
- ----------------------------------------------------------------------------------------------------------------------
Investment income--net ..................................... $ 1,427,173 $ 2,673,097
Realized gain--net ......................................... 2,857,055 6,229,001
Change in unrealized appreciation/depreciation--net ........ 6,964,998 25,266,567
-------------------------------
Net increase in net assets resulting from operations ....... 11,249,226 34,168,665
-------------------------------
======================================================================================================================
Dividends to Shareholders
- ----------------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A ................................................. (686,848) (1,400,106)
Class B ................................................. (204,033) (493,529)
Class C ................................................. (85,084) (164,643)
Class I ................................................. (252,424) (520,382)
-------------------------------
Net decrease in net assets resulting from dividends to
shareholders .............................................. (1,228,389) (2,578,660)
-------------------------------
======================================================================================================================
Capital Share Transactions
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in net assets derived from capital share
transactions .............................................. (5,364,545) (25,760,427)
-------------------------------
======================================================================================================================
Net Assets
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets ............................... 4,656,292 5,829,578
Beginning of period ........................................ 140,796,370 134,966,792
-------------------------------
End of period* ............................................. $ 145,452,662 $ 140,796,370
===============================
* Undistributed investment income--net .................. $ 669,097 $ 470,313
===============================
See Notes to Financial Statements.
14 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
Financial Highlights
Class A
-----------------------------------------------------------------------
For the Six For the Year Ended
Months Ended November 30,
The following per share data and ratios have been derived May 31, ----------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.38 $ 8.23 $ 7.40 $ 9.67 $ 11.81
---------------------------------------------------------------------
Investment income--net*** .............. .11 .20 .19 .26 .32
Realized and unrealized gain (loss)--net .74 2.14 .85 (2.14) (1.46)
---------------------------------------------------------------------
Total from investment operations ....... .85 2.34 1.04 (1.88) (1.14)
---------------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.10) (.19) (.21) (.28) (.33)
Realized gain--net .................. -- -- -- (.11) (.67)
---------------------------------------------------------------------
Total dividends and distributions ...... (.10) (.19) (.21) (.39) (1.00)
---------------------------------------------------------------------
Net asset value, end of period ......... $ 11.13 $ 10.38 $ 8.23 $ 7.40 $ 9.67
=====================================================================
==================================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 8.22%+ 28.82% 14.26% (19.83%) (10.67%)
=====================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.25%* 1.28% 1.33% 1.26% 1.11%
=====================================================================
Investment income--net ................. 2.12%* 2.11% 2.42% 3.13% 2.86%
=====================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $76,770 $73,286 $60,142 $34,038 $36,794
=====================================================================
Portfolio turnover ..................... 6.68% 10.89% 21.20% 31.16% 45.66%
=====================================================================
* Annualized.
** Total investment returns exclude the effects 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, 2005 15
Financial Highlights (continued)
Class B
-----------------------------------------------------------------------
For the Six For the Year Ended
Months Ended November 30,
The following per share data and ratios have been derived May 31, ----------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.35 $ 8.19 $ 7.37 $ 9.61 $ 11.75
---------------------------------------------------------------------
Investment income--net*** .............. .09 .14 .16 .22 .26
Realized and unrealized gain (loss)--net .73 2.16 .82 (2.13) (1.47)
---------------------------------------------------------------------
Total from investment operations ....... .82 2.30 .98 (1.91) (1.21)
---------------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.07) (.14) (.16) (.22) (.26)
Realized gain--net .................. -- -- -- (.11) (.67)
---------------------------------------------------------------------
Total dividends and distributions ...... (.07) (.14) (.16) (.33) (.93)
---------------------------------------------------------------------
Net asset value, end of period ......... $ 11.10 $ 10.35 $ 8.19 $ 7.37 $ 9.61
=====================================================================
==================================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 7.95%+ 28.30% 13.47% (20.16%) (11.25%)
=====================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.77%* 1.81% 1.86% 1.77% 1.63%
=====================================================================
Investment income--net ................. 1.59%* 1.58% 2.08% 2.63% 2.40%
=====================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $30,253 $31,935 $41,317 $74,822 $147,549
=====================================================================
Portfolio turnover ..................... 6.68% 10.89% 21.20% 31.16% 45.66%
=====================================================================
* Annualized.
** Total investment returns exclude the effects 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, 2005
Financial Highlights (continued)
Class C
-----------------------------------------------------------------------
For the Six For the Year Ended
Months Ended November 30,
The following per share data and ratios have been derived May 31, ----------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.25 $ 8.13 $ 7.31 $ 9.55 $ 11.68
---------------------------------------------------------------------
Investment income--net*** .............. .08 .14 .15 .21 .25
Realized and unrealized gain (loss)--net .73 2.12 .83 (2.11) (1.45)
---------------------------------------------------------------------
Total from investment operations ....... .81 2.26 .98 (1.90) (1.20)
---------------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.07) (.14) (.16) (.23) (.26)
Realized gain--net .................. -- -- -- (.11) (.67)
---------------------------------------------------------------------
Total dividends and distributions ...... (.07) (.14) (.16) (.34) (.93)
---------------------------------------------------------------------
Net asset value, end of period ......... $ 10.99 $ 10.25 $ 8.13 $ 7.31 $ 9.55
=====================================================================
==================================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 7.94%+ 28.03% 13.62% (20.27%) (11.24%)
=====================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.82%* 1.85% 1.91% 1.84% 1.69%
=====================================================================
Investment income--net ................. 1.55%* 1.53% 1.93% 2.55% 2.31%
=====================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $13,534 $11,898 $10,994 $10,545 $10,194
=====================================================================
Portfolio turnover ..................... 6.68% 10.89% 21.20% 31.16% 45.66%
=====================================================================
* Annualized.
** Total investment returns exclude the effects 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, 2005 17
Financial Highlights (concluded)
Class I
-----------------------------------------------------------------------
For the Six For the Year Ended
Months Ended November 30,
The following per share data and ratios have been derived May 31, ----------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.37 $ 8.22 $ 7.39 $ 9.66 $ 11.81
---------------------------------------------------------------------
Investment income--net*** .............. .13 .22 .21 .29 .34
Realized and unrealized gain (loss)--net .74 2.14 .84 (2.15) (1.47)
---------------------------------------------------------------------
Total from investment operations ....... .87 2.36 1.05 (1.86) (1.13)
---------------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.11) (.21) (.22) (.30) (.35)
Realized gain--net .................. -- -- -- (.11) (.67)
---------------------------------------------------------------------
Total dividends and distributions ...... (.11) (.21) (.22) (.41) (1.02)
---------------------------------------------------------------------
Net asset value, end of period ......... $ 11.13 $ 10.37 $ 8.22 $ 7.39 $ 9.66
=====================================================================
==================================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 8.46%+ 29.16% 14.54% (19.64%) (10.54%)
=====================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.00%* 1.03% 1.07% 1.00% .86%
=====================================================================
Investment income--net ................. 2.37%* 2.36% 2.77% 3.39% 3.15%
=====================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $24,896 $23,677 $22,514 $20,342 $26,700
=====================================================================
Portfolio turnover ..................... 6.68% 10.89% 21.20% 31.16% 45.66%
=====================================================================
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
+ Aggregate total investment return.
See Notes to Financial Statements.
18 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
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 present a fair statement of the results for the interim period. 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 (except that Class B shareholders may vote on certain changes to
the Class A distribution plan). Income, expenses (other than expenses
attributable to a specific class) and realized and unrealized gains and losses
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 asked
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 asked 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 asked
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 the
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.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005 19
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. 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.
20 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
Notes to Financial Statements (continued)
(g) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(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 Plan 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 Plan 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"), an affiliate of MLIM, 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, 2005, 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 ............................ $ 1,518 $33,611
Class I ............................ $ 6 $ 67
- --------------------------------------------------------------------------------
For the six months ended May 31, 2005, MLPF&S received contingent deferred sales
charges of $13,619 and $449, relating to transactions in Class B Shares and
Class C Shares, respectively.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005 21
Notes to Financial Statements (continued)
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 managed by MLIM, LLC or in registered money market funds advised by MLIM
or its affiliates.
In addition, MLPF&S received $936 in commissions on the execution of portfolio
security transactions for the Fund for the six months ended May 31, 2005.
For the six months ended May 31, 2005 the Fund reimbursed MLIM $1,625 for
certain accounting services.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
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 six
months ended May 31, 2005 were $9,392,919 and $13,796,287, respectively.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$5,364,545 and $25,760,427 for the six months ended May 31, 2005 and the year
ended November 30, 2004, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended May 31, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 256,737 $ 2,788,183
Automatic conversion of shares ......... 166,160 1,807,204
Shares issued to shareholders
in reinvestment of dividends ........ 49,512 533,109
--------------------------------
Total issued ........................... 472,409 5,128,496
Shares redeemed ........................ (637,588) (6,863,380)
--------------------------------
Net decrease ........................... (165,179) $ (1,734,884)
================================
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended November 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 282,359 $ 2,555,395
Automatic conversion of shares ......... 1,250,628 11,120,589
Shares issued to shareholders
in reinvestment of dividends ........ 120,893 1,091,475
--------------------------------
Total issued ........................... 1,653,880 14,767,459
Shares redeemed ........................ (1,904,582) (17,277,664)
--------------------------------
Net decrease ........................... (250,702) $ (2,510,205)
================================
- --------------------------------------------------------------------------------
Class B Shares for the Six Months Dollar
Ended May 31, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 192,903 $ 2,077,160
Shares issued to shareholders
in reinvestment of dividends ........ 13,838 148,330
--------------------------------
Total issued ........................... 206,741 2,225,490
--------------------------------
Automatic conversion of shares ......... (166,747) (1,807,204)
Shares redeemed ........................ (400,764) (4,325,274)
--------------------------------
Total redeemed ......................... (567,511) (6,132,478)
--------------------------------
Net decrease ........................... (360,770) $ (3,906,988)
================================
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended November 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 304,248 $ 2,789,140
Shares issued to shareholders
in reinvestment of dividends ........ 40,756 365,876
--------------------------------
Total issued ........................... 345,004 3,155,016
--------------------------------
Automatic conversion of shares ......... (1,045,446) (11,120,589)
Shares redeemed ........................ (1,255,100) (9,438,326)
--------------------------------
Total redeemed ......................... (2,300,546) (20,558,915)
--------------------------------
Net decrease ........................... (1,955,542) $(17,403,899)
================================
- --------------------------------------------------------------------------------
Class C Shares for the Six Months Dollar
Ended May 31, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 192,566 $ 2,058,676
Shares issued to shareholders
in reinvestment of dividends ........ 6,519 69,357
--------------------------------
Total issued ........................... 199,085 2,128,033
Shares redeemed ........................ (128,461) (1,380,166)
--------------------------------
Net increase ........................... 70,624 $ 747,867
================================
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended November 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 145,974 $ 1,325,472
Shares issued to shareholders
in reinvestment of dividends ........ 15,000 133,902
--------------------------------
Total issued ........................... 160,974 1,459,374
Shares redeemed ........................ (353,438) (3,148,439)
--------------------------------
Net decrease ........................... (192,464) $ (1,689,065)
================================
22 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
Notes to Financial Statements (concluded)
- --------------------------------------------------------------------------------
Class I Shares for the Six Months Dollar
Ended May 31, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 155,728 $ 1,687,992
Shares issued to shareholders
in reinvestment of dividends ........ 19,968 214,865
--------------------------------
Total issued ........................... 175,696 1,902,857
Shares redeemed ........................ (220,746) (2,373,397)
--------------------------------
Net decrease ........................... (45,050) $ (470,540)
================================
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended November 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 190,762 $ 1,705,184
Shares issued to shareholders
in reinvestment of dividends ........ 49,587 446,639
--------------------------------
Total issued ........................... 240,349 2,151,823
Shares redeemed ........................ (696,696) (6,309,081)
--------------------------------
Net decrease ........................... (456,347) $ (4,157,258)
================================
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 a group of 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 .07% 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 defined in the credit agreement.
The Fund did not borrow under the credit agreement during the six months ended
May 31, 2005.
6. Capital Loss Carryforward:
On November 30, 2004, the Fund had a net capital loss carryforward of
$37,182,869, of which $34,674,004 expires in 2010 and $2,508,865 expires in
2011. This amount will be available to offset like amounts of any future taxable
gains.
7. Commitments:
At May 31, 2005, the Fund had entered into foreign exchange contracts under
which it had agreed to purchase and sell various foreign currencies with
approximate values of $292,000 and $906,000, respectively.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005 23
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director whose
only affiliation with Merrill Lynch Investment Managers, L.P. (the "Investment
Adviser") or other Merrill Lynch affiliates is as a director of the Fund and
certain other funds advised by the Investment Adviser or its affiliates. The
Chairman of the Board is also an independent director. New director nominees are
chosen as nominees by a Nominating Committee comprised of independent directors.
All independent directors also are members of the Board's Audit Committee and
the independent directors meet in executive session at each in person Board
meeting. The Board and the Audit Committee meet in person for at least two days
each quarter and conduct other in person and telephone meetings throughout the
year, some of which are formal board meetings, and some of which are
informational meetings. The independent counsel to the independent directors
attends all in person Board and Audit Committee meetings and other meetings at
the independent directors' request.
Investment Advisory Agreement -- Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment advisory
agreement (the "Investment Advisory Agreement"). The Board also annually reviews
and considers approval of the sub-advisory agreement on behalf of the Fund
between the Investment Adviser and an affiliate. The Board assesses the nature,
scope and quality of the services provided to the Fund by the personnel of the
Investment Adviser, the sub-adviser and their affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory requirements.
The Board also receives and assesses information regarding the services provided
to the Fund by certain unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates, including the sub-adviser. Among the
matters considered are: (a) fees (in addition to management fees) paid to the
Investment Adviser and its affiliates by the Fund, such as transfer agency fees
and fees for marketing and distribution; (b) Fund operating expenses paid to
third parties; (c) the resources devoted to and compliance reports relating to
the Fund's investment objective, policies and restrictions, and its compliance
with its Code of Ethics and the Investment Adviser's compliance policies and
procedures; and (d) the nature, cost and character of non-investment management
services provided by the Investment Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by the
Investment Adviser to be generally of high quality. The Board also believes that
the Investment Adviser is financially sound and well managed and notes that the
Investment Adviser is affiliated with one of America's largest financial firms.
The Board works closely with the Investment Adviser in overseeing the Investment
Adviser's efforts to achieve good performance. As part of this effort, the Board
discusses portfolio manager effectiveness and, when performance is not
satisfactory, discusses with the Investment Adviser taking steps such as
changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement and the sub-advisory agreement, the Board requests and
receives materials specifically relating to the Fund's Investment Advisory
Agreement and/or the sub-advisory agreement. These materials include (a)
information compiled by Lipper Inc. ("Lipper") on the fees and expenses and the
investment performance of the Fund as compared to a comparable group of funds as
classified by Lipper; (b) sales and redemption data for the Fund; (c) a
discussion by the Fund's portfolio management team of investment strategies used
by the Fund during its most recent fiscal year; (d) information on the
profitability to the Investment Adviser and its affiliates of the Investment
Advisory Agreement, the sub-advisory agreement and other relationships with the
Fund; and (e) information provided by the Investment Adviser concerning
investment advisory fees charged to other clients, such as offshore funds under
similar investment mandates and generally to institutional clients. The Board
also considers other matters it deems important to the approval process such as
payments made to the Investment Adviser or its affiliates relating to the
distribution of Fund shares, services related to the valuation and pricing of
Fund portfolio holdings, allocation of Fund brokerage fees (including the
related benefits to the Investment Adviser of "soft dollars"), the Fund's
portfolio turnover statistics, and direct and indirect benefits to the
Investment Adviser and the sub-adviser and their affiliates from their
relationship with the Fund.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement and the sub-advisory
24 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
agreement in May 2005, the independent directors' and Board's review included
the following:
Services Provided by the Investment Adviser -- The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, including the
investment advisory services and the resulting performance of the Fund, and the
sub-adviser. The Board focused primarily on the Investment Adviser's investment
advisory services and the Fund's investment performance, having concluded that
the other services provided to the Fund by the Investment Adviser were
satisfactory. The Board compared Fund performance -- both including and
excluding the effects of the Fund's fees and expenses -- to the performance of a
comparable group of mutual funds, and the performance of a relevant index or
combination of indexes. While the Board reviews performance data at least
quarterly, consistent with the Investment Adviser's investment goals, the Board
attaches more importance to performance over relatively long periods of time,
typically three to five years. The Fund's performance after fees and expenses
ranked above the median of its comparable group for the one-year and three-year
periods and at the median for the five-year period. Considering these factors,
the Board concluded that the Fund's performance supported the continuation of
the Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process -- The Board reviews
at least annually the Fund's investment objectives and strategies. The Board
discusses with senior management of the Investment Adviser responsible for
investment operations and the senior management of the Investment Adviser's
equity investing group the strategies being used to achieve the stated
objectives. Among other things, the Board considers the size, education and
experience of the Investment Adviser's investment staff, its use of technology,
and the Investment Adviser's approach to training and retaining portfolio
managers and other research, advisory and management personnel. The Board also
reviews the Investment Adviser's compensation policies and practices with
respect to the Fund's portfolio manager. The Board also considered the
experience of the Fund's portfolio manager and noted that Ms. Anderson has more
than ten years' experience in portfolio management; moreover, the Investment
Adviser and its investment staff have extensive experience in analyzing and
managing the types of investments used by the Fund. The Board concluded that the
Fund benefits from that expertise.
Management Fees and Other Expenses -- The Board reviews the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory and
administrative service fees and the effects of any fee waivers -- compared to
the other funds in its Lipper category. It also compares the Fund's total
expenses to those of other comparable funds. The Board considered the services
provided to and the fees charged by the Investment Adviser to other types of
clients. The Board noted that the Fund's contractual and actual management fee
rates and its overall expense ratio were lower than the median of the eleven
comparable funds classified by Lipper. The Board has concluded that the Fund's
management fee and fee rate and overall expense ratio are reasonable compared to
those of other comparable funds.
Profitability -- The Board considers the cost of the services provided to the
Fund by the Investment Adviser, and the Investment Adviser's and its affiliates'
profits relating to the management and distribution of the Fund and the
MLIM/FAM-advised funds. As part of its analysis, the Board reviewed the
Investment Adviser's methodology in allocating its costs to the management of
the Fund and concluded that there was a reasonable basis for the allocation. The
Board believes the Investment Adviser's profits are reasonable in relation to
the nature and quality of services provided.
Economies of Scale -- The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable the
Fund to participate in these economies of scale. While there was no evidence to
date that the Fund's assets have reached a level where such economies are
effectively available, the Board will continue to seek information relating to
economies of scale.
Conclusion
After the independent directors deliberated in executive session, the entire
Board, including all of the independent directors, approved the renewal of the
existing Investment Advisory Agreement and sub-advisory agreement, concluding
that the advisory fee was reasonable in relation to the services provided and
that a contract renewal was in the best interests of the shareholders.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005 25
Officers and Directors
Robert C. Doll, Jr., President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Jean Margo Reid, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Kathleen M. Anderson, Vice President and Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
JPMorgan Chase Bank, N.A.
3 Chase MetroTech Center
Brooklyn, NY 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
26 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2005
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
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 at 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, 2005 27
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
- --------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.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. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
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 -- 5/05
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 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(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.
11(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 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(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/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Utilities and Telecommunications Fund, Inc.
Date: July 15, 2005
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/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Utilities and Telecommunications Fund, Inc.
Date: July 15, 2005
By: /s/ Donald C. Burke
-----------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Utilities and Telecommunications Fund, Inc.
Date: July 15, 2005