MERRILL LYNCH
STRATEGIC
DIVIDEND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
July 31, 1998
<PAGE>
MERRILL LYNCH STRATEGIC DIVIDEND FUND
Security
Representation as a
Percentage of
Equities as of
July 31, 1998
[A pie graph depicting security representation as a percentage of equities as of
July 31, 1998]
Utilities 34.3%
Capital Goods 8.1%
Energy 11.0%
Financial Services 21.4%
Basic Industries 7.7%
Consumer 17.5%
US Common Stock
Investments as of
July 31, 1998
S&P
Fund 500*
-----------------------------------------------------------------------------
Average Capitalization (in billions) $24.8 $65.4
-----------------------------------------------------------------------------
Price/Book Value 3.5 4.2
-----------------------------------------------------------------------------
Price/Earnings Ratio** 18.3 24.8
-----------------------------------------------------------------------------
Yield Based on Current Dividend 3.6% 1.4%
-----------------------------------------------------------------------------
*An unmanaged broad-based index comprised of common stocks.
**Based on trailing 12-month earnings.
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1998
DEAR SHAREHOLDER
Mounting evidence of a slowing economy and the prospect of lower corporate
earnings growth led to greater volatility in the US financial markets during the
quarter ended July 31, 1998. At the same time, greater economic and political
uncertainties in Asia and Russia led investors to become concerned about the
outlook for economic activity worldwide. Although these developments were
negative for stock markets, they generally were beneficial to bond prices,
especially as inflationary trends remained subdued. As was widely anticipated,
the Federal Reserve Board did not move to tighten monetary policy.
In the United States, gross domestic product (GDP) rose at a rate of 1.4% for
the second calendar quarter, down from the 5.5% rate for the first three months
of the year. The economic slowdown in Asia negatively impacted US exports, and
the protracted strike at General Motors Corporation also was a negative factor
for economic activity. However, the US dollar remained strong, especially
relative to the Japanese yen. The weakness of the Japanese economy continues to
be a source of concern not only for Asia, but also for the rest of the world as
well.
In the months ahead, investors will continue to focus on the economic outlook in
Asia and its impact on worldwide economic activity and corporate earnings
results. If there were evidence of more buoyant yet moderate US economic growth
and a pick-up in corporate profits growth, we would expect stability to return
to the financial markets on a global basis. Absent these developments, market
volatility is likely to continue.
Portfolio Matters
For the three months ended July 31, 1998, Merrill Lynch Strategic Dividend
Fund's Class A, Class B, Class C and Class D Shares had total returns of -4.07%,
- -4.32%, -4.34% and -4.13%, respectively. (Results shown do not reflect sales
charges; results would be lower if sales charges were included. For complete
performance information, see pages 5-7 of this report to shareholders.) The
total return of the 200 highest-yielding stocks in the unmanaged Standard &
Poor's 500 Index (S&P 500) was -3.51%.
The Fund's performance during the July quarter reflected that of the
highest-yielding stocks, our primary investment focus. This group of stocks
significantly underperformed the overall market during this volatile period.
Several factors contributed to the weakness. As the recovery in Asian markets
proved unsustainable, concerns about slowing US corporate profits growth and
rising interest rates were renewed. High-yielding stocks in the energy, basic
industry, natural gas and electric utility sectors were particularly negatively
affected. The Fund has significant exposure to these industry sectors.
Our primary investment strategy remained unchanged during the July quarter. We
continued to center our investment activity on improving the overall dividend
yield of the Fund. Our focus remained on buying attractively valued individual
stocks that we believed offered high dividend yields. We continued to realize
profits in those holdings where we became somewhat concerned about the high
relative valuations. We also reviewed our holdings in companies with significant
exposure to Asian markets and addressed those issues according to relative risk
and long-term opportunities.
Investment activities during the July quarter included the elimination of seven
companies and reductions in four others. We initiated new positions in six
higher-yielding companies: three within the utility sector, a real estate
investment trust (REIT), a small tobacco company, and a foreign steel producer.
In terms of our new positions, we added the shares of E'Town Corporation and
United Water Resources Inc. to our water utility investments. We believe shares
of water utilities, which operate as regulated monopolies within their local
service areas, offer attractive long-term total return opportunities with
relatively low risk characteristics. This is a highly fragmented and
consolidating industry providing significant growth opportunities for the major
players, including a number of our portfolio holdings. We acquired a position in
Sempra Energy, a new holding company. We accomplished this through our purchase
of the shares of Pacific Enterprises, a natural gas utility operating in
southern California, just prior to its merger with Enova Corp., an electric and
gas utility also in southern California. The outlook for the new company is
positive, given the conservative nature of its utility assets and good growth
prospects from both its existing nonregulated businesses and new ones it is
developing. Highwoods Properties, Inc. is a REIT that owns and operates
commercial office, light industrial and retail properties in eight southern
states. The generous dividend yield and good earnings prospects made this an
attractive addition to our REIT holdings. UST Inc. is a leading producer and
marketer of moist smokeless tobacco. In our view, the shares of UST offered an
attractive total return potential given continuing strong growth prospects in
the US smokeless tobacco market and the company's trading at a deep discount to
the market price/earnings ratio and providing a high and safe dividend yield.
British Steel PLC is a major producer of steel and iron products in the United
Kingdom, primarily for export. The shares of this company had come under
pressure as the price of the underlying commodity approached a five-year low,
largely in response to concerns about the Asian market. Once demand for steel
improves, we believe this company is well-positioned to participate. The stock
is an attractive total return investment, in our view.
Fiscal Year in Review
For the fiscal year ended July 31, 1998, the Fund's Class A, Class B, Class C
and Class D Shares had total returns of +12.03%, +10.94%, +10.96% and +11.84%,
respectively. The Fund's primary investment objective is to seek to provide
long-term total returns from a diversified portfolio of common stocks that yield
more than the S&P 500. Our strategy of focusing investments on quality, low
risk, high dividend yield, large-capitalization companies benefited performance
during the Fund's fiscal year. The 200 highest-yielding stocks in the unmanaged
S&P 500 returned +9.76% during the 12-month period. The Fund's performance also
compared favorably with the +10.48% total return of the Lipper Equity Income
Funds Average. Furthermore, according to Lipper Analytical Services, the Fund's
net yield after expenses for the 12 months ended July 31, 1998 was very
competitive compared to other equity income funds.
During the 12 months ended July 31, 1998, we maintained the Fund's historic
overweighting in the three highest-yielding sectors. Approximately two-thirds of
the Fund's net assets were invested in the utility, energy and financial
services sectors. During the 12-month period, we employed an investment strategy
of focusing our investment activities on increasing the Fund's dividend yield.
As a result, we increased the Fund's weighting in the utility sector by more
than 50%. This strategy benefited the Fund's performance, particularly during
periods of high market volatility. The only major negative impact on performance
came from our large exposure to the energy sector. We believe the energy sector,
specifically stocks of larger oil companies, offers attractive long-term
prospects.
In Conclusion
Merrill Lynch Strategic Dividend Fund typically has been less volatile than the
stock market because the broad sectors we invest in have lower-than-market
volatility. Examples of these sectors include the financial services and utility
sectors, as well as the energy sector. Our strategy also has natural "hedges"
built into it. The energy sector hedges against inflation and rises in commodity
prices. The financial and utilities sectors, as interest rate-sensitive sectors,
generally do well during non-inflationary times accompanied by lower interest
rates. Furthermore, our significant weighting in high-yielding US stocks should
also provide a cushion against volatile international markets.
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,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Walter D. Rogers
Walter D. Rogers
Senior Vice President and
Portfolio Manager
September 2, 1998
2 & 3
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1998
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
Walter D. Rogers, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President
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
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
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:
o 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.
o 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.)
o 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.
o 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 "Recent Performance Results" and "Average
Annual Total Return" 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.
Recent
Performance
Results
<TABLE>
<CAPTION>
Ten Years/
12 Month 3 Month Since Inception
Total Return Total Return Total Return
=================================================================================================================
<S> <C> <C> <C>
ML Strategic Dividend Fund Class A Shares* +12.03% -4.07% +247.22%
- -----------------------------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class B Shares* +10.94 -4.32 +220.37
- -----------------------------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class C Shares* +10.96 -4.34 +102.07
- -----------------------------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class D Shares* +11.84 -4.13 +108.30
- -----------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index** +19.28 +1.18 +439.65/+445.10/+161.20
=================================================================================================================
</TABLE>
*Investment results shown do not reflect sales charges; results would be
lower if a sales charge was included. Total investment returns are based
on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the ex-dividend date. The Fund's ten-year/inception dates are:
Class A Shares, 11/29/88; Class BShares, ten years ended 7/31/98; and
Class C and Class D Shares, 10/21/94.
**An unmanaged broad-based index comprised of common stocks. Ten years/since
inception total returns are: from 11/29/88 to 7/31/98; for the ten years
ended 7/31/98; and from 10/21/94 to 7/31/98, respectively.
4 & 5
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1998
PERFORMANCE DATA (concluded)
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** 7/98
ML Strategic Dividend Fund+--
Class A Shares* $9,475 $32,903
Standard & Poor's 500 Index++ $10,000 $53,963
High Yield Index+++ $10,000 $29,242
[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:]
7/88 7/98
ML Strategic Dividend Fund+--
Class B Shares* $10,000 $32,034
Standard & Poor's 500 Index++ $10,000 $54,510
High Yield Index+++ $10,000 $28,840
[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 $20,207
ML Strategic Dividend Fund+--
Class D Shares* $9,475 $19,737
Standard & Poor's 500 Index++ $10,000 $26,119
High Yield Index+++ $10,000 $19,767
*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 two quintiles of the
highest-yielding stocks of the S&P 500. The starting date for the Index in
each of the graphs are: Class A Shares graph, 11/30/88; Class B Shares
graph, 7/31/88; and Class C & Class D Shares graph, 10/31/94.
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 6/30/98 +23.25% +16.78%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +17.60 +16.34
- --------------------------------------------------------------------------------
Inception (11/29/88) through 6/30/98 +14.28 +13.64
- --------------------------------------------------------------------------------
*Maximum sales charge is 5.25%
**Assuming maximum sales charge.
================================================================================
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 6/30/98 +22.08% +18.08%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +16.41 +16.41
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/98 +12.79 +12.79
- --------------------------------------------------------------------------------
*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 6/30/98 +22.01% +21.01%
- --------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/98 +22.15 +22.15
- --------------------------------------------------------------------------------
*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 6/30/98 +22.98% +16.52%
- --------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/98 +23.13 +21.35
- --------------------------------------------------------------------------------
*Maximum sales charge is 5.25%
**Assuming maximum sales charge.
6 & 7
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1998
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
Percent
Shares Value of Net
EUROPE Industries Held Common Stocks Cost (Note 1a) Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Netherlands Oil--International 50,000 Royal Dutch Petroleum PLC
(NY Registered Shares) $ 747,328 $ 2,550,000 1.2%
------------------------------------------------------------------------------------------------------------
Total Investments in the
Netherlands 747,328 2,550,000 1.2
====================================================================================================================================
United Kingdom Banking 70,000 Barclays PLC 2,097,292 2,004,100 1.0
------------------------------------------------------------------------------------------------------------
Oil--International 30,000 British Petroleum Co. PLC (ADR)* 1,328,520 2,407,500 1.2
------------------------------------------------------------------------------------------------------------
Steel 700,000 British Steel PLC 1,938,756 1,440,089 0.7
------------------------------------------------------------------------------------------------------------
Total Investments in the
United Kingdom 5,364,568 5,851,689 2.9
====================================================================================================================================
Total Investments in Europe 6,111,896 8,401,689 4.1
====================================================================================================================================
NORTH AMERICA
====================================================================================================================================
United States Aerospace & Defense 20,000 Rockwell International Corp. 975,228 813,750 0.4
60,000 TRW Inc. 1,663,738 3,251,250 1.6
----------- ----------- -----
2,638,966 4,065,000 2.0
------------------------------------------------------------------------------------------------------------
Automobiles 70,000 Ford Motor Company 1,318,007 3,985,625 2.0
25,000 General Motors Corp. 1,145,473 1,807,813 0.9
----------- ----------- -----
2,463,480 5,793,438 2.9
------------------------------------------------------------------------------------------------------------
Automotive Equipment
& Tires 72,000 Arvin Industries, Inc. 1,656,934 2,799,000 1.4
50,000 Cooper Tire and Rubber Company 1,202,300 943,750 0.4
60,000 Dana Corp. 1,649,850 2,985,000 1.5
----------- ----------- -----
4,509,084 6,727,750 3.3
------------------------------------------------------------------------------------------------------------
Banks 39,000 Bank of New York Company,
Inc. (The) 1,989,838 2,496,000 1.2
10,000 Bankers Trust New York Corp. 709,031 1,120,625 0.6
28,000 Crestar Financial Corporation 1,447,180 1,909,250 1.0
10,000 J.P. Morgan & Co., Inc. 897,556 1,260,000 0.6
46,000 Mellon Bank Corp. 990,205 3,099,250 1.5
34,500 Mercantile Bancorp. 1,002,055 1,875,938 0.9
30,000 National City Corporation 2,011,800 2,006,250 1.0
32,000 State Street Corporation 1,952,758 2,218,000 1.1
----------- ----------- -----
11,000,423 15,985,313 7.9
------------------------------------------------------------------------------------------------------------
Business Services 52,000 Dun & Bradstreet Corporation (The) 1,378,715 1,426,750 0.7
------------------------------------------------------------------------------------------------------------
Capital Goods 30,000 General Electric Co. 724,669 2,679,375 1.3
28,000 Minnesota Mining &
Manufacturing Co. 1,608,098 2,096,500 1.0
68,000 Ogden Corporation 1,531,759 1,763,750 0.9
----------- ----------- -----
3,864,526 6,539,625 3.2
------------------------------------------------------------------------------------------------------------
Chemicals 23,000 Dow Chemical Co. (The) 1,369,880 2,087,250 1.1
40,000 du Pont (E.I.) de Nemours & Co. 1,329,525 2,480,000 1.2
----------- ----------- -----
2,699,405 4,567,250 2.3
------------------------------------------------------------------------------------------------------------
Drugs 100,000 American Home Products Corp. 3,031,175 5,150,000 2.5
40,000 Bristol-Myers Squibb Co. 913,275 4,557,500 2.3
----------- ----------- -----
3,944,450 9,707,500 4.8
------------------------------------------------------------------------------------------------------------
Foods 40,000 General Mills, Inc. 2,938,894 2,477,500 1.2
55,000 Quaker Oats Company 2,983,189 2,908,125 1.5
----------- ----------- -----
5,922,083 5,385,625 2.7
------------------------------------------------------------------------------------------------------------
Household Products 24,000 Clorox Company 728,490 2,460,000 1.2
------------------------------------------------------------------------------------------------------------
Insurance 65,000 American General Corp. 1,346,718 4,440,313 2.2
30,000 Lincoln National Corp. 1,275,150 2,872,500 1.4
85,000 Ohio Casualty Corp. 2,708,281 3,623,125 1.8
----------- ----------- -----
5,330,149 10,935,938 5.4
------------------------------------------------------------------------------------------------------------
Merchandising 25,000 Penney (J.C.) Company, Inc. 1,157,975 1,467,188 0.7
------------------------------------------------------------------------------------------------------------
Oil--Domestic 28,000 Atlantic Richfield Co. 1,584,596 1,897,000 0.9
90,000 Occidental Petroleum Corp. 2,323,525 2,002,500 1.0
50,000 Phillips Petroleum Co. 1,731,105 2,209,375 1.1
----------- ----------- -----
5,639,226 6,108,875 3.0
------------------------------------------------------------------------------------------------------------
Oil--International 40,000 Exxon Corp. 1,189,846 2,805,000 1.4
40,000 Mobil Corp. 915,150 2,790,000 1.4
50,000 Texaco Inc. 1,177,506 3,040,625 1.5
----------- ----------- -----
3,282,502 8,635,625 4.3
------------------------------------------------------------------------------------------------------------
Paper & Forest Products 66,000 Union Camp Corp. 3,963,011 2,800,875 1.4
60,000 Weyerhaeuser Co. 2,666,100 2,520,000 1.2
----------- ----------- -----
6,629,111 5,320,875 2.6
------------------------------------------------------------------------------------------------------------
Real Estate Investment 38,000 Apartment Investment &
Trusts Management Co. (Class A) 1,201,028 1,444,000 0.7
19,207 Avalon Properties, Inc. 514,336 689,051 0.3
40,000 Colonial Properties Trust 1,256,788 1,095,000 0.6
20,000 Crescent Real Estate Equities
Company 632,078 587,500 0.3
32,000 Developers Diversified Realty Corp 1,296,294 1,184,000 0.6
52,000 Duke Realty Investments, Inc. 1,267,708 1,114,750 0.6
35,000 Essex Property Trust, Inc. 854,486 1,067,500 0.5
35,000 Highwoods Properties, Inc. 1,132,663 1,082,813 0.5
30,000 Mack-Cali Realty Corporation 1,126,800 931,875 0.5
----------- ----------- -----
9,282,181 9,196,489 4.6
------------------------------------------------------------------------------------------------------------
Steel 55,000 Carpenter Technology Corp. 1,747,599 2,382,187 1.2
------------------------------------------------------------------------------------------------------------
Tobacco 78,000 UST Inc. 2,105,181 2,106,000 1.0
------------------------------------------------------------------------------------------------------------
</TABLE>
8 & 9
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1998
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<TABLE>
<CAPTION>
Percent
NORTH AMERICA Shares Value of Net
(concluded) Industries Held Common Stocks Cost (Note 1a) Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
United States Utilities--Electric 85,000 American Electric Power Co., Inc. $ 2,682,600 $ 3,660,312 1.8%
(concluded) 106,000 BEC Energy (a) 2,656,360 4,054,500 2.0
60,000 Central and South West
Corporation 1,598,600 1,526,250 0.7
63,000 Consolidated Edison Co. of
New York, Inc. 1,779,750 2,665,687 1.3
105,000 Edison International, Inc. 1,759,425 2,913,750 1.4
60,000 Entergy Corporation 1,689,850 1,642,500 0.8
44,000 Marketspan Corporation (c) 1,120,500 1,212,750 0.6
66,000 New Century Energies, Inc. 2,137,905 2,747,250 1.4
120,000 Northern States Power Co. 2,613,600 3,157,500 1.6
200,000 PECO Energy Company 3,948,520 5,987,500 3.0
----------- ----------- ----
21,987,110 29,567,999 14.6
------------------------------------------------------------------------------------------------------------
Utilities--Natural Gas 40,000 Consolidated Natural Gas Co. 1,805,775 2,067,500 1.0
44,000 Enron Corp. 2,026,319 2,329,250 1.2
78,197 +Sempra Energy 2,037,272 1,969,587 1.0
50,000 Sonat, Inc. 882,073 1,462,500 0.7
65,000 Williams Companies, Inc. (The) 2,185,643 2,084,062 1.0
----------- ----------- ----
8,937,082 9,912,899 4.9
------------------------------------------------------------------------------------------------------------
Utilities-- 78,000 Ameritech Corporation 3,008,167 3,836,625 1.9
Telecommunications 92,160 Bell Atlantic Corp. 2,299,200 4,181,760 2.1
120,000 Frontier Corporation 3,101,508 4,027,500 2.0
40,000 GTE Corporation 1,429,930 2,175,000 1.1
55,000 US West, Inc. (b) 1,852,675 2,935,625 1.4
----------- ----------- ----
11,691,480 17,156,510 8.5
------------------------------------------------------------------------------------------------------------
Utilities--Water 76,000 American Water Works Co., Inc. 1,429,750 2,275,250 1.1
11,800 E'Town Corporation 477,827 478,638 0.2
55,500 Philadelphia Suburban Corporation 1,203,656 1,186,312 0.6
31,500 United Water Resources Inc. 584,469 584,719 0.3
----------- ----------- ----
3,695,702 4,524,919 2.2
------------------------------------------------------------------------------------------------------------
Total Investments in North
America 120,634,920 169,973,755 84.0
====================================================================================================================================
Total Common Stocks 126,746,816 178,375,444 88.1
====================================================================================================================================
<CAPTION>
Face
Amount Short-Term Securities
====================================================================================================================================
Repurchase Agreements** $ 9,648,000 Nikko Securities International,
Inc., purchased on 7/31/1998 to
yield 5.65% to 8/03/1998 9,648,000 9,648,000 4.8
------------------------------------------------------------------------------------------------------------
US Government Agency 17,000,000 Federal Home Loan Mortgage Corp.,
Obligations*** 5.56% due 8/03/1998 16,992,123 16,992,123 8.4
===================================================================================================================================
Total Short-Term Securities 26,640,123 26,640,123 13.2
===================================================================================================================================
Total Investments $153,386,939 205,015,567 101.3
============
Liabilities in Excess of Other Assets (2,694,837) (1.3)
------------ -----
Net Assets $202,320,730 100.0%
============ =====
====================================================================================================================================
</TABLE>
*American Depositary Receipts (ADR).
**Repurchase Agreements are fully collateralized by US Government & Agency
Obligations.
***US Government Agency Obligations are traded on a discount basis; the
interest rate shown reflects the discount rate paid at the time of purchase
by the Fund.
+Non-income producing security.
(a)Formerly Boston Edison Co.
(b)Formerly U S West Communications Group.
(c)Formerly Long Island Lighting Company.
See Notes to Financial Statements.
10 & 11
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1998
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of July 31, 1998
========================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$153,386,939) (Note 1a) .. $205,015,567
Cash ............................................................. 2,362
Receivables:
Dividends ..................................................... $ 631,860
Beneficial interest sold ...................................... 98,466 730,326
----------
Prepaid registration fees and other assets (Note 1g) ............. 44,559
------------
Total assets ..................................................... 205,792,814
------------
========================================================================================================================
Liabilities: Payables:
Securities purchased .......................................... 2,790,021
Beneficial interest redeemed .................................. 364,720
Investment adviser (Note 2) ................................... 106,917
Distributor (Note 2) .......................................... 90,329 3,351,987
----------
Accrued expenses and other liabilities ........................... 120,097
------------
Total liabilities ................................................ 3,472,084
------------
========================================================================================================================
Net Assets: Net assets ....................................................... $202,320,730
============
========================================================================================================================
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized ......................... $ 157,742
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized ......................... 475,201
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized ......................... 28,719
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized ......................... 655,370
Paid-in capital in excess of par ................................. 119,791,853
Undistributed investment income--net ............................. 406,383
Undistributed realized capital gains on investments and foreign
currency transactions--net .................................... 29,178,734
Unrealized appreciation on investments and foreign currency
transactions--net ............................................. 51,626,728
------------
Net assets ....................................................... $202,320,730
============
========================================================================================================================
Net Asset Class A--Based on net assets of $24,232,991 and 1,577,415
Value: shares of beneficial interest outstanding ..................... $ 15.36
============
Class B--Based on net assets of $73,067,070 and 4,752,005
shares of beneficial interest outstanding ..................... $ 15.38
============
Class C--Based on net assets of $4,379,013 and 287,188
shares of beneficial interest outstanding ..................... $ 15.25
============
Class D--Based on net assets of $100,641,656 and
6,553,697 shares of beneficial interest outstanding ........... $ 15.36
============
========================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended July 31, 1998
========================================================================================================================
<S> <C> <C> <C>
Investment Dividends (net of $42,825 foreign withholding tax) ............... $ 6,110,296
Income Interest and discount earned ..................................... 838,906
(Notes 1e & 1f): -----------
Total income ..................................................... 6,949,202
-----------
========================================================================================================================
Expenses: Investment advisory fees (Note 2) ................................ $ 1,230,228
Account maintenance and distribution fees--Class B (Note 2) ...... 809,407
Account maintenance fees--Class D (Note 2) ....................... 229,949
Transfer agent fees--Class B (Note 2) ............................ 113,856
Transfer agent fees--Class D (Note 2) ............................ 106,132
Printing and shareholder reports ................................. 103,992
Registration fees (Note 1g) ...................................... 64,180
Professional fees ................................................ 64,092
Account maintenance and distribution fees--Class C (Note 2) ...... 37,876
Accounting services (Note 2) ..................................... 36,688
Transfer agent fees--Class A (Note 2) ............................ 33,565
Custodian fees ................................................... 25,488
Trustees' fees and expenses ...................................... 24,312
Transfer agent fees--Class C (Note 2) ............................ 5,515
Pricing fees ..................................................... 323
Other ............................................................ 6,596
----------
Total expenses ................................................... 2,892,199
-----------
Investment income--net ........................................... 4,057,003
-----------
========================================================================================================================
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net .............................................. 33,547,037
(Loss) On Foreign currency transactions--net ............................ (3,755) 33,543,282
Investments & ----------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions-- Investments--net .............................................. (15,044,869)
Net (Notes 1c, Foreign currency transactions--net ............................ (1,900) (15,046,769)
1d, 1f &3): ---------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions ......................................... 18,496,513
-----------
Net Increase in Net Assets Resulting from Operations ............. $22,553,516
===========
========================================================================================================================
</TABLE>
See Notes to Financial Statements.
12 & 13
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1998
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended July 31,
--------------------------------
Increase (Decrease) in Net Assets: 1998 1997
========================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ........................................... $ 4,057,003 $ 3,936,804
Realized gain on investments and foreign currency
transactions--net ............................................. 33,543,282 13,476,208
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net ........................ (15,046,769) 41,809,369
------------ ------------
Net increase in net assets resulting from operations ............. 22,553,516 59,222,381
------------ ------------
========================================================================================================================
Dividends & Investment income--net:
Distributions to Class A ....................................................... (687,382) (633,917)
Shareholders Class B ....................................................... (1,178,158) (1,785,749)
(Note 1h): Class C ....................................................... (58,545) (46,527)
Class D ....................................................... (2,102,336) (1,455,366)
Realized gain on investments--net:
Class A ....................................................... (2,370,162) (1,974,335)
Class B ....................................................... (6,786,151) (10,210,077)
Class C ....................................................... (257,657) (237,095)
Class D ....................................................... (6,550,432) (5,178,309)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders ................................. (19,990,823) (21,521,375)
------------ ------------
========================================================================================================================
Beneficial Net increase (decrease) in net assets derived from beneficial
Interest interest transactions ......................................... (292,936) 1,139,438
Transactions ------------ ------------
(Note 4):
========================================================================================================================
Net Assets: Total increase in net assets ..................................... 2,269,757 38,840,444
Beginning of year ................................................ 200,050,973 161,210,529
------------ ------------
End of year* ..................................................... $202,320,730 $200,050,973
============ ============
========================================================================================================================
* Undistributed investment income--net (Note 1i) ................ $ 406,383 $ 379,522
============ ============
========================================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements. ----------------------------------------------------
For the Year Ended July 31,
----------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1997+ 1996+ 1995 1994
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ....................... $ 15.21 $ 12.43 $ 12.24 $ 12.78 $ 13.60
Operating ------- ------- ------- ------- -------
Performance: Investment income--net ................................... .39 .38 .38 .39 .41
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .................. 1.37 4.17 1.55 1.10 (.12)
------- ------- ------- ------- -------
Total from investment operations ......................... 1.76 4.55 1.93 1.49 .29
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net .................................. (.39) (.39) (.36) (.42) (.46)
------- ------- ------- ------- -------
Realized gain on investments--net ....................... (1.22) (1.38) (1.38) (1.61) (.65)
------- ------- ------- ------- -------
Total dividends and distributions ........................ (1.61) (1.77) (1.74) (2.03) (1.11)
------- ------- ------- ------- -------
Net asset value, end of year ............................. $ 15.36 $ 15.21 $ 12.43 $ 12.24 $ 12.78
======= ======= ======= ======= =======
====================================================================================================================================
Total Investment Based on net asset value per share ....................... 12.03% 40.42% 16.98% 14.04% 2.38%
Return:* ======= ======= ======= ======= =======
====================================================================================================================================
Ratios to Average Expenses ................................................. .88% .90% 1.04% 1.05% .85%
Net Assets: ======= ======= ======= ======= =======
Investment income--net ................................... 2.51% 2.87% 3.04% 3.39% 3.42%
======= ======= ======= ======= =======
====================================================================================================================================
Supplemental Net assets, end of year (in thousands) ................... $24,233 $28,940 $18,106 $18,687 $21,854
Data: ======= ======= ======= ======= =======
Portfolio turnover ....................................... 32.66% 14.29% 26.42% 52.69% 22.75%
======= ======= ======= ======= =======
====================================================================================================================================
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements. ----------------------------------------------------
For the Year Ended July 31,
----------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1997+ 1996+ 1995 1994
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ....................... $ 15.22 $ 12.44 $ 12.23 $ 12.77 $ 13.59
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ................................... .23 .25 .26 .29 .33
Realized and unrealized gain (loss) on
investments and foreign currency transactions--net ....... 1.38 4.16 1.55 1.07 (.18)
-------- -------- -------- -------- --------
Total from investment operations ......................... 1.61 4.41 1.81 1.36 .15
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ................................. (.23) (.25) (.22) (.29) (.32)
Realized gain on investments--net ...................... (1.22) (1.38) (1.38) (1.61) (.65)
-------- -------- -------- -------- --------
Total dividends and distributions ........................ (1.45) (1.63) (1.60) (1.90) (.97)
-------- -------- -------- -------- --------
Net asset value, end of year ............................. $ 15.38 $ 15.22 $ 12.44 $ 12.23 $ 12.77
======== ======== ======== ======== ========
====================================================================================================================================
Total Investment Based on net asset value per share ....................... 10.94% 38.90% 15.89% 12.82% 1.30%
Return:* ======== ======== ======== ======== ========
====================================================================================================================================
Ratios to Average Expenses ................................................. 1.90% 1.94% 2.08% 2.09% 1.88%
Net Assets: ======== ======== ======== ======== ========
Investment income--net ................................... 1.50% 1.89% 2.06% 2.36% 2.39%
======== ======== ======== ======== ========
====================================================================================================================================
Supplemental Net assets, end of year (in thousands) ................... $ 73,067 $ 93,509 $ 96,461 $130,921 $167,889
Data: ======== ======== ======== ======== ========
Portfolio turnover ....................................... 32.66% 14.29% 26.42% 52.69% 22.75%
======== ======== ======== ======== ========
====================================================================================================================================
</TABLE>
*Total investment returns exclude the effects of sales loads
+Based on average shares outstanding See Notes to Financial
Statements
See Notes to Financial Statements.
14 & 15
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1998
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
Class C
-----------------------------------------
For the
Period
The following per share data and ratios have been derived For the Year Oct. 21,
from information provided in the financial statements. Ended July 31, 1994+ to
------------------------------ July 31,
Increase (Decrease) in Net Asset Value: 1998++ 1997++ 1996++ 1995
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ................... $15.11 $12.37 $12.20 $11.84
Operating ------ ------ ------ ------
Performance: Investment income--net ................................. .23 .24 .24 .21
Realized and unrealized gain on investments and foreign
currency transactions--net ............................. 1.37 4.13 1.55 1.21
------ ------ ------ ------
Total from investment operations ....................... 1.60 4.37 1.79 1.42
------ ------ ------ ------
Less dividends and distributions:
Investment income--net .............................. (.24) (.25) (.24) (.25)
Realized gain on investments--net ................... (1.22) (1.38) (1.38) (.81)
------ ------ ------ ------
Total dividends and distributions ...................... (1.46) (1.63) (1.62) (1.06)
------ ------ ------ ------
Net asset value, end of period ......................... $15.25 $15.11 $12.37 $12.20
====== ====== ====== ======
=========================================================================================================================
Total Investment Based on net asset value per share ..................... 10.96% 38.84% 15.78% 13.30%++
Return:** ====== ====== ====== ======
=========================================================================================================================
Ratios to Average Expenses ............................................... 1.90% 1.95% 2.08% 2.19%*
Net Assets: ====== ====== ====== ======
Investment income--net ................................. 1.47% 1.83% 1.91% 1.94%*
====== ====== ====== ======
=========================================================================================================================
Supplemental Net assets, end of period (in thousands) ............... $4,379 $3,025 $1,953 $ 811
Data: ====== ====== ====== ======
Portfolio turnover ..................................... 32.66% 14.29% 26.42% 52.69%
====== ====== ====== ======
=========================================================================================================================
<CAPTION>
Class D
-----------------------------------------
For the
Period
The following per share data and ratios have been derived For the Year Oct. 21,
from information provided in the financial statements. Ended July 31, 1994+ to
------------------------------ July 31,
Increase (Decrease) in Net Asset Value: 1998++ 1997++ 1996++ 1995
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ................... $ 15.20 $ 12.43 $ 12.24 $ 11.85
Operating -------- ------- ------- -------
Performance: Investment income--net .35 .35 .34 .26
Realized and unrealized gain on investments and foreign
currency transactions--net ............................. 1.38 4.16 1.57 1.23
-------- ------- ------- -------
Total from investment operations ....................... 1.73 4.51 1.91 1.49
-------- ------- ------- -------
Less dividends and distributions:
Investment income--net .............................. (.35) (.36) (.34) (.29)
Realized gain on investments--net ................... (1.22) (1.38) (1.38) (.81)
-------- ------- ------- -------
Total dividends and distributions ...................... (1.57) (1.74) (1.72) (1.10)
-------- ------- ------- -------
Net asset value, end of period ......................... $ 15.36 $ 15.20 $ 12.43 $ 12.24
======== ======= ======= =======
=========================================================================================================================
Total Investment Based on net asset value per share ..................... 11.84% 39.99% 16.73% 13.98%++
Return:** ======== ======= ======= =======
=========================================================================================================================
Ratios to Average Expenses ............................................... 1.12% 1.15% 1.28% 1.38%*
Net Assets: ======== ======= ======= =======
Investment income--net ................................. 2.25% 2.62% 2.62% 2.93%*
======== ======= ======= =======
=========================================================================================================================
Supplemental Net assets, end of period (in thousands) ............... $100,642 $74,577 $44,691 $13,988
Data: ======== ======= ======= =======
Portfolio turnover ..................................... 32.66% 14.29% 26.42% 52.69%
======== ======= ======= =======
=========================================================================================================================
</TABLE>
*Annualized.
**Total investment returns exclude the effects of sales loads
++Aggregate total investment return.
+Commencement of operations.
++Based on average shares outstanding.
See Notes to Financial Statements.
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
16 & 17
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1998
NOTES TO FINANCIAL STATEMENTS (continued)
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) Repurchase agreements--The Fund invests in money market securities pursuant
to repurchase agreements. Under such agreements, the counterparty agrees to
repurchase the security at a mutually agreed upon time and price. The Fund takes
possession of the underlying securities, marks to market such securities and, if
necessary, receives additional securities daily to ensure that the contract is
fully collateralized.
(c) 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.
o Financial futures contracts--The Fund may purchase or sell financial 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.
o Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-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.
o 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.
o Options--The Fund is authorized to write call and put 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.
(d) 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.
(e) 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.
(f) 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.
(g) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(h) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(i) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $3,721 have been reclassified between undistributed net
realized capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset values per share.
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 ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is 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 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.
For the year ended July 31, 1998, 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 ............................................... $ 260 $ 3,654
Class D ............................................... $2,330 $33,138
- --------------------------------------------------------------------------------
18 & 19
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended July 31, 1998, MLPF&S received contingent deferred sales
charges of $70,120 and $1,695 relating to transactions in Class B and Class C
Shares, respectively.
In addition, MLPF&S received $7,029 in commissions on the execution of portfolio
security transactions for the Fund for the year ended July 31, 1998.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 1998 were $61,819,072 and $85,850,061, respectively.
Net realized gains (losses) for the year ended July 31, 1998 and net unrealized
gains (losses) as of July 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Gains Unrealized
(Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments ......................... $ 33,547,063 $ 51,628,628
Short-term investments ........................ (26) --
Foreign currency transactions ................. (3,755) (1,900)
------------ ------------
Total ......................................... $ 33,543,282 $ 51,626,728
============ ============
- --------------------------------------------------------------------------------
As of July 31, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $51,628,628, of which $55,834,488 related to appreciated securities
and $4,205,860 related to depreciated securities. At July 31, 1998, the
aggregate cost of investments for Federal income tax purposes was $153,386,939.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $(292,936) and $1,139,438 for the years ended July 31, 1998 and
July 31, 1997, respectively.
Transactions in shares of beneficial interest for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 514,315 $ 7,854,695
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................ 161,266 2,431,803
------------ ------------
Total issued ............................. 675,581 10,286,498
Shares redeemed .......................... (1,001,374) (15,674,992)
------------ ------------
Net decrease ............................. (325,793) $ (5,388,494)
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 B Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 1,170,952 $ 17,989,341
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................ 397,438 6,004,482
------------ ------------
Total issued ............................. 1,568,390 23,993,823
Automatic conversion of shares ........... (1,761,378) (26,630,593)
Shares redeemed .......................... (1,200,240) (18,345,326)
------------ ------------
Net decrease ............................. (1,393,228) $(20,982,096)
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 C Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 269,716 $ 4,117,807
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................ 15,921 238,604
------------ ------------
Total issued ............................. 285,637 4,356,411
Shares redeemed .......................... (198,582) (3,033,238)
------------ ------------
Net increase ............................. 87,055 $ 1,323,173
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 294,437 $ 4,567,752
Automatic conversion of shares ........... 1,762,950 26,630,593
Shares issued to shareholders in
reinvestment of dividends
and distributions ........................ 436,035 6,579,795
------------ ------------
Total issued ............................. 2,493,422 37,778,140
Shares redeemed .......................... (845,433) (13,023,659)
------------ ------------
Net increase ............................. 1,647,989 $ 24,754,481
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
============ ============
- --------------------------------------------------------------------------------
20 & 21
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1998
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, 1998, 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,
1998 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, 1998, 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 8, 1998
IMPORTANT TAX INFORMATION (unaudited)
Of the ordinary income distributions paid quarterly by Merrill Lynch Strategic
Dividend Fund during its taxable year ended July 31, 1998, 100% 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, 1998:
- --------------------------------------------------------------------------------
Record Payable Long-Term
Date Date Capital Gains
- --------------------------------------------------------------------------------
10/06/97 10/14/97 $.879214*
12/16/97 12/24/97 $.323376**
- --------------------------------------------------------------------------------
*Of this long-term capital gain distribution, 39.13% is subject to the 28% tax
rate and 60.87% is subject to the 20% tax rate.
**Of this long-term capital gain distribution, 16.48% is subject to the 28% tax
rate and 83.52% is subject to the 20% tax rate.
Please retain this information for your records.
PORTFOLIO CHANGES (unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended July 31, 1998
===================================================================================================================
<S> <C> <C> <C>
Additions British Steel PLC * R.H. Donnelley Corp. UST Inc.
E'Town Corporation Sempra Energy United Water Resources Inc.
Highwoods Properties, Inc.
===================================================================================================================
Deletions Cooper Industries, Inc. Harris Corporation May Department Stores Co.
Eastman Kodak Co. Long Island Lighting Co. Patriot American Hospitality, Inc.
Foster Wheeler Corp. Manitowoc Company, Inc. (The) * R.H. Donnelley Corp.
===================================================================================================================
</TABLE>
* Added and deleted in the same quarter.
PORTFOLIO INFORMATION (unaudited)
As of July 31, 1998
=============================================================================
Percent of
Ten Largest Common Stock Holdings Net Assets
PECO Energy Company ....................... 3.0%
American Home Products Corp. .............. 2.5
Bristol-Myers Squibb Co.................... 2.3
American General Corp ..................... 2.2
Bell Atlantic Corp......................... 2.1
BEC Energy ................................ 2.0
Frontier Corporation ...................... 2.0
Ford Motor Company ........................ 2.0
Ameritech Corporation ..................... 1.9
American Electric Power Co., Inc. ......... 1.8
22 & 23
<PAGE>
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 10561--7/98
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