MERRILL LYNCH
STRATEGIC
DIVIDEND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
July 31, 1999
<PAGE>
MERRILL LYNCH STRATEGIC DIVIDEND FUND
Sector
Representation as a
Percentage of
Equities as of
July 31, 1999
[A pie graph depicting sector representation as a percentage of equities as of
July 31, 1999]
Utilities 27.9%
Capital Goods 7.5%
Energy 13.4%
Financial Services 28.3%
Basic Industries 8.7%
Consumer 14.2%
US Common Stock
Investments as of
July 31, 1999
S&P
Fund 500**
- --------------------------------------------------------------------------------
Average Capitalization (in billions) $29.3 $101.0
- --------------------------------------------------------------------------------
Price/Book Value 3.4 4.8
- --------------------------------------------------------------------------------
Price/Earnings Ratio*** 22.5 29.5
- --------------------------------------------------------------------------------
Yield Based on Current Dividend 2.7%* 1.3%
- --------------------------------------------------------------------------------
* Net yield after expenses for 12-months ended 7/31/99, according to Lipper
Analytical Services.
** An unmanaged broad-based index comprised of common stocks.
*** Based on trailing 12-month earnings.
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1999
DEAR SHAREHOLDER
Economic crosscurrents were evident during the quarter ended July 31, 1999. The
US economic expansion is ongoing, especially in the consumer sector. This gave
rise to inflationary concerns. However, there was not consistent evidence that
economic growth is occurring at inflationary rates, although the Organization of
Petroleum Exporting Countries (OPEC) successfully engineered a near-term
increase in the price of crude oil. Against this backdrop, the US Federal
Reserve Board raised the Federal Funds rate 0.25% at its June 30, 1999 meeting.
After the quarter's close, the US central bank met again and determined that an
additional 0.25% interest rate increase was needed to limit inflationary
pressures. Meanwhile, Japan reported its first quarter of economic positive
economic growth in more than a year. There were growing signs of improvement in
some emerging economies (most notably South Korea and Mexico), although concerns
remain for others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the July
quarter. While the spread between yields on Treasury securities and corporate
issues of similar maturities has narrowed somewhat, it remains wide by historic
standards. Although the US stock market exhibited greater price volatility, its
advances broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
Portfolio Matters
For the three months ended July 31, 1999, Merrill Lynch Strategic Dividend
Fund's Class A, Class B, Class C and Class D Shares had total returns of -1.06%,
- -1.25%, -1.25% and -1.04%, respectively. (Results shown do not reflect sales
charges and would be lower if sales charges were included. Complete performance
information can be found on pages 5 - 7 of this report to shareholders.)
Although the Fund declined during the July quarter, its performance compared
favorably with the -2.50% total return of the 200 highest-yielding stocks in the
Standard & Poor's 500 (S&P 500) Index.
During the July quarter, the Fund's relative performance was influenced by
action on the part of the Federal Reserve Board to push interest rates higher.
Our investments in the basic industrial (8% of net assets), consumer cyclical
(9%) and financial services (21%) sectors exhibited the heaviest relative
underperformance to the broad stock market, while our holdings in the energy
(12%), electric utilities (11%), telecommunications (10%), capital goods (7%)
and natural gas (7%) sectors posted favorable results. In previous shareholder
letters, we expressed our positive investment outlook regarding the electric
utility and energy industry groups, even in a rising interest rate environment.
Many electric utilities continue to trade at the lowest price/earnings ratios
relative to the S&P 500 Index in 20 years. Additionally, we believe both
oil-related and natural gas-related energy stocks remain attractively valued at
current levels. We see good prospects for earnings and dividend growth as the
price of the commodities continues to rise, reflecting steady demand growth and
no significant build-up in inventory level. The Fund remains overweighted to
these industry groups relative to the high-yield stock universe and the overall
market.
Transactions in the July quarter included initiating three new positions and
eliminating one. We acquired the shares of BellSouth Corporation, a regional
Bell operating company providing wireline communications services in nine
southeastern states. The company also provides wireless telephone service in the
United States and has interests in wireless operations in Latin America, Europe,
the Middle East and South Asia. The company's fundamentals remain among the
strongest of the regional Bell operating companies, and we expect earnings to
grow strongly over the next several years. In our view, the stock is attractive
based on its total return potential.
We also added the shares of two property-casualty companies -- The Chubb
Corporation and St. Paul Companies, Inc. In a group move, the shares of both
companies came under heavy selling pressure as weather-related losses,
disappointing personal auto results and the ongoing tough pricing environment
eroded profits. With the group selling at less than half the market
price/earnings multiple and at nearly book value, we believed the shares of
good-quality companies with strong underwriting disciplines, such as Chubb and
St. Paul, are attractively valued at current levels and offer good total return
opportunities. We sold our investment in AGL Resources, Inc. because the stock
no longer met our investment criteria.
Fiscal Year in Review
The Fund's investment objective is to seek to provide shareholders with
long-term total returns by investing primarily in a diversified portfolio of
dividend-paying common stocks that yield more than the S&P 500 Index. Our
strategy is based on our belief that stocks that have above-average dividend
yields will provide attractive long-term total return and greater price
stability than stocks that have below average dividend yields, especially during
periods of downward movements in market prices. We seek to outperform the 200
highest-yielding stocks in the S&P 500 Index on a total return basis.
Our investment approach to stock selection for the Fund is both focused and
conservative. We seek to enhance the Fund's performance through careful stock
selection, screening the high-yield universe for attractively valued stocks
based not just on high dividend yield but also on solid earnings and dividend
growth prospects. Since diversification is one of our top priorities, we buy
individual stocks that include an attractive dividend yield relative to their
respective industry but most often also are attractively valued on a
price/earnings ratio and price/book value basis. We do recognize that the
market's highest-yielding sectors are utilities, financials and energy, in which
the Fund has a high concentration of assets. As a result, reviewing sector
allocation and developing and setting investment strategy as market and economic
conditions evolve are also key elements in our investment strategy.
The 12-month period ended July 31, 1999 presented a challenge as investor
sentiment seemed to shift from growth stocks to value stocks, from the long-time
favored large-capitalization stocks to small- and mid-size stocks, and from
technology to defensive issues such as basic industrials and utilities and then
back again to technology. However, this period was especially challenging for
value investors with a yield bias. Federal Reserve Board action during this
period included lowering interest rates during the second half of 1998 in an
attempt to staunch any possibility of a financial crisis domestically or
internationally followed by pushing interest rates up again in the second
quarter of 1999 as inflationary fears resurfaced. The Fund's position during
this period was to stay the course. We maintained cash reserves at about 10% of
net assets, essentially a fully invested position with a small cushion for
opportunity moves. Our investment transactions during the period were based on a
stock by stock basis. Our goal was to maintain an attractively competitive
dividend yield on the Fund while seeking to enhance total return. During the
fiscal year ended July 31, 1999, this strategy benefited the Fund's performance,
as the Fund's Class A, Class B, Class C and Class D Shares had total returns of
+14.15%, +12.96%, +12.96% and +13.88%, respectively. The Fund's performance for
the fiscal year compared favorably with the +8.66% total return of the 200
highest-yielding stocks in the S&P 500 Index. The Fund's performance also
compared favorably with the +11.69% total return of the Lipper Analytical
Services Equity Income Funds Average.
Our top ten holdings at July 31, 1999 accounted for 22.4% of net assets and
generated a gross yield of 2.0%. We increased our exposure in our foreign
investments believing that certain European markets currently offer attractive
investment opportunities.
In Conclusion
We thank you for your investment in Merrill Lynch Strategic Dividend Fund, and
we look forward to reviewing our outlook and strategy with you again in our
upcoming quarterly report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Trustee
/s/ Walter D. Rogers
Walter D. Rogers
Senior Vice President and
Portfolio Manager
September 1, 1999
2 & 3
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1999
PORTFOLIO INFORMATION
As of July 31, 1999
Percent of
Ten Largest Common Stock Holdings Net Assets
Royal Dutch Petroleum Company
(NY Registered Shares) ............................................. 3.3%
The Chase Manhattan Corporation ...................................... 3.0
Ameritech Corporation ................................................ 2.4
The Bank of New York Company, Inc. ................................... 2.3
American General Corporation ......................................... 2.1
International Paper Company .......................................... 2.1
Whirlpool Corporation ................................................ 1.9
PNC Bank Corp. ....................................................... 1.8
Mobil Corporation .................................................... 1.8
National Westminster Bank PLC ........................................ 1.7
PORTFOLIO CHANGES
For the Quarter Ended July 31, 1999
Additions
BellSouth Corporation
The Chubb Corporation
The St. Paul Companies, Inc.
Deletion
AGL Resources, Inc.
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* +14.15% -1.06% +224.83%
- ---------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class B Shares* +12.96 -1.25 +193.08
- ---------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class C Shares* +12.96 -1.25 +128.25
- ---------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class D Shares* +13.88 -1.04 +137.21
- ---------------------------------------------------------------------------------------------
Standard & Poor's 500 Index** +20.20 -0.16 +396.63/+213.97
=============================================================================================
</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/since inception periods
are ten years for Class A & Class B Shares and from 10/21/94 for Class C &
Class D Shares.
** An unmanaged broad-based index comprised of common stocks. Ten years/since
inception total returns are for ten years and from 10/21/94, respectively.
4 & 5
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1999
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
& Class B Shares compared to growth of an investment in the Standard & Poor's
500 Index and High Yield Index. Beginning and ending values are:]
7/89 7/99
ML Strategic Dividend Fund+--
Class A Shares* $9,475 $30,781
ML Strategic Dividend Fund+--
Class A Shares* $10,000 $29,305
Standard & Poor's 500 Index++ $10,000 $49,663
High Yield Index+++ $10,000 $26,294
[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 Index and High Yield Index. Beginning and ending values are:]
10/21/94** 7/99
ML Strategic Dividend Fund+--
Class C Shares* $10,000 $22,825
ML Strategic Dividend Fund+--
Class D Shares* $9,475 $22,477
Standard & Poor's 500 Index++ $10,000 $31,396
High Yield Index+++ $10,000 $21,478
* 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
the Class C & Class D Shares' graph is from10/31/94.
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 6/30/99 +13.12% + 7.18%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +20.50 +19.21
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 +13.59 +12.98
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 6/30/99 +11.92% + 8.14%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 +19.26 +19.26
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 +12.43 +12.43
- --------------------------------------------------------------------------------
* 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 6/30/99 +11.92% +10.97%
- --------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/99 +19.89 +19.89
- --------------------------------------------------------------------------------
* 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 6/30/99 +12.83% + 6.91%
- --------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/99 +20.86 +19.48
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
6 & 7
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1999
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
EUROPE
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Netherlands
Oil -- International 125,000 Royal Dutch Petroleum Company
(NY Registered Shares) $ 4,284,612 $ 7,625,000 3.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in the Netherlands 4,284,612 7,625,000 3.3
====================================================================================================================================
United Kingdom
Banking 200,000 National Westminster Bank PLC 3,791,943 3,949,560 1.7
- ------------------------------------------------------------------------------------------------------------------------------------
Oil -- International 30,504 BP Amoco PLC (ADR) (a) 1,370,665 3,534,651 1.5
- ------------------------------------------------------------------------------------------------------------------------------------
Steel 700,000 British Steel PLC 1,938,756 1,876,770 0.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in the United Kingdom 7,101,364 9,360,981 4.0
====================================================================================================================================
Total Investments in Europe 11,385,976 16,985,981 7.3
====================================================================================================================================
NORTH AMERICA
====================================================================================================================================
United States
Aerospace & Defense 20,000 Rockwell International Corporation 803,055 1,176,250 0.5
- ------------------------------------------------------------------------------------------------------------------------------------
Automobile 70,000 Ford Motor Company 1,318,007 3,403,750 1.5
- ------------------------------------------------------------------------------------------------------------------------------------
Automotive 72,000 Arvin Industries, Inc. 1,656,934 2,691,000 1.1
Equipment & Tires 50,000 Cooper Tire & Rubber Company 1,202,300 1,125,000 0.5
60,000 Dana Corporation 1,649,850 2,505,000 1.1
------------ ------------ -----
4,509,084 6,321,000 2.7
- ------------------------------------------------------------------------------------------------------------------------------------
Automotive Parts 60,000 TRW Inc. 1,663,737 3,206,250 1.4
- ------------------------------------------------------------------------------------------------------------------------------------
Banking 145,000 The Bank of New York Company, Inc. 4,329,860 5,355,938 2.3
90,000 The Chase Manhattan Corporation 5,600,772 6,918,750 3.0
92,000 Mellon Bank Corporation 990,205 3,105,000 1.3
34,500 Mercantile Bancorporation Inc. 1,002,055 1,880,250 0.8
60,000 National City Corporation 2,011,800 1,785,000 0.8
78,000 PNC Bank Corp. 4,070,243 4,124,250 1.8
40,000 State Street Corporation 2,655,414 2,835,000 1.2
26,880 SunTrust Banks, Inc. 1,447,180 1,733,760 0.7
------------ ------------ -----
22,107,529 27,737,948 11.9
- ------------------------------------------------------------------------------------------------------------------------------------
Business Services 52,000 The Dun & Bradstreet Corporation 1,378,715 1,651,000 0.7
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Goods 30,000 General Electric Company 724,669 3,270,000 1.4
28,000 Minnesota Mining and Manufacturing
Company (3M) 1,608,098 2,462,250 1.1
68,000 Ogden Corporation 1,531,759 1,721,250 0.7
------------ ------------ -----
3,864,526 7,453,500 3.2
- ------------------------------------------------------------------------------------------------------------------------------------
Chemicals 23,000 The Dow Chemical Company 1,369,880 2,852,000 1.2
40,000 E.I. du Pont de Nemours and Company 1,329,525 2,882,500 1.2
------------ ------------ -----
2,699,405 5,734,500 2.4
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer -- Durables 63,000 Whirlpool Corporation 3,323,062 4,516,312 1.9
- ------------------------------------------------------------------------------------------------------------------------------------
Drugs 50,000 American Home Products Corporation 1,721,675 2,550,000 1.1
- ------------------------------------------------------------------------------------------------------------------------------------
52,000 Bristol-Myers Squibb Company 593,629 3,458,000 1.5
------------ ------------ -----
2,315,304 6,008,000 2.6
- ------------------------------------------------------------------------------------------------------------------------------------
Foods 40,000 General Mills, Inc. 2,938,894 3,312,500 1.4
55,000 The Quaker Oats Company 2,983,189 3,743,437 1.6
------------ ------------ -----
5,922,083 7,055,937 3.0
- ------------------------------------------------------------------------------------------------------------------------------------
Household Products 24,000 The Clorox Company 728,490 2,688,000 1.1
- ------------------------------------------------------------------------------------------------------------------------------------
Insurance 65,000 American General Corporation 1,346,718 5,029,375 2.1
58,000 The Chubb Corporation 3,778,387 3,469,125 1.5
60,000 Lincoln National Corporation 1,275,150 3,000,000 1.3
170,000 Ohio Casualty Corporation 2,708,281 3,038,750 1.3
100,000 The St. Paul Companies, Inc. 3,648,430 3,112,500 1.3
------------ ------------ -----
12,756,966 17,649,750 7.5
- ------------------------------------------------------------------------------------------------------------------------------------
Merchandising 25,000 J.C. Penney Company, Inc. 1,157,975 1,093,750 0.5
- ------------------------------------------------------------------------------------------------------------------------------------
Oil -- Domestic 28,000 Atlantic Richfield Company (ARCO) 1,584,596 2,521,750 1.1
90,000 Occidental Petroleum Corporation 2,323,525 1,760,625 0.7
50,000 Phillips Petroleum Company 1,731,105 2,565,625 1.1
------------ ------------ -----
5,639,226 6,848,000 2.9
- ------------------------------------------------------------------------------------------------------------------------------------
Oil -- International 30,000 Exxon Corporation 892,384 2,381,250 1.0
40,000 Mobil Corporation 915,150 4,090,000 1.8
50,000 Texaco Inc. 1,177,506 3,115,625 1.3
------------ ------------ -----
2,985,040 9,586,875 4.1
- ------------------------------------------------------------------------------------------------------------------------------------
Paper & Forest Products 98,023 International Paper Company 3,963,011 5,011,426 2.1
60,000 Weyerhaeuser Company 2,666,100 3,881,250 1.7
------------ ------------ -----
6,629,111 8,892,676 3.8
- ------------------------------------------------------------------------------------------------------------------------------------
Real Estate Investment 38,000 Apartment Investment & Management
Trusts Company (Class A) 1,151,438 1,550,875 0.7
19,207 Avalonbay Communities, Inc. 505,756 651,838 0.3
40,000 Colonial Properties Trust 1,244,488 1,085,000 0.5
20,000 Crescent Real Estate Equities Company 620,058 440,000 0.2
64,000 Developers Diversified Realty Corporation 1,296,294 968,000 0.4
52,000 Duke Realty Investments, Inc. 1,265,836 1,137,500 0.5
35,000 Essex Property Trust, Inc. 844,248 1,181,250 0.5
35,000 Highwoods Properties, Inc. 1,128,127 822,500 0.3
30,000 Mack-Cali Realty Corporation 1,126,800 840,000 0.3
------------ ------------ -----
9,183,045 8,676,963 3.7
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8 & 9
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1999
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<TABLE>
<CAPTION>
NORTH AMERICA (concluded)
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
United States (concluded)
Steel 55,000 Carpenter Technology Corporation $ 1,747,599 $ 1,457,500 0.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Utilities 77,000 Reliant Energy, Inc. 2,188,847 2,112,687 0.9
- ------------------------------------------------------------------------------------------------------------------------------------
Utilities -- Electric 40,000 American Electric Power Company, Inc. 1,262,400 1,415,000 0.6
50,000 BEC Energy 1,253,000 2,131,250 0.9
60,000 Central & South West Corporation 1,598,600 1,278,750 0.6
63,000 Consolidated Edison, Inc. 1,779,750 2,740,500 1.2
105,000 Edison International 1,759,425 2,657,813 1.1
56,000 FPL Group, Inc. 3,155,764 3,020,500 1.3
44,000 KeySpan Corporation 1,120,500 1,221,000 0.5
96,000 New Century Energies, Inc. 3,189,435 3,330,000 1.4
120,000 Northern States Power Company 2,613,600 2,700,000 1.2
------------ ------------ -----
17,732,474 20,494,813 8.8
- ------------------------------------------------------------------------------------------------------------------------------------
Utilities -- Natural Gas 40,000 Consolidated Natural Gas Company 1,805,775 2,505,000 1.1
44,000 Enron Corp. 2,026,319 3,748,250 1.6
78,197 Sempra Energy 2,037,272 1,734,996 0.7
50,000 Sonat Inc. 882,073 1,759,375 0.8
35,000 The Williams Companies, Inc. 1,196,528 1,472,187 0.6
------------ ------------ -----
7,947,967 11,219,808 4.8
- ------------------------------------------------------------------------------------------------------------------------------------
Utilities -- 78,000 Ameritech Corporation 3,008,167 5,713,500 2.4
Telecommunications 50,000 Bell Atlantic Corporation 1,247,396 3,187,500 1.4
52,000 BellSouth Corporation 2,457,900 2,496,000 1.1
40,000 GTE Corporation 1,429,930 2,947,500 1.3
55,000 U S WEST, Inc. 1,852,675 3,152,187 1.3
------------ ------------ -----
9,996,068 17,496,687 7.5
- ------------------------------------------------------------------------------------------------------------------------------------
Utilities -- Water 76,000 American Water Works Company, Inc. 1,429,750 2,275,250 1.0
25,000 E'Town Corporation 1,010,729 1,184,375 0.5
55,500 Philadelphia Suburban Corporation 1,203,656 1,269,563 0.5
53,000 United Water Resources Inc. 983,294 1,225,625 0.5
------------ ------------ -----
4,627,429 5,954,813 2.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in North America 133,224,744 188,436,769 80.5
====================================================================================================================================
Total Investments in Common Stocks 144,610,720 205,422,750 87.8
====================================================================================================================================
<CAPTION>
Face
Amount Short-Term Securities
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Repurchase Agreements* $ 9,376,000 Warburg Dillon Read LLC, purchased on
7/30/1999 to yield 5.05% to 8/02/1999 9,376,000 9,376,000 4.0
- ------------------------------------------------------------------------------------------------------------------------------------
US Government 17,000,000 Federal Home Loan Mortgage Corporation
Agency Obligations** Participation Certificates, 4.95% due
8/25/1999 16,939,225 16,939,225 7.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities 26,315,225 26,315,225 11.3
====================================================================================================================================
Total Investments $170,925,945 231,737,975 99.1
============
Other Assets Less Liabilities 2,158,682 0.9
------------ -----
Net Assets $233,896,657 100.0%
============ =====
====================================================================================================================================
</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 rate shown reflects the discount rate paid at the time of
purchase by the Fund.
See Notes to Financial Statements.
10 & 11
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1999
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of July 31, 1999
=================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $170,925,945) (Note 1a) . $231,737,975
Cash .............................................................. 404
Foreign cash (Note 1d) ............................................ 217,571
Receivables:
Securities sold ................................................ $ 1,826,022
Dividends ...................................................... 600,350
Beneficial interest sold ....................................... 220,338 2,646,710
------------
Prepaid registration fees and other assets (Note 1g) .............. 44,752
------------
Total assets ...................................................... 234,647,412
------------
=================================================================================================================
Liabilities: Payables:
Beneficial interest redeemed ................................... 387,553
Investment adviser (Note 2) .................................... 118,499
Distributor (Note 2) ........................................... 95,207 601,259
------------
Accrued expenses and other liabilities ............................ 149,496
------------
Total liabilities ................................................. 750,755
------------
=================================================================================================================
Net Assets: Net assets ........................................................ $233,896,657
============
=================================================================================================================
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized ....................................... $ 178,485
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized ....................................... 527,059
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized ....................................... 37,804
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized ....................................... 895,372
Paid-in capital in excess of par .................................. 161,119,237
Undistributed investment income -- net ............................ 420,994
Undistributed realized capital gains on investments and foreign
currency transactions -- net ...................................... 9,907,698
Unrealized appreciation on investments and foreign currency
transactions -- net ............................................... 60,810,008
------------
Net assets ........................................................ $233,896,657
============
=================================================================================================================
Net Asset Class A -- Based on net assets of $25,476,997 and 1,784,846 shares
Value: of beneficial interest outstanding ................................ $ 14.27
============
Class B -- Based on net assets of $75,329,703 and 5,270,594 shares
of beneficial interest outstanding ................................ $ 14.29
============
Class C -- Based on net assets of $5,346,549 and 378,039 shares
of beneficial interest outstanding ................................ $ 14.14
============
Class D -- Based on net assets of $127,743,408 and 8,953,722 shares
of beneficial interest outstanding ................................ $ 14.27
============
=================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended July 31, 1999
======================================================================================================================
<S> <C> <C> <C>
Investment Dividends (net of $56,802 foreign withholding tax) .......... $ 6,004,374
Income Interest and discount earned ................................ 1,234,760
(Notes 1e & 1f): ------------
Total income ................................................ 7,239,134
------------
======================================================================================================================
Expenses: Investment advisory fees (Note 2) ........................... $ 1,287,539
Account maintenance and distribution fees -- Class B (Note 2) 769,537
Account maintenance fees -- Class D (Note 2) ................ 269,815
Transfer agent fees -- Class D (Note 2) ..................... 130,485
Transfer agent fees -- Class B (Note 2) ..................... 109,224
Registration fees (Note 1g) ................................. 82,580
Accounting services (Note 2) ................................ 65,898
Professional fees ........................................... 61,033
Printing and shareholder reports ............................ 55,537
Account maintenance and distribution fees -- Class C (Note 2) 48,535
Transfer agent fees -- Class A (Note 2) ..................... 30,123
Custodian fees .............................................. 25,336
Trustees' fees and expenses ................................. 23,988
Transfer agent fees -- Class C (Note 2) ..................... 7,345
Pricing fees ................................................ 202
Other ....................................................... 6,425
------------
Total expenses .............................................. 2,973,602
------------
Investment income -- net .................................... 4,265,532
------------
======================================================================================================================
Realized & Realized gain (loss) from:
Unrealized Gain (Loss) Investments -- net ....................................... 13,639,976
On Investments & Foreign currency transactions -- net ..................... (9,067) 13,630,909
Foreign Currency ------------
Transactions -- Net Change in unrealized appreciation/depreciation on:
(Notes 1c, 1d, 1f & 3): Investments -- net ....................................... 9,183,402
Foreign currency transactions -- net ..................... (122) 9,183,280
------------ ------------
Net realized and unrealized gain on investments and
foreign currency transactions ............................... 22,814,189
------------
Net Increase in Net Assets Resulting from Operations ........ $ 27,079,721
============
======================================================================================================================
</TABLE>
See Notes to Financial Statements.
12 & 13
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1999
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended July 31,
------------------------------
Increase (Decrease) in Net Assets: 1999 1998
=============================================================================================================================
<S> <C> <C>
Operations: Investment income -- net ............................................ $ 4,265,532 $ 4,057,003
Realized gain on investments and foreign currency transactions -- net 13,630,909 33,543,282
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions -- net ................................ 9,183,280 (15,046,769)
------------- -------------
Net increase in net assets resulting from operations ................ 27,079,721 22,553,516
------------- -------------
=============================================================================================================================
Dividends & Investment income -- net:
Distributions to Class A .......................................................... (615,334) (687,382)
Shareholders Class B .......................................................... (1,107,518) (1,178,158)
(Note 1h): Class C .......................................................... (71,147) (58,545)
Class D .......................................................... (2,447,831) (2,102,336)
Realized gain on investments -- net:
Class A .......................................................... (3,916,159) (2,370,162)
Class B .......................................................... (11,960,245) (6,786,151)
Class C .......................................................... (691,392) (257,657)
Class D .......................................................... (16,343,239) (6,550,432)
------------- -------------
Net decrease in net assets resulting from dividends and distributions
to shareholders ..................................................... (37,152,865) (19,990,823)
------------- -------------
=============================================================================================================================
Beneficial Interest Net increase (decrease) in net assets derived from beneficial ....... 41,649,071 (292,936)
Transactions interest transactions ............................................... ------------- -------------
(Note 4):
=============================================================================================================================
Net Assets: Total increase in net assets ........................................ 31,575,927 2,269,757
Beginning of year ................................................... 202,320,730 200,050,973
------------- -------------
End of year* ........................................................ $ 233,896,657 $ 202,320,730
============= =============
=============================================================================================================================
*Undistributed investment income -- net (Note 1i) .................... $ 420,994 $ 406,383
============= =============
=============================================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have Class A
been derived from information provided in -------------------------------------------------------------
the financial statements. For the Year Ended July 31,
-------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1999+ 1998+ 1997+ 1996+ 1995
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ......... $ 15.36 $ 15.21 $ 12.43 $ 12.24 $ 12.78
Operating -------- -------- -------- -------- ---------
Performance: Investment income -- net ................... .35 .39 .38 .38 .39
Realized and unrealized gain on investments
and foreign currency transactions -- net ... 1.42 1.37 4.17 1.55 1.10
-------- -------- -------- -------- ---------
Total from investment operations ........... 1.77 1.76 4.55 1.93 1.49
-------- -------- -------- -------- ---------
Less dividends and distributions:
Investment income -- net ................ (.36) (.39) (.39) (.36) (.42)
Realized gain on investments -- net ..... (2.50) (1.22) (1.38) (1.38) (1.61)
-------- -------- -------- -------- ---------
Total dividends and distributions .......... (2.86) (1.61) (1.77) (1.74) (2.03)
-------- -------- -------- -------- ---------
Net asset value, end of year ............... $ 14.27 $ 15.36 $ 15.21 $ 12.43 $ 12.24
======== ======== ======== ======== =========
================================================================================================================================
Total Investment Based on net asset value per share ......... 14.15% 12.03% 40.42% 16.98% 14.04%
Return:* ======== ======== ======== ======== =========
================================================================================================================================
Ratios to Average Expenses ................................... .87% .88% .90% 1.04% 1.05%
Net Assets: ======== ======== ======== ======== =========
Investment income -- net ................... 2.50% 2.51% 2.87% 3.04% 3.39%
======== ======== ======== ======== =========
================================================================================================================================
Supplemental Net assets, end of year (in thousands) ..... $ 25,477 $ 24,233 $ 28,940 $ 18,106 $ 18,687
Data: ======== ======== ======== ======== =========
Portfolio turnover ......................... 20.11% 32.66% 14.29% 26.42% 52.69%
======== ======== ======== ======== =========
================================================================================================================================
<CAPTION>
The following per share data and ratios have Class B
been derived from information provided in -------------------------------------------------------------
the financial statements. For the Year Ended July 31,
-------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1999+ 1998+ 1997+ 1996+ 1995
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ......... $ 15.38 $ 15.22 $ 12.44 $ 12.23 $ 12.77
Operating -------- -------- -------- -------- ---------
Performance: Investment income -- net ................... .21 .23 .25 .26 .29
Realized and unrealized gain on investments
and foreign currency transactions -- net ... 1.41 1.38 4.16 1.55 1.07
-------- -------- -------- -------- ---------
Total from investment operations ........... 1.62 1.61 4.41 1.81 1.36
-------- -------- -------- -------- ---------
Less dividends and distributions:
Investment income -- net ................ (.21) (.23) (.25) (.22) (.29)
Realized gain on investments -- net ..... (2.50) (1.22) (1.38) (1.38) (1.61)
-------- -------- -------- -------- ---------
Total dividends and distributions .......... (2.71) (1.45) (1.63) (1.60) (1.90)
-------- -------- -------- -------- ---------
Net asset value, end of year ............... $ 14.29 $ 15.38 $ 15.22 $ 12.44 $ 12.23
======== ======== ======== ======== =========
================================================================================================================================
Total Investment Based on net asset value per share ......... 12.96% 10.94% 38.90% 15.89% 12.82%
Return:* ======== ======== ======== ======== =========
================================================================================================================================
Ratios to Average Expenses ................................... 1.89% 1.90% 1.94% 2.08% 2.09%
Net Assets: Investment income -- net ................... 1.48% 1.50% 1.89% 2.06% 2.36%
======== ======== ======== ======== =========
================================================================================================================================
Supplemental Net assets, end of year (in thousands) ..... $ 75,330 $ 73,067 $ 93,509 $ 96,461 $ 130,921
Data: ======== ======== ======== ======== =========
Portfolio turnover ......................... 20.11% 32.66% 14.29% 26.42% 52.69%
======== ======== ======== ======== =========
================================================================================================================================
</TABLE>
* Total investment returns exclude the effects of sales
charges.
+ Based on average shares outstanding.
See Notes to Financial Statements.
14 & 15
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1999
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------------
For the
The following per share data and ratios have Period
been derived from information provided in Oct. 21,
the financial statements. For the Year Ended July 31, 1994+ to
----------------------------------------------- July 31,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ....... $ 15.25 $ 15.11 $ 12.37 $ 12.20 $ 11.84
Operating -------- -------- -------- -------- ---------
Performance: Investment income -- net ................... .20 .23 .24 .24 .21
Realized and unrealized gain on investments
and foreign currency transactions -- net ... 1.40 1.37 4.13 1.55 1.21
-------- -------- -------- -------- ---------
Total from investment operations ........... 1.60 1.60 4.37 1.79 1.42
-------- -------- -------- -------- ---------
Less dividends and distributions:
Investment income -- net ................ (.21) (.24) (.25) (.24) (.25)
Realized gain on investments -- net ..... (2.50) (1.22) (1.38) (1.38) (.81)
-------- -------- -------- -------- ---------
Total dividends and distributions .......... (2.71) (1.46) (1.63) (1.62) (1.06)
-------- -------- -------- -------- ---------
Net asset value, end of period ............. $ 14.14 $ 15.25 $ 15.11 $ 12.37 $ 12.20
======== ======== ======== ======== =========
================================================================================================================================
Total Investment Based on net asset value per share ......... 12.96% 10.96% 38.84% 15.78% 13.30%++
Return:** ======== ======== ======== ======== =========
================================================================================================================================
Ratios to Average Expenses ................................... 1.90% 1.90% 1.95% 2.08% 2.19%*
Net Assets: ======== ======== ======== ======== =========
Investment income -- net ................... 1.45% 1.47% 1.83% 1.91% 1.94%*
======== ======== ======== ======== =========
================================================================================================================================
Supplemental Net assets, end of period (in thousands) ... $ 5,347 $ 4,379 $ 3,025 $ 1,953 $ 811
Data: ======== ======== ======== ======== =========
Portfolio turnover ......................... 20.11% 32.66% 14.29% 26.42% 52.69%
======== ======== ======== ======== =========
================================================================================================================================
<CAPTION>
Class D
-------------------------------------------------------------
For the
The following per share data and ratios have Period
been derived from information provided in Oct. 21,
the financial statements. For the Year Ended July 31, 1994+ to
----------------------------------------------- July 31,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ....... $ 15.36 $ 15.20 $ 12.43 $ 12.24 $ 11.85
Operating -------- -------- -------- -------- ---------
Performance: Investment income -- net ................... .32 .35 .35 .34 .26
Realized and unrealized gain on investments
and foreign currency transactions -- net ... 1.41 1.38 4.16 1.57 1.23
-------- -------- -------- -------- ---------
Total from investment operations ........... 1.73 1.73 4.51 1.91 1.49
-------- -------- -------- -------- ---------
Less dividends and distributions:
Investment income -- net ................ (.32) (.35) (.36) (.34) (.29)
Realized gain on investments -- net ..... (2.50) (1.22) (1.38) (1.38) (.81)
-------- -------- -------- -------- ---------
Total dividends and distributions .......... (2.82) (1.57) (1.74) (1.72) (1.10)
-------- -------- -------- -------- ---------
Net asset value, end of period ............. $ 14.27 $ 15.36 $ 15.20 $ 12.43 $ 12.24
======== ======== ======== ======== =========
================================================================================================================================
Total Investment Based on net asset value per share ......... 13.88% 11.84% 39.99% 16.73% 13.98%++
Return:** ======== ======== ======== ======== =========
================================================================================================================================
Ratios to Average Expenses ................................... 1.12% 1.12% 1.15% 1.28% 1.38%*
Net Assets: ======== ======== ======== ======== =========
Investment income -- net ................... 2.26% 2.25% 2.62% 2.62% 2.93%*
======== ======== ======== ======== =========
================================================================================================================================
Supplemental Net assets, end of period (in thousands) ... $127,743 $100,642 $ 74,577 $ 44,691 $ 13,988
Data: ======== ======== ======== ======== =========
Portfolio turnover ......................... 20.11% 32.66% 14.29% 26.42% 52.69%
======== ======== ======== ======== =========
================================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
charges.
+ Commencement of operations.
++ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
16 & 17
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1999
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's financial statements are prepared in accordance with
generally accepted accounting principles, which may require the use of
management accruals and estimates. The Fund offers four classes of shares under
the Merrill Lynch Select Pricing(SM) System. Shares of Class A and Class D are
sold with a front-end sales charge. Shares of Class B and Class C may be subject
to a contingent deferred sales charge. All classes of shares have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Portfolio securities that 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
that 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
or purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the over-the-counter market, valuation
is the last asked price (options written) or the last bid price (options
purchased). Short-term securities are valued at amortized cost, which
approximates market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not available are valued at fair value as determined in
good faith by or under the direction of the Fund's Board of Trustees.
(b) 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.
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 $9,091 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 the "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch
Group, Inc.
18 & 19
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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
.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 .................................. .25% .75%
Class C .................................. .25% .75%
Class D .................................. .25% --
- --------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("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, 1999, 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 .............................. $66 $1,066
Class D .............................. $1,502 $20,475
- --------------------------------------------------------------------------------
For the year ended July 31, 1999, MLPF&S received contingent deferred sales
charges of $109,392 and $2,528 relating to transactions in Class B and Class C
Shares, respectively.
In addition, MLPF&S received $22,980 in commissions on the execution of
portfolio security transactions for the Fund for the year ended July 31, 1999.
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, 1999 were $42,723,686 and $38,370,429, respectively.
Net realized gains (losses) for the year ended July 31, 1999 and net unrealized
gains (losses) as of July 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments .................. $13,638,590 $60,812,030
Short-term investments ................. 1,386 --
Foreign currency transactions .......... (9,067) (2,022)
------------ ------------
Total .................................. $13,630,909 $60,810,008
============ ============
- --------------------------------------------------------------------------------
As of July 31, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $60,812,030, of which $65,162,685 related to appreciated securities
and $4,350,655 related to depreciated securities. At July 31, 1999, the
aggregate cost of investments for Federal income tax purposes was $170,925,945.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $41,649,071 and $(292,936) for the years ended July 31, 1999
and July 31, 1998, respectively.
Transactions in shares of beneficial interest for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 446,426 $ 6,159,548
Shares issued to shareholders in
reinvestment of dividends and
distributions ............................ 300,330 3,873,661
------------ ------------
Total issued ............................. 746,756 10,033,209
Shares redeemed .......................... (539,325) (7,578,565)
------------ ------------
Net increase ............................. 207,431 $ 2,454,644
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 B Shares for the Year Dollar
Ended July 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 2,525,084 $ 34,620,181
Shares issued to shareholders in
reinvestment of dividends and
distributions ............................ 804,138 10,362,932
------------ ------------
Total issued ............................. 3,329,222 44,983,113
Automatic conversion of shares ........... (767,206) (10,719,733)
Shares redeemed .......................... (2,043,427) (28,760,574)
------------ ------------
Net increase ............................. 518,589 $ 5,502,806
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 C Shares for the Year Dollar
Ended July 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 245,472 $ 3,350,198
Shares issued to shareholders in
reinvestment of dividends and
distributions ............................ 50,462 644,271
------------ ------------
Total issued ............................. 295,934 3,994,469
Shares redeemed .......................... (205,083) (2,865,334)
------------ ------------
Net increase ............................. 90,851 $ 1,129,135
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 D Shares for the Year Dollar
Ended July 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 2,152,445 $ 30,438,636
Automatic conversion of shares ........... 768,031 10,719,733
Shares issued to shareholders in
reinvestment of dividends and
distributions ............................ 1,207,415 15,577,811
------------ ------------
Total issued ............................. 4,127,891 56,736,180
Shares redeemed .......................... (1,727,866) (24,173,694)
------------ ------------
Net increase ............................. 2,400,025 $ 32,562,486
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
============ ============
- --------------------------------------------------------------------------------
20 & 21
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1999
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, 1999, 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
reason able 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,
1999 by correspondence with the custodian and broker. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Strategic Dividend Fund as of July 31, 1999, 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 10, 1999
IMPORTANT TAX INFORMATION
Of the ordinary income distributions paid quarterly by Merrill Lynch Strategic
Dividend Fund during its taxable year ended July 31, 1999, 86.91% 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, 1999:
- --------------------------------------------------------------------------------
Record Payable Long-Term
Date Date Capital Gains*
- --------------------------------------------------------------------------------
10/01/98 10/09/98 $2.192915
12/15/98 12/23/98 $ .122127
- --------------------------------------------------------------------------------
* This entire distribution is subject to the 20% tax rate.
Please retain this information for your records.
OFFICERS AND TRUSTEES
Terry K. Glenn, President and Trustee
Ronald W. Forbes, Trustee
Cynthia A. Montgomery, Trustee
Charles C. Reilly, Trustee
Kevin A. Ryan, Trustee
Richard R. West, Trustee
Arthur Zeikel, Trustee
Robert C. Doll, Senior Vice President
Walter D. Rogers, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and 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
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 -- 7/99
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