MERRILL LYNCH
STRAGEGIC
DIVIDEND FUND
FUND LOGO
Annual Report
July 31, 1997
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.
<PAGE>
Merrill Lynch
Strategic Dividend Fund
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH STRATEGIC DIVIDEND FUND
A pie chart illustrating Security Representation as a Percentage
of Equities as of July 31, 1997:
Financial Services 21.4%
Energy 14.1%
Basic Industries 6.9%
Capital Goods 17.3%
Utilities 25.0%
Consumer 15.3%
<PAGE>
US Common Stock
Investments as of
July 31, 1997
S&P
Fund 500*
Average Capitalization (in billions) $30.9 $52.0
Price/Book Value 2.6 3.7
Price/Earnings Ratio** 16.6 19.9
Yield Based on Current Dividend 3.2% 1.6%
[FN]
*An unmanaged broad-based index comprised of common stocks.
**Based on trailing 12-month earnings.
DEAR SHAREHOLDER
During the quarter ended July 31, 1997, increasing evidence of
noninflationary economic growth boosted investor confidence. This
growing confidence was confirmed further when, as widely expected,
the Federal Reserve Board chose to leave monetary policy unchanged
at its July meeting. This confluence of positive indicators helped
produce a significant rally in the US stock market. The unmanaged
Standard & Poor's 500 Composite Average, led by its 50 largest
issues (in terms of stock market capitalization), generated a
+19.58% total return for the July quarter. A slight decline in
interest rates during the quarter resulted in a modest positive
total return for US fixed-income investments.
Current consensus expectations are for the US economy's rate of
growth to lose some momentum over the balance of 1997. Although real
(inflation-adjusted) gross domestic product (GDP) growth for the
first quarter of the year was revised slightly upward to 5.9%, the
rate of real growth for the second quarter was announced at a more
sustainable 2.2% rate. At the same time, inflationary pressures
remain contained. It remains to be seen whether economic activity
will continue moderate enough to rule out future Federal Reserve
Board monetary policy tightenings later this year.
<PAGE>
As the July quarter drew to a close, Congress approved tax-cut and
five-year balanced budget bills. Although considered positive
because it encourages savings and investment, it is uncertain how
successful the new legislation will be in reducing the Federal
budget deficit in the years ahead.
At present, it appears that the US economy is perceived favorably by
global investors for its ongoing growth and limited inflationary
pressures, as supported by the US dollar's continued strength
relative to other currencies. If economic data releases continue to
support this point of view, the outlook for the US capital markets
will remain positive.
Portfolio Matters
For the three months ended July 31, 1997, total returns for Merrill
Lynch Strategic Dividend Fund's Class A, Class B, Class C and Class
D Shares were +15.29%, +14.99%, +14.95% and +15.15%, respectively.
The Fund's performance lagged the +19.58% total return for the
unmanaged Standard & Poor's 500 Index (S&P 500), and nearly matched
the +15.31% total return for an unmanaged portfolio of the 200
highest-yielding stocks in the S&P 500. (Results shown are before
the deduction of sales charges; results would be lower if sales
charges were included. For complete performance information,
including average annual total return, see pages 4--8 of this report
to shareholders.)
Since it is our goal that the Fund achieve an overall yield which is
better than the yield of the S&P 500, our heaviest weightings
remained in the highest-yielding stocks, specifically in stocks with
yields greater than 2.5%. This accounted for about 62% of the Fund's
net assets. These stocks significantly lagged in price performance
relative to the overall market during the July quarter. However, the
relatively strong price gains of our lower-yielding investments,
particularly those in the basic industrial, capital goods, consumer
cyclical and growth, and financial companies, helped offset the weak
price increases of our higher-yielding utilities and real estate
investment trusts.
With the stock market continuing to set record levels during the
July quarter, finding attractively valued, high-yielding stocks
became much more challenging. As a result, our investment activities
during the July quarter were focused on increasing the Fund's
dividend yield by pruning holdings in lower-yielding stocks and
adding higher-yielding ones. We reduced our positions in seven
companies which had appreciated significantly in price and whose
yields had declined, and eliminated our position in one company. We
added five new positions and increased our investment in one
existing holding.
We eliminated AT&T Corp. because of renewed concerns about
management's succession, the continued threat of market share
erosion and increasing price competition from the imminent entry
into the long distance market by regional bell operating companies.
<PAGE>
Our new investments included Apartment Investment & Management Co.,
an apartment real estate investment trust; Cooper Industries, Inc.,
a diversified manufacturer of automotive parts, electrical products,
and tools and hardware; Harris Corporation, a manufacturer of
electronic systems, semiconductors, and communications and office
equipment; Ogden Corporation, a diversified company engaged in a
wide range of waste disposal services, aviation services and a
provider of entertainment and sports venues; and Uniao de Bancos
Brasileiros S.A. (Unibanco), a major Brazilian banking concern. We
increased our investment in Occidental Petroleum Corp. because we
believed the stock was undervalued relative to the overall market
and the oil group. These new investments offered attractive total
return potentials as well as above-market dividend yields.
Fiscal Year in Review
The Fund's primary investment focus continued to be stocks with
higher-than-market yields. The dividend yield on the Fund's equity
holdings averaged 3.5% during the 12 months ended July 31, 1997,
substantially above the 2.0% average for the S&P 500. The Fund's
total return for the 12 months ended July 31, 1997 for Class A,
Class B, Class C and Class D Shares were +40.42%, +38.90%, +38.84%
and +39.99%, respectively. While the Fund's performance lagged the
formidable +52.02% total return of the unmanaged S&P 500, it
outperformed its benchmark universe of higher-yielding stocks (as
measured by an unmanaged portfolio of the 200 highest-yielding
stocks in the S&P 500 Index, which returned +35.72% during this 12-
month period). The Fund's performance, relative to higher-yielding
stocks, was positively impacted by our holdings in the shares of
companies in the banking, insurance, pharmaceuticals, household
products and capital goods industries, which together more than
offset the poor relative performance of our utility and energy
holdings.
The Fund has historically maintained a greater-than-market exposure
to the three highest-yielding market sectors: utilities, 23.0% of
net assets at July 31, 1997; financials, 19.7%; and energy, 12.9%.
However, over the past 12 months, our exposure to the consumer and
capital goods sectors increased as our holdings in these sectors
appreciated significantly. We continued to search for attractively
valued, high-yielding investments, even as the overall stock market
continued to climb to record levels and overall yields declined. Our
transactions during the fiscal year ended July 31, 1997 were limited
to taking capital gains in several of our larger holdings and adding
to a few select companies spread over a wide range of market
sectors.
<PAGE>
We employ a conservative investment strategy emphasizing
diversification when selecting stocks for Merrill Lynch Strategic
Dividend Fund. We seek out companies that have strong leadership
positions in their main lines of business or hold attractive market
niche positions. These companies are typically financially sound and
their shares attractively valued. As a result, most of our holdings
are rated B+ or better by Standard & Poor's Ratings Services and are
perceived to have defensive and low volatility characteristics. In
most cases, our holdings possess among the highest dividend yields
within their respective industries. This strategy enables us to meet
the Fund's primary investment strategy of seeking to provide long-
term total returns from a diversified investment portfolio which
yields more than the S&P 500.
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
September 4, 1997
PERFORMANCE DATA
About Fund
Performance
<PAGE>
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.
* 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. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" tables assume reinvestment of
all dividends and capital gains distributions at net asset value on
the ex-dividend date. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<PAGE>
<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
1996 12.22 12.68 1.232 0.527 +19.08
1/1/97--7/31/97 12.68 15.21 -- 0.183 +21.56
------ ------
Total $4.922 Total $4.563
Cumulative total return as of 7/31/97: +209.94%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures 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
1996 12.24 12.69 1.232 0.391 +17.71
1/1/97--7/31/97 12.69 15.22 -- 0.112 +20.92
------ ------
Total $5.048 Total $3.822
Cumulative total return as of 7/31/97: +218.02%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</TABLE>
<PAGE>
<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
1996 12.17 12.61 1.232 0.400 +17.82
1/1/97--7/31/97 12.61 15.11 -- 0.111 +20.81
------ ------
Total $3.339 Total $0.977
Cumulative total return as of 7/31/97: +82.12%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures 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
1996 12.22 12.68 1.232 0.496 +18.79
1/1/97--7/31/97 12.68 15.20 -- 0.166 +21.34
------ ------
Total $3.339 Total $1.216
Cumulative total return as of 7/31/97: +86.25%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charge; results would be lower if
sales charge was included.
</TABLE>
<PAGE>
PERFORMANCE DATA (continued)
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 Standard &
Poor's 500 and High Yield Index. Beginning and ending values are:
11/29/88** 7/97
ML Strategic Dividend Fund++--
Class A Shares* $ 9,475 $29,370
Standard & Poor's 500 Index++++ $10,000 $45,178
High Yield Index++++ $10,000 $22,278
A line graph depicting the growth of an investment in the Fund's
Class B Shares compared to growth of an investment in the Standard &
Poor's 500 and High Yield Index. Beginning and ending values are:
11/25/87** 7/97
ML Strategic Dividend Fund++--
Class B Shares* $10,000 $31,802
Standard & Poor's 500 Index++++ $10,000 $52,020
High Yield Index++++ $10,000 $21,663
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 Standard & Poor's 500 and High Yield Index.
Beginning and ending values are:
10/21/94** 7/97
ML Strategic Dividend Fund++--
Class C Shares* $10,000 $18,212
<PAGE>
ML Strategic Dividend Fund++--
Class D Shares* $ 9,475 $17,648
Standard & Poor's 500 Index++++ $10,000 $21,867
High Yield Index++++ $10,000 $16,793
[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 6/30/97 +27.18% +20.50%
Five Years Ended 6/30/97 +15.45 +14.22
Inception (11/29/88) through 6/30/97 +13.27 +12.56
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/97 +25.83% +21.83%
Five Years Ended 6/30/97 +14.27 +14.27
Inception (11/25/87) through 6/30/97 +12.10 +12.10
<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 6/30/97 +25.86% +24.86%
Inception (10/21/94) through 6/30/97 +22.20 +22.20
[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 6/30/97 +26.87% +20.21%
Inception (10/21/94) through 6/30/97 +23.19 +20.74
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
PERFORMANCE DATA (concluded)
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
7/31/97 4/30/96 7/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Strategic Dividend Fund Class A Shares* $15.21 $13.28 $12.43 +34.87%(1) +14.53%
ML Strategic Dividend Fund Class B Shares* 15.22 13.29 12.44 +34.83(1) +14.52
ML Strategic Dividend Fund Class C Shares* 15.11 13.20 12.37 +34.70(1) +14.47
ML Strategic Dividend Fund Class D Shares* 15.20 13.28 12.43 +34.78(1) +14.46
Standard & Poor's 500 Index** 954.29 801.34 639.95 +49.12 +19.09
ML Strategic Dividend Fund Class A Shares--Total Return* +40.42(2) +15.29(3)
ML Strategic Dividend Fund Class B Shares--Total Return* +38.90(4) +14.99(5)
ML Strategic Dividend Fund Class C Shares--Total Return* +38.84(6) +14.95(7)
ML Strategic Dividend Fund Class D Shares--Total Return* +39.99(8) +15.15(9)
Standard & Poor's 500 Index--Total Return** +52.02 +19.58
<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 $1.232 per share capital
gains distributions.
(2)Percent change includes reinvestment of $0.536 per share ordinary
income dividends and $1.232 per share capital gains distributions.
(3)Percent change includes reinvestment of $0.097 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.396 per share ordinary
income dividends and $1.232 per share capital gains distributions.
(5)Percent change includes reinvestment of $0.060 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.400 per share ordinary
income dividends and $1.232 per share capital gains distributions.
(7)Percent change includes reinvestment of $0.061 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.504 per share ordinary
income dividends and $1.232 per share capital gains distributions.
(9)Percent change includes reinvestment of $0.088 per share ordinary
income dividends.
</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> <S> <C> <C> <C>
Netherlands Oil--International 67,200 Royal Dutch Petroleum PLC (NY
Registered Shares) $ 982,387 $ 3,759,000 1.8%
Total Investments in the
Netherlands 982,387 3,759,000 1.8
Spain Oil & Gas Producers 25,000 Repsol S.A. (ADR)* 798,632 1,006,250 0.5
Total Investments in Spain 798,632 1,006,250 0.5
United Oil--International 38,336 British Petroleum Co. PLC (ADR)* 1,696,341 3,160,324 1.6
Kingdom
Total Investments in the United
Kingdom 1,696,341 3,160,324 1.6
Total Investments in Europe 3,477,360 7,925,574 3.9
<PAGE>
LATIN
AMERICA
Brazil Banks 49,400 ++Uniao de Bancos Brasileiros S.A.
(Unibanco) (GDR)** 1,667,250 1,988,350 1.0
Total Investments in Latin America 1,667,250 1,988,350 1.0
NORTH
AMERICA
United Aerospace & Defense 40,000 Northrop Grumman Corp. 1,435,900 4,605,000 2.3
States 28,000 Rockwell International Corp. 1,565,072 1,837,500 0.9
60,000 TRW Inc. 1,663,737 3,510,000 1.8
------------ ------------ ------
4,664,709 9,952,500 5.0
Automobiles 85,000 Ford Motor Company 2,416,975 3,474,375 1.7
50,000 General Motors Corp. 2,421,750 3,093,750 1.6
------------ ------------ ------
4,838,725 6,568,125 3.3
Automotive 72,000 Arvin Industries, Inc. 1,656,934 2,506,500 1.2
Equipment 60,000 Dana Corp. 1,649,850 2,726,250 1.4
------------ ------------ ------
3,306,784 5,232,750 2.6
Banks 20,000 Bankers Trust New York Corp. 1,418,062 2,023,750 1.0
40,000 Barnett Banks, Inc. 1,002,350 2,277,500 1.1
74,000 CoreStates Financial Corp. 2,584,813 4,564,875 2.3
46,000 First Commerce Corp. 1,587,910 2,415,000 1.2
10,000 J.P. Morgan & Co., Inc. 897,556 1,158,750 0.6
46,000 Mellon Bank Corp. 990,205 2,320,125 1.2
23,000 Mercantile Bancorp. 1,002,055 1,622,938 0.8
------------ ------------ ------
9,482,951 16,382,938 8.2
Capital Goods 40,000 General Electric Co. 966,225 2,807,500 1.4
28,000 Minnesota Mining & Manufacturing Co. 1,608,098 2,653,000 1.3
25,000 Ogden Corporation 526,750 525,000 0.3
------------ ------------ ------
3,101,073 5,985,500 3.0
Chemicals 23,000 The Dow Chemical Co. 1,369,880 2,185,000 1.1
61,400 E.I. du Pont de Nemours & Co. 2,060,442 4,109,963 2.0
------------ ------------ ------
3,430,322 6,294,963 3.1
<PAGE>
Cosmetics 17,000 Avon Products, Inc. 506,260 1,233,563 0.6
Drugs 40,000 American Home Products Corp. 2,125,575 3,297,500 1.6
55,000 Bristol-Myers Squibb Co. 1,255,753 4,314,062 2.2
35,000 Eli Lilly & Co. 951,993 3,955,000 2.0
------------ ------------ ------
4,333,321 11,566,562 5.8
Engineering & 37,000 Foster Wheeler Corp. 1,380,470 1,641,875 0.8
Construction
</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> <S> <C> <C> <C>
United Financial Services 35,000 Beneficial Corp. $ 1,352,468 $ 2,537,500 1.3%
States 30,000 PaineWebber Group Inc. 713,100 1,200,000 0.6
(concluded) ------------ ------------ ------
2,065,568 3,737,500 1.9
Forest Products 60,000 Weyerhaeuser Co. 2,666,100 3,735,000 1.9
Household Products 12,000 The Clorox Co. 728,490 1,675,500 0.8
Industrial-- 38,000 Cooper Industries, Inc. 2,036,029 2,111,375 1.1
Consumer Goods
Insurance 95,000 American General Corp. 1,961,793 5,058,750 2.5
30,000 Lincoln National Corp. 1,275,150 2,133,750 1.1
110,000 Ohio Casualty Corp. 3,512,187 5,101,250 2.5
------------ ------------ ------
6,749,130 12,293,750 6.1
Machinery 106,200 The Manitowoc Company, Inc. 1,306,732 4,088,700 2.0
Merchandising 50,000 J.C. Penney Company Inc. 2,315,950 2,925,000 1.5
29,000 May Department Stores Co. 1,140,994 1,620,375 0.8
------------ ------------ ------
3,456,944 4,545,375 2.3
Metals 55,000 Carpenter Technology Corp. 1,747,599 2,612,500 1.3
Oil--Domestic 28,000 Atlantic Richfield Co. 1,584,596 2,094,750 1.1
90,000 Occidental Petroleum Corp. 2,323,525 2,255,625 1.1
62,000 Phillips Petroleum Co. 2,146,570 2,855,875 1.4
50,000 Ultramar Corp. 1,578,500 1,662,500 0.8
------------ ------------ ------
7,633,191 8,868,750 4.4
<PAGE>
Oil--International 40,000 Exxon Corp. 1,189,846 2,570,000 1.3
40,000 Mobil Corp. 915,150 3,060,000 1.5
30,000 Texaco Inc. 1,407,728 3,481,875 1.8
------------ ------------ ------
3,512,724 9,111,875 4.6
Photography 40,000 Eastman Kodak Co. 1,624,689 2,680,000 1.3
Real Estate 38,000 Apartment Investment & Management
Investment Trusts Co. (Class A) 1,201,028 1,216,000 0.6
40,000 Avalon Properties, Inc. 830,602 1,105,000 0.6
35,000 Essex Property Trust, Inc. 854,486 1,148,437 0.6
60,000 Patriot American Hospitality Inc. 788,310 1,496,275 0.7
------------ ------------ ------
3,674,426 4,965,712 2.5
Telecommunications 30,000 Harris Corporation 2,600,982 2,606,250 1.3
Utilities--Electric 85,000 American Electric Power Co., Inc. 2,682,600 3,803,750 1.9
106,000 Boston Edison Company 2,656,360 2,981,250 1.5
126,000 Consolidated Edison Co. of New
York, Inc. 3,559,500 3,984,750 2.0
105,000 Edison International, Inc. 1,759,425 2,651,250 1.3
100,000 Houston Industries Inc. 1,934,250 2,093,750 1.1
50,000 Long Island Lighting Co. 1,120,500 1,228,125 0.6
60,000 Northern States Power Co. 2,613,600 3,082,500 1.5
66,000 Public Service Co. of Colorado 2,137,905 2,747,250 1.4
100,000 Wisconsin Energy Corp. 2,593,500 2,556,250 1.3
------------ ------------ ------
21,057,640 25,128,875 12.6
Utilities--Gas & 149,000 AGL Resources, Inc. 2,790,407 3,119,687 1.6
Gas Pipeline 40,000 Consolidated Natural Gas Co. 1,805,775 2,315,000 1.2
15,000 KN Energy, Inc. 607,105 630,000 0.3
50,000 Sonat Inc. 882,073 2,493,750 1.2
------------ ------------ ------
6,085,360 8,558,437 4.3
Utilities-- 40,000 GTE Corp. 1,429,930 1,860,000 0.9
Telecommunications 60,000 NYNEX Corp. 2,299,200 3,326,250 1.7
90,000 Southern New England Telecommuni-
cations Corp. 3,095,355 3,577,500 1.8
55,000 U S West Communications Group, Inc. 1,852,675 2,010,937 1.0
------------ ------------ ------
8,677,160 10,774,687 5.4
<PAGE>
Utilities--Water 76,000 American Water Works Co., Inc. 1,429,750 1,648,250 0.8
Total Investments in North America 112,097,129 174,001,312 87.0
Total Common Stocks 117,241,739 183,915,236 91.9
Face
Amount Short-Term Securities
Repurchase $5,816,000 UBS Securities Inc., purchased
Agreements*** on 7/31/1997 to yield 5.75% to
8/01/1997 5,816,000 5,816,000 2.9
US Government 5,000,000 Federal Home Loan Mortgage Corp.,
Agency 5.39% due 8/05/1997 4,996,257 4,996,257 2.5
Obligations****
Total Short-Term Securities 10,812,257 10,812,257 5.4
Total Investments $128,053,996 194,727,493 97.3
============
Other Assets Less Liabilities 5,323,480 2.7
------------ ------
Net Assets $200,050,973 100.0%
============ ======
<FN>
*American Depositary Receipts (ADR).
**Global Depositary Receipts (GDR).
***Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
****US Government Agency Obligations are traded on a discount basis;
the interest rate shown is the discount rate paid at the time of
purchase by the Fund.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of July 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$128,053,996) (Note 1a) $194,727,493
Receivables:
Securities sold $ 12,737,387
Dividends 462,154
Beneficial interest sold 280,187 13,479,728
------------
Prepaid registration and other assets (Note 1f) 49,925
------------
Total assets 208,257,146
------------
<PAGE>
Liabilities: Payables:
Securities purchased 7,369,689
Beneficial interest redeemed 449,636
Investment adviser (Note 2) 99,617
Distributor (Note 2) 97,948 8,016,890
------------
Accrued expenses and other liabilities 189,283
------------
Total liabilities 8,206,173
------------
Net Assets: Net assets $200,050,973
============
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 190,321
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 614,523
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 20,013
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 490,571
Paid-in capital in excess of par 120,086,393
Undistributed investment income--net 379,522
Undistributed realized capital gains on investments--net 11,596,133
Unrealized appreciation on investments--net 66,673,497
------------
Net assets $200,050,973
============
Net Asset Class A--Based on net assets of $28,940,112 and 1,903,208
Value: shares of beneficial interest outstanding $ 15.21
============
Class B--Based on net assets of $93,509,060 and 6,145,233
shares of beneficial interest outstanding $ 15.22
============
Class C--Based on net assets of $3,024,553 and 200,133
shares of beneficial interest outstanding $ 15.11
============
Class D--Based on net assets of $74,577,248 and 4,905,708
shares of beneficial interest outstanding $ 15.20
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended July 31, 1997
<S> <S> <C> <C>
Investment Dividends (net of $35,053 foreign withholding tax) $ 6,198,512
Income Interest and discount earned 495,021
(Notes 1d & 1e): ------------
Total income 6,693,533
------------
Expenses: Investment advisory fees (Note 2) $ 1,056,060
Account maintenance and distribution fees--Class B (Note 2) 965,768
Transfer agent fees--Class B (Note 2) 171,034
Account maintenance fees--Class D (Note 2) 137,032
Printing and shareholder reports 100,652
Transfer agent fees--Class D (Note 2) 79,117
Registration fees (Note 1f) 72,218
Professional fees 56,617
Transfer agent fees--Class A (Note 2) 31,713
Account maintenance and distribution fees--Class C (Note 2) 24,804
Custodian fees 21,251
Trustees' fees and expenses 19,698
Accounting services (Note 2) 9,157
Transfer agent fees--Class C (Note 2) 4,588
Pricing fees 290
Other 6,730
------------
Total expenses 2,756,729
------------
Investment income--net 3,936,804
------------
Realized & Realized gain on investments--net 13,476,208
Unrealized Gain on Change in unrealized appreciation on investments--net 41,809,369
Investments--Net ------------
(Notes 1b, 1c,
1e & 3): Net Increase in Net Assets Resulting from Operations $ 59,222,381
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 3,936,804 $ 3,835,631
Realized gain on investments and foreign currency transactions
--net 13,476,208 19,882,622
Change in unrealized appreciation/depreciation on investments--net 41,809,369 1,345,776
------------ ------------
Net increase in net assets resulting from operations 59,222,381 25,064,029
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (633,917) (535,935)
Shareholders Class B (1,785,749) (1,991,833)
(Note 1g): Class C (46,527) (30,000)
Class D (1,455,366) (921,650)
Realized gain on investments--net:
Class A (1,974,335) (2,003,328)
Class B (10,210,077) (13,717,932)
Class C (237,095) (122,417)
Class D (5,178,309) (2,210,481)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (21,521,375) (21,533,576)
------------ ------------
Beneficial Interest Net increase (decrease) in net assets derived from beneficial
Transactions interest transactions 1,139,438 (6,726,944)
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets 38,840,444 (3,196,491)
Beginning of year 161,210,529 164,407,020
------------ ------------
End of year* $200,050,973 $161,210,529
============ ============
<FN>
*Undistributed investment income--net $ 379,522 $ 364,277
============ ============
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 Class A
the financial statements.
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.43 $ 12.24 $ 12.78 $ 13.60 $ 12.79
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .38 .38 .39 .41 .44
Realized and unrealized gain (loss) on
investments and foreign currency transactions
--net 4.17 1.55 1.10 (.12) .81
-------- -------- -------- -------- --------
Total from investment operations 4.55 1.93 1.49 .29 1.25
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.39) (.36) (.42) (.46) (.44)
Realized gain on investments--net (1.38) (1.38) (1.61) (.65) --
-------- -------- -------- -------- --------
Total dividends and distributions (1.77) (1.74) (2.03) (1.11) (.44)
-------- -------- -------- -------- --------
Net asset value, end of year $ 15.21 $ 12.43 $ 12.24 $ 12.78 $ 13.60
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 40.42% 16.98% 14.04% 2.38% 10.03%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses .90% 1.04% 1.05% .85% .81%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 2.87% 3.04% 3.39% 3.42% 3.38%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 28,940 $ 18,106 $ 18,687 $ 21,854 $ 34,228
Data: ======== ======== ======== ======== ========
Portfolio turnover 14.29% 26.42% 52.69% 22.75% 25.23%
======== ======== ======== ======== ========
Average commission rate paid++++ $ .0619 $ .0576 -- -- --
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding during the year.
++++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. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the
rate shown.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<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: 1997++++ 1996++++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.44 $ 12.23 $ 12.77 $ 13.59 $ 12.78
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .25 .26 .29 .33 .31
Realized and unrealized gain (loss) on
investments and foreign currency transactions
--net 4.16 1.55 1.07 (.18) .81
-------- -------- -------- -------- --------
Total from investment operations 4.41 1.81 1.36 .15 1.12
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.25) (.22) (.29) (.32) (.31)
Realized gain on investments--net (1.38) (1.38) (1.61) (.65) --
-------- -------- -------- -------- --------
Total dividends and distributions (1.63) (1.60) (1.90) (.97) (.31)
-------- -------- -------- -------- --------
Net asset value, end of year $ 15.22 $ 12.44 $ 12.23 $ 12.77 $ 13.59
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 38.90% 15.89% 12.82% 1.30% 8.90%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.94% 2.08% 2.09% 1.88% 1.84%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 1.89% 2.06% 2.36% 2.39% 2.37%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 93,509 $ 96,461 $130,921 $167,889 $227,089
Data: ======== ======== ======== ======== ========
Portfolio turnover 14.29% 26.42% 52.69% 22.75% 25.23%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0619 $ .0576 -- -- --
======== ======== ======== ======== ========
<PAGE>
Class C Class D
The following per share data and
ratios have been derived from For the For the
information provided in the Period Period
financial statements. Oct. 21, Oct. 21,
For the Year 1994++ to For the Year 1994++ to
Increase (Decrease) in Net Ended July 31, July 31, Ended July 31, July 31,
Asset Value: 1997++++ 1996++++ 1995 1997++++ 1996++++ 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 12.37 $ 12.20 $ 11.84 $ 12.43 $ 12.24 $ 11.85
Performance: -------- -------- -------- -------- -------- --------
Investment income--net .24 .24 .21 .35 .34 .26
Realized and unrealized
gain on investments and
foreign currency
transactions--net 4.13 1.55 1.21 4.16 1.57 1.23
-------- -------- -------- -------- -------- --------
Total from investment
operations 4.37 1.79 1.42 4.51 1.91 1.49
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net (.25) (.24) (.25) (.36) (.34) (.29)
Realized gain on
investments--net (1.38) (1.38) (.81) (1.38) (1.38) (.81)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (1.63) (1.62) (1.06) (1.74) (1.72) (1.10)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 15.11 $ 12.37 $ 12.20 $ 15.20 $ 12.43 $ 12.24
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return:** per share 38.84% 15.78% 13.30%+++ 39.99% 16.73% 13.98%+++
======== ======== ======== ======== ======== ========
Ratios to Average Expenses 1.95% 2.08% 2.19%* 1.15% 1.28% 1.38%*
Net Assets: ======== ======== ======== ======== ======== ========
Investment income--net 1.83% 1.91% 1.94%* 2.62% 2.62% 2.93%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 3,025 $ 1,953 $ 811 $ 74,577 $ 44,691 $ 13,988
======== ======== ======== ======== ======== ========
Portfolio turnover 14.29% 26.42% 52.69% 14.29% 26.42% 52.69%
======== ======== ======== ======== ======== ========
Average commission rate
paid++++++ $ .0619 $ .0576 -- $ .0619 $ .0576 --
======== ======== ======== ======== ======== ========
<PAGE>
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
++++Based on average shares outstanding during the year.
++++++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. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may significantly affect
the rate shown.
<PAGE>
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 (except that Class B shareholders may vote
upon any material changes to Class D account maintenance and
distribution expenditures). The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
(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.
* 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.
<PAGE>
* Options--The Fund is authorized to write call options 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 tax-
able 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 dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined 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.
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% --
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.
<PAGE>
For the year ended July 31, 1997, MLFD earned underwriting discounts
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 $ 384 $ 6,245
Class D $1,314 $19,683
For the year ended July 31, 1997, MLPF&S received contingent
deferred sales charges ("CDSCs") of $125,517 and $1,310 relating to
transactions in Class B and Class C Shares, respectively. This
figure may include CDSCs, which are contingent obligations that
arise when a shareholder's shares are redeemed prior to the
expiration of the applicable CDSC period and the proceeds are
reinvested, without the imposition of a sales charge, in Class A
Shares in conjunction with such shareholder's participation in the
Merrill Lynch Mutual Funds Advisor ("MFA") program. The CDSC is
booked as a contingent obligation that declines over a two-year
period and is not payable unless the shareholder terminates
participation in the MFA program.
In addition, MLPF&S received $8,080 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
July 31, 1997.
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, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended July 31, 1997 were $23,710,108 and $47,594,076,
respectively.
Net realized and unrealized gains as of July 31, 1997 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $13,476,206 $66,673,497
Short-term investments 2 --
----------- -----------
Total $13,476,208 $66,673,497
=========== ===========
<PAGE>
As of July 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $66,673,497, of which $66,780,397 related to
appreciated securities and $106,900 related to depreciated
securities. At July 31,1997, the aggregate cost of investments for
Federal income tax purposes was $128,053,996.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial
interest transactions was $1,139,438 and $(6,726,944) for the years
ended July 31, 1997 and July 31, 1996, respectively.
NOTES TO FINANCIAL STATEMENTS (concluded)
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 738,877 $ 9,839,082
Shares issued to shareholders in
reinvestment of dividends and
distributions 174,588 2,156,968
------------ ------------
Total issued 913,465 11,996,050
Shares redeemed (466,533) (6,214,661)
------------ ------------
Net increase 446,932 $ 5,781,389
============ ============
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)
============ ============
<PAGE>
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 1,152,569 $ 15,222,749
Shares issued to shareholders in
reinvestment of dividends and
distributions 780,725 9,588,807
------------ ------------
Total issued 1,933,294 24,811,556
Automatic conversion of shares (1,502,518) (20,727,653)
Shares redeemed (2,041,893) (27,000,714)
------------ ------------
Net decrease (1,611,117) $(22,916,811)
============ ============
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
Automatic conversion of shares (2,767,942) (34,512,602)
Shares redeemed (2,374,171) (29,558,902)
------------ ------------
Net decrease (2,944,675) $(37,330,122)
============ ============
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 168,820 $ 2,194,913
Shares issued to shareholders in
reinvestment of dividends and
distributions 16,466 201,175
------------ ------------
Total issued 185,286 2,396,088
Shares redeemed (143,105) (1,879,385)
------------ ------------
Net increase 42,181 $ 516,703
============ ============
<PAGE>
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 D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 148,779 $ 1,971,059
Automatic conversion of shares 1,502,850 20,727,653
Shares issued to shareholders in
reinvestment of dividends and
distributions 436,926 5,386,950
------------ ------------
Total issued 2,088,555 28,085,662
Shares redeemed (778,090) (10,327,505)
------------ ------------
Net increase 1,310,465 $ 17,758,157
============ ============
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
============ ============
<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, 1997, the related statements
of operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period
then ended. These financial statements and the financial highlights
are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at July 31,
1997 by correspondence with the custodian and brokers. 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, 1997, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 5, 1997
</AUDIT-REPORT>
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, 1997,
98.39% 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, 1997:
Record Payable Long-Term
Date Date Capital Gains
Class A Shares: 10/03/96 10/11/96 $1.104876
12/12/96 12/20/96 $0.127501
Class B Shares: 10/03/96 10/11/96 $1.104876
12/12/96 12/20/96 $0.127501
Class C Shares: 10/03/96 10/11/96 $1.104876
12/12/96 12/20/96 $0.127501
Class D Shares: 10/03/96 10/11/96 $1.104876
12/12/96 12/20/96 $0.127501
Please retain this information for your records.
PORTFOLIO CHANGES (unaudited)
For the Quarter Ended July 31, 1997
Additions
Apartment Investment & Management Co.
(Class A)
Cooper Industries, Inc.
*EDP--Electricidade de Portugal, S.A.
(ADR)
Harris Corporation
Ogden Corporation
Uniao de Bancos Brasileiros S.A.
(Unibanco) (GDR)
Deletions
AT&T Corp.
*EDP--Electricidade de Portugal, S.A.
(ADR)
[FN]
*Added and deleted in the same quarter.
<PAGE>
PORTFOLIO INFORMATION (unaudited)
As of July 31, 1997
Percent of
Ten Largest Common Stock Holdings Net Assets
Ohio Casualty Corp. 2.5%
American General Corp. 2.5
Northrop Grumman Corp. 2.3
CoreStates Financial Corp. 2.3
Bristol-Myers Squibb Co. 2.2
E.I. du Pont de Nemours & Co. 2.0
The Manitowoc Company, Inc. 2.0
Consolidated Edison Co. of New York, Inc. 2.0
Eli Lilly & Co. 2.0
American Electric Power Co., Inc. 1.9
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
Thomas D. Jones III, Secretary
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
<PAGE>
