MERRILL LYNCH
STRATEGIC
DIVIDEND FUND
FUND LOGO
Annual Report
July 31, 1996
Officers and Trustees
Arthur Zeikel, President and Trustee
Ronald W. Forbes, Trustee
Cynthia A. Montgomery, 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
One Heritage Drive, P2N
North Quincy, MA 02171
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
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.
Merrill Lynch
Strategic Dividend Fund
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH STRATEGIC DIVIDEND FUND
Important Tax
Information
(unaudited)
<PAGE>
Of the ordinary income distributions paid quarterly by Merrill Lynch
Strategic Dividend Fund during its taxable year ended July 31, 1996,
95.52% qualify for the dividends received deduction for corporations.
Additionally, the following information summarizes the long-term
capital gains distributions paid by the Fund during its taxable year
ended July 31, 1996:
Record Payable Long-Term
Date Date Capital Gains
Class A Shares: 10/04/95 10/12/95 $1.070863
12/13/95 12/21/95 $0.237984
Class B Shares: 10/04/95 10/12/95 $1.070863
12/13/95 12/21/95 $0.237984
Class C Shares: 10/04/95 10/12/95 $1.070863
12/13/95 12/21/95 $0.237984
Class D Shares: 10/04/95 10/12/95 $1.070863
12/13/95 12/21/95 $0.237984
Please retain this information for your records.
Portfolio
Information
As of July 31, 1996
(unaudited)
Percent of
Ten Largest Common Stock Holdings Net Assets
General Electric Co. 2.6%
du Pont (E.I.) de Nemours & Co. 2.5
The Clorox Co. 2.4
American Electric Power Co., Inc. 2.2
Ohio Casualty Corp. 2.2
Atlantic Richfield Co. 2.2
Bristol-Myers Squibb Co. 2.1
Southern New England Telecommunications Corp. 2.1
Consolidated Edison Co. of New York, Inc. 2.1
American General Corp. 2.0
DEAR SHAREHOLDER
<PAGE>
The US economy demonstrated surprising strength during the first
half of 1996. As a result, during the quarter ended July 31, 1996,
investors focused on prospects for an overheating economy,
increasing inflationary pressures, and the potential for monetary
policy tightening by the Federal Reserve Board. With more robust
economic growth, a sharp rise in prices for crude oil and
agricultural commodities, and expectations of escalating wage
pressures, long-term interest rates (as measured by the yield on the
30-year US Treasury bond) rose to in excess of 7%.
Inflationary concerns were heightened further with the report of a
stronger-than-expected employment report for June. Unemployment fell
to a six-year low, and hourly wages rose sharply. This mounting
evidence of a tighter labor market and rising labor costs suggested
to many investors that the US central bank would be forced to raise
short-term interest rates in the coming months. However, shortly
after the close of the July quarter, more subdued job growth and
decelerating hourly wage gains were reported for the month of July.
It remains to be seen whether this employment report is the first
sign that the economy is slowing from its rapid rate of growth in
the second quarter.
In the weeks ahead, investors will continue to monitor economic data
releases to determine the potential for monetary policy tightening
by the Federal Reserve Board. A significant development in this area
may be the slowdown in the technology sector, and its potential
impact on other areas of the economy. Evidence of more moderate, but
sustained, economic activity would be a beneficial development for
the US stock and bond markets.
Portfolio Matters
For the three-month period ended July 31, 1996, total returns for
Merrill Lynch Strategic Dividend Fund's Class A, Class B, Class C
and Class D Shares were -2.20%, -2.37%, -2.38% and -2.18%,
respectively. The Fund modestly underperformed the -1.61% total
return of the unmanaged Standard & Poor's 500 Index (S&P 500).
(Results shown do not reflect sales charges and would be lower if
sales charges were included. For complete performance information,
including average annual total returns, see pages 4--7 of this
report to shareholders.) However, the Fund invests primarily in
stocks whose yields are above the yield of the S&P 500. Returns from
high-yield stocks generally lagged the return of the S&P 500. The
Fund did outperform its benchmark universe of high-yielding stocks.
The dividend yield on the Fund's equity holdings at the end of the
July quarter was 4.1%, while the dividend yield of the S&P 500 was
2.2%.
<PAGE>
During the quarter ended July 31, 1996, we continued to focus our
investment activities on increasing the Fund's weighting in higher-
yielding stocks. Therefore, we initiated investments in four high-
yielding common stocks, and sold nine stocks (excluding two spin-off
companies), most of which had appreciated in value and whose yields
were at or below the market's. In the July quarter, our focus on new
investments was targeted on the three highest-yielding sectors:
utilities, financials and energy. We gave particular attention to
the utility sector, since these stocks had underperformed the
overall market and on a selective basis offered attractive
investment opportunities at current share price levels. During the
quarter ended July 31, 1996, we invested in a water company, an
electric utility, a bank, and an oil refiner.
One of our new investments is in American Water Works Co., Inc., the
largest investor-owned water utility in the United States. The
company serves over six million people in 21 states. New Jersey and
Pennsylvania each account for 23% of its revenues. American Water
Works continues to make major strides in acquiring new water systems
and upgrading and expanding its water treatment plants and
distribution systems. The fundamental outlook remains strong, in our
view, with earnings and dividends expected to grow in the high
single digits, well above the utility industry average.
Another new investment was Boston Edison Company, which supplies
electricity to customers in Boston and surrounding areas. The
company purchases about 25% of its total power needs, and derives
the balance almost equally from nuclear and natural gas generation.
With a comfortable 20% reserve margin, Boston Edison has no need for
new capacity additions until the next century. Thus, capital
spending is expected to decline 30% by the end of the decade. A
reorganization program initiated last year should allow the company
to lower its operating costs, improve customer services, and
position it well for the deregulation taking place within this
industry.
Bankers Trust New York Corp., the eighth-largest bank in the United
States, was another addition to the Fund's portfolio. Bankers Trust
is engaged solely in wholesale banking. Core client businesses
include advisory, financial risk management services, financing and
processing. The company also maintains a large trading and
positioning account which, in the past, produced erratic earnings
swings. In late 1995, a new management team took control of Bankers
Trust and embarked on a more risk-disciplined and customer-oriented
focus. The turnaround appears to be progressing positively as
evidenced by recent quarterly earnings results. The stock is
attractively valued at current levels based on the company's
potential improvement in earnings and financial position over the
long term.
<PAGE>
Finally, we added Ultramar Corp., a leading independent refiner and
marketer of petroleum products in California and eastern Canada. The
company recently announced plans aimed at significantly improving
earnings over the next several quarters. These plans include
investing in an extensive retail marketing program, improving the
performance of its refining operations, particularly on the West
Coast, and lowering operating costs. The high dividend yield and
strong balance sheet, coupled with an attractive valuation, made the
stock an attractive investment.
Fiscal Year in Review
Our strategy for Merrill Lynch Strategic Dividend Fund is to seek to
invest in a diversified mix of quality stocks with yields generally
above the stock market, that have the potential for additional
upside price appreciation and limited downside risk. The dividend
yield on the Fund's equity holdings averaged 3.8% during the 12
months ended July 31, 1996, substantially above the 2.2% average
yield for the S&P 500. The Fund's higher-than-market yield was
obtained through the greater-than-market exposure to the three
highest-yielding market sectors: utilities, financials and energy
stocks. Between one-half and two-thirds of the Fund's assets were
invested in these stock sectors during the fiscal year. At fiscal
year-end, utilities accounted for 27.6% of the Fund's net assets;
financials, 16.1%; and energy, 14.6%.
The Fund's total returns for the year ended July 31, 1996 for Class
A, Class B, Class C and Class D Shares were +16.98%, +15.89%, 15.78%
and +16.73%, respectively, while the unmanaged S&P 500 provided a
total return of +16.53%. The Fund's performance compared favorably
with that of high-yielding stocks during the fiscal year. Financial
and energy-related stocks, which also included natural gas stocks,
were largely responsible for this positive relative performance.
Financial stocks, led primarily by banking stocks, produced solid
share price gains, significantly outperforming the overall market.
Also benefiting performance were stocks in the consumer, capital
goods and basic industries sectors.
The Fund's exposure to these sectors was about 38% of assets as of
July 31, 1996. The primary offset to performance during the fiscal
year were our holdings of electric and telephone utility stocks.
Both industries significantly underperformed the overall stock
market.
During the fiscal year, as the stock market continued to climb to
record levels, the Fund employed a fully invested policy, with cash
reserves ranging between 2% and 6% of net assets. As of July 31,
1996, cash reserves were 5.4% of net assets. Within the last few
months of the fiscal year, we began to selectively add to our
holdings in the utility sector.
<PAGE>
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 30, 1996
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors.
<PAGE>
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 8 years. (There is no initial
sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should 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. 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.
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 High Yield Index.
11/29/88** 7/96
ML Strategic Dividend Fund++--
Class A Shares* $ 9,475 $20,916
S&P 500++++ $10,000 $29,721
High Yield Index++++++ $10,000 $17,628
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
High Yield Index.
11/25/87** 7/96
ML Strategic Dividend Fund++--
Class B Shares* $10,000 $22,895
S&P 500++++ $10,000 $34,222
High Yield Index++++++ $10,000 $17,142
A line graph depicting the growth of an investment in the Fund's
Class C Shares and Class D Shares compared to growth of an
investment in the S&P 500 and High Yield Index. Beginning and
ending values are:
<PAGE>
10/21/94** 7/96
ML Strategic Dividend Fund++--
Class C Shares* $10,000 $13,117
ML Strategic Dividend Fund++--
Class D Shares* $ 9,475 $12,606
S&P 500++++ $10,000 $14,382
High Yield Index++++++ $10,000 $13,288
[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.
Past performance is not predictive of future performance.
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/96 +23.82% +17.32%
Five Years Ended 6/30/96 +12.65 +11.44
Inception (11/29/88) through 6/30/96 +11.55 +10.76
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/96 +22.59% +18.59%
Five Years Ended 6/30/96 +11.49 +11.49
Inception (11/25/87) through 6/30/96 +10.60 +10.60
<PAGE>
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/96 +22.56% +21.56%
Inception (10/21/94) through 6/30/96 +20.05 +20.05
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/96 +23.47% +16.98%
Inception (10/21/94) through 6/30/96 +21.02 +17.23
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
PERFORMANCE DATA (concluded)
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
7/31/96 4/30/96 7/31/95 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Strategic Dividend Fund Class A Shares* $12.43 $ 12.80 $12.24 +13.08%(1) -2.89%
ML Strategic Dividend Fund Class B Shares* 12.44 12.80 12.23 +13.25(1) -2.81
ML Strategic Dividend Fund Class C Shares* 12.37 12.73 12.20 +12.94(1) -2.83
ML Strategic Dividend Fund Class D Shares* 12.43 12.79 12.24 +13.07(1) -2.81
Standard & Poor's 500 Index** 639.95 654.17 562.06 +13.86 -2.17
ML Strategic Dividend Fund Class A Shares--Total Return* +16.98(2) -2.20(3)
ML Strategic Dividend Fund Class B Shares--Total Return* +15.89(4) -2.37(5)
ML Strategic Dividend Fund Class C Shares--Total Return* +15.78(6) -2.38(7)
ML Strategic Dividend Fund Class D Shares--Total Return* +16.73(8) -2.18(9)
Standard & Poor's 500 Index--Total Return** +16.53 -1.61
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
**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 $1.309 per share capital
gains distributions.
(2)Percent change includes reinvestment of $0.431 per share ordinary
income dividends and $1.309 per share capital gains distributions.
(3)Percent change includes reinvestment of $0.093 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.293 per share ordinary
income dividends and $1.309 per share capital gains distributions.
(5)Percent change includes reinvestment of $0.059 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.314 per share ordinary
income dividends and $1.309 per share capital gains distributions.
(7)Percent change includes reinvestment of $0.060 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.405 per share ordinary
income dividends and $1.309 per share capital gains distributions.
(9)Percent change includes reinvestment of $0.085 per share ordinary
income dividends.
</TABLE>
<TABLE>
Performance
Summary--
Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <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
1994 12.74 10.70 1.596 0.465 + 0.17
1995 10.70 12.22 1.309 0.463 +32.08
1/1/96--7/31/96 12.22 12.43 -- 0.173 + 3.09
------ ------
Total $3.690 Total $4.026
Cumulative total return as of 7/31/96: +120.73%**
<PAGE>
<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**
<S> <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
1994 12.74 10.71 1.596 0.333 - 0.82
1995 10.71 12.24 1.309 0.330 +30.73
1/1/96--7/31/96 12.24 12.44 -- 0.106 + 2.47
------ ------
Total $3.816 Total $3.425
Cumulative total return as of 7/31/96: +128.95%**
<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>
Performance
Summary--
Class C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $11.84 $10.69 $0.798 $0.108 - 2.02%
1995 10.69 12.17 1.309 0.358 +30.59
1/1/96--7/31/96 12.17 12.37 -- 0.111 + 2.52
------ ------
Total $2.107 Total $0.577
<PAGE>
Cumulative total return as of 7/31/96: +31.17%**
<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>
Performance
Summary--
Class D Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $11.85 $10.71 $0.798 $0.115 - 1.88%
1995 10.71 12.22 1.309 0.439 +31.69
1/1/96--7/31/96 12.22 12.43 -- 0.158 + 2.96
------ ------
Total $2.107 Total $0.712
Cumulative total return as of 7/31/96: +33.04%**
<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>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
EUROPE Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C> <C>
Netherlands Oil--International 20,000 Royal Dutch Petroleum PLC (NY
Registered Shares) $ 1,157,315 $ 3,017,500 1.9%
Total Investments in the Netherlands 1,157,315 3,017,500 1.9
<PAGE>
Spain Oil & Gas Producers 50,000 Repsol S.A. (ADR)* 1,597,265 1,668,750 1.0
Total Investments in Spain 1,597,265 1,668,750 1.0
United Oil--International 19,000 British Petroleum Co. PLC (ADR)* 1,676,727 2,087,625 1.3
Kingdom
Total Investments in the
United Kingdom 1,676,727 2,087,625 1.3
Total Investments in Europe 4,431,307 6,773,875 4.2
NORTH
AMERICA
United Aerospace & Defense 40,000 Northrop Grumman Corp. 1,435,901 2,750,000 1.7
States 30,000 TRW Inc. 1,663,738 2,711,250 1.7
------------ ------------ ------
3,099,639 5,461,250 3.4
Automobiles 85,000 Ford Motor Company 2,416,975 2,762,500 1.7
50,000 General Motors Corp. 2,421,750 2,437,500 1.5
------------ ------------ ------
4,838,725 5,200,000 3.2
Automotive Equipment 72,000 Arvin Industries, Inc. 1,656,934 1,557,000 1.0
60,000 Dana Corp. 1,649,850 1,672,500 1.0
------------ ------------ ------
3,306,784 3,229,500 2.0
Banks 20,000 Bankers Trust New York Corp. 1,418,062 1,437,500 0.9
20,000 Barnett Banks, Inc. 1,002,350 1,227,500 0.8
28,000 Boatmen's Bancshares, Inc. 1,004,500 1,116,500 0.7
74,000 CoreStates Financial Corp. 2,584,814 2,904,500 1.8
26,000 First Commerce Corp. 832,910 903,500 0.6
23,000 Mellon Bank Corp. 990,205 1,213,250 0.7
23,000 Mercantile Bancorp. 1,002,055 1,055,125 0.6
------------ ------------ ------
8,834,896 9,857,875 6.1
Chemicals 23,000 The Dow Chemical Co. 1,369,880 1,710,625 1.1
50,000 du Pont (E.I.) de Nemours & Co. 3,365,700 4,037,500 2.5
------------ ------------ ------
4,735,580 5,748,125 3.6
Cosmetics & Household 34,000 Avon Products, Inc. 1,009,895 1,496,000 0.9
Products 42,000 The Clorox Co. 2,495,107 3,816,750 2.4
------------ ------------ ------
3,505,002 5,312,750 3.3
<PAGE>
Drugs 40,000 American Home Products Corp. 2,125,575 2,270,000 1.4
40,000 Bristol-Myers Squibb Co. 1,826,550 3,465,000 2.1
35,000 Eli Lilly & Co. 951,993 1,960,000 1.2
------------ ------------ ------
4,904,118 7,695,000 4.7
Electrical Equipment 50,000 General Electric Co. 2,415,562 4,118,750 2.6
Financial Services 60,000 Beneficial Corp. 2,305,713 3,240,000 2.0
Food Merchandising 32,500 Lance, Inc. 583,175 544,375 0.3
Insurance 95,000 American General Corp. 1,961,793 3,301,250 2.0
50,000 Lincoln National Corp. 2,135,530 2,131,250 1.3
110,000 Ohio Casualty Corp. 3,512,187 3,492,500 2.2
------------ ------------ ------
7,609,510 8,925,000 5.5
Machinery 70,800 The Manitowoc Company, Inc. 1,306,732 1,876,200 1.2
Metals 55,000 Carpenter Technology Corp. 1,747,599 1,828,750 1.1
70,000 Cyprus Amax Minerals Co. 1,840,867 1,505,000 1.0
130,000 Worthington Industries, Inc. 2,715,050 2,453,750 1.5
------------ ------------ ------
6,303,516 5,787,500 3.6
Miscellaneous 28,000 Minnesota Mining & Manufacturing Co. 1,608,098 1,820,000 1.1
Technology
Oil--Domestic 30,000 Atlantic Richfield Co. 3,395,562 3,480,000 2.2
50,000 Occidental Petroleum Corp. 1,318,625 1,118,750 0.7
70,000 Phillips Petroleum Co. 2,423,547 2,765,000 1.7
50,000 Ultramar Corp. 1,578,500 1,318,750 0.8
------------ ------------ ------
8,716,234 8,682,500 5.4
Oil--International 40,000 Exxon Corp. 2,379,692 3,290,000 2.0
20,000 Mobil Corp. 915,150 2,207,500 1.4
30,000 Texaco Inc. 1,407,728 2,550,000 1.6
------------ ------------ ------
4,702,570 8,047,500 5.0
Paper & Forest 60,000 Weyerhaeuser Co. 2,666,100 2,505,000 1.6
Products
Photography 40,000 Eastman Kodak Co. 1,624,689 2,985,000 1.9
Publishing/Printing 70,000 McGraw-Hill, Inc. 2,434,950 2,730,000 1.7
<PAGE>
Real Estate Investment 40,000 Avalon Properties, Inc. 846,650 900,000 0.6
Trusts 30,000 Patriot American Hospitality Inc. 720,000 851,250 0.5
------------ ------------ ------
1,566,650 1,751,250 1.1
Retail 50,000 J.C. Penney Company Inc. 2,315,950 2,487,500 1.5
29,000 May Department Stores Co. 1,140,994 1,301,375 0.8
------------ ------------ ------
3,456,944 3,788,875 2.3
Savings & Loan 80,000 Great Western Financial Corporation 1,685,600 1,900,000 1.2
Utilities--Electric 85,000 American Electric Power Co., Inc. 2,682,600 3,527,500 2.2
106,000 Boston Edison Company 2,656,360 2,398,250 1.5
126,000 Consolidated Edison Co. of New
York, Inc. 3,559,500 3,402,000 2.1
45,000 Edison International 705,825 697,500 0.4
100,000 Houston Industries Inc. 1,934,250 2,262,500 1.4
40,000 IPALCO Enterprises, Inc. 1,067,000 1,030,000 0.6
60,000 Northern States Power Co. 2,613,600 2,685,000 1.7
66,000 Public Service Co. of Colorado 2,137,905 2,334,750 1.4
100,000 Wisconsin Energy Corp. 2,593,500 2,662,500 1.7
------------ ------------ ------
19,950,540 21,000,000 13.0
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
NORTH AMERICA Shares Value Percent of
(concluded) Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C> <C>
United Utilities--Gas & 149,000 AGL Resources, Inc. $ 2,790,407 $ 2,719,250 1.7%
States Gas Pipeline 125,000 The Brooklyn Union Gas Co. 3,351,250 3,125,000 1.9
(concluded) 40,000 Consolidated Natural Gas Co. 1,805,775 2,015,000 1.3
50,000 Sonat Inc. 882,073 2,131,250 1.3
------------ ------------ ------
8,829,505 9,990,500 6.2
Utilities-- 69,000 GTE Corp. 2,455,578 2,846,250 1.8
Telecommunications 60,000 NYNEX Corp. 2,299,200 2,692,500 1.7
90,000 Southern New England
Telecommunications Corp. 3,095,355 3,453,750 2.1
38,000 Sprint Corp. 1,117,375 1,391,750 0.9
55,000 U S West Communications Group, Inc. 1,852,675 1,670,625 1.0
------------ ------------ ------
10,820,183 12,054,875 7.5
<PAGE>
Utilities--Water 76,000 American Water Works Co., Inc. 1,429,750 1,510,500 0.9
Total Investments in North America 123,240,765 145,762,325 90.4
Total Common Stocks 127,672,072 152,536,200 94.6
Face
Amount Short-Term Securities
Repurchase $3,661,000 UBS Securities Inc., purchased on
Agreement** 7/31/1996 to yield 5.61% to 8/01/1996 3,661,000 3,661,000 2.3
US Government & 5,000,000 Federal National Mortgage Association,
Agency Obligations*** 5.22%due 8/20/1996 4,985,500 4,985,500 3.1
Total Short-Term Securities 8,646,500 8,646,500 5.4
Total Investments $136,318,572 161,182,700 100.0
============
Other Assets Less Liabilities 27,829 0.0
------------ ------
Net Assets $161,210,529 100.0%
============ ======
<FN>
*American Depositary Receipt (ADR).
**Repurchase Agreement is fully collateralized by US Government &
Agency Obligations.
***Certain US Government & Agency Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Fund.
See Notes to Financial Statements.
</TABLE>
PORTFOLIO CHANGES (unaudited)
For the Quarter Ended July 31, 1996
Additions
American Water Works Co., Inc.
Bankers Trust New York Corp.
Boston Edison Company
*Imation Corporation
*Payless Shoesource Inc.
Ultramar Corp.
<PAGE>
Deletions
American Express Co.
The Chase Manhattan Corp.
*Imation Corporation
*Payless Shoesource Inc.
Pacific Gas and Electric Co.
Public Service Enterprise Group, Inc.
Sears, Roebuck & Co.
The Stanley Works
Union Pacific Corp.
United Technologies Corporation
Xerox Corp.
[FN]
*Added and deleted in the same quarter.
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of July 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$136,318,572) (Note 1a) $161,182,700
Cash 878
Receivables:
Dividends $ 463,705
Beneficial interest sold 184,174
Securities sold 59,680 707,559
------------
Prepaid expenses and other assets (Note 1f) 51,904
------------
Total assets 161,943,041
------------
Liabilities: Payables:
Beneficial interest redeemed 357,861
Distributor (Note 2) 101,349
Investment adviser (Note 2) 89,120 548,330
------------
Accrued expenses and other liabilities 184,182
------------
Total liabilities 732,512
------------
Net Assets: Net assets $161,210,529
============
<PAGE>
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 145,628
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 775,635
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 15,795
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 359,524
Paid-in capital in excess of par 118,965,801
Undistributed investment income--net 364,277
Undistributed realized capital gains on investments and foreign
currency transactions--net 15,719,741
Unrealized appreciation on investments--net 24,864,128
------------
Net assets . $161,210,529
============
Net Asset Class A--Based on net assets of $18,105,713 and 1,456,276 shares
Value: of beneficial interest outstanding $ 12.43
============
Class B--Based on net assets of $96,460,577 and 7,756,350 shares
of beneficial interest outstanding $ 12.44
============
Class C--Based on net assets of $1,953,307 and 157,952 shares
of beneficial interest outstanding $ 12.37
============
Class D--Based on net assets of $44,690,932 and 3,595,243 shares
of beneficial interest outstanding $ 12.43
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended July 31, 1996
<S> <S> <C> <C>
Investment Dividends (net of $50,048 foreign withholding tax) $ 6,496,639
Income Interest and discount earned 381,230
(Notes 1d & 1e): ------------
Total income 6,877,869
------------
<PAGE>
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 1,147,402
Investment advisory fees (Note 2) 1,007,894
Transfer agent fees--Class B (Note 2) 245,317
Printing and shareholder reports 138,068
Accounting services (Note 2) 112,081
Professional fees 94,651
Account maintenance fees--Class D (Note 2) 82,087
Transfer agent fees--Class D (Note 2) 57,579
Registration fees (Note 1f) 57,162
Transfer agent fees--Class A (Note 2) 33,718
Custodian fees 21,860
Trustees' fees and expenses 19,476
Account maintenance and distribution fees--Class C (Note 2) 15,538
Transfer agent fees--Class C (Note 2) 3,443
Pricing fees 403
Other 5,559
------------
Total expenses 3,042,238
------------
Investment income--net 3,835,631
------------
Realized & Realized gain from:
Unrealized Gain Investments--net 19,882,588
(Loss) on Foreign currency transactions--net 34 19,882,622
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 1,345,820
(Notes 1b, 1c, Foreign currency transactions--net (44) 1,345,776
1e & 3): ------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions 21,228,398
------------
Net Increase in Net Assets Resulting from Operations $ 25,064,029
============
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: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 3,835,631 $ 4,252,093
Realized gain on investments and foreign currency
transactions--net 19,882,622 25,348,235
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 1,345,776 (9,619,672)
------------ ------------
Net increase in net assets resulting from operations 25,064,029 19,980,656
------------ ------------
<PAGE>
Dividends & Investment income--net:
Distributions to Class A (535,935) (668,538)
Shareholders Class B (1,991,833) (3,464,874)
(Note 1g): Class C (30,000) (8,975)
Class D (921,650) (247,242)
Realized gain on investments--net:
Class A (2,003,328) (2,560,061)
Class B (13,717,932) (19,570,649)
Class C (122,417) (13,005)
Class D (2,210,481) (470,632)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (21,533,576) (27,003,976)
------------ ------------
Beneficial Interest Net decrease in net assets derived from beneficial interest
Transactions transactions (6,726,944) (18,312,516)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (3,196,491) (25,335,836)
Beginning of year 164,407,020 189,742,856
------------ ------------
End of year* $161,210,529 $164,407,020
============ ============
<FN>
*Undistributed investment income--net $ 364,277 $ 8,064
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios
have been derived from information Class A
provided in the financial statements.
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.24 $ 12.78 $ 13.60 $ 12.79 $ 11.90
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .38 .39 .41 .44 .44
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.55 1.10 (.12) .81 .93
-------- -------- -------- -------- --------
Total from investment operations 1.93 1.49 .29 1.25 1.37
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.36) (.42) (.46) (.44) (.48)
Realized gain on investments--net (1.38) (1.61) (.65) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (1.74) (2.03) (1.11) (.44) (.48)
-------- -------- -------- -------- --------
Net asset value, end of year $ 12.43 $ 12.24 $ 12.78 $ 13.60 $ 12.79
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 16.98% 14.04% 2.38% 10.03% 11.96%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.04% 1.05% .85% .81% .88%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 3.04% 3.39% 3.42% 3.38% 3.75%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 18,106 $ 18,687 $ 21,854 $ 34,228 $ 31,512
Data: ======== ======== ======== ======== ========
Portfolio turnover 26.42% 52.69% 22.75% 25.23% 29.17%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0576 -- -- -- --
======== ======== ======== ======== ========
<CAPTION>
The following per share data and ratios have
been derived from information provided in Class B
the financial statements.
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.23 $ 12.77 $ 13.59 $ 12.78 $ 11.88
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .26 .29 .33 .31 .34
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.55 1.07 (.18) .81 .91
-------- -------- -------- -------- --------
Total from investment operations 1.81 1.36 .15 1.12 1.25
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.22) (.29) (.32) (.31) (.35)
Realized gain on investments--net (1.38) (1.61) (.65) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (1.60) (1.90) (.97) (.31) (.35)
-------- -------- -------- -------- --------
Net asset value, end of year $ 12.44 $ 12.23 $ 12.77 $ 13.59 $ 12.78
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 15.89% 12.82% 1.30% 8.90% 10.85%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 2.08% 2.09% 1.88% 1.84% 1.91%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 2.06% 2.36% 2.39% 2.37% 2.74%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 96,461 $130,921 $167,889 $227,089 $239,048
Data: ======== ======== ======== ======== ========
Portfolio turnover 26.42% 52.69% 22.75% 25.23% 29.17%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0576 -- -- -- --
======== ======== ======== ======== ========
<CAPTION>
Class C Class D
For For the For For the
The following per share data and ratios have been the Period the Period
derived from information provided in the financial Year Oct. 21, Year Oct. 21,
statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1996++++ 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 12.20 $ 11.84 $ 12.24 $ 11.85
Operating -------- -------- -------- --------
Performance: Investment income--net .24 .21 .34 .26
Realized and unrealized gain on investments and
foreign currency transactions--net 1.55 1.21 1.57 1.23
-------- -------- -------- --------
Total from investment operations 1.79 1.42 1.91 1.49
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.24) (.25) (.34) (.29)
Realized gain on investments--net (1.38) (.81) (1.38) (.81)
-------- -------- -------- --------
Total dividends and distributions (1.62) (1.06) (1.72) (1.10)
-------- -------- -------- --------
Net asset value, end of period $ 12.37 $ 12.20 $ 12.43 $ 12.24
======== ======== ======== ========
Total Investment Based on net asset value per share 15.78% 13.30%+++ 16.73% 13.98%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.08% 2.19%* 1.28% 1.38%*
Net Assets: ======== ======== ======== ========
Investment income--net 1.91% 1.94%* 2.62% 2.93%*
======== ======== ======== ========
<PAGE>
Supplemental Net assets, end of period (in thousands) $ 1,953 $ 811 $ 44,691 $ 13,988
Data: ======== ======== ======== ========
Portfolio turnover 26.42% 52.69% 26.42% 52.69%
======== ======== ======== ========
Average commission rate paid++++++ $ .0576 -- $ .0576 --
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
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 four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D 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. The following is a summary of
significant accounting policies followed by the Fund.
<PAGE>
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, 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 bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Trustees as the
primary market. Securities which are traded both in the over-the-
counter 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 over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market quotations are not available are valued at fair
value as determined in good faith by or under the direction of the
Fund's Board of Trustees.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell interest
rate futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. 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.
* 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-US 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.
<PAGE>
* Forward foreign exchange contracts--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 Fund enters into such contracts. Premium
or discount is amortized over the life of the contracts.
* Options--The Fund is authorized to write and purchase put and call
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.
(c) 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 US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(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). 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.
<PAGE>
(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.
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"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
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, and 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 pro rata expense limitation at the time
of such payment.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
<PAGE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D 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 year ended July 31, 1996, MLFD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 390 $ 5,946
Class D $1,311 $15,534
For the year ended July 31, 1996, MLPF&S received contingent
deferred sales charges of $75,449 and $2,429 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $13,020 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
July 31, 1996.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is 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, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended July 31, 1996 were $42,428,489 and $69,789,299,
respectively.
Net realized and unrealized gains as of July 31, 1996 were as
follows:
Realized Unrealized
Gains Gains
<PAGE>
Long-term investments $19,882,565 $24,864,128
Short-term investments 23 --
Foreign currency transactions 34 --
----------- -----------
Total $19,882,622 $24,864,128
=========== ===========
As of July 31, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $24,864,128, of which $27,185,113 related to
appreciated securities and $2,320,985 related to depreciated
securities. At July 31, 1996, the aggregate cost of investments for
Federal income tax purposes was $136,318,572.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest
transactions was $6,726,944 and $18,312,516 for the years ended July
31, 1996 and July 31, 1995, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 180,887 $ 2,269,224
Shares issued to shareholders in
reinvestment of dividends and
distributions 178,596 2,119,723
------------ ------------
Total issued 359,483 4,388,947
Shares redeemed (430,082) (5,371,607)
------------ ------------
Net decrease (70,599) $ (982,660)
============ ============
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 181,563 $ 2,155,978
Shares issued to shareholders in
reinvestment of dividends and
distributions 222,923 2,499,626
------------ ------------
Total issued 404,486 4,655,604
Shares redeemed (587,662) (7,012,619)
------------ ------------
Net decrease (183,176) $ (2,357,015)
============ ============
<PAGE>
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 1,123,504 $ 14,059,381
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,073,934 12,682,001
------------ ------------
Total issued 2,197,438 26,741,382
Shares redeemed (2,374,171) (29,558,902)
Automatic conversion of shares (2,767,942) (34,512,602)
------------ ------------
Net decrease (2,944,675) $(37,330,122)
============ ============
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 1,056,552 $ 12,463,967
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,658,976 18,600,026
------------ ------------
Total issued 2,715,528 31,063,993
Shares redeemed (3,932,552) (46,733,450)
Automatic conversion of shares (1,228,326) (14,212,015)
------------ ------------
Net decrease (2,445,350) $(29,881,472)
============ ============
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 145,930 $ 1,818,959
Shares issued to shareholders in
reinvestment of dividends and
distributions 9,105 107,703
------------ ------------
Total issued 155,035 1,926,662
Shares redeemed (63,574) (801,102)
------------ ------------
Net increase 91,461 $ 1,125,560
============ ============
Class C Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
<PAGE>
Shares sold 76,521 $ 887,173
Shares issued to shareholders in
reinvestment of dividends and
distributions 963 10,674
------------ ------------
Total issued 77,484 897,847
Shares redeemed (10,993) (128,548)
------------ ------------
Net increase 66,491 $ 769,299
============ ============
[FN]
++ Commencement of Operations.
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 512,946 $ 6,437,453
Automatic conversion of shares 2,765,284 34,512,602
Shares issued to shareholders in
reinvestment of dividends and
distributions 214,959 2,586,011
------------ ------------
Total issued 3,493,189 43,536,066
Shares redeemed (1,040,583) (13,075,788)
------------ ------------
Net increase 2,452,606 $ 30,460,278
============ ============
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 118,404 $ 1,359,401
Automatic conversion of shares 1,226,771 14,212,015
Shares issued to shareholders in
reinvestment of dividends and
distributions 54,447 595,598
------------ ------------
Total issued 1,399,622 16,167,014
Shares redeemed (256,985) (3,010,342)
------------ ------------
Net increase 1,142,637 $ 13,156,672
============ ============
[FN]
++Commencement of Operations.
<PAGE>
<AUDIT-REPORT>
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, 1996, 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 state-ments 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,
1996 by correspondence with the custodian and broker. 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.
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, 1996, the
results of its operations, the changes in its net assets, andthe
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 4, 1996
</AUDIT-REPORT>
