MERRILL
LYNCH
STRATEGIC
DIVIDEND
FUND
FUND LOGO
Annual Report July 31, 1994
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.
Merrill Lynch
Strategic Dividend Fund
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH STRATEGIC DIVIDEND FUND
Officers and
Trustees
Arthur Zeikel, President and Trustee
Ronald W. Forbes, Trustee
Charles C. Reilly, Trustee
Kevin A. Ryan, Trustee
Richard R. West, Trustee
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Walter D. Rogers, Vice President and Portfolio Manager
Gerald M. Richard, Treasurer
Robert Harris, Secretary
<PAGE>
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
DEAR SHAREHOLDER
The expectation of increasing inflationary pressures and higher
interest rates initially heightened investor concerns and
increased financial market volatility during the July quarter.
However, as the quarter progressed, it was the weakness of the
US dollar in foreign exchange markets that dominated the
financial news and prolonged stock and bond market declines.
Although the US dollar had strengthened slightly by July quarter-
end, which may have improved investor confidence in the stock
and bond markets, the possibility of continued tightening by
the Federal Reserve Board resurfaced following Chairman Alan
Greenspan's recent Congressional testimony. Nevertheless, as
the quarter drew to a close, a lower-than-expected rate of
growth reported for the US economy during the second calendar
quarter allayed investor concerns and led to stock and bond
market rallies.
During the July quarter, the US dollar's weakness relative to
other major currencies reflected the deteriorating US trade
deficit and widening net long-term capital outflows. In 1993, an
expanding US economy and recession in other industrial countries
led to a higher level of imports and weaker export growth,
widening the US trade deficit further. In addition, global
investors favored non-US dollar denominated assets throughout
1993, which has further depressed the dollar's value. This trend
is not improving significantly thus far in 1994 since foreign
inflows into US capital markets continue to decline, although
US investors are investing outside of the United States
to a lesser degree.
<PAGE>
Over the longer term, if the economies of the United States'
major trading partners expand (improving the prospects for US
export growth), the outlook for the US dollar is likely to
improve. In the near term, central banks have attempted to
reverse the dollar's decline through currency market intervention.
These efforts have met with limited success thus far, giving
rise to the concern that the Federal Reserve Board will be forced
to continue to raise short-term interest rates to attract investment
capital back to the United States and bolster the dollar's value.
However, further interest rate increases may jeopardize the US
economic expansion. Despite evidence of a moderating trend in the
US economy, Federal Reserve Board Chairman Alan Greenspan indicated
in his July Humphrey-Hawkins testimony that the central bank would
prefer to err on the side of too much monetary tightening rather
than too little. In the weeks ahead, investors will continue to
assess economic data and inflationary trends as they focus on the
US dollar in order to gauge whether further increases in short-term
interest rates are imminent. Continued indications of moderate
and sustainable levels of economic growth would be positive for
the US capital markets.
Portfolio Matters
As noted in our last two reports to shareholders, we made several
changes in Merrill Lynch Strategic Dividend Fund's investment
holdings during the Fund's last three quarters. Specifically, we
increased the Fund's exposure to the capital goods and basic
industries sectors, believing that shares of companies in these
sectors would benefit from the recovering US economy before
companies in other sectors. Our strategy during the quarter ended
July 31, 1994 was essentially to "stay the course" adopted over
the last two quarters. We added only one new stock to the Fund,
Lincoln National Corp. In addition, we partially reduced 20 other
holdings, and we eliminated Lehman Brothers Holdings Inc., a
spin-off from American Express Co. These transactions effectively
increased our exposure to issues likely to benefit from the early
phases of economic recovery and to financial stocks, while at the
same time reducing the Fund's historic overweighting to utility
and energy stocks. While implementation began several months ago,
this strategy worked well for the Fund during the July quarter.
For the three-month period ended July 31, 1994, total returns of
Merrill Lynch Strategic Dividend Fund's Class A and Class B
Shares (+4.60% and +4.32%, respectively) outperformed the total
return of the unmanaged Standard & Poor's 500 Index (S&P 500) of
+2.39% and the average total return of Lipper Analytical Services
Inc.'s Equity Income Funds category (+1.67%), in which your Fund
is grouped. (Complete performance information, including average
annual total returns, can be found on pages 4, 5 and 6 of this
report to shareholders.) The best-performing sectors within the
S&P 500 during the quarter were basic industries, capital goods,
energy, natural gas and financials. Collectively, these sectors
represented 74% of the Fund's equity assets.
<PAGE>
As noted above, the sole addition to the Fund in the July quarter
was Lincoln National Corp., an insurance holding company that is
among the top 25 property and casualty underwriters and has other
operations in individual health, life reinsurance and annuities.
With a strong balance sheet and conservative accounting, we
believe Lincoln National is positioned to benefit from the demand
by individuals for tax-advantaged investments as a result of
higher marginal tax rates, since Lincoln National is one of the
largest issuers of individual annuities in the United States.
We expect Lincoln National's earnings will have healthy growth
over the next five years, given its increasingly important
position in the annuity market. The company's property and
casualty operations are now the second-largest contributor to
operating earnings after life insurance and annuities. What
distinguishes Lincoln National from other property and casualty
companies is the likelihood that it will not be required to add
to reserves for earlier losses since it has historically
established appropriate reserves for these operations. Moreover,
its 1979-1993 underwriting record has been attributed to superior
underwriting, pricing and reserving discipline.
In May, American Express Co. distributed the shares of Lehman
Brothers Holdings Inc. to its existing shareholders. We eliminated
those shares immediately after their receipt because they did not
meet our investment criteria, since the price/earnings valuation
was too high and the dividend yield too low.
The remaining transactions for the July quarter involved only
partial reductions in 20 stocks, specifically American Express
Co., B.A.T. Industries PLC (ADR), Bell Atlantic Corp., Bristol-
Myers Squibb Co., The Brooklyn Union Gas Co., CIGNA Corp., E.I.
du Pont de Nemours & Co., Enron Corp., Mobil Corp., National City
Corp., NICOR Inc., Northrop Grumman Corp., Ohio Casualty Corp.,
Public Service Enterprise Group, Inc., Royal Dutch Petroleum PLC
(ADR), Sears, Roebuck & Co., Southwestern Bell Corp., Texaco
Inc., TRW Inc. and Union Camp Corp. We continue to retain the
bulk of these holdings. The reasons for the sales varied from
capturing some of the capital appreciation in many of the
holdings to the need to raise our cash levels. On the whole, we
are comfortable with our remaining positions in these stocks. The
sale transactions reflected neither deterioration in business
outlooks nor fundamentals at the respective companies.
<PAGE>
Fiscal Year in Review
Our primary investment strategy for Merrill Lynch Strategic
Dividend Fund is to invest in a diversified portfolio of common
stocks whose yields are greater than that of the stock market, as
represented by the S&P 500. We look for investments that offer
solid or improving fundamentals which will lead to price
appreciation as well as growing and safe dividends. At year-end
1993, to allow for greater diversification, we lowered the
minimum yield criterion for the Fund's common stock investments
at the time of purchase to that of the average yield of the S&P
500. This strategy repositioned the Fund's sector weightings by
reducing the historically heavily weighted energy and utility
sectors and increasing the capital goods, basic industries and
certain consumer cyclical and financial services sectors, and
enhance the Fund's total return in the latter part of the fiscal
year.
In Conclusion
We thank you for your investment in Merrill Lynch Strategic
Dividend Fund, and we look forward to reviewing our outlook and
strategy with you again in our upcoming quarterly report to
shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Walter D. Rogers)
Walter D. Rogers
Vice President and Portfolio Manager
August 22, 1994
PERFORMANCE DATA
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
Class A and Class B Shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Total Return
Based on a
$10,000
Investment
GRAPHIC MATERIAL APPEARS HERE. SEE APPENDIX: ITEM 1.
<PAGE>
Average
Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/94 +0.15% -6.36%
Five Years Ended 6/30/94 +7.08 +5.65
Inception (11/29/88) through 6/30/94 +8.77 +7.47
[FN]
*Maximum sales charge is 6.5%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/94 -0.84% -4.51%
Five Years Ended 6/30/94 +5.99% +5.99%
Inception (11/25/87) through 6/30/94 +8.32% +8.32%
[FN]
*Maximum contingent deferred sales charge is 4% and
is reduced to 0% after 4 years.
**Assuming payment of applicable contingent deferred
sales charge.
<PAGE>
<TABLE>
Performance
Summary--
Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
11/29/88--12/31/88 $10.71 $10.56 $0.140 $0.156 + 1.37%
1989 10.56 12.50 -- 0.612 +24.61
1990 12.50 10.95 -- 0.725 + 6.70
1991 10.95 12.15 -- 0.516 +15.99
1992 12.15 12.75 -- 0.460 + 8.95
1993 12.75 12.74 0.645 0.456 + 8.66
1/1/94--7/31/94 12.74 12.78 -- 0.235 + 2.24
Total $0.785 Total $3.160
Cumulative total return as of 7/31/94: +65.46%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions at net asset
value on the ex-dividend date, and do not include sales charge; results would be lower if
sales charge was included.
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
11/25/87--12/31/87 $10.00 $10.02 -- $0.047 + 0.67%
1988 10.02 10.56 $0.266 0.465 +12.81
1989 10.56 12.49 -- 0.504 +23.40
1990 12.49 10.94 -- 0.604 - 7.68
1991 10.94 12.14 -- 0.393 +14.78
1992 12.14 12.75 -- 0.328 + 7.89
1993 12.75 12.74 0.645 0.315 + 7.54
1/1/94--7/31/94 12.74 12.77 -- 0.169 + 1.62
Total $0.911 Total $2.825
Cumulative total return as of 7/31/94: +75.10%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions at net
asset value on the ex-dividend date, and do not reflect deduction of any sales charge;
results would be lower if sales charge was deducted.
</TABLE>
<PAGE>
PERFORMANCE DATA (concluded)
<TABLE>
Recent
Performance
Results*
<CAPTION>
12 Month 3 Month
7/31/94 4/30/94 7/31/93 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Strategic Dividend Fund Class A Shares $12.78 $12.34 $13.60 -1.19% +3.57%
ML Strategic Dividend Fund Class B Shares 12.77 12.33 13.59 -1.20(1) +3.57
Standard & Poor's 500 Index** 458.26 450.91 448.13 +2.26 +1.63
ML Strategic Dividend Fund Class A Shares--Total Return +2.38(2) +4.60(3)
ML Strategic Dividend Fund Class B Shares--Total Return +1.30(4) +4.32(5)
Standard & Poor's 500 Index--Total Return** +5.14% +2.39
<FN>
*Investment results shown for the 3-month and 12-month periods are before the deduction
of any sales charges.
**An unmanaged broad-based index comprised of common stocks. Total investment returns for
unmanaged indexes are based on estimates.
(1)Percent change includes reinvestment of $0.645 per share capital gains distributions.
(2)Percent change includes reinvestment of $0.460 per share ordinary income dividends and
$0.645 per share capital gains distributions.
(3)Percent change includes reinvestment of $0.124 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.323 per share ordinary income dividends and
$0.645 per share capital gains distributions.
(5)Percent change includes reinvestment of $0.091 per share ordinary income dividends.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
EUROPE
United Kingdom
Chemicals 62,000 Imperial Chemical Industries PLC (ADR)* $ 2,744,392 $ 3,177,500 1.7%
Consumer Products 350,000 B.A.T. Industries PLC (ADR)* 4,470,025 4,681,250 2.5
Oil--International 65,000 Royal Dutch Petroleum PLC (ADR)* 3,617,240 7,345,000 3.9
Total Investments in Europe 10,831,757 15,203,750 8.1
NORTH AMERICA
Canada
Telecommunications 142,000 BC Telecom, Inc. 2,669,047 2,440,481 1.3
Total Investments in Canada 2,669,047 2,440,481 1.3
United States
Aerospace & Defense 180,000 Northrop Grumman Corp. 6,327,472 7,560,000 4.0
79,000 TRW Inc. 4,310,795 5,510,250 2.9
------------ ------------ ------
10,638,267 13,070,250 6.9
Banking 90,000 The Chase Manhattan Corp. 3,166,154 3,318,750 1.7
70,000 First Chicago Corp. 1,966,210 3,517,500 1.9
100,000 National City Corp. 2,661,218 2,687,500 1.4
------------ ------------ ------
7,793,582 9,523,750 5.0
Chemicals 46,000 The Dow Chemical Co. 2,739,760 3,179,750 1.7
110,000 du Pont (E.I.) de Nemours & Co. 4,384,428 6,531,250 3.4
------------ ------------ ------
7,124,188 9,711,000 5.1
Drugs 40,000 Bristol-Myers Squibb Co. 1,826,550 2,105,000 1.1
Electrical Equipment 80,000 General Electric Co. 3,864,900 4,030,000 2.1
Financial Services 170,000 American Express Co. 3,631,867 4,505,000 2.4
72,000 Beneficial Corp. 2,763,271 2,862,000 1.5
------------ ------------ ------
6,395,138 7,367,000 3.9
Hardware Products 61,000 The Stanley Works Co. 2,557,835 2,493,375 1.3
Information Processing 20,000 Xerox Corp. 1,963,262 2,045,000 1.1
<PAGE>
Insurance 150,000 American General Corp. 3,096,836 4,293,750 2.2
60,000 CIGNA Corp. 3,420,450 4,110,000 2.2
60,000 Lincoln National Corp. 2,565,720 2,257,500 1.3
30,000 Marsh & McLennan Companies, Inc. 2,626,800 2,557,500 1.3
160,000 Ohio Casualty Corp. 5,117,500 4,920,000 2.6
------------ ------------ ------
16,827,306 18,138,750 9.6
Metals 50,000 Carpenter Technology Corp. 3,167,183 3,018,750 1.6
100,000 Cyprus Amax Minerals Co. 2,627,429 3,125,000 1.6
------------ ------------ ------
5,794,612 6,143,750 3.2
Oil--International 80,000 Mobil Corp. 3,581,850 6,710,000 3.5
110,000 Texaco Inc. 5,107,249 6,985,000 3.7
------------ ------------ ------
8,689,099 13,695,000 7.2
Oil Services 135,000 Halliburton Co. 4,039,632 4,590,000 2.4
Paper & Forest Products 163,100 Federal Paper Board Co., Inc. 3,555,174 4,077,500 2.1
100,000 Union Camp Corp. 4,787,720 4,725,000 2.5
------------ ------------ ------
8,342,894 8,802,500 4.6
Photographic 100,000 Eastman Kodak Co. 3,975,843 4,837,500 2.5
Retail 110,000 Sears, Roebuck & Co. 3,025,842 5,197,500 2.7
Telecommunications 110,000 Bell Atlantic Corp. 4,071,196 6,228,750 3.3
170,000 Southwestern Bell Corp. 4,488,850 7,140,000 3.8
------------ ------------ ------
8,560,046 13,368,750 7.1
Utilities--Electric 126,000 Consolidated Edison Co. of N.Y., Inc. 3,559,500 3,622,500 1.9
86,000 Public Service Co. of Colorado 2,768,078 2,322,000 1.2
120,000 Public Service Enterprise Group, Inc. 4,209,600 3,330,000 1.8
92,000 Texas Utilities Corp. 3,335,000 3,024,500 1.6
------------ ------------ ------
13,872,178 12,299,000 6.5
Utilities--Gas & 160,000 The Brooklyn Union Gas Co. 4,287,226 4,020,000 2.1
Gas Pipeline 200,000 Enron Corp. 2,126,430 6,475,000 3.4
155,000 NICOR Inc. 4,397,154 3,894,375 2.1
236,000 Sonat, Inc. 4,263,114 7,817,500 4.1
------------ ------------ ------
15,073,924 22,206,875 11.7
Total Investments in the United States 130,365,098 159,625,000 84.0
Total Investments in North America 133,034,145 162,065,481 85.3
<PAGE>
PACIFIC BASIN
Hong Kong
Airlines 1,525,000 Cathay Pacific Airways Ltd. 2,733,414 2,467,733 1.3
Total Investments in the Pacific Basin 2,733,414 2,467,733 1.3
Total Common Stocks 146,599,316 179,736,964 94.7
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Repurchase $5,823,000 UBS Finance Corp., purchased on
Agreement** 7/29/1994 to yield 4.22% to 8/01/1994 $ 5,823,000 $ 5,823,000 3.1%
Total Short-Term Securities 5,823,000 5,823,000 3.1
Total Investments $152,422,316 185,559,964 97.8
============
Other Assets Less Liabilities 4,182,892 2.2
------------ ------
Net Assets $189,742,856 100.0%
============ ======
<FN>
*American Depositary Receipt (ADR).
**Repurchase Agreements are fully collateralized by US Government Obligations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of July 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$152,422,316) (Note 1a) $185,559,964
Cash 28,428
Receivables:
Securities sold $ 4,994,357
Dividends 560,555
Beneficial interest sold 189,978 5,744,890
------------
Prepaid registration fees and other assets (Note 1e) 58,038
------------
Total assets 191,391,320
------------
<PAGE>
Liabilities: Payables:
Beneficial interest redeemed 1,323,760
Distributor (Note 2) 134,065
Investment adviser (Note 2) 90,828 1,548,653
------------
Accrued expenses and other liabilities 99,811
------------
Total liabilities 1,648,464
Net Assets: Net assets $189,742,856
============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited number of
Consist of: shares authorized $ 171,005
Class B Shares of beneficial interest, $0.10 par value, unlimited number of
shares authorized 1,314,638
Paid-in capital in excess of par 143,816,200
Undistributed investment income--net 192,681
Undistributed realized capital gains on investments and foreign currency
transactions--net 11,110,308
Unrealized appreciation on investments and foreign currency transactions--net 33,138,024
------------
Net assets $189,742,856
============
Net Asset Class A--Based on net assets of $21,854,071 and 1,710,051 shares of beneficial
Value: interest outstanding $ 12.78
============
Class B--Based on net assets of $167,888,785 and 13,146,375 shares of beneficial
interest outstanding $ 12.77
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended July 31, 1994
<S> <S> <C> <C>
Investment Dividends (net of $153,312 foreign withholding tax) $ (9,416,012)
Income Interest and discount earned 404,334
(Notes 1c & 1d): Other income 959
------------
Total income 9,821,305
------------
<PAGE>
Expenses: Distribution fees--Class B (Note 2) 2,013,716
Investment advisory fees (Note 2) 1,381,980
Transfer agent fees--Class B (Note 2) 268,527
Printing and shareholder reports 127,935
Accounting services (Note 2) 51,945
Registration fees (Note 1e) 43,622
Professional fees 41,427
Transfer agent fees--Class A (Note 2) 31,884
Custodian fees 27,501
Trustees' fees and expenses 27,474
Amortization of organization expenses (Note 1e) 1,522
Other 6,653
------------
Total expenses 4,024,186
------------
Investment income--net 5,797,119
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net $ 13,167,444
(Loss) on Foreign currency transactions (4,340) 13,163,104
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (16,549,230)
(Notes 1b, 1d & 3): Foreign currency transactions 2,794 (16,546,436)
------------ ------------
Net realized and unrealized loss on investments and foreign currency
transactions (3,383,332)
------------
Net Increase in Net Assets Resulting from Operations $ 2,413,787
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 5,797,119 $ 6,443,619
Realized gain on investments and foreign currency transactions--net 13,163,104 15,349,726
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net (16,546,436) 183,755
------------ ------------
Net increase in net assets resulting from operations 2,413,787 21,977,100
------------ ------------
<PAGE>
Dividends & Investment income--net:
Distributions to Class A (987,005) (1,084,305)
Shareholders Class B (4,814,245) (5,336,560)
(Note 1f): Realized gain on investments--net:
Class A (1,506,196) --
Class B (10,287,745) --
------------ ------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (17,595,191) (6,420,865)
------------ ------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions (56,392,747) (24,799,466)
Transactions ------------ ------------
(Note 4):
Net Assets: Net decrease in net assets (71,574,151) (9,243,231)
Beginning of year 261,317,007 270,560,238
------------ ------------
End of year* $189,742,856 $261,317,007
============ ============
<FN>
*Undistributed investment income--net $ 192,681 $ 196,812
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.60 $ 12.79 $ 11.90 $ 11.80 $ 12.38
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .41 .44 .44 .55 .76
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net (1) (.12) .81 .93 .14 (.61)
--------- --------- --------- --------- ---------
Total from investment operations .29 1.25 1.37 .69 .15
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.46) (.44) (.48) (.59) (.73)
Realized gain on investments--net (.65) -- -- -- --
--------- --------- --------- --------- ---------
Total dividends and distributions (1.11) (.44) (.48) (.59) (.73)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 12.78 $ 13.60 $ 12.79 $ 11.90 $ 11.80
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 2.38% 10.03% 11.96% 6.25% 1.20%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses .85% .81% .88% .88% .86%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 3.42% 3.38% 3.75% 4.83% 6.17%
========= ========= ========= ========= =========
<PAGE>
Supplemental Net assets, end of period (in thousands) $ 21,854 $ 34,228 $ 31,512 $ 33,916 $ 37,499
Data: ========= ========= ========= ========= =========
Portfolio turnover 22.75% 25.23% 29.17% 10.50% 16.99%
========= ========= ========= ========= =========
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.59 $ 12.78 $ 11.88 $ 11.78 $ 12.37
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .33 .31 .34 .45 .60
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net (1) (.18) .81 .91 .12 (.58)
--------- --------- --------- --------- ---------
Total from investment operations .15 1.12 1.25 .57 .02
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.32) (.31) (.35) (.47) (.61)
Realized gain on investments--net (.65) -- -- -- --
--------- --------- --------- --------- ---------
Total dividends and distributions (.97) (.31) (.35) (.47) (.61)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 12.77 $ 13.59 $ 12.78 $ 11.88 $ 11.78
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 1.30% 8.90% 10.85% 5.14% 0.15%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses, excluding distribution fees .88% .84% .91% .90% .89%
Net Assets: ========= ========= ========= ========= =========
Expenses 1.88% 1.84% 1.91% 1.90% 1.89%
========= ========= ========= ========= =========
Investment income--net 2.39% 2.37% 2.74% 3.81% 5.14%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 167,889 $227,089 $239,048 $284,869 $337,072
Data: ========= ========= ========= ========= =========
Portfolio turnover 22.75% 25.23% 29.17% 10.50% 16.99%
========= ========= ========= ========= =========
<FN>
*Total investment returns exclude the effects of sales loads.
(1)Foreign currency transaction amounts have been reclassified to conform to 1994 presentation.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Strategic Dividend Fund (the "Fund") is
registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The Fund
offers both Class A and Class B Shares. Class A Shares are sold
with a front-end sales charge. Class B Shares may be subject
to a contingent deferred sales charge. Both classes of shares
have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class B Shares
bear certain expenses related to the account maintenance and
distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The
following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of investments--Portfolio securities which are
traded on stock exchanges are valued at the last sale price as of
the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last
available quoted bid price in the over-the-counter market prior to
the time of valuation. Portfolio securities which are traded both
in the over-the-counter market and on a stock exchange are valued
based upon the prices or quotes obtained from the broadest and most
representative market. Short-term securities are valued at
amortized cost which approximates market. Options which are
traded on exchanges are valued at their last sale price as of the
close of such exchanges or, lacking any sales, at the last
available bid price. Securities for which market quotations are
not readily available are valued at their fair value as determined
in good faith by or under the direction of the Fund's Trustees.
(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) such transactions expressed in
foreign currencies into US dollars. Realized and unrealized gains
or losses from investments include the effects of foreign exchange
rates on investments.
<PAGE>
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or
portfolio positions. Such contracts are not entered on the Fund's
records. However, the effect on operations is recorded from the
date the Company enters into such contracts. Premium or discount
is amortized over the life of the contracts.
(c) 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.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are
entered into (the trade dates). Dividend income is recorded on
the ex-dividend date, except that if the ex-dividend date has
passed, certain dividends from foreign securities are recorded as
soon as the Fund is informed of the ex-dividend date. Interest
income (including amortization of discount) is recognized on the
accrual basis. Realized gains and losses on security transactions
are determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration
fees--Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Costs related to the
organization of the second class of shares are charged to expense
over a period not exceeding five years. Prepaid registration fees
are charged to expense as the related shares are issued.
(f) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
(g) Non-income producing investments--Written and purchased
options are non-income producing investments.
(h) Reclassifications--Certain 1993 amounts have been reclassified
to conform to the 1994 presentation.
<PAGE>
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). Effective
January 1, 1994, the investment advisory business of MLAM was
reorganized from a corporation to a limited partnership. Both
prior to and after the reorganization, ultimate control of MLAM
was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The
general partner of MLAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of ML & Co. The limited partners
are ML & Co. and Merrill Lynch Investment Management, Inc.
("MLIM"), which is also an indirect wholly-owned subsidiary of
ML & Co. The Fund has also entered into Distribution Agreements
and a Distribution Plan with Merrill Lynch Funds Distributor,
Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of
MLIM. MLAM is responsible for the management of the Fund's
portfolio and provides the necessary personnel, facilities,
equipment and certain other services necessary to the operations
of the Fund. For such services, the Fund pays a monthly fee of
0.60%, on an annual basis, of the average daily value of the
Fund's net assets. The Investment Advisory Agreement obligates
MLAM to reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, extraordinary items) exceed 2.5% of the Fund's first
$30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets, and 1.5% of the average
daily net assets in excess thereof. No fee payment will be made
to MLAM during any fiscal year which will cause such expenses to
exceed the expense limitation at the time of such payment.
The Fund has adopted a Plan of Distribution (the "Plan") in
accordance with Rule 12b-1 under the Investment Company Act of
1940 pursuant to which MLFD receives from the Fund at the end of
each month an ongoing account maintenance fee and a distribution
fee, which are accrued daily and paid monthly at the annual rates
of 0.25% and 0.75%, respectively, of the average daily net assets
of the Class B Shares of the Fund. These fees are to compensate
the Distributor for services provided and the expenses borne by
the Distributor under the Distribution Agreement. As authorized
by the Plan, the Distributor has entered into an agreement with
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), which
provides for the compensation of MLPF&S for providing
distribution-related services to the Fund. For the year ended
July 31, 1994, MLFD earned $2,013,716 under the Plan, all of
which was paid to MLPF&S pursuant to the agreement.
For the year ended July 31, 1994, MLFD earned underwriting
discounts of $4,364, and MLPF&S earned dealer concessions of
$76,161 on sales of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges for the
sale of Class B Shares of $122,226 and $13,650 in commissions
on the execution of portfolio security transactions for the Fund
during the year.
<PAGE>
Financial Data Services, Inc. ("FDS"), a wholly-owned
subsidiary of ML & Co., acts as the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of MLAM, MLIM, MLPF&S, FDS, MLFD, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the year ended July 31, 1994 were $49,266,246 and
$109,536,566, respectively.
Net realized and unrealized gains (losses) as of July 31, 1994
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $13,167,444 $33,137,648
Foreign currency transactions (4,340) 376
----------- -----------
Total $13,163,104 $33,138,024
=========== ===========
As of July 31, 1994, net unrealized appreciation for Federal
income tax purposes aggregated $33,137,648, of which $36,888,711
related to appreciated securities and $3,751,063 related to
depreciated securities. The aggregate cost of investments at
July 31, 1994 for Federal income tax purposes was $152,422,316.
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial interest
transactions was $56,392,747 and $24,799,466 for the years ended
July 31, 1994 and July 31, 1993, respectively.
Transactions in capital shares for Class A and Class B Shares
were as follows:
Class A Shares for the Year Dollar
Ended July 31, 1994 Shares Amount
Shares sold 565,272 7,579,456
Shares issued to shareholders in
reinvestment of dividends and distributions 126,113 1,592,528
----------- -----------
Total issued 691,385 9,171,984
Shares redeemed (1,497,859) (19,449,269)
----------- -----------
Net decrease (806,474) (10,277,285)
=========== ===========
<PAGE>
Class A Shares for the Year Dollar
Ended July 31, 1993 Shares Amount
Shares sold 644,558 8,429,680
Shares issued to shareholders in
reinvestment of dividends 52,863 679,791
----------- -----------
Total issued 697,421 9,109,471
Shares redeemed (644,026) (8,392,440)
----------- -----------
Net increase 53,395 717,031
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1994 Shares Amount
Shares sold 1,342,236 $17,730,479
Shares issued to shareholders in
reinvestment of dividends and distributions 963,577 12,154,097
----------- -----------
Total issued 2,305,813 29,884,576
Shares redeemed (5,872,428) (76,000,038)
----------- -----------
Net decrease (3,566,615) $(46,115,462)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1993 Shares Amount
Shares sold 1,929,689 25,209,671
Shares issued to shareholders in
reinvestment of dividends 332,400 4,271,745
----------- -----------
Total issued 2,262,089 29,481,416
Shares redeemed (4,255,519) (54,997,913)
----------- -----------
Net decrease (1,993,430) $(25,516,497)
=========== ===========
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Strategic Dividend Fund:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill
Lynch Strategic Dividend Fund as of July 31, 1994, the related
statements of operations for the year then ended and changes in
net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the
five-year period then ended. These financial statements and the
financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and the financial highlights are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
securities owned at July 31, 1994 by correspondence with the
custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
<PAGE>
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Strategic Dividend Fund as of July 31, 1994, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 29, 1994
IMPORTANT TAX INFORMATION
All of the ordinary income distributions paid quarterly by
Merrill Lynch Strategic Dividend Fund during its taxable year
ended July 31, 1994 qualify for the dividends received deduction
for corporations.
Additionally, there were no long-term capital gain distributions
paid by the Fund during the year.
Please retain this information for your records.
PORTFOLIO CHANGES
For the Quarter Ended July 31, 1994
Additions
*Lehman Brothers Holdings Inc.
Lincoln National Corp.
Deletion
*Lehman Brothers Holdings Inc.
[FN]
*Acquired through a special tax-exempt dividend from the Fund's
holding of American Express Co.
<PAGE>
PORTFOLIO INFORMATION
As of July 31, 1994
Percent of
Ten Largest Common Stock Holdings Net Assets
Sonat, Inc. 4.1%
Northrop Grumman Corp. 4.0
Royal Dutch Petroleum PLC (ADR) 3.9
Southwestern Bell Corp. 3.8
Texaco Inc. 3.7
Mobil Corp. 3.5
du Pont (E.I.) de Nemours & Co. 3.4
Enron Corp. 3.4
Bell Atlantic Corp. 3.3
TRW Inc. 2.9
APPENDIX GRAPHIC AND IMAGE MATERIAL.
ITEM 1:
Total Return Based on a $10,000 Investment
A Line graph depicting the growth of an investment in the Fund's
Class A Shares compared to growth of an investment in the S&P 500
and the High Yield Index. Beginning and ending values are:
11/29/88** 7/94
ML Strategic Dividend Fund++--
Class A Shares* $9,350 $15,470
S&P 500++++ $10,000 $20,234
High Yield Index++++++ $10,000 $12,567
A Line graph depicting the growth of an investment in the Fund's
Class B Shares compared to growth of an investment in the S&P 500
and the High Yield Index. Beginning and ending values are:
11/25/87** 7/94
ML Strategic Dividend Fund++--
Class A Shares* $10,000 $17,510
S&P 500++++ $10,000 $23,297
High Yield Index++++++ $10,000 $12,567
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses including advisory fees.
**Commencement of Operations.
++ML Strategic Dividend Fund invests primarily in companies with
a continuous record of paying dividends.
++++This unmanaged broad-based Index is comprised of common stocks.
++++++This unmanaged Index consists of the first quintile of the
highest-yielding stocks of the S&P 500. This Index does not
include reinvestment of all dividends and capital gains
distributions.
