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: 11/30/06
Date of reporting period: 12/01/05 - 05/31/06
Item 1 - Report to Stockholders
Semi-Annual Report
May 31, 2006
Merrill Lynch Utilities and
Telecommunications
Fund, Inc.
Merrill Lynch Utilities and Telecommunications Fund, Inc.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company ("New BlackRock") that will be one of the world's largest
asset management firms with approximately $1 trillion in assets under management
(based on combined assets under management as of March 31, 2006) (the
"Transaction"). The Transaction is expected to close in the third quarter of
2006, at which time the new company will operate under the BlackRock name. The
Fund's Board of Directors has approved a new investment advisory agreement with
BlackRock Advisors, Inc. or its successor on substantially the same terms and
for the same advisory fee as the current investment advisory agreement with the
Investment Adviser. If the new agreement is approved by the Fund's shareholders,
BlackRock Advisors, Inc. or its successor is expected to become the investment
adviser of the Fund upon the closing of the Transaction.
Industry Classification as a Percentage of Total Investments as of May 31, 2006
A pie graph depicting Industry Classification as a Percentage of Total
Investments as of May 31, 2006.
Electric Utilities 25.8%
Diversified Telecommunication Services 18.8%
Multi-Utilities 15.5%
Wireless Telecommunication Services 11.5%
Independent Power Producers & Energy Traders 11.1%
Oil, Gas & Consumable Fuels 6.3%
Gas Utilities 4.3%
Energy Equipment & Services 3.7%
Media 1.2%
Commercial Services & Supplies 0.4%
Electrical Equipment 0.4%
Construction & Engineering 0.3%
Other* 0.7%
* Includes portfolio holdings in short-term investments.
For Fund compliance purposes, the Fund's industry classifications refer to
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 industry sub-classifications for reporting
ease.
2 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
A Letter From the President
Dear Shareholder
You may be aware that changes are on the horizon at Merrill Lynch Investment
Managers ("MLIM"). Earlier this year, Merrill Lynch announced plans to combine
its investment advisory business, including MLIM, with another highly regarded
investment manager -- BlackRock, Inc. ("BlackRock").
At the completion of the transaction, which is expected at the end of the third
quarter of this year (subject to regulatory and shareholder approvals), the
resultant firm will be a top-10 investment manager worldwide with approximately
$1 trillion in assets under management.* The combined company will provide a
wider selection of high-quality investment solutions across a range of asset
classes and investment styles. MLIM and BlackRock possess complementary
capabilities that together create a well-rounded organization uniting some of
the finest money managers in the industry. At the same time, the firms share
similar values and beliefs -- they are focused on delivering excellence on
behalf of clients, and both make investment performance their single most
important mission. In short, the combination only reinforces our commitment to
shareholders.
Most of MLIM's investment products -- including mutual funds, separately managed
accounts, annuities and variable insurance funds -- eventually will carry the
"BlackRock" name. As a shareholder in one or more MLIM-advised mutual funds, you
recently were mailed a proxy package asking you to vote on proposed changes that
affect those funds. The proposals vary based on the funds in which you invest.
However, all shareholders are asked to vote on a new investment advisory
agreement with BlackRock Advisors, Inc. Your Fund's Board of Directors has
approved, and recommends that you approve, the new agreement. Your Fund's Board
also has approved, and recommends that you approve, a contingent subadvisory
agreement that will serve to ensure that management services can continue during
the course of completing the transaction.
It is important that you exercise your right as a mutual fund shareholder by
voting on the proposals that are presented to you in your funds' proxy
statements. Your participation -- via phone, mail, online or in person -- is
critical. (Refer to your proxy card for detailed voting procedures and
deadlines.) You should know that your vote on these proposals will not affect
your brokerage account or change your relationship with your financial advisor.
If you are a client of Merrill Lynch, you will remain a client of Merrill Lynch.
Should you have any questions or concerns, please do not hesitate to call
1.866.752.6486.
As always, we thank you for entrusting us with your investment assets, and we
look forward to continuing to serve your investment needs with even greater
strength and scale as the new BlackRock.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.039 trillion in assets under management as of March 31, 2006.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 3
A Discussion With Your Fund's Portfolio Manager
The Fund outperformed the broader stock market and the S&P Utility Index
for the period, benefiting from favorable stock selection and sector weightings.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended May 31, 2006, Merrill Lynch Utilities and
Telecommunications Fund, Inc.'s Class A, Class B, Class C and Class I Shares had
total returns of +5.93%, +5.65%, +5.61% and +6.06%, 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 +2.60% and +3.14%, while the Lipper Utility Funds category recorded
an average return of +5.82%. (Funds in this Lipper category invest at least 65%
of their equity portfolios in utility shares. The Fund also invests in
telecommunication services stocks, in which many funds in the Lipper group have
no position.)
Both our diversification of holdings away from the traditional electric utility
companies and good stock selection within this sector contributed to the Fund's
performance relative to the benchmark S&P Utility Index during the period.
Moreover, an underweight position and strong security selection in the
multi-utilities subsector also enhanced Fund returns. The Fund's holdings in
oil, gas and consumable fuels and wireless telecommunications also contributed
positively to returns for the period. Finally, performance benefited from an
increased weighting in the telecommunication sector, as well as AT&T, Inc.'s bid
for BellSouth Corp., one of the portfolio's top-10 largest holdings.
The share prices of the more traditional electric utility companies came under
some pressure early in 2006 as the yield on the 10-year U.S. Treasury note rose
above 5%. Furthermore, the volatility in natural gas prices, along with
headlines of rising utility bills, resulted in the potential for increased
regulatory oversight. Therefore, some natural gas stocks came under some price
pressure. Conversely, the telecommunications sector in the United States had
third quarter 2005 earnings results that indicated an inflection point. It was
at that point that earnings revisions started to turn upward after several years
of declining. It is also important to note that the two largest
telecommunications companies in the United States are in the process of
integrating companies that they acquired and, therefore, the opportunity for
better-than-expected operating synergies is a possibility.
What changes were made to the portfolio during the period?
The most significant change during the period was an increase in the portfolio's
exposure to the telecommunication services sector. After the three large
telecommunications companies -- Verizon Communications, Inc., AT&T Corp.
(formerly SBC Communications) and BellSouth Corp. -- announced their third
quarter 2005 results, we found more stability in operating measurements such as
fixed telephone access lines. Growth in broadband lines, digital subscriber
lines (DSL) and wireless subscribers continued. These factors, coupled with
operating costs that appeared to be under control, led us to believe that the
recurring downward bias in earnings revisions was nearing an end. In the
subsequent months, we added to our holdings in these stocks.
Also within telecommunications, we added exposure to our tower-related holdings.
Companies in the tower business benefit from the continued demand for wireless
services and quality of service improvements. Our initial focus and largest
holding in this space is American Tower Corp., which has the most geographic
diversification and also had a stock buyback program. We also established new
positions in SBA Communications and Crown Castle International Corp., which
provides further diversification for the portfolio and, we believe, additional
growth opportunities.
To fund these purchases, we reduced or eliminated some of our holdings in
utilities, foreign telecommunications and energy companies. These stocks were no
longer as attractive to us compared to the improving fundamentals of the
companies that we added to the portfolio, particularly in the telecommunication
services sector.
4 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
How would you characterize the Fund's position at the close of the period?
At May 31, 2006, the portfolio consisted of 104 holdings across 14 countries.
The utilities sector remains the most heavily weighted, followed by
telecommunication services. In terms of our utility holdings, we have been
adding companies that we believe have more growth prospects with little or no
dividend yield. We expect these companies should perform better in a rising
interest rate environment, as their growth potential (rather than their yields)
is likely to attract investors. Moreover, many of these companies have a greater
proportion of non-regulated assets, which should be a positive in an environment
of increased price scrutiny by regulators of the hometown integrated utility
companies. We also have focused on companies such as TXU Corp. that have
mitigated many of the risks of higher natural gas prices but have outlined
future growth plans. Finally, several of our utility holdings provide
investments in alternative energy sources. Companies such as FPL Corp.,
Iberdrola S.A. and Scottish Power Plc are big in the wind-related energy
business. Ormat Technologies, Inc. is a geothermal company, while Energy
Conversion Devices provides us with an investment opportunity in the solar
sector.
At the end of the period, the telecommunication services sector accounted for
just over 30% of the Fund's net assets. Our focus remains on the continued
growth prospects for the wireless telecommunications sector. Because there are
fewer pure play wireless companies in the marketplace, we have focused on the
integrated companies, such as AT&T and Verizon, that have significant exposure
to the wireless sector. In addition, our holdings in tower companies also
provide growth opportunities in the wireless sector.
We continue to look for companies within our two primary sectors, utilities and
telecommunications, that offer the right balance of investment risk and return.
The majority of the stocks in the portfolio continue to have dividend yields.
Several of the non-dividend-paying stocks may reinstate the dividends in the
future or begin to pay a dividend as cash flow begins to grow faster than
capital expenditures.
Kathleen M. Anderson
Vice President and Portfolio Manager
June 21, 2006
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 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. 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 Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class I Shares bear no ongoing distribution or
account maintenance fees and are available only to eligible investors. Had
the sales charge been included, the Fund's Class I Shares' performance
would have been lower.
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 Standardized
As of May 31, 2006 Total Return Total Return Total Return 30-day Yield
===============================================================================================================================
ML Utilities and Telecommunications Fund, Inc. Class A Shares* +5.93% +14.47% +141.55% 1.60%
- -------------------------------------------------------------------------------------------------------------------------------
ML Utilities and Telecommunications Fund, Inc. Class B Shares* +5.65 +13.78 +129.20 1.15
- -------------------------------------------------------------------------------------------------------------------------------
ML Utilities and Telecommunications Fund, Inc. Class C Shares* +5.61 +13.83 +128.87 1.10
- -------------------------------------------------------------------------------------------------------------------------------
ML Utilities and Telecommunications Fund, Inc. Class I Shares* +6.06 +14.66 +147.64 1.92
- -------------------------------------------------------------------------------------------------------------------------------
S&P 500(R) Index** +2.60 + 8.64 +122.91 --
- -------------------------------------------------------------------------------------------------------------------------------
S&P Utilities Index*** +3.14 + 9.45 +101.73 --
- -------------------------------------------------------------------------------------------------------------------------------
* 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, 2006
Performance Data (concluded)
Average Annual Total Return
- --------------------------------------------------------------------------------
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 5/31/06 +14.47% + 9.89%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/06 + 4.33 + 3.48
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/06 + 9.22 + 8.77
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
- --------------------------------------------------------------------------------
Return Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 5/31/06 +13.78% + 9.78%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/06 + 3.78 + 3.43
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/06 + 8.65 + 8.65
- --------------------------------------------------------------------------------
* 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 5/31/06 +13.83% +12.83%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/06 + 3.73 + 3.73
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/06 + 8.63 + 8.63
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
** Assuming payment of applicable contingent deferred sales charge.
- --------------------------------------------------------------------------------
Class I Shares Return
================================================================================
One Year Ended 5/31/06 +14.66%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/06 + 4.59
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/06 + 9.49
- --------------------------------------------------------------------------------
Portfolio Information as of May 31, 2006
Percent of
Geographic Allocation Equities
- --------------------------------------------------------------------------------
United States .................................................... 72.0%
Canada ........................................................... 8.0
United Kingdom ................................................... 5.5
Spain ............................................................ 3.4
Germany .......................................................... 2.6
Brazil ........................................................... 2.5
France ........................................................... 2.1
Mexico ........................................................... 1.2
Italy ............................................................ 0.7
Norway ........................................................... 0.5
Austria .......................................................... 0.5
Finland .......................................................... 0.4
South Korea ...................................................... 0.3
Belgium .......................................................... 0.3
- --------------------------------------------------------------------------------
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
- --------------------------------------------------------------------------------
TXU Corp. ........................................................ 4.9%
Exelon Corp. ..................................................... 3.2
BellSouth Corp. .................................................. 2.9
AT&T, Inc. ....................................................... 2.9
PPL Corp. ........................................................ 2.9
Verizon Communications, Inc. ..................................... 2.8
Duke Energy Corp. ................................................ 2.8
Dominion Resources, Inc. ......................................... 2.5
Alltel Corp. ..................................................... 2.3
FirstEnergy Corp. ................................................ 2.2
- --------------------------------------------------------------------------------
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 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
12b-1 fees, and other Fund expenses. The following example (which is based on a
hypothetical investment of $1,000 invested on December 1, 2005 and held through
May 31, 2006) 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, 2005 to
December 1, 2005 May 31, 2006 May 31, 2006
===========================================================================================================
Actual
===========================================================================================================
Class A $1,000 $1,059.30 $6.31
- -----------------------------------------------------------------------------------------------------------
Class B $1,000 $1,056.50 $8.97
- -----------------------------------------------------------------------------------------------------------
Class C $1,000 $1,056.10 $9.23
- -----------------------------------------------------------------------------------------------------------
Class I $1,000 $1,060.60 $5.03
===========================================================================================================
Hypothetical (5% annual return before expenses)**
===========================================================================================================
Class A $1,000 $1,018.77 $6.19
- -----------------------------------------------------------------------------------------------------------
Class B $1,000 $1,016.17 $8.80
- -----------------------------------------------------------------------------------------------------------
Class C $1,000 $1,015.92 $9.05
- -----------------------------------------------------------------------------------------------------------
Class I $1,000 $1,020.01 $4.94
- -----------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (1.23% for Class A, 1.75% for Class B, 1.80% for Class
C and .98% 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, 2006
Schedule of Investments (in U.S. dollars)
Shares
Country Industry Common Stocks Held Value
===============================================================================
Austria--0.4%
Diversified Telecommunication
Services--0.4%
Telekom Austria AG (b) 14,000 $ 628,600
-------------------------------------------------------------------
Total Common Stocks in Austria 628,600
===============================================================================
Belgium--0.2%
Wireless Telecommunication
Services--0.2%
Mobistar SA 4,500 359,307
-------------------------------------------------------------------
Total Common Stocks in Belgium 359,307
===============================================================================
Brazil--2.5%
Diversified Telecommunication
Services--0.6%
Brasil Telecom Participacoes SA (b) 18,000 550,800
Tele Norte Leste Participacoes SA (b) 28,000 367,360
------------
918,160
-------------------------------------------------------------------
Electric Utilities--1.1%
CPFL Energia SA (b) 23,700 879,033
EDP--Energias do Brasil SA 53,900 655,462
------------
1,534,495
-------------------------------------------------------------------
Independent Power Producers &
Energy Traders--0.0%
Tractebel Energia SA 200 1,485
-------------------------------------------------------------------
Oil, Gas & Consumable Fuels--0.4%
Petroleo Brasileiro SA (b) 5,900 512,415
-------------------------------------------------------------------
Wireless Telecommunication
Services--0.4%
Tim Participacoes SA (b) 22,500 545,175
-------------------------------------------------------------------
Total Common Stocks in Brazil 3,511,730
===============================================================================
Canada--7.8%
Diversified Telecommunication
Services--4.8%
BCE, Inc. 101,700 2,465,208
TELUS Corp. 50,500 2,100,822
TELUS Corp. (Non-Voting Shares) 56,224 2,264,893
------------
6,830,923
-------------------------------------------------------------------
Oil, Gas & Consumable Fuels--2.0%
Cameco Corp. 19,400 796,300
Husky Energy, Inc. 11,000 646,442
Suncor Energy, Inc. (b) 10,100 819,413
Talisman Energy, Inc. 35,400 651,006
------------
2,913,161
-------------------------------------------------------------------
Wireless Telecommunication
Services--1.0%
Rogers Communications, Inc. Class B 32,300 1,347,879
-------------------------------------------------------------------
Total Common Stocks in Canada 11,091,963
===============================================================================
Finland--0.3%
Diversified Telecommunication
Services--0.3%
Elisa Corp. 26,000 508,542
-------------------------------------------------------------------
Total Common Stocks in Finland 508,542
===============================================================================
France--2.1%
Electric Utilities--0.5%
Electricite de France 11,900 650,275
-------------------------------------------------------------------
Multi-Utilities--1.6%
Suez SA 33,200 1,281,347
Veolia Environnement 18,800 1,049,853
------------
2,331,200
-------------------------------------------------------------------
Total Common Stocks in France 2,981,475
===============================================================================
Germany--2.5%
Electric Utilities--1.8%
E.On AG 21,900 2,545,175
-------------------------------------------------------------------
Multi-Utilities--0.7%
RWE AG 12,300 1,057,627
-------------------------------------------------------------------
Total Common Stocks in Germany 3,602,802
===============================================================================
Italy--0.7%
Diversified Telecommunication
Services--0.7%
FastWeb SpA 14,000 692,706
Telecom Italia SpA (RNC) 115,000 294,195
-------------------------------------------------------------------
Total Common Stocks in Italy 986,901
===============================================================================
Mexico--1.2%
Wireless Telecommunication
Services--1.2%
America Movil, SA de CV (b) 53,100 1,734,246
-------------------------------------------------------------------
Total Common Stocks in Mexico 1,734,246
===============================================================================
Norway--0.5%
Diversified Telecommunication
Services--0.5%
Telenor ASA 56,700 718,483
-------------------------------------------------------------------
Total Common Stocks in Norway 718,483
===============================================================================
South Korea--0.3%
Wireless Telecommunication
Services--0.3%
SK Telecom Co., Ltd. (b) 14,200 370,620
-------------------------------------------------------------------
Total Common Stocks in South Korea 370,620
===============================================================================
Spain--3.3%
Diversified Telecommunication
Services--0.5%
Telefonica SA 43,288 710,300
-------------------------------------------------------------------
Electric Utilities--2.3%
Endesa SA 45,100 1,515,205
Iberdrola SA 56,400 1,814,196
------------
3,329,401
-------------------------------------------------------------------
Wireless Telecommunication
Services--0.5%
Telefonica Moviles, SA 45,200 623,430
-------------------------------------------------------------------
Total Common Stocks in Spain 4,663,131
===============================================================================
United Kingdom--5.3%
Diversified Telecommunication
Services--0.3%
BT Group Plc 90,000 396,311
-------------------------------------------------------------------
Electric Utilities--2.2%
Scottish & Southern Energy Plc 41,400 876,145
Scottish Power Plc 165,793 1,734,834
Scottish Power Plc (Preference 'B' Shares) 69,633 471,048
------------
3,082,027
-------------------------------------------------------------------
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 9
Schedule of Investments (continued) (in U.S. dollars)
Shares
Country Industry Common Stocks Held Value
===============================================================================
United Kingdom (concluded)
Independent Power Producers &
Energy Traders--1.2%
International Power Plc 311,500 $ 1,689,220
-------------------------------------------------------------------
Multi-Utilities--0.5%
National Grid Plc 69,918 794,421
-------------------------------------------------------------------
Wireless Telecommunication
Services--1.1%
Vodafone Group Plc (b) 69,500 1,598,500
-------------------------------------------------------------------
Total Common Stocks in the United Kingdom 7,560,479
===============================================================================
United States--69.9%
Commercial Services &
Supplies--0.4%
Synagro Technologies, Inc. 126,000 565,740
-------------------------------------------------------------------
Construction & Engineering--0.3%
InfraSource Services, Inc. (a) 25,000 460,000
-------------------------------------------------------------------
Diversified Telecommunication
Services--10.5%
AT&T, Inc. 158,800 4,138,328
BellSouth Corp. 123,600 4,173,982
Citizens Communications Co. 80,700 1,023,276
Qwest Communications International
Inc. (a) 75,000 525,750
Time Warner Telecom, Inc. Class A (a) 51,300 781,299
Valor Communications Group, Inc. 22,500 277,200
Verizon Communications, Inc. 128,400 4,007,364
------------
14,927,199
-------------------------------------------------------------------
Electric Utilities--17.6%
Allegheny Energy, Inc. (a) 17,000 619,820
American Electric Power Co., Inc. 37,000 1,267,990
DPL, Inc. 57,900 1,551,720
Edison International 58,100 2,279,844
Entergy Corp. 36,900 2,587,059
Exelon Corp. 80,800 4,574,088
FPL Group, Inc. 44,600 1,776,418
FirstEnergy Corp. 60,000 3,145,200
ITC Holdings Corp. 26,800 694,388
Mirant Corp. (a) 54,800 1,363,424
Northeast Utilities 29,600 598,808
PPL Corp. 137,200 4,084,444
The Southern Co. 17,900 572,263
------------
25,115,466
-------------------------------------------------------------------
Electrical Equipment--0.4%
Energy Conversion Devices, Inc. (a) 12,600 500,850
-------------------------------------------------------------------
Energy Equipment &
Services--3.6%
ENSCO International, Inc. 11,000 549,890
GlobalSantaFe Corp. 14,800 889,924
Halliburton Co. 19,900 1,484,341
Transocean, Inc. (a) 18,000 1,464,660
Weatherford International Ltd. (a) 14,900 775,396
------------
5,164,211
-------------------------------------------------------------------
Gas Utilities--4.2%
AGL Resources, Inc. 33,100 1,210,467
Energen Corp. 17,200 582,736
Equitable Resources, Inc. 17,200 578,780
New Jersey Resources Corp. 25,000 1,123,000
Questar Corp. 21,500 1,584,335
UGI Corp. 42,000 976,920
------------
6,056,238
-------------------------------------------------------------------
Independent Power Producers &
Energy Traders--9.0%
The AES Corp. (a) 32,500 598,000
Constellation Energy Group, Inc. 59,300 3,065,810
NRG Energy, Inc. (a) 24,700 1,228,825
Ormat Technologies, Inc. 25,300 942,931
TXU Corp. 122,200 7,002,060
------------
12,837,626
-------------------------------------------------------------------
Media--1.2%
Cablevision Systems Corp. Class A 19,700 387,302
Comcast Corp. Special Class A (a) 41,200 1,318,400
------------
1,705,702
-------------------------------------------------------------------
Multi-Utilities--12.3%
Ameren Corp. 26,700 1,321,383
CMS Energy Corp. (a) 47,800 613,752
Dominion Resources, Inc. 50,037 3,631,686
Duke Energy Corp. 140,732 3,971,457
MDU Resources Group, Inc. 10,100 358,348
NSTAR 38,600 1,067,676
PG&E Corp. 55,000 2,182,400
Public Service Enterprise Group, Inc. 42,900 2,734,017
Sempra Energy 19,900 894,903
Wisconsin Energy Corp. 19,100 761,517
------------
17,537,139
-------------------------------------------------------------------
Oil, Gas & Consumable Fuels--3.7%
Chevron Corp. 5,000 298,950
ConocoPhillips 11,000 696,190
EOG Resources, Inc. 15,600 1,024,296
Peabody Energy Corp. 15,000 935,100
Valero Energy Corp. 12,400 760,740
Williams Cos., Inc. 71,800 1,622,680
------------
5,337,956
-------------------------------------------------------------------
Wireless Telecommunication
Services--6.7%
Alltel Corp. 52,945 3,274,648
American Tower Corp. Class A (a) 43,500 1,347,195
Crown Castle International Corp. (a) 10,100 320,877
NII Holdings, Inc. (a) 7,000 381,220
Nextel Partners, Inc. Class A (a) 28,400 806,560
SBA Communications Corp. Class A (a) 30,600 700,434
Sprint Nextel Corp. 127,625 2,706,926
------------
9,537,860
-------------------------------------------------------------------
Total Common Stocks in the United States 99,745,987
===================================================================
Total Common Stocks
(Cost--$95,377,197)--97.0% 138,464,266
===============================================================================
10 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
Schedule of Investments (concluded) (in U.S. dollars)
Face
Country Industry Trust Preferred Amount Value
===============================================================================
United States--0.7%
Independent Power Producers &
Energy Traders--0.7%
AES Trust III, 6.75% due 10/15/2029 $1,092,450 $ 1,008,175
-------------------------------------------------------------------
Total Trust Preferred
(Cost--$664,068)--0.7% 1,008,175
===============================================================================
Short-Term Beneficial
Securities Interest
===============================================================================
Merrill Lynch Liquidity Series, LLC Cash
Sweep Series I, 4.85% (c)(d) 964,646 964,646
-------------------------------------------------------------------
Total Short-Term Securities
(Cost--$964,646)--0.7% 964,646
===============================================================================
Total Investments
(Cost--$97,005,911*)--98.4% 140,437,087
Other Assets Less Liabilities--1.6% 2,230,436
------------
Net Assets--100.0% $142,667,523
============
* The cost and unrealized appreciation (depreciation) of investments as of
May 31, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ............................................ $97,005,911
===========
Gross unrealized appreciation ............................. $44,283,821
Gross unrealized depreciation ............................. (852,645)
-----------
Net unrealized appreciation ............................... $43,431,176
===========
(a) Non-income producing security.
(b) Depositary receipts.
(c) Investments in companies considered to be an affiliate of the Fund, for
purposes of 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 $(5,511,367) $77,115
--------------------------------------------------------------------------
(d) Represents the current yield as of 5/31/2006.
o For Fund compliance purposes, the Fund's industry classifications refer to
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 industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets.
See Notes to Financial Statements.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 11
Statement of Assets and Liabilities
As of May 31, 2006
===============================================================================================================================
Assets
- -------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$96,041,265) $ 139,472,441
Investments in affiliated securities, at value (identified cost--$964,646) ..... 964,646
Foreign cash (cost--$28,875) ................................................... 29,163
Cash ........................................................................... 283
Receivables:
Securities sold ............................................................. $ 2,607,314
Dividends ................................................................... 402,762
Capital shares sold ......................................................... 25,609
Interest .................................................................... 10,534 3,046,219
-------------
Prepaid expenses ............................................................... 32,804
-------------
Total assets ................................................................... 143,545,556
-------------
===============================================================================================================================
Liabilities
- -------------------------------------------------------------------------------------------------------------------------------
Payables:
Securities purchased ........................................................ 355,011
Capital shares redeemed ..................................................... 337,295
Other affiliates ............................................................ 64,010
Investment adviser .......................................................... 61,606
Distributor ................................................................. 46,063 863,985
-------------
Accrued expenses ............................................................... 14,048
-------------
Total liabilities .............................................................. 878,033
-------------
===============================================================================================================================
Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
Net assets ..................................................................... $ 142,667,523
=============
===============================================================================================================================
Net Assets Consist of
- -------------------------------------------------------------------------------------------------------------------------------
Class A Shares of Common Stock, $.10 par value, 100,000,000 shares authorized .. $ 629,824
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares authorized .. 201,570
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares authorized .. 118,224
Class I Shares of Common Stock, $.10 par value, 100,000,000 shares authorized .. 195,857
Paid-in capital in excess of par ............................................... 110,820,082
Undistributed investment income--net ........................................... $ 1,064,953
Accumulated realized capital losses--net ....................................... (13,794,884)
Unrealized appreciation--net ................................................... 43,431,897
-------------
Total accumulated earnings--net ................................................ 30,701,966
-------------
Net Assets ..................................................................... $ 142,667,523
=============
===============================================================================================================================
Net Asset Value
- -------------------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $78,596,442 and 6,298,235 shares outstanding ... $ 12.48
=============
Class B--Based on net assets of $25,079,748 and 2,015,703 shares outstanding ... $ 12.44
=============
Class C--Based on net assets of $14,562,778 and 1,182,238 shares outstanding ... $ 12.32
=============
Class I--Based on net assets of $24,428,555 and 1,958,570 shares outstanding ... $ 12.47
=============
See Notes to Financial Statements.
12 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
Statement of Operations
For the Six Months Ended May 31, 2006
===============================================================================================================================
Investment Income
- -------------------------------------------------------------------------------------------------------------------------------
Dividends (net of $88,415 foreign withholding tax) ............................. $ 2,753,951
Interest (including $77,115 from affiliates) ................................... 115,855
-------------
Total income ................................................................... 2,869,806
-------------
===============================================================================================================================
Expenses
- -------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ....................................................... $ 441,491
Account maintenance and distribution fees--Class B ............................. 101,019
Account maintenance fees--Class A .............................................. 100,146
Account maintenance and distribution fees--Class C ............................. 60,010
Transfer agent fees--Class A ................................................... 52,741
Accounting services ............................................................ 48,764
Professional fees .............................................................. 29,391
Printing and shareholder reports ............................................... 26,071
Registration fees .............................................................. 24,174
Directors' fees and expenses ................................................... 23,289
Transfer agent fees--Class B ................................................... 20,836
Custodian fees ................................................................. 18,443
Transfer agent fees--Class I ................................................... 16,526
Transfer agent fees--Class C ................................................... 11,441
Pricing fees ................................................................... 1,726
Other .......................................................................... 12,308
-------------
Total expenses ................................................................. 988,376
-------------
Investment income--net ......................................................... 1,881,430
-------------
===============================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- -------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ............................................................ 9,384,111
Foreign currency transactions--net .......................................... (6,378) 9,377,733
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ............................................................ (2,783,458)
Foreign currency transactions--net .......................................... 641 (2,782,817)
-------------------------------
Total realized and unrealized gain--net ........................................ 6,594,916
-------------
Net Increase in Net Assets Resulting from Operations ........................... $ 8,476,346
=============
See Notes to Financial Statements.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 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: 2006 2005
===============================================================================================================================
Operations
- -------------------------------------------------------------------------------------------------------------------------------
Investment income--net ......................................................... $ 1,881,430 $ 2,895,587
Realized gain--net ............................................................. 9,377,733 14,086,694
Change in unrealized appreciation/depreciation--net ............................ (2,782,817) 5,837,960
-------------------------------
Net increase in net assets resulting from operations ........................... 8,476,346 22,820,241
-------------------------------
===============================================================================================================================
Dividends to Shareholders
- -------------------------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A ..................................................................... (659,329) (1,690,691)
Class B ..................................................................... (143,990) (498,453)
Class C ..................................................................... (81,241) (231,125)
Class I ..................................................................... (237,198) (605,203)
-------------------------------
Net decrease in net assets resulting from dividends to shareholders ............ (1,121,758) (3,025,472)
-------------------------------
===============================================================================================================================
Capital Share Transactions
- -------------------------------------------------------------------------------------------------------------------------------
Net decrease in net assets derived from capital share transactions ............. (11,906,071) (13,372,133)
-------------------------------
===============================================================================================================================
Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ........................................ (4,551,483) 6,422,636
Beginning of period ............................................................ 147,219,006 140,796,370
-------------------------------
End of period* ................................................................. $ 142,667,523 $ 147,219,006
===============================
* Undistributed investment income--net ...................................... $ 1,064,953 $ 305,281
===============================
See Notes to Financial Statements.
14 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
Financial Highlights
Class A
----------------------------------------------------------------------
The following per share data For the Six For the Year Ended
and ratios have been derived Months Ended November 30,
from information provided in May 31, -----------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.88 $ 10.38 $ 8.23 $ 7.40 $ 9.67
---------------------------------------------------------------------
Investment income--net*** .............. .17 .24 .20 .19 .26
Realized and unrealized gain (loss)--net .53 1.51 2.14 .85 (2.14)
---------------------------------------------------------------------
Total from investment operations ....... .70 1.75 2.34 1.04 (1.88)
---------------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.10) (.25) (.19) (.21) (.28)
Realized gain--net .................. -- -- -- -- (.11)
---------------------------------------------------------------------
Total dividends and distributions ...... (.10) (.25) (.19) (.21) (.39)
---------------------------------------------------------------------
Net asset value, end of period ......... $ 12.48 $ 11.88 $ 10.38 $ 8.23 $ 7.40
=====================================================================
================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 5.93%+ 16.95% 28.82% 14.26% (19.83%)
=====================================================================
================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.23%* 1.23% 1.28% 1.33% 1.26%
=====================================================================
Investment income--net ................. 2.68%* 2.07% 2.11% 2.42% 3.13%
=====================================================================
================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 78,596 $ 79,008 $ 73,286 $ 60,142 $ 34,038
=====================================================================
Portfolio turnover ..................... 19.58% 25.48% 10.89% 21.20% 31.16%
=====================================================================
Class B
-----------------------------------------------------------------------
The following per share data For the Six For the Year Ended
and ratios have been derived Months Ended November 30,
from information provided in May 31, -----------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
=================================================================================================================
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.84 $ 10.35 $ 8.19 $ 7.37 $ 9.61
---------------------------------------------------------------------
Investment income--net*** .............. .13 .18 .14 .16 .22
Realized and unrealized gain (loss)--net .54 1.49 2.16 .82 (2.13)
---------------------------------------------------------------------
Total from investment operations ....... .67 1.67 2.30 .98 (1.91)
---------------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.07) (.18) (.14) (.16) (.22)
Realized gain--net .................. -- -- -- -- (.11)
---------------------------------------------------------------------
Total dividends and distributions ...... (.07) (.18) (.14) (.16) (.33)
---------------------------------------------------------------------
Net asset value, end of period ......... $ 12.44 $ 11.84 $ 10.35 $ 8.19 $ 7.37
=====================================================================
=================================================================================================================
Total Investment Return**
- -----------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 5.65%+ 16.26% 28.30% 13.47% (20.16%)
=====================================================================
=================================================================================================================
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.75%* 1.75% 1.81% 1.86% 1.77%
=====================================================================
Investment income--net ................. 2.12%* 1.56% 1.58% 2.08% 2.63%
=====================================================================
=================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 25,080 $ 28,298 $ 31,935 $ 41,317 $ 74,822
=====================================================================
Portfolio turnover ..................... 19.58% 25.48% 10.89% 21.20% 31.16%
=====================================================================
* 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, 2006 15
Financial Highlights (concluded)
Class C
-----------------------------------------------------------------------
The following per share data For the Six For the Year Ended
and ratios have been derived Months Ended November 30,
from information provided in May 31, -----------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.73 $ 10.25 $ 8.13 $ 7.31 $ 9.55
---------------------------------------------------------------------
Investment income--net*** .............. .13 .17 .14 .15 .21
Realized and unrealized gain (loss)--net .53 1.50 2.12 .83 (2.11)
---------------------------------------------------------------------
Total from investment operations ....... .66 1.67 2.26 .98 (1.90)
---------------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.07) (.19) (.14) (.16) (.23)
Realized gain--net .................. -- -- -- -- (.11)
---------------------------------------------------------------------
Total dividends and distributions ...... (.07) (.19) (.14) (.16) (.34)
---------------------------------------------------------------------
Net asset value, end of period ......... $ 12.32 $ 11.73 $ 10.25 $ 8.13 $ 7.31
=====================================================================
================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 5.61%+ 16.34% 28.03% 13.62% (20.27%)
=====================================================================
================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.80%* 1.80% 1.85% 1.91% 1.84%
=====================================================================
Investment income--net ................. 2.10%* 1.49% 1.53% 1.93% 2.55%
=====================================================================
================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 14,563 $ 14,789 $ 11,898 $ 10,994 $ 10,545
=====================================================================
Portfolio turnover ..................... 19.58% 25.48% 10.89% 21.20% 31.16%
=====================================================================
Class I
-----------------------------------------------------------------------
The following per share data For the Six For the Year Ended
and ratios have been derived Months Ended November 30,
from information provided in May 31, -----------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.87 $ 10.37 $ 8.22 $ 7.39 $ 9.66
---------------------------------------------------------------------
Investment income--net*** .............. .18 .26 .22 .21 .29
Realized and unrealized gain (loss)--net .54 1.51 2.14 .84 (2.15)
---------------------------------------------------------------------
Total from investment operations ....... .72 1.77 2.36 1.05 (1.86)
---------------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.12) (.27) (.21) (.22) (.30)
Realized gain--net .................. -- -- -- -- (.11)
---------------------------------------------------------------------
Total dividends and distributions ...... (.12) (.27) (.21) (.22) (.41)
---------------------------------------------------------------------
Net asset value, end of period ......... $ 12.47 $ 11.87 $ 10.37 $ 8.22 $ 7.39
=====================================================================
================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 6.06%+ 17.25% 29.16% 14.54% (19.64%)
=====================================================================
================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------
Expenses ............................... .98%* .98% 1.03% 1.07% 1.00%
=====================================================================
Investment income--net ................. 2.92%* 2.32% 2.36% 2.77% 3.39%
=====================================================================
================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 24,429 $ 25,125 $ 23,677 $ 22,514 $ 20,342
=====================================================================
Portfolio turnover ..................... 19.58% 25.48% 10.89% 21.20% 31.16%
=====================================================================
* Annualized.
** Total investment returns exclude the effects of sales charges. Effective
December 28, 2005, Class I Shares are no longer subject to any front-end
sales charge.
*** Based on average shares outstanding.
+ Aggregate total investment return.
See Notes to Financial Statements.
16 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
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. Effective December 28, 2005, Class I Shares are no longer
subject to any front-end sales charge. Shares of Class A are sold with a
front-end sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. Class I Shares are sold only to certain
eligible investors. 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
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 based upon quoted fair valuations
received daily by the Fund from a pricing service or counterparty. 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.
Valuation of other short-term investment vehicles is generally based on the net
asset value of the underlying investment vehicle or amortized cost.
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,
money market instruments and certain fixed income securities, 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
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 17
Notes to Financial Statements (continued)
Directors or by the Investment Adviser using a pricing service and/or procedures
approved by the Fund's Board of Directors.
(b) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
The Fund invests in foreign securities, which may involve a number of risk
factors and special considerations not present with investments in securities of
U.S. corporations.
(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 substantially 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.
18 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
Notes to Financial Statements (continued)
(f) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(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, 2006, 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 .............................. $ 548 $6,288
Class I .............................. $ 444 $ 7
- --------------------------------------------------------------------------------
For the six months ended May 31, 2006, MLPF&S received contingent deferred sales
charges of $14,966 and $927, relating to transactions in Class B Shares and
Class C Shares, respectively.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 19
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.
In addition, MLPF&S received $14,809 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended May 31,
2006.
For the six months ended May 31, 2006, the Fund reimbursed MLIM $1,586 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, ML & Co., and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including MLIM, to the
investment management business of BlackRock, Inc. The transaction is expected to
close in the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended May 31, 2006 were $27,930,641 and $35,474,189, respectively.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$11,906,071 and $13,372,133 for the six months ended May 31, 2006 and for the
year ended November 30, 2005, respectively.
Transactions in capital shares for each class were as follows:
- -------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended May 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 91,570 $ 1,133,611
Automatic conversion of shares ......... 150,872 1,858,143
Shares issued to shareholders
in reinvestment of dividends ......... 42,047 513,552
-------------------------------
Total issued ........................... 284,489 3,505,306
Shares redeemed ........................ (636,331) (7,878,438)
-------------------------------
Net decrease ........................... (351,842) $ (4,373,132)
===============================
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended November 30, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 465,190 $ 5,276,033
Automatic conversion of shares ......... 283,666 3,199,572
Shares issued to shareholders
in reinvestment of dividends ......... 116,214 1,322,524
-------------------------------
Total issued ........................... 865,070 9,798,129
Shares redeemed ........................ (1,275,616) (14,475,156)
-------------------------------
Net decrease ........................... (410,546) $ (4,677,027)
===============================
- -------------------------------------------------------------------------------
Class B Shares for the Six Months Dollar
Ended May 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 73,931 $ 912,903
Shares issued to shareholders
in reinvestment of dividends ......... 8,470 103,190
-------------------------------
Total issued ........................... 82,401 1,016,093
-------------------------------
Automatic conversion of shares ......... (151,354) (1,858,143)
Shares redeemed ........................ (304,759) (3,766,394)
-------------------------------
Total redeemed ......................... (456,113) (5,624,537)
-------------------------------
Net decrease ........................... (373,712) $ (4,608,444)
===============================
- -------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended November 30, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 309,576 $ 3,457,354
Shares issued to shareholders
in reinvestment of dividends ......... 31,715 359,265
-------------------------------
Total issued ........................... 341,291 3,816,619
-------------------------------
Automatic conversion of shares ......... (284,614) (3,199,572)
Shares redeemed ........................ (754,153) (8,527,451)
-------------------------------
Total redeemed ......................... (1,038,767) (11,727,023)
-------------------------------
Net decrease ........................... (697,476) $ (7,910,404)
===============================
20 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
Notes to Financial Statements (concluded)
- -------------------------------------------------------------------------------
Class C Shares for the Six Months Dollar
Ended May 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 74,014 $ 903,824
Shares issued to shareholders
in reinvestment of dividends ......... 5,403 65,173
-------------------------------
Total issued ........................... 79,417 968,997
Shares redeemed ........................ (158,140) (1,938,439)
-------------------------------
Net decrease ........................... (78,723) $ (969,442)
===============================
- -------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended November 30, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 372,824 $ 4,174,489
Shares issued to shareholders
in reinvestment of dividends ......... 16,623 187,409
-------------------------------
Total issued ........................... 389,447 4,361,898
Shares redeemed ........................ (288,951) (3,263,839)
-------------------------------
Net increase ........................... 100,496 $ 1,098,059
===============================
- -------------------------------------------------------------------------------
Class I Shares for the Six Months Dollar
Ended May 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 86,719 $ 1,075,203
Shares issued to shareholders
in reinvestment of dividends ......... 16,628 202,927
-------------------------------
Total issued ........................... 103,347 1,278,130
Shares redeemed ........................ (260,578) (3,233,183)
-------------------------------
Net decrease ........................... (157,231) $ (1,955,053)
===============================
- -------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended November 30, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 260,026 $ 2,946,308
Shares issued to shareholders
in reinvestment of dividends ......... 45,445 516,186
-------------------------------
Total issued ........................... 305,471 3,462,494
Shares redeemed ........................ (472,012) (5,345,255)
-------------------------------
Net decrease ........................... (166,541) $ (1,882,761)
===============================
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, which
expires November 2006. 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, 2006.
6. Capital Loss Carryforward:
On November 30, 2005, the Fund had a net capital loss carryforward of
$23,172,617, of which $20,663,752 expires in 2010 and $2,508,865 expires in
2011. This amount will be available to offset like amounts of any future taxable
gains.
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 21
Disclosure of Investment Advisory Agreement
Activities and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director whose
only association with Merrill Lynch Investment Managers, L.P. (the "Investment
Adviser") or other Merrill Lynch affiliates is as a director of the Fund and as
a trustee or director of 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 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 Merrill Lynch Asset Management U.K. Limited
(the "sub-adviser"). 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 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 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 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 regarding 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 a retail insurance fund under a similar investment mandate.
Since the sub-advisory services are provided by an affiliate of the Investment
Adviser, and no additional fee is paid for these services, the Board considered
the sub-advisory agreement and Investment Advisory Agreement together. 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, and direct and indirect benefits to the Investment Adviser
and the sub-adviser and their affiliates from their relationship with the Fund.
The Board did not identify any particular information as controlling, and each
member of the Board may have attributed different weights to the various items
considered.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement and the sub-advisory agreement in May 2006, the independent directors'
and Board's review included the following:
22 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
Services Provided by the Investment Adviser -- The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser and the
sub-adviser, including the investment advisory services and the resulting
performance of the Fund. The Board focused primarily on the Investment Adviser's
investment advisory services and the Fund's investment performance. 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.
According to Lipper's ranking of all retail and institutional utility funds for
the periods ended February 28, 2006, the Fund's performance after fees and
expenses ranked in the second quintile for each of the one- and five-year
periods and in the third quintile for the three-year period. The Board also
considered the Fund's performance based on annualized total return and noted
that the Fund's total return was in the second quintile for each one-year period
ended February 28, 2006 and 2005, in the fourth quintile for one-year period
ended February 28, 2004, in the third quintile for the one-year period ended
February 28, 2003, and in the first quintile for the one-year period ended
February 28, 2002. 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'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 managers. The Board also considered the experience of the Fund's
portfolio managers and noted that Ms. Anderson, the Fund's senior portfolio
manager, has more than eleven years of experience in analyzing and investing in
equity securities. The Board considered that 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 experience.
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 considered 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 a retail
insurance fund with a similar investment mandate. It was noted that the fees
charged by the Investment Adviser to the retail insurance fund were identical to
those being charged to the Fund. The Board noted that the Fund's actual and
contractual management fees and actual total expenses including
investment-related expenses were below the median of expenses of comparable
funds as classified by Lipper. The Board concluded that the Fund's management
fee rate and overall expense ratio are acceptable 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 also considered federal court decisions discussing an investment adviser's
profitability and profitability levels considered to be reasonable in those
decisions. The Board believes that the profits of the Investment Adviser and its
affiliates are acceptable in relation to the nature and quality of services
provided and given the level of fees and expenses overall.
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 noted that they would continue to seek
information relating to economies of scale. The Board determined that no changes
were currently necessary.
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, 2006 23
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreement -- Matters Considered by the Board
In connection with the Transaction between Merrill Lynch and BlackRock, the
Fund's Board of Directors considered a new investment advisory agreement (the
"New Investment Advisory Agreement") between the Fund and BlackRock Advisors,
Inc. or its successor ("BlackRock Advisors"). If the New Investment Advisory
Agreement is approved by the Fund's shareholders, it will become effective upon
the closing of the Transaction, which is expected in the third quarter of 2006.
The Board discussed the New Investment Advisory Agreement at telephonic and
in-person meetings held during April and May 2006. The Board, including the
independent directors, approved the New Investment Advisory Agreement at a
meeting held on May 12, 2006.
To assist the Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent directors, through their independent legal counsel,
also requested and received additional information from Merrill Lynch and
BlackRock in connection with their consideration of the New Investment Advisory
Agreement. The additional information was provided in advance of the May 12,
2006 meeting. In addition, the independent directors consulted with their
counsel and Fund counsel on numerous occasions, discussing, among other things,
the legal standards and certain other considerations relevant to the directors'
deliberations.
At the Board meetings, members of the Board discussed with Merrill Lynch
management and certain BlackRock representatives the Transaction, its strategic
rationale and BlackRock's general plans and intentions regarding the Fund. At
these Board meetings, representatives of Merrill Lynch and BlackRock made
presentations to and responded to questions from the Board. The directors also
inquired about the plans for and anticipated roles and responsibilities of
certain employees and officers of the Investment Adviser and certain affiliates
being transferred to BlackRock in connection with the Transaction. The
independent directors of the Board also conferred separately and with their
counsel about the Transaction and other matters related to the Transaction on a
number of occasions, including in connection with the April and May 2006
meetings. After the presentations and after reviewing the written materials
provided, the independent directors met in executive sessions with their counsel
to consider the New Investment Advisory Agreement.
In connection with the Board's review of the New Investment Advisory Agreement,
Merrill Lynch and/or BlackRock advised the directors about a variety of matters.
The advice included the following, among other matters:
o that there is not expected to be any diminution in the nature, quality and
extent of services provided to the Fund and its shareholders by BlackRock
Advisors, including compliance services;
o that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented
professionals;
o that the Fund should benefit from having access to BlackRock's state of
the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions(R) brand name;
o that BlackRock has no present intention to alter any applicable expense
waivers and reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek the approval of the Board
before making any changes;
o that BlackRock and Merrill Lynch will enter into an agreement, for an
initial three-year period and automatically renewable from year to year
thereafter, in connection with the Transaction under which Merrill
Lynch-affiliated broker-dealers will continue to offer the Fund as an
investment product;
o that BlackRock Advisors will have substantially the same access to the
Merrill Lynch sales force when distributing shares of the Fund as is
currently provided to the Investment Adviser and that other arrangements
between the Investment Adviser and Merrill Lynch sales channels will be
preserved;
o that the Fund will have access to BlackRock's network of third party
brokers, retirement plan platforms and registered investment advisers;
o that under the Transaction Agreement, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds
24 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
advised by BlackRock or the Investment Adviser (or its affiliates),
respectively; and
o that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they have a different financial
interest in the matters that were being considered than do Fund
shareholders;
The directors considered the information provided by Merrill Lynch and BlackRock
above, and, among other factors, the following:
o the potential benefits to Fund shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies
of scale and access to investment opportunities;
o the potential for expanding distribution of Fund shares through improved
access to third party distribution;
o the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
o the compliance policies and procedures of BlackRock Advisors;
o the terms and conditions of the New Investment Advisory Agreement,
including the fact that the schedule of the Fund's total advisory fees
will not increase by virtue of the New Investment Advisory Agreement, but
will remain the same;
o that within the past year the Board performed a full annual review of the
investment advisory agreement currently in effect for the Fund (the
"Current Investment Advisory Agreement") as required by the 1940 Act and
has determined that the Investment Adviser has the capabilities, resources
and personnel necessary to provide the advisory and administrative
services currently provided to the Fund; and that the advisory and/or
management fees paid by the Fund, taking into account any applicable
agreed-upon fee waivers and breakpoints, represent reasonable compensation
to the Investment Adviser in light of the services provided, the costs to
the Investment Adviser of providing those services, economies of scale,
the fees and other expenses paid by similar funds (including information
provided by Lipper, Inc. ["Lipper"]), and such other matters as the
directors have considered relevant in the exercise of their reasonable
judgment (the Board had most recently performed a full annual review of
the Current Investment Advisory Agreement in May 2005); and
o that Merrill Lynch agreed to pay all expenses of the Fund in connection
with the Board's consideration of the New Investment Advisory Agreement
and related agreements and all costs of shareholder approval of the New
Investment Advisory Agreement and as a result the Fund would bear no costs
in obtaining shareholder approval of the New Investment Advisory
Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, the Board assessed the
nature, scope and quality of the services to be provided to the Fund by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting, marketing services
and assistance in meeting legal and regulatory requirements. In its review of
the New Investment Advisory Agreement, the Board also considered a range of
information in connection with its oversight of the services to be provided by
BlackRock Advisors and its affiliates. Among the matters considered were: (a)
fees (in addition to management fees) to be paid to BlackRock Advisors and its
affiliates by the Fund; (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 BlackRock Advisors' compliance policies and procedures; and
(d) the nature, cost and character of non-investment management services to be
provided by BlackRock Advisors and its affiliates.
In the period prior to the Board meetings to consider renewal of the Current
Investment Advisory Agreement, the Board had requested and received materials
specifically relating to the agreement. These materials included (a) information
compiled by 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)
a discussion by the Fund's portfolio management team on investment strategies
used by the Fund during its most recent fiscal year; (c) information on the
profitability to the Investment Adviser of the Current Investment Advisory
Agreement and other payments received by the Investment Adviser and its
affiliates from the Fund; and (d) information provided by the Investment Adviser
concerning services related to the valuation and pricing of Fund portfolio
holdings, allocation of Fund brokerage fees, the Fund's portfolio turnover
statistics, and direct and indirect
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 25
Disclosure of New Investment Advisory Agreement (continued)
benefits to the Investment Adviser and its affiliates from their relationship
with the Fund.
In their deliberations, the directors considered information received in
connection with their most recent continuation of the Current Investment
Advisory Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the New Investment Advisory Agreement. The directors did not
identify any particular information that was all-important or controlling, and
each director attributed different weights to the various factors. The
directors, including a majority of the independent directors, concluded that the
terms of the New Investment Advisory Agreement are appropriate, that the fees to
be paid are reasonable in light of the services to be provided to the Fund, and
that the New Investment Advisory Agreement should be approved and recommended to
Fund shareholders.
Nature, Quality and Extent of Services Provided -- 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, as well as the nature, quality and extent of services expected to be
provided by BlackRock Advisors. The Board focused primarily on the Investment
Adviser's investment advisory services and the Fund's investment performance,
but also considered certain areas in which both the Investment Adviser and the
Fund receive services as part of the Merrill Lynch complex. The Board compared
the Fund's 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.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the New Investment Advisory Agreement, the directors
considered, among other things, the expected impact of the Transaction on the
operations, facilities, organization and personnel of New BlackRock and how it
would affect the Fund; the ability of BlackRock Advisors to perform its duties
after the Transaction; and any anticipated changes to the current investment and
other practices of the Fund.
The directors were given information with respect to the potential benefits to
the Fund and its shareholders from having access to BlackRock's state of the art
technology and risk management analytic tools, including the investment tools
provided under the BlackRock Solutions brand name.
The directors were advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Fund will continue to be subject to
restrictions concerning certain transactions involving Merrill Lynch affiliates
(for example, transactions with a Merrill Lynch broker-dealer acting as
principal) absent revised or new regulatory relief. The directors were advised
that a revision of existing regulatory relief with respect to these restrictions
was being sought from the Securities and Exchange Commission and were advised of
the possibility of receipt of such revised regulatory relief. There can be no
assurance that such relief will be obtained.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the directors
determined that the nature and quality of services to be provided to the Fund
under the New Investment Advisory Agreement were expected to be as good or
better than that provided under the Current Investment Advisory Agreement. It
was noted, however, that it is expected that there will be changes in personnel
following the Transaction and the combination of the operations of the
Investment Adviser and its affiliates with those of BlackRock. The directors
noted that if current portfolio managers or other personnel cease to be
available, the Board would consider all available options, which could include
seeking the investment advisory or other services of BlackRock affiliates.
Accordingly, the directors concluded that, overall, they were satisfied at the
present time with assurances from BlackRock and BlackRock Advisors as to the
expected nature, extent and quality of the services to be provided to the Fund
under the New Investment Advisory Agreement.
Costs of Services Provided and Profitability -- It was noted that, in
conjunction with the recent review of the Current Investment Advisory Agreement,
the directors had received, among other things, a report from Lipper comparing
the Fund's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Investment Adviser or its
affiliates to other registered investment company clients for investment
management services. The Board reviewed 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 fees and the effects of any
fee waivers -- compared to the other funds in its Lipper category. They also
compared the Fund's total expenses to those of other comparable funds. The
information showed that the
26 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
Fund had fees and expenses within the range of fees and expenses of comparable
funds. The Board considered the services to be provided by and the fees to be
charged by BlackRock Advisors to other funds with similar investment mandates
and noted that the fees charged by BlackRock Advisors in those cases, including
fee waivers and expense reimbursements, were generally comparable to those being
charged to the Fund. The Board also noted that, as a general matter, according
to the information provided by BlackRock, fees charged to institutional clients
were lower than the fees charged to the Fund, but BlackRock Advisors provided
less extensive services to such clients. The Board concluded that the Fund's
management fee and fee rate and overall expense ratio are reasonable compared to
those of other comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the New Investment Advisory Agreement, the directors considered, among
other things, whether advisory fees or other expenses would change as a result
of the Transaction. Based on their review of the materials provided and the fact
that the New Investment Advisory Agreement is substantially similar to the
Current Investment Advisory Agreement in all material respects, including the
rate of compensation, the directors determined that the Transaction should not
increase the total fees payable, including any fee waivers and expense
reimbursements, for advisory and administrative services. The directors noted
that it was not possible to predict how the Transaction would affect BlackRock
Advisors' profitability from its relationship with the Fund.
The directors discussed with BlackRock Advisors its general methodology to be
used in determining its profitability with respect to its relationship with the
Fund. The directors noted that they expect to receive profitability information
from BlackRock Advisors on at least an annual basis and thus be in a position to
evaluate whether any adjustments in Fund fees and/or fee breakpoints would be
appropriate.
Fees and 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. The Board
determined that changes were not currently necessary and that the Fund
appropriately participated in these economies of scale.
In reviewing the Transaction, the directors considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the New Investment Advisory Agreement is
substantially similar to the Current Investment Advisory Agreement in all
material respects, including the rate of compensation, the directors determined
that as a result of the Transaction, the Fund's total advisory fees would be no
higher than the fees under its Current Investment Advisory Agreement. The
directors noted that in conjunction with their most recent deliberations
concerning the Current Investment Advisory Agreement, the directors had
determined that the total fees for advisory and administrative services for the
Fund were reasonable in light of the services provided. It was noted that in
conjunction with the recent review of the Current Investment Advisory Agreement,
the directors had received, among other things, a report from Lipper comparing
the Fund's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Investment Adviser to
other registered investment company clients for investment management services.
The directors concluded that, because the rates for advisory fees for the Fund
would be no higher than its current fee rates, the proposed management fee
structure, including any fee waivers, was reasonable and that no additional
changes were currently necessary.
Fall-Out Benefits -- In evaluating the fall-out benefits to be received by
BlackRock Advisors under the New Investment Advisory Agreement, the directors
considered whether the Transaction would have an impact on the fall-out benefits
received by the Investment Adviser by virtue of the Current Investment Advisory
Agreement. Based on their review of the materials provided, including materials
received in connection with their most recent approval or continuance of the
Current Investment Advisory Agreement, and their discussions with management of
the Investment Adviser and BlackRock, the directors determined that those
benefits could include increased ability for BlackRock to distribute shares of
its funds and other investment products and, where applicable, to obtain
research services using the Fund's portfolio transaction brokerage commissions.
The directors noted that any such benefits were difficult to quantify with
certainty at this time, and indicated that they would continue to evaluate them
going forward.
Investment Performance -- The directors considered investment performance for
the Fund. The directors compared the Fund's 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. The comparative information received from Lipper showed
Fund performance at various levels within the range of performance of
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 27
Disclosure of New Investment Advisory Agreement (concluded)
comparable funds over different time periods. While the Board reviews
performance data at least quarterly, consistent with the Investment Adviser's
investment goals, the Board attaches more importance over relatively long
periods of time, typically three to five years. The directors believed the
Fund's performance was satisfactory. Also, the directors took into account the
investment performance of funds currently advised by BlackRock Advisors. The
Board considered comparative information from Lipper which showed that the
performance of the funds advised by BlackRock Advisors was within the range of
performance of comparable funds over different time periods. The Board noted
BlackRock's considerable investment management experience and capabilities, but
were unable to predict what effect, if any, consummation of the Transaction
would have on the future performance of the Fund.
Conclusion -- After the independent directors of the Fund deliberated in
executive session, the entire Board, including the independent directors,
approved the New Investment Advisory Agreement, concluding that the advisory fee
rate was reasonable in relation to the services provided and that the New
Investment Advisory Agreement was in the best interests of the shareholders. In
approving the New Investment Advisory Agreement, the Board noted that it
anticipated reviewing the continuance of the agreement in advance of the
expiration of the initial two-year period.
Contingent BlackRock Subadvisory Agreement -- Matters Considered by the Board
At the telephonic and in-person meetings held during April and May 2006 at which
the Board of Directors discussed and approved the New Investment Advisory
Agreement, the Board, including the independent directors, also discussed and
approved a contingent subadvisory agreement (the "Contingent Subadvisory
Agreement") between the Investment Adviser and BlackRock Advisors (the
"BlackRock The Contingent Subadvisory Agreement is intended to ensure that the
Fund operates with efficient portfolio management services until the closing of
the Transaction, in the event that the Board deems it necessary and in the best
interests of the Fund and its shareholders that the BlackRock Subadviser assist
in managing the operations of the Fund during the interim period until the
closing of the Transaction. If shareholders approve the Contingent Subadvisory
Agreement, it will take effect only upon recommendation from the Investment
Adviser and upon subsequent approval of the Board in the period up to the
closing of the Transaction. The effectiveness of the Contingent Subadvisory
Agreement, therefore, would be contingent on further Board approval after
shareholders approve it. Pursuant to the Contingent Subadvisory Agreement, the
BlackRock Subadviser would receive a monthly fee from the Investment Adviser
equal to 50% of the advisory fee received by the Investment Adviser. The
Investment Adviser would pay the BlackRock Subadviser out of its own resources.
There would be no increase in Fund expenses as a result of the Contingent
Subadvisory Agreement.
In making its approval, the Board considered the Contingent Subadvisory
Agreement in conjunction with the New Investment Advisory Agreement and reviewed
the same information and factors discussed above, and came to the same
conclusions. The Board also considered in conjunction with the Contingent
Subadvisory Agreement the necessity of ensuring that the Fund operates with
effective management services until the closing of the Transaction. In reviewing
the subadvisory fee rate provided in the Contingent Subadvisory Agreement, the
Board took note of the fact that both the Investment Adviser and the BlackRock
Subadviser would have significant responsibilities under their respective
advisory agreements. The Investment Adviser would remain responsible for
oversight of the Fund's operations and administration and the BlackRock
Subadviser would provide advisory services to the Fund under the Contingent
Subadvisory Agreement. The Board also took into account the expected short
duration of the term of any Contingent Subadvisory Agreement and the fact that
total advisory fees paid by the Fund would not increase as a result of the
Contingent Subadvisory Agreement. Under all of the circumstances, the Board
concluded that it was a reasonable allocation of fees for the BlackRock
Subadviser to receive 50% of the advisory fee paid by the Fund to the Investment
Adviser.
After the independent directors deliberated in executive session, the entire
Board, including the independent directors, approved the Contingent Subadvisory
Agreement, concluding that the advisory fee was reasonable in relation to the
services provided and that the Contingent Subadvisory Agreement was in the best
interests of shareholders.
28 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
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
Donald C. Burke, Vice President and Treasurer
Kathleen M. Anderson, Vice President and Portfolio Manager
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
MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 29
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.
30 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006
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, 2006 31
[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 1-800-637-3863; (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 -- 5/06
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 21, 2006
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 21, 2006
By: /s/ Donald C. Burke
-----------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Utilities and Telecommunications Fund, Inc.
Date: July 21, 2006