MERRILL LYNCH
STRATEGIC
DIVIDEND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Quarterly Report
October 31, 1998
<PAGE>
MERRILL LYNCH STRATEGIC DIVIDEND FUND
Sector
Representation as a
Percentage of
Equities as of
October 31, 1998
A pie graph depicting sector representation as a percentage of equities as of
October 31, 1998
Utilities 33.3%
Capital Goods 8.6%
Energy 12.0%
Financial Services 19.0%
Basic Industries 8.0%
Consumer 19.1%
US Common Stock
Investments as of
October 31, 1998
S&P
Fund 500*
- --------------------------------------------------------------------------------
Average Capitalization (in billions) $23.9 $72.9
- --------------------------------------------------------------------------------
Price/Book Value 3.1 4.1
- --------------------------------------------------------------------------------
Price/Earnings Ratio** 18.4 24.3
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Yield Based on Current Dividend 3.6% 1.6%
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* An unmanaged broad-based index comprised of common stocks.
** Based on trailing 12-month earnings.
<PAGE>
Merrill Lynch Strategic Dividend Fund, October 31, 1998
DEAR SHAREHOLDER
Concerns over the prospects for the worldwide economy spilled over into the US
stock market during the quarter ended October 31, 1998. The increased volatility
in US share prices reflected the deteriorating outlook for corporate profits
amid signs of a weakening US economy. The uncertain economic picture and the
resulting flight to quality by investors pushed the 30-year US Treasury bond to
record low yields. In contrast, corporate bonds, mortgage-backed securities and
emerging markets debt underperformed Treasury securities by a wide margin. The
leverage/derivatives-related problems of a major hedge fund and possible
impeachment of President Clinton further heightened investor uncertainties, as
did Russia's devaluation and effective repudiation of its debt in August. A
one-quarter point cut in the Federal Funds rate in late September did not
restore investor confidence. However, when the Federal Reserve Board cut the
Federal Funds rate another quarter point in October, a rally in stock and bond
prices ensued.
However, as long as worldwide economic prospects appear fragile, it is likely
that stock and bond market volatility will continue. For the overall global
economy, the deepening recession in Japan is of great concern as well as the
difficulties in emerging economies such as Russia and Brazil. Investors are
waiting to see whether the recently implemented reforms in Japan will be
successful in stabilizing, and ultimately resolving, the problems of the banking
system. Positive developments in Japan, combined with continued monetary easing
on the part of the Federal Reserve Board, would likely provide an important
element of stability to the volatile investment environment.
Portfolio Matters
For the three months ended October 31, 1998, Merrill Lynch Strategic Dividend
Fund's Class A, Class B, Class C and Class D Shares had total returns of +1.41%,
+1.13%, +1.13% and +1.34%, respectively. (Results shown do not reflect sales
charges and would be lower if sales charges were included. For complete
performance information, see pages 4 and 5 of this report to shareholders.) The
Fund significantly outperformed both the -2.05% total return of the Lipper
Equity Income Funds' Average and the -0.88% total return of the 200
highest-yielding stocks in the unmanaged Standard & Poor's 500 Index (S&P 500)
for the quarter ended October 31, 1998. The Fund also outperformed the S&P 500
Index, which posted a total return of -1.57% during the same three-month period.
During the quarter ended October 31, 1998, the Fund's strong relative
performance was largely attributable to our heavy weighting in stocks in the two
highest-yielding quintiles of the S&P 500. At quarter-end, approximately 75% of
the Fund's net assets were invested in stocks whose yields fell within the two
highest-yielding quintiles. While the universe of high-yielding stocks
outperformed the overall market by a wide margin during the three-month period
ended October 31, 1998, the Fund's strong performance can also be attributed to
stock selection and overweighting in specific sectors. Best relative
performances were achieved by our investments in the energy, electric utilities,
telecommunications, consumer staples and capital goods sectors, which together
accounted for approximately 56% of the Fund's net assets as of October 31, 1998.
The Fund does not invest solely in stocks with the highest-dividend yields;
rather, it is our intention to seek to enhance the Fund's total return
performance through careful stock selection. This strategy has proved to be
successful, as the Fund's total returns have often outperformed the 200
highest-yielding stocks in the S&P 500. When selecting stocks for the Fund, we
seek companies that are financially strong and hold leadership positions in
their primary businesses, or those that possess attractive market niche
products. Also, it is our strategy to buy individual stocks based on attractive
valuations that always include attractive dividend yields relative to their
respective industries, but typically also have attractive price/earnings ratios
and price/book value ratios. Moreover, most of our equity holdings have S&P
stock ratings of B+ or better and possess defensive and low volatility
characteristics.
While diversification of the Fund is one of our top priorities, we recognize
that the market's highest-yielding sectors traditionally have been utilities,
financials and energy. Historically, the Fund has had an overweighting in these
three sectors, ranging from a low of 55% of net assets to 76% during the
quarter. Also, our exposure to foreign investments has generally remained below
10%, and accounted for less than 5% of net assets at quarter-end. We continually
review international investment opportunities, but we believe domestic equities
offer more attractive opportunities in the present market environment because
foreign equities typically offer lower dividend yields and possess country and
currency risks.
Because of the highly volatile market environment during the quarter ended
October 31, 1998, our investment activities focused primarily on reducing our
exposure to several high-risk investments and on increasing our cash reserves.
Consequently, no new positions were initiated during the quarter. Two positions
in water utilities that we initiated in the July quarter--E'Town Corp. and
United Water Resources Inc.--were completed during the October quarter. Also, we
reduced our investments in three electric utilities, which had appreciated
significantly in value. Finally, we eliminated our holdings in three bank stocks
and one electric utility.
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 semi-annual report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Walter D. Rogers
Walter D. Rogers
Senior Vice President and
Portfolio Manager
December 3, 1998
2 & 3
<PAGE>
Merrill Lynch Strategic Dividend Fund, October 31, 1998
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* +13.33% +1.41% +252.11%
- -----------------------------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class B Shares* +12.22 +1.13 +212.60
- -----------------------------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class C Shares* +12.22 +1.13 +104.35
- -----------------------------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class D Shares* +13.06 +1.34 +111.09
- -----------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index** +21.99 -1.57 +431.16/+418.25/+157.09
=================================================================================================================
</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 periods are:
Class A Shares, from 11/29/88 to 10/31/98; Class B Shares, for the ten
years ended 10/31/98; and Class C & Class D Shares, from 10/21/94 to
10/31/98.
** An unmanaged broad-based index comprised of common stocks. Ten years/since
inception total returns are: from 11/29/88 to 10/31/98; for the ten years
ended 10/31/98; and from 10/21/94 to 10/31/98, respectively.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 9/30/98 + 6.62% + 1.02%
- --------------------------------------------------------------------------------
Five Years Ended 9/30/98 +14.99 +13.76
- --------------------------------------------------------------------------------
Inception (11/29/88) through 9/30/98 +13.26 +12.65
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
- --------------------------------------------------------------------------------
Year Ended 9/30/98 + 5.58% + 1.74%
- --------------------------------------------------------------------------------
Five Years Ended 9/30/98 +13.82 +13.82
- --------------------------------------------------------------------------------
Ten Years Ended 9/30/98 +11.91 +11.91
- --------------------------------------------------------------------------------
* 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 9/30/98 + 5.55% + 4.59%
- --------------------------------------------------------------------------------
Inception (10/21/94) through 9/30/98 +18.87 +18.87
- --------------------------------------------------------------------------------
* 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 9/30/98 + 6.37% + 0.78%
- --------------------------------------------------------------------------------
Inception (10/21/94) through 9/30/98 +19.84 +18.21
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
4 & 5
<PAGE>
Merrill Lynch Strategic Dividend Fund, October 31, 1998
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
Percent
Shares of Net
EUROPE Industries Held Common Stocks Cost Value Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Netherlands Oil--International 50,000 Royal Dutch Petroleum Company
(NY Registered Shares) $ 747,327 $ 2,462,500 1.2%
------------------------------------------------------------------------------------------------------------
Total Investments in the
Netherlands 747,327 2,462,500 1.2
====================================================================================================================================
United Kingdom Oil--International 30,000 British Petroleum Company
PLC (ADR) (a) 1,328,520 2,653,125 1.4
------------------------------------------------------------------------------------------------------------
Steel 700,000 British Steel PLC 1,938,756 1,201,382 0.6
------------------------------------------------------------------------------------------------------------
Total Investments in the United
Kingdom 3,267,276 3,854,507 2.0
====================================================================================================================================
Total Investments in Europe 4,014,603 6,317,007 3.2
====================================================================================================================================
NORTH AMERICA
====================================================================================================================================
United States Aerospace & Defense 20,000 Rockwell International Corporation 975,228 821,250 0.4
60,000 TRW Inc. 1,663,737 3,416,250 1.7
----------- ----------- -----
2,638,965 4,237,500 2.1
------------------------------------------------------------------------------------------------------------
Automobile 70,000 Ford Motor Company 1,318,007 3,797,500 1.9
25,000 General Motors Corporation 1,145,473 1,576,562 0.8
----------- ----------- -----
2,463,480 5,374,062 2.7
------------------------------------------------------------------------------------------------------------
Automotive Equipment & Tires 72,000 Arvin Industries, Inc. 1,656,934 2,853,000 1.5
50,000 Cooper Tire & Rubber Company 1,202,300 831,250 0.4
60,000 Dana Corp. 1,649,850 2,508,750 1.3
----------- ----------- -----
4,509,084 6,193,000 3.2
------------------------------------------------------------------------------------------------------------
Banking 78,000 Bank of New York Company, Inc. (The) 1,989,839 2,461,875 1.3
28,000 Crestar Financial Corporation 1,447,180 1,844,500 0.9
46,000 Mellon Bank Corporation 990,205 2,765,750 1.4
34,500 Mercantile Bancorp. 1,002,055 1,576,219 0.8
30,000 National City Corporation 2,011,800 1,929,375 1.0
32,000 State Street Corporation 1,952,758 1,996,000 1.0
----------- ----------- -----
9,393,837 12,573,719 6.4
------------------------------------------------------------------------------------------------------------
Business Services 52,000 Dun & Bradstreet Corporation 1,378,715 1,475,500 0.8
------------------------------------------------------------------------------------------------------------
Capital Goods 30,000 General Electric Company 724,669 2,625,000 1.3
28,000 Minnesota Mining & Manufacturing Co. 1,608,098 2,240,000 1.2
68,000 Ogden Corporation 1,531,759 1,827,500 0.9
----------- ----------- -----
3,864,526 6,692,500 3.4
------------------------------------------------------------------------------------------------------------
Chemicals 23,000 Dow Chemical Co. (The) 1,369,880 2,153,375 1.1
40,000 duPont (E.I.) de Nemours & Co. 1,329,525 2,300,000 1.2
----------- ----------- -----
2,699,405 4,453,375 2.3
------------------------------------------------------------------------------------------------------------
Drugs 100,000 American Home Products Corporation 3,031,175 4,875,000 2.5
40,000 Bristol-Myers Squibb Co. 913,275 4,422,500 2.2
----------- ----------- -----
3,944,450 9,297,500 4.7
------------------------------------------------------------------------------------------------------------
Foods 40,000 General Mills, Inc. 2,938,894 2,940,000 1.5
55,000 Quaker Oats Company 2,983,189 3,248,438 1.7
----------- ----------- -----
5,922,083 6,188,438 3.2
------------------------------------------------------------------------------------------------------------
Household Products 24,000 Clorox Company 728,490 2,622,000 1.3
------------------------------------------------------------------------------------------------------------
Insurance 65,000 American General Corporation 1,346,718 4,452,500 2.3
30,000 Lincoln National Corporation 1,275,150 2,276,250 1.2
85,000 Ohio Casualty Corporation 2,708,281 3,208,750 1.6
----------- ----------- -----
5,330,149 9,937,500 5.1
------------------------------------------------------------------------------------------------------------
Merchandising 25,000 Penney (J.C.) Company, Inc. 1,157,975 1,187,500 0.6
------------------------------------------------------------------------------------------------------------
Oil--Domestic 28,000 Atlantic Richfield Company 1,584,596 1,928,500 1.0
90,000 Occidental Petroleum Corporation 2,323,525 1,788,750 0.9
50,000 Phillips Petroleum Company 1,731,105 2,162,500 1.1
----------- ----------- -----
5,639,226 5,879,750 3.0
------------------------------------------------------------------------------------------------------------
Oil--International 40,000 Exxon Corporation 1,189,846 2,850,000 1.5
40,000 Mobil Corporation 915,150 3,027,500 1.5
50,000 Texaco Inc. 1,177,506 2,965,625 1.5
----------- ----------- -----
3,282,502 8,843,125 4.5
------------------------------------------------------------------------------------------------------------
Paper & Forest Products 66,000 Union Camp Corp. 3,963,011 2,838,000 1.4
60,000 Weyerhaeuser Co. 2,666,100 2,808,750 1.4
----------- ----------- -----
6,629,111 5,646,750 2.8
------------------------------------------------------------------------------------------------------------
Real Estate Investment 38,000 Apartment Investment & Management
Trusts Co. (Class A) 1,201,028 1,327,625 0.7
19,207 Avalonbay Communities, Inc. 514,336 617,025 0.3
40,000 Colonial Properties Trust 1,256,788 1,100,000 0.6
20,000 Crescent Real Estate Equities
Company 632,078 501,250 0.3
64,000 Developers Diversified Realty Corp. 1,296,294 1,208,000 0.6
52,000 Duke Realty Investments, Inc. 1,267,708 1,241,500 0.6
35,000 Essex Property Trust, Inc. 854,486 1,098,125 0.6
35,000 Highwoods Properties, Inc. 1,132,663 977,812 0.5
30,000 Mack-Cali Realty Corporation 1,126,800 888,750 0.4
----------- ----------- -----
9,282,181 8,960,087 4.6
------------------------------------------------------------------------------------------------------------
Steel 55,000 Carpenter Technology Corp. 1,747,599 1,928,437 1.0
------------------------------------------------------------------------------------------------------------
Tobacco 78,000 UST Inc. 2,105,181 2,652,000 1.4
------------------------------------------------------------------------------------------------------------
Utilities--Electric 40,000 American Electric Power
Company, Inc. 1,262,400 1,957,500 1.0
50,000 BEC Energy 1,253,000 1,984,375 1.0
60,000 Central and South West Corporation 1,598,600 1,668,750 0.8
63,000 Consolidated Edison, Inc. 1,779,750 3,157,875 1.6
105,000 Edison International, Inc. 1,759,425 2,769,375 1.4
44,000 KeySpan Energy 1,120,500 1,314,500 0.7
66,000 New Century Energies, Inc. 2,137,905 3,188,625 1.6
120,000 Northern States Power Co. 2,613,600 3,240,000 1.7
50,000 PECO Energy Company 987,130 1,934,375 1.0
----------- ----------- -----
14,512,310 21,215,375 10.8
------------------------------------------------------------------------------------------------------------
</TABLE>
6 & 7
<PAGE>
Merrill Lynch Strategic Dividend Fund, October 31, 1998
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<TABLE>
<CAPTION>
Percent
NORTH AMERICA Shares of Net
(concluded) Industries Held Common Stocks Cost Value Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
United States Utilities--Natural Gas 40,000 Consolidated Natural Gas Co. $ 1,805,775 $ 2,112,500 1.1%
(concluded) 44,000 Enron Corporation 2,026,319 2,321,000 1.2
78,197 Sempra Energy 2,037,272 2,033,122 1.0
50,000 Sonat, Inc. 882,073 1,515,625 0.8
65,000 Williams Companies, Inc. (The) 2,185,643 1,783,438 0.9
----------- ----------- -----
8,937,082 9,765,685 5.0
------------------------------------------------------------------------------------------------------------
Utilities--
Telecommunications 78,000 Ameritech Corporation 3,008,167 4,207,125 2.1
92,160 Bell Atlantic Corporation 2,299,200 4,896,000 2.5
120,000 Frontier Corporation 3,101,508 3,607,500 1.8
40,000 GTE Corporation 1,429,930 2,347,500 1.2
55,000 U S West, Inc. 1,852,675 3,155,625 1.6
----------- ----------- -----
11,691,480 18,213,750 9.2
------------------------------------------------------------------------------------------------------------
Utilities--Water 76,000 American Water Works Co., Inc. 1,429,750 2,427,250 1.2
25,000 E'Town Corporation 1,010,729 1,095,312 0.6
55,500 Philadelphia Suburban Corporation 1,203,656 1,363,219 0.7
53,000 United Water Resources Inc. 983,294 1,026,875 0.5
----------- ----------- -----
4,627,429 5,912,656 3.0
------------------------------------------------------------------------------------------------------------
Total Investments in North America 112,485,260 159,250,209 81.1
====================================================================================================================================
Total Investments in Common Stocks 116,499,863 165,567,216 84.3
====================================================================================================================================
<CAPTION>
Face
Amount Short-Term Securities
====================================================================================================================================
Repurchase Agreements* $ 9,666,000 HSBC Holdings, purchased on
10/30/1998 to yield 5.40% to
11/02/1998 9,666,000 9,666,000 4.9
------------------------------------------------------------------------------------------------------------
US Government Agency 9,000,000 Federal Home Loan Mortgage
Obligations** Corporation, 5.42% due 11/02/1998 8,995,935 8,995,935 4.6
12,000,000 Federal National Mortgage
Association, 5.145% due 11/10/1998 11,981,135 11,981,135 6.1
----------- ----------- -----
20,977,070 20,977,070 10.7
====================================================================================================================================
Total Investments in Short-Term
Securities 30,643,070 30,643,070 15.6
====================================================================================================================================
Total Investments $147,142,933 196,210,286 99.9
============
Other Assets Less Liabilities 224,026 0.1
------------ ------
Net Assets $196,434,312 100.0%
============ ======
====================================================================================================================================
Class A--Based on net assets of $23,424,668 and 1,782,083 shares
of beneficial interest outstanding $ 13.14
===========
Class B--Based on net assets of $71,722,646 and 5,449,423 shares of
beneficial interest outstanding $ 13.16
===========
Class C--Based on net assets of $4,131,919 and 317,053 shares
of beneficial interest outstanding $ 13.03
===========
Class D--Based on net assets of $97,155,079 and 7,394,084 shares
of beneficial interest outstanding $ 13.14
===========
====================================================================================================================================
</TABLE>
(a) 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 rates shown reflect the
discount rate paid at the time of purchase by the Fund.
8 & 9
<PAGE>
Merrill Lynch Strategic Dividend Fund, October 31, 1998
PORTFOLIO CHANGES
Deletions
For the Quarter Ended October 31, 1998
Bankers Trust New York Corp.
Barclays PLC
Entergy Corporation
J.P. Morgan & Co., Inc.
PORTFOLIO INFORMATION
As of October 31, 1998
Percent of
Ten Largest Common Stock Holdings Net Assets
Bell Atlantic Corporation ........................................... 2.5%
American Home Products Corporation .................................. 2.5
American General Corporation ........................................ 2.3
Bristol-Myers Squibb Co. ............................................ 2.3
Ameritech Corporation ............................................... 2.1
Ford Motor Company .................................................. 1.9
Frontier Corporation ................................................ 1.8
TRW Inc. ............................................................ 1.7
Quaker Oats Company ................................................. 1.7
Northern States Power Co. ........................................... 1.6
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
10 & 11
<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--10/98
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