MERRILL
LYNCH
STRATEGIC
DIVIDEND
FUND
FUND LOGO
Semi-Annual Report January 31, 1994
This report is not authorized for use as an offer of sale or a solicita-
tion of an offer to buy shares of the Fund unless accompanied or pre-
ceded by the Fund's current prospectus. Past performance results shown
in this report should not be considered a representation of future per-
formance. 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
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
<PAGE>
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
DEAR SHAREHOLDER
As 1993 drew to a close, the US economy showed signs of strong improvement.
The initial estimate for gross domestic product (GDP) growth in the final
quarter of 1993 was +5.9% in real terms, the strongest quarterly perform-
ance since the fourth quarter of 1987. GDP growth was led by interest rate-
sensitive sectors, such as housing, durable goods orders and business
investment in capital equipment. Consumer confidence also improved after
remaining lackluster throughout most of 1993. While the exceptionally robust
rate of growth may not be sustainable in the first quarter of 1994 (especial-
ly considering the harsh winter weather experienced by virtually half of the
country in January), this strong showing suggests that the US economy may
at last be gaining momentum. This was supported by the December increase
in the Index of Leading Economic Indicators, the fifth monthly rise in this
indicator of future economic activity.
At the same time, the rate of inflation remains in check. Nevertheless,
concerns arose late in 1993 that the rate of business activity might
increase inflationary pressures, which were reflected in an upturn of
longer-term interest rates. In January, Federal Reserve Board Chairman
Alan Greenspan indicated in Congressional testimony that continued strong
expansion of economic activity would lead the central bank to tighten
monetary policy in an effort to contain inflation. On February 4, 1994,
the central bank broke with tradition and publicly announced an increase
in short-term interest rates. In the weeks ahead, investors will continue
to gauge the pace of the economic expansion and watch for signs of an over-
heating economy that could prompt successive Federal Reserve Board actions
to raise short-term interest rates.
Portfolio Matters
During the January quarter, we began to reposition the Fund's sector
weightings by reducing exposure to the more heavily weighted energy
and utility sectors and increasing investments in economically sensitive
sectors such as capital goods, basic industries and certain cyclical
consumer and financial service companies. We believe that these industry
groups offer better earnings and dividend growth prospects in a recovering
economy in which interest rates are on the increase. The Fund added ten
new stocks during the quarter, eliminated five holdings and reduced invest-
ments in eight issues.
We purchased shares of Beneficial Corp., a financial services company
specializing in unsecured loans to middle- and lower-middle class con-
sumers as well as secured real estate loans and credit-related insurance.
The company is reporting solid earnings growth as it benefits from strong
growth in finance receivables, fueled by the pickup in consumer demand,
and ongoing credit quality and balance sheet improvements. We believe
that the stock is undervalued at current levels given prospects for con-
tinued strong earnings growth and the generous dividend yield.
<PAGE>
Xerox Corp., another portfolio addition, is a capital goods company
providing information processing products and services. Major changes
have taken place at Xerox, with new management and a major restructuring
program that is well underway which is already reducing costs. More im-
portant, the company has implemented other programs, including updating
product lines, to emphasize higher-growth areas, to lessen competition
and to establish product niches. Continued economic expansion in North
America and a stabilizing-to-improving European economy should result in
a pickup in revenue growth for Xerox and lead to higher earnings in the
months ahead. The likely spinoff of the company's financial services
operations is also a plus.
We also added The Stanley Works Company which manufactures hand tools and
hardware products for the home improvement, consumer, industrial and
professional markets. About one-third of the company's sales and opera-
ting income is from operations principally located in Europe and, to a
lesser extent, in Latin America and the Far East. With the European
economies stabilizing and the Latin American and Far East economies
exceeding expectations, we believe that Stanley Works is poised for
a strong improvement in sales and earnings.
We added to the Fund's basic industry investments with the acquisition
of shares of two chemical companies, Dow Chemical Co. and Imperial
Chemical Industries PLC. Currently, shares of these two companies
appear undervalued based on their future earnings power. With im-
proved demand potential as industrial production continues to expand
domestically and stabilize in Europe--and with the ongoing benefits of
cost reductions and restructuring programs already in place--profit
margins for these companies are likely to improve. Furthermore,
shares of both companies offer high dividend yields relative to
other chemical stocks.
We expanded basic industry exposure by purchasing shares of Cyprus Amax
Minerals Co. and Carpenter Technology Corp., two industrial metals com-
panies. Cyprus is engaged in the exploration and production of minerals,
principally copper and coal, as well as gold, lithium and molybdenum.
The company is the result of the recently completed merger of Cyprus
Minerals with Amax Inc., which expanded Cyprus' minerals asset base.
The company is now the world's second-largest copper producer, with
copper accounting for over half of its revenues. Rationalization of
several noncore businesses, coupled with an aggressive cost-cutting
program and improved operating margins, should produce very favorable
earnings for Cyprus Amax in the future.
Carpenter Technology manufactures and fabricates specialty steels and
metals for a broad range of end-use markets, primarily industrial. The
company has recently experienced increased demand for products related
to automobiles, residential and commercial construction, and power gen-
eration. As the US economy continues to expand we expect that Carpenter
Technology's shipments will grow at an even faster rate, and the company
has been working at reducing lead times and improving reliability. All of
these developments are likely to result in sharply higher earnings. Car-
penter Technology shares are attractively priced and offer one of the
highest yields in their industry.
<PAGE>
We also purchased shares of Cathay Pacific Airways Ltd., one of the best-
managed and most financially sound airlines in the world. Although Asian
airlines have avoided the aggressive competitive price wars of their North
American and European counterparts, operating costs are increasing. As a
result, Cathay Pacific has implemented cost-cutting measures to stabilize
profit margins. This Hong Kong-based airline operates in one of the fastest-
growing economic regions in the world. With its proximity to The People's
Republic of China (PRC), Cathay Pacific is well-positioned to participate
in this market following China's scheduled annexation of Hong Kong in 1997.
Over 20% of Cathay Pacific's stock is controlled by mainland Chinese concerns.
This strong PRC support should place Cathay Pacific in an advantageous bar-
gaining position for landing rights and new route negotiations post-1997.
We added two utility stocks during the January quarter, BC Telecom, Inc.
and Public Service Company of Colorado. BC Telecom is the second-largest
telecommunications company in Canada, operating in the province of British
Columbia. The company's mobile cellular business continues to be one of the
most profitable with significant market penetration. Local service has been
growing at a healthy pace, reflecting the region's strong economic environ-
ment. With the company's good earnings growth and the attractive dividend
yield of its shares, we believe that BC Telecom is a total return invest-
ment opportunity for the Fund. Public Service Company of Colorado is a
combination electric and gas utility operating throughout Colorado. The
company has divested its nonutility business, and the recently announced
workforce reduction program should help keep costs down. With modest
earnings growth and an above-industry average dividend payout ratio,
Public Service Company of Colorado offers attractive total return
potential.
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 next quarterly report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Walter D. Rogers)
Walter D. Rogers
Vice President and Portfolio Manager
March 8, 1994
<PAGE>
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.
<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--1/31/94 12.74 13.17 -- -- + 3.38
------ ------
Total $0.785 Total $2.925
Cumulative total return as of 1/31/94: +67.30%**
<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>
<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--1/31/94 12.74 13.16 -- -- + 3.30%
------ ------
Total $0.911 Total $2.656
<PAGE> Cumulative total return as of 1/31/94: +77.99%**
<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>
<TABLE>
Recent
Performance
Results*
<CAPTION>
12 Month 3 Month
1/31/94 10/31/93 1/31/93 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Strategic Dividend Fund Class A Shares $13.17 $13.83 $12.80 + 8.19%(1) +0.13%(1)
ML Strategic Dividend Fund Class B Shares 13.16 13.81 12.78 + 8.28(1) +0.20(1)
Standard & Poor's 500 Index** 481.61 467.83 438.78 + 9.76 +2.95
ML Strategic Dividend Fund Class A Shares--Total Return +11.89(2) +0.89(3)
ML Strategic Dividend Fund Class B Shares--Total Return +10.83(4) +0.68(5)
Standard & Poor's 500 Index--Total Return** +12.85 +3.63
<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 $0.456 per share ordinary income dividends and $0.645
per share capital gains distributions.
(3) Percent change includes reinvestment of $0.099 per share ordinary income dividends and $0.645
per share capital gains distributions.
(4) Percent change includes reinvestment of $0.315 per share ordinary income dividends and $0.645
per share capital gains distributions.
(5) Percent change includes reinvestment of $0.064 per share ordinary income dividends and $0.645
per share capital gains distributions.
</TABLE>
Average
Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/93 +8.66% +1.60%
Five Years Ended 12/31/93 +9.81 +8.34
Inception (11/29/88) through 12/31/93 +9.92 +8.48
[FN]
*Maximum sales charge is 6.5%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/93 +7.54% +3.55%
Five Years Ended 12/31/93 +8.70 +8.70
Inception (11/25/87) through 12/31/93 +9.32 +9.32
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Value Percent of
EUROPE Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Chemicals 62,000 Imperial Chemical Industries PLC (ADR)* $ 2,744,492 $ 3,022,500 1.2%
Kingdom
Consumer Products 900,000 B.A.T. Industries PLC (ADR)* 5,777,483 7,200,000 3.0
Oil--International 80,000 Royal Dutch Petroleum PLC (ADR)* 4,437,215 8,800,000 3.6
Total Investments in Europe 12,959,190 19,022,500 7.8
NORTH
AMERICA
Canada Telecommunications 142,000 BC Telecom, Inc. 2,669,047 2,744,569 1.1
Total Investments in Canada 2,669,047 2,744,569 1.1
United Aerospace & Defense 305,000 Northrop Corp. 10,738,110 11,856,875 4.9
States 95,000 TRW Inc. 5,165,162 7,101,250 2.9
------------ ------------ -----
15,903,272 18,958,125 7.8
Banking 90,000 The Chase Manhattan Corp. 3,166,154 3,251,250 1.3
70,000 First Chicago Corp. 1,966,210 3,290,000 1.4
100,000 Meridian Bancorp., Inc. 1,957,930 3,025,000 1.2
120,000 National City Corp. 3,195,088 3,105,000 1.3
------------ ------------ -----
10,285,382 12,671,250 5.2
Chemicals 46,000 The Dow Chemical Co. 2,739,760 2,921,000 1.2
150,000 du Pont (E.I.) de Nemours & Co. 5,976,108 8,400,000 3.5
------------ ------------ -----
8,715,868 11,321,000 4.7
Drugs 90,000 American Home Products Corp. 3,850,287 5,715,000 2.4
161,400 Bristol-Myers Squibb Co. 7,390,678 9,341,025 3.9
------------ ------------ -----
11,240,965 15,056,025 6.3
Financial Services 200,000 American Express Co. 4,997,760 6,550,000 2.7
72,000 Beneficial Corp. 2,763,271 2,853,000 1.2
------------ ------------ -----
7,761,031 9,403,000 3.9
<PAGE>
Hardware Products 61,000 The Stanley Works Co. 2,557,835 2,684,000 1.1
Information Processing 20,000 Xerox Corp. 1,963,262 1,962,500 0.8
Insurance 100,000 Alexander & Alexander Services, Inc. 2,663,000 2,100,000 0.9
150,000 American General Corp. 3,096,836 4,293,750 1.8
65,000 CIGNA Corp. 3,705,487 4,493,125 1.8
30,000 Marsh & McLennan Companies, Inc. 2,626,800 2,467,500 1.0
83,000 Ohio Casualty Corp. 5,308,000 5,312,000 2.2
------------ ------------ -----
17,400,123 18,666,375 7.7
Metals 50,000 Carpenter Technology Corp. 3,167,183 3,100,000 1.3
100,000 Cyprus Amax Minerals Co. 2,627,429 3,000,000 1.3
------------ ------------ -----
5,794,612 6,100,000 2.6
Oil--International 85,000 Mobil Corp. 3,804,075 6,885,000 2.9
157,800 Texaco Inc. 7,430,088 10,671,225 4.4
------------ ------------ -----
11,234,163 17,556,225 7.3
Oil Services 135,000 Halliburton Co. 4,039,632 4,353,750 1.8
Paper & Forest 163,100 Federal Paper Board Co., Inc. 3,555,174 4,281,375 1.8
Products 115,000 Union Camp Corp. 5,486,615 5,649,375 2.3
------------ ------------ -----
9,041,789 9,930,750 4.1
Photographic 100,000 Eastman Kodak Co. 3,975,843 4,412,500 1.8
Retail 120,000 Sears, Roebuck & Co. 3,300,919 6,585,000 2.7
Savings & 100,000 Great Western Financial Corp. 1,469,500 1,937,500 0.8
Loan Associations
Telecommunications 124,000 Bell Atlantic Corp. 4,583,953 7,037,000 2.9
78,000 GTE Corp. 1,786,545 2,681,250 1.1
200,000 Southwestern Bell Corp. 5,281,000 8,375,000 3.5
------------ ------------ -----
11,651,498 18,093,250 7.5
Utilities--Electric 126,000 Consolidated Edison Co. N.Y., Inc. 3,559,500 3,921,750 1.6
86,000 Public Service Co. of Colorado 2,768,078 2,698,250 1.1
150,000 Public Service Enterprise Group, Inc. 5,262,000 4,743,750 2.0
92,000 Texas Utilities Corp. 3,335,000 3,553,500 1.5
------------ ------------ -----
14,924,578 14,917,250 6.2
<PAGE>
Utilities--Gas & 200,000 The Brooklyn Union Gas Co. 5,363,746 5,475,000 2.3
Gas Pipeline 300,000 Enron Corp. 3,121,930 9,862,500 4.1
160,000 NICOR Inc. 4,536,876 4,600,000 1.9
236,000 Sonat, Inc. 4,263,114 7,345,500 3.0
------------ ------------ -----
17,285,666 27,283,000 11.3
Total Investments in the United States 158,545,938 201,891,500 83.6
Total Investments in North America 161,214,985 204,636,069 84.7
PACIFIC
BASIN
Hong Kong Airlines 1,525,000 Cathay Pacific Airways Ltd. 2,733,414 2,724,978 1.1
Total Investments in the Pacific Basin 2,733,414 2,724,978 1.1
Total Common Stocks 176,907,589 226,383,547 93.6
<CAPTION>
Face
Amount Short-Term Securities
<S> <C> <S> <C> <C> <C>
Repurchase $8,706,000 Bankers Trust Co., purchased on
Agreements** 1/31/1994 to yield 3.15% to 2/01/1994 8,706,000 8,706,000 3.6
Total Short-Term Securities 8,706,000 8,706,000 3.6
Total Investments $185,613,589 235,089,547 97.2
============
Other Assets Less Liabilities 6,661,004 2.8
------------ -----
Net Assets $241,750,551 100.0%
============ =====
<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 January 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$185,613,589) (Note 1a) $235,089,547
Cash 6,012,681
<PAGE>
Receivables:
Securities sold $ 3,660,534
Dividends 665,816
Beneficial interest sold 461,433 4,787,783
------------
Deferred organization expenses (Note 1e) 1,522
Prepaid registration fees and other assets (Note 1e) 48,881
------------
Total assets 245,940,414
------------
Liabilities: Payables:
Securities purchased 2,412,488
Beneficial interest redeemed 1,318,005
Distributor (Note 2) 177,567
Investment adviser (Note 2) 122,488 4,030,548
------------
Accrued expenses and other liabilities 159,315
------------
Total liabilities 4,189,863
------------
Net Assets: Net assets $241,750,551
============
Net Assets Class A Common Stock, $0.10 par value, unlimited number
Consist of: of shares authorized $ 243,891
Class B Common Stock, $0.10 par value, unlimited number
of shares authorized 1,592,620
Paid-in capital in excess of par 187,472,631
Undistributed investment income--net 335,412
Undistributed realized capital gains on investments
and foreign currency transactions--net 2,381,477
Unrealized appreciation on investments and foreign
currency transactions--net 49,724,520
------------
Net assets $241,750,551
============
Net Asset Class A Shares--Based on net assets of $32,129,291 and 2,438,908 shares of
Value: beneficial interest outstanding $ 13.17
============
Class B Shares--Based on net assets of $209,621,260 and 15,926,198 shares
of beneficial interest outstanding $ 13.16
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended January 31, 1994
<S> <S> <C> <C>
Investment Dividends (net of $109,406 foreign withholding tax) $5,110,865
Income Interest and discount earned 200,367
(Notes 1c & 1d): Other income 800
----------
Total income 5,312,032
----------
Expenses: Distribution fees--Class B (Note 2) 1,122,038
Investment advisory fees (Note 2) 771,201
Transfer agent fees--Class B (Note 2) 150,064
Printing and shareholder reports 61,779
Professional fees 29,787
Registration fees (Note 1e) 24,383
Accounting services (Note 2) 20,562
Transfer agent fees--Class A (Note 2) 18,203
Trustees' fees and expenses 14,039
Custodian fees 12,798
Amortization of organization expenses (Note 1e) 746
Other 3,199
----------
Total expenses 2,228,799
----------
Investment income--net 3,083,233
----------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net $4,438,043
(Loss) on Foreign currency transactions (3,769) 4,434,274
Investments & ----------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (210,920)
(Notes 1b, 1d & 3): Foreign currency transactions 250,980 40,060
---------- ----------
Net realized and unrealized gain on investments and foreign
currency transactions 4,474,334
----------
Net Increase in Net Assets Resulting from Operations $7,557,567
==========
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
<PAGE>
For the Six For the Year
Months Ended Ended
Increase (Decrease) in Net Assets: January 31, 1994 July 31, 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 3,083,233 $ 6,443,619
Realized gain on investments and foreign currency transactions--net 4,434,274 15,349,726
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 40,060 183,755
------------ --------------
Net increase in net assets resulting from operations 7,557,567 21,977,100
------------ --------------
Dividends & Investment income--net:
Distributions to Class A (517,816) (1,084,305)
Shareholders Class B (2,426,817) (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 (14,738,574) (6,420,865)
------------ --------------
Beneficial Interest Net decrease in net assets derived from
Transactions beneficial interest transactions (12,385,449) (24,799,466)
(Note 4): ------------ --------------
Net Assets: Net decrease in net assets (19,566,456) (9,243,231)
Beginning of period 261,317,007 270,560,238
------------ --------------
End of period* $241,750,551 $ 261,317,007
============ ==============
<FN>
*Undistributed investment income--net $ 335,412 $ 196,812
============ ==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been
derived from information provided in the financial Class A
statements:
For the Six For the Year Ended
Months Ended July 31,
January 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 period $ 13.60 $ 12.79 $ 11.90 $ 11.80 $ 12.38
Operating ------- ------- ------- ------- -------
Performance: Investment income--net .22 .44 .44 .55 .76
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net (1) .22 .81 .93 .14 (.61)
------- ------- -------- ------- -------
Total from investment operations .44 1.25 1.37 .69 .15
------- ------- -------- ------- -------
Less dividends and distributions:
Investment income--net (.22) (.44) (.48) (.59) (.73)
Realized gain on investments--net (.65) -- -- -- --
------- ------- ------- ------- -------
Total dividends and distributions (.87) (.44) (.48) (.59) (.73)
------- ------- -------- ------- -------
Net asset value, end of period $ 13.17 $ 13.60 $ 12.79 $ 11.90 $ 11.80
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 3.52%++ 10.03% 11.96% 6.25% 1.20%
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses 84%* .81% .88% .88% .86%
Net Assets: ======= ======= ======= ======= =======
Investment income--net 3.29%* 3.38% 3.75% 4.83% 6.17%
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $32,129 $34,228 $31,512 $33,916 $37,499
Data: ======= ======= ======= ======= =======
Portfolio turnover 17.86% 25.23% 29.17% 10.50% 16.99%
======= ======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following per share data and ratios have been
derived from information provided in the financial Class B
statements:
For the Six For the Year Ended
Months Ended July 31,
January 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 period $ 13.59 $ 12.78 $ 11.88 $ 11.78 $ 12.37
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .16 .31 .34 .45 .60
Realized and unrealized gain (loss) on
investments and foreign currency transactions--net (1) .21 .81 .91 .12 (.58)
-------- -------- -------- -------- --------
Total from investment operations .37 1.12 1.25 .57 .02
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.15) (.31) (.35) (.47) (.61)
Realized gain on investments--net (.65) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.80) (.31) (.35) (.47) (.61)
-------- -------- -------- -------- --------
Net asset value, end of period $ 13.16 $ 13.59 $ 12.78 $ 11.88 $ 11.78
======== ======== ======== ======== ========
Total Invest- Based on net asset value per share 2.97%+++ 8.90% 10.85% 5.14% 0.15%
ment Return:** ======== ======== ======== ======== ========
Ratios to Expenses, excluding distribution fees .86%* .84% .91% .90% .89%
Average ======== ======== ======== ======== ========
Net Assets: Expenses 1.86%* 1.84% 1.91% 1.90% 1.89%
======== ======== ======== ======== ========
Investment income--net 2.27%* 2.37% 2.74% 3.81% 5.14%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $209,621 $227,089 $239,048 $284,869 $337,072
Data: ======== ======== ======== ======== ========
Portfolio turnover 17.86% 25.23% 29.17% 10.50% 16.99%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Aggregate total investment return.
(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 investment
management 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 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 securities--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.
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 trans-
actions expressed in foreign currencies into US dollars. Realized and un-
realized gains or losses from investments include the effects of foreign
exchange rates on investments.
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 share-
holders. 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.
<PAGE>
(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 securi-
ties 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 ("MLAM"). Effective January 1, 1994, the invest-
ment 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., 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 manage-
ment 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.
Pursuant to a distribution plan (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 an ongoing account mainten-
ance fee and distribution fee, which are accrued daily and paid monthly
at the annual rate of 0.25% and 0.75%, respectively, of the average
daily net assets of the Class B Shares of the Fund. This fee is 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 agree-
ment 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 six months ended January 31, 1994, MLFD earned underwriting
discounts of $3,352, and MLPF&S earned dealer concessions of $54,687
on the sales of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges for the sale
of Class B Shares of $57,439 and $10,800 in commissions on the exe-
cution of portfolio security transactions for the Fund during the
year.
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 directors of the Fund are officers and/or
directors of MLIM, MLPF&S, FDS, MLFD, and/or ML & Co.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended January 31, 1994 were $42,835,626 and
$64,112,891, respectively.
Net realized and unrealized gains (losses) as of January 31, 1994 were
as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 4,438,043 $ 49,475,958
Foreign currency transactions (3,769) 248,562
------------- ------------
Total $ 4,434,274 $ 49,724,520
============= ============
As of January 31, 1994, net unrealized appreciation for Federal income
tax purposes aggregated $49,475,958, of which $50,952,805 related to
appreciated securities and $1,476,847 related to depreciated securities.
The aggregate cost of investments at January 31, 1994 for Federal income
tax purposes was $185,613,589.
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial interest transactions
was $12,385,449 and $24,799,466 for the six months ended January 31, 1994
and the year ended July 31, 1993, respectively.
Transactions in capital shares for Class A and Class B Shares were
as follows:
Class A Shares for the Six Months Dollar
Ended January 31, 1994 Shares Amount
Shares sold 417,877 $ 5,709,231
Shares issued to shareholders in
reinvestment of dividends and
distributions 100,791 1,281,171
-------- -----------
Total issued 518,668 6,990,402
Shares redeemed (596,285) (8,220,151)
-------- -----------
Net decrease (77,617) $(1,229,749)
======== ===========
<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 Six Months Dollar
Ended January 31, 1994 Shares Amount
Shares sold 846,803 $ 11,481,031
Shares issued to shareholders in
reinvestment of dividends and
distributions 808,002 10,241,120
---------- ------------
Total issued 1,654,805 21,722,151
Shares redeemed (2,441,597) (32,877,851)
---------- ------------
Net decrease (786,792) $(11,155,700)
========== ============
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)
========== ============
PORTFOLIO CHANGES
For the Quarter Ended January 31, 1994
<PAGE>
Additions
BC Telecom, Inc.
Beneficial Corp.
Carpenter Technology Corp.
Cathay Pacific Airways Ltd.
Cyprus Amax Minerals Co.
The Dow Chemical Co.
*Eastman Chemical Co.
Imperial Chemical Industries PLC (ADR)
Public Service Co. of Colorado
The Stanley Works Co.
Xerox Corp.
Deletions
Atlantic Richfield Co.
BCE Inc. (ADR)
Consolidated Natural Gas Co.
*Eastman Chemical Co.
Occidental Petroleum Corp.
Weingarten Realty Investors
[FN]
*Acquired through a company distribution during the quarter.
PORTFOLIO INFORMATION
For the Quarter
Ended
January 31, 1994
Percent of
Ten Largest Common Stock Holdings Net Assets
Northrop Corp. 4.9%
Texaco Inc. 4.4
Enron Corp. 4.1
Bristol-Myers Squibb Co. 3.9
Royal Dutch Petroleum Co. (ADR) 3.6
du Pont (E.I.) de Nemours & Co. 3.5
Southwestern Bell Corp. 3.5
Sonat, Inc. 3.0
B.A.T. Industries PLC (ADR) 3.0
TRW Inc. 2.9
