MERRILL LYNCH
STRATEGIC
DIVIDEND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
July 31, 2000
<PAGE>
MERRILL LYNCH STRATEGIC DIVIDEND FUND
Sector Representation as a Percentage of Equities as of July 31, 2000
A pie graph depicting sector representation as a percentage of equities as of
July 31, 2000
Utilities 22.6%
Capital Goods 16.4%
Energy 19.5%
Financial Services 21.1%
Basic Industries 5.8%
Consumer 14.6%
US Common Stock Investments as of July 31, 2000
S&P
Fund 500**
--------------------------------------------------------------------------------
Average Capitalization (in billions) $ 44.3 $144.4
--------------------------------------------------------------------------------
Price/Book Value 3.7 4.9
--------------------------------------------------------------------------------
Price/Earnings Ratio*** 17.9 26.9
--------------------------------------------------------------------------------
Yield Based on Current Dividend 2.1%* 1.5%
--------------------------------------------------------------------------------
* Net yield after expenses for 12-months ended 7/31/00, 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, 2000
DEAR SHAREHOLDER
Economic slowing has finally arrived in the United States. As a result,
significant increases in inflation or interest rates appear less likely, which
usually is good news for financial assets. On the other hand, profit growth is
likely to decelerate from unsustainably high levels.
Investor sentiment changed significantly during the course of the first half of
2000. In general, concerns centered on economic growth being too strong. A
recent inflection may indicate healthy, but slower economic and profit growth in
the second half of the year. Following potential uncertainty during the
adjustment period, the sustainability of the economic expansion could buoy
investor expectations.
During the first half of the year, equity investors switched gears from an
excessive focus on momentum, which was prevalent during most of 1999, reaching a
peak during the fourth quarter of last year. This transition to a more balanced
focus on both valuation and earnings growth, which began in March, provides a
healthier investment backdrop. However, this change has caused deterioration in
many extremely highly valued securities with speculative fundamentals and
improvement in previously neglected, solidly performing companies.
In the coming months, we believe investors are likely to focus on continuing
cyclical economic developments as well as the presidential election campaign.
Federal budget policy, social security funding options and trade policy are
likely to shape investor interest in the outcome of the election. Generally,
financial markets have tended to do better under divided governments, preferring
legislative gridlock. In part, US markets historically have done well as a
result of fiscal policy restraint and could react poorly to any significant
reversal of that trend.
Despite near-term uncertainties surrounding economic slowdown, earnings growth
and valuation levels, the long-term forces supporting US economic and financial
market leadership seem to remain in place. Chief among these are the continued
heavy investment in technology, telecommunications and other
efficiency-enhancing projects, thus potentially enabling productivity-led
growth.
Fiscal Year in Review
For the 12 months ended July 31, 2000, Merrill Lynch Strategic Dividend Fund's
Class A, Class B, Class C and Class D Shares had total returns of -4.44%,
-5.39%, -5.39% and -4.68%, respectively. The Fund's performance lagged the
-3.71% total return of the Lipper Analytical Services Inc.'s peer group of
Equity Income Funds for the same period. (Fund 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.)
Performance during the period reflected the relatively favorable price action of
our holdings in the financial services, utilities, consumer non-durable and
energy sectors of the market. Offsetting these positive trends were specific
investments within our consumer cyclical, electronics/technology and basic
materials sectors. In general, high-yielding stocks lagged the broad markets
during this period as technology stocks led the overall market to set new
records by mid-March 2000. However, as the technology sector began its big
sell-off in mid-March, stocks within our high-yield universe began to rebound
and the improvement in the Fund's performance followed.
During the fiscal year ended July 31, 2000, the Fund's investment style remained
essentially intact, focusing largely on stocks with above-average yields.
However, as investor sentiment shifted away from the technology sector, stocks
within our historically three most heavily weighted sectors--utilities,
financials and energy--rallied. As a result, we embarked on a strategy to
selectively trim our holdings in these sectors, targeting investments that
appeared to be fully valued or offered limited potential upside. At the same
time, we initiated positions in a number of high-quality stocks in the capital
goods/technology and consumer sectors that were selling at historically low
valuation levels. These modest sector weighting changes were achieved without
significantly reducing the overall gross yield of the Fund. We believe that the
Fund is positioned more favorably relative to the overall market as a result of
the changes made to the portfolio over the past year. The Fund's investment
holdings are always under constant review for their investment attractiveness,
and we recognize that the key factor in driving performance will continue to be
good stock selection.
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 in our next
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 6, 2000
2 & 3
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 2000
PORTFOLIO INFORMATION
As of July 31, 2000
Percent of
Ten Largest Common Stock Holdings Net Assets
FPL Group, Inc. .......................................... 4.0%
Enron Corp. .............................................. 3.9
Phillips Petroleum Company ............................... 3.3
Columbia Energy Group .................................... 2.9
BP Amoco PLC (ADR) ....................................... 2.9
Royal Dutch Petroleum Company
(NY Registered Shares) ................................. 2.8
The Bank of New York Company, Inc. ....................... 2.5
The St. Paul Companies, Inc. ............................. 2.5
The Chubb Corporation .................................... 2.5
PNC Bank Corp. ........................................... 2.2
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/
6 Month 12 Month Since Inception
As of July 31, 2000 Total Return Total Return Total Return
==================================================================================================
<S> <C> <C> <C>
ML Strategic Dividend Fund Class A Shares* +1.16% -4.44% +206.74%
--------------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class B Shares* +0.69 -5.39 +176.87
--------------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class C Shares* +0.67 -5.39 +115.94
--------------------------------------------------------------------------------------------------
ML Strategic Dividend Fund Class D Shares* +1.04 -4.68 +126.11
--------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index** +3.20 +8.97 +408.18/+242.14
==================================================================================================
</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 return periods are ten years and from 10/21/94,
respectively.
4 & 5
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 2000
PERFORMANCE DATA (concluded)
Merrill Lynch Strategic Dividend Fund
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:
7/90 7/00
ML Strategic Dividend Fund+--
Class A Shares* $ 9,475 $29,066
ML Strategic Dividend Fund+--
Class B Shares* $10,000 $27,684
Standard & Poor's 500 Index++ $10,000 $50,818
High Yield Index+++ $10,000 $20,905
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** 7/00
ML Strategic Dividend Fund+--
Class C Shares* $10,000 $21,594
ML Strategic Dividend Fund+--
Class D Shares* $ 9,475 $21,425
Standard & Poor's 500 Index++ $10,000 $34,214
High Yield Index+++ $10,000 $17,114
* 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 from 10/31/94.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/00 - 7.65% -12.50%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +15.18 +13.95
--------------------------------------------------------------------------------
Ten Years Ended 6/30/00 +11.72 +11.12
--------------------------------------------------------------------------------
* Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class A Shares
were offered at a higher sales charge. Thus, actual returns would have
been lower than shown for the ten-year period.)
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 6/30/00 - 8.59% - 12.02%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +14.01 +14.01
--------------------------------------------------------------------------------
Ten Years Ended 6/30/00 +10.57 +10.57
--------------------------------------------------------------------------------
* 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*
================================================================================
One Year Ended 6/30/00 - 8.58% - 9.44%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +14.00 +14.00
--------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/00 +14.31 +14.31
--------------------------------------------------------------------------------
* 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*
================================================================================
One Year Ended 6/30/00 - 7.89% -12.72%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +14.89 +13.66
--------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/00 +15.22 +14.13
--------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
6 & 7
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 2000
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
Shares Percent of
EUROPE Industries Held Common Stocks Value Net Assets
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Netherlands Oil--International 80,000 Royal Dutch Petroleum Company (NY Registered Shares) $ 4,660,000 2.8%
---------------------------------------------------------------------------------------------------------------
Total Investments in the Netherlands 4,660,000 2.8
================================================================================================================================
United Kingdom Beverages 395,960 Diageo PLC 3,475,152 2.1
---------------------------------------------------------------------------------------------------------------
Oil--International 90,000 BP Amoco PLC (ADR) (a) 4,708,125 2.9
---------------------------------------------------------------------------------------------------------------
Total Investments in the United Kingdom 8,183,277 5.0
================================================================================================================================
Total Investments in Europe 12,843,277 7.8
================================================================================================================================
NORTH AMERICA
================================================================================================================================
United States Aerospace & Defense 45,000 General Dynamics Corporation 2,539,687 1.6
41,000 Northrop Grumman Corporation 2,913,562 1.8
44,000 Rockwell International Corporation 1,542,750 0.9
----------- ----
6,995,999 4.3
---------------------------------------------------------------------------------------------------------------
Appliances 73,000 Maytag Corporation 2,472,875 1.5
---------------------------------------------------------------------------------------------------------------
Automotive 28,000 General Motors Corporation 1,594,250 1.0
---------------------------------------------------------------------------------------------------------------
Automotive Parts 40,000 TRW Inc. 1,797,500 1.1
---------------------------------------------------------------------------------------------------------------
Banking 90,000 The Bank of New York Company, Inc. 4,213,125 2.5
70,500 The Chase Manhattan Corporation 3,502,969 2.1
72,139 Firstar Corporation 1,424,745 0.9
71,000 PNC Bank Corp. 3,612,125 2.2
26,880 SunTrust Banks, Inc. 1,286,880 0.8
----------- ----
14,039,844 8.5
---------------------------------------------------------------------------------------------------------------
Capital Goods 54,000 General Electric Company 2,777,625 1.7
45,000 Honeywell International Inc. 1,513,125 0.9
20,000 Minnesota Mining and Manufacturing Company (3M) 1,801,250 1.1
----------- ----
6,092,000 3.7
---------------------------------------------------------------------------------------------------------------
Chemicals 60,900 The Dow Chemical Company 1,750,875 1.1
23,343 E.I. du Pont de Nemours and Company 1,057,730 0.6
----------- ----
2,808,605 1.7
---------------------------------------------------------------------------------------------------------------
Cosmetics 28,000 Avon Products, Inc. 1,111,250 0.7
---------------------------------------------------------------------------------------------------------------
Drugs 50,000 American Home Products Corporation 2,653,125 1.6
52,000 Bristol-Myers Squibb Company 2,580,500 1.6
----------- ----
5,233,625 3.2
---------------------------------------------------------------------------------------------------------------
Electric & Gas 25,000 Cleco Corporation 921,875 0.6
---------------------------------------------------------------------------------------------------------------
Foods 50,000 The Quaker Oats Company 3,362,500 2.0
---------------------------------------------------------------------------------------------------------------
Household Products 48,000 The Clorox Company 1,983,000 1.2
53,000 The Procter & Gamble Company 3,014,375 1.8
----------- ----
4,997,375 3.0
---------------------------------------------------------------------------------------------------------------
Insurance 50,000 American General Corporation 3,334,375 2.0
55,000 The Chubb Corporation 4,070,000 2.5
60,000 Lincoln National Corporation 2,617,500 1.6
94,000 The St. Paul Companies, Inc. 4,177,125 2.5
----------- ----
14,199,000 8.6
---------------------------------------------------------------------------------------------------------------
Manufacturing/Heavy 50,000 Deere & Company 1,928,125 1.2
Equipment
---------------------------------------------------------------------------------------------------------------
Oil--Domestic 106,000 Phillips Petroleum Company 5,386,125 3.3
---------------------------------------------------------------------------------------------------------------
Oil--International 45,000 Exxon Mobil Corporation 3,600,000 2.2
50,000 Texaco Inc. 2,471,875 1.5
----------- ----
6,071,875 3.7
---------------------------------------------------------------------------------------------------------------
Paper & Forest 98,023 International Paper Company 3,332,782 2.0
Products 60,000 Weyerhaeuser Company 2,741,250 1.7
----------- ----
6,074,032 3.7
---------------------------------------------------------------------------------------------------------------
Real Estate 41,000 Brandywine Realty Trust 899,438 0.6
Investment Trusts 29,000 CarrAmerica Realty Corporation 866,375 0.5
50,000 Duke-Weeks Realty Corporation 1,225,000 0.7
50,000 Simon Property Group, Inc. 1,306,250 0.8
----------- ----
4,297,063 2.6
---------------------------------------------------------------------------------------------------------------
Retail--Stores 100,000 J.C. Penney Company, Inc. 1,612,500 1.0
---------------------------------------------------------------------------------------------------------------
Telecommunications 26,000 Lucent Technologies Inc. 1,137,500 0.7
75,000 Sprint Corp. (FON Group) 2,671,875 1.6
----------- ----
3,809,375 2.3
---------------------------------------------------------------------------------------------------------------
Utilities 77,000 Reliant Energy, Inc. 2,579,500 1.6
---------------------------------------------------------------------------------------------------------------
Utilities--Electric 105,000 Edison International 2,067,187 1.2
135,000 FPL Group, Inc. 6,513,750 4.0
44,000 KeySpan Corporation 1,397,000 0.9
90,000 New Century Energies, Inc. 3,076,875 1.9
120,000 Northern States Power Company 2,647,500 1.6
74,000 The Southern Company 1,808,375 1.1
----------- ----
17,510,687 10.7
---------------------------------------------------------------------------------------------------------------
</TABLE>
8 & 9
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 2000
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<TABLE>
<CAPTION>
NORTH AMERICA Shares Percent of
(concluded) Industries Held Common Stocks Value Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
United States Utilities--Gas Pipeline 69,000 Columbia Energy Group $ 4,709,250 2.9%
(concluded) 50,000 El Paso Energy Corporation 2,418,750 1.4
------------ -----
7,128,000 4.3
-------------------------------------------------------------------------------------------------------------------
Utilities--Natural Gas 88,000 Enron Corp. 6,479,000 3.9
35,000 The Williams Companies, Inc. 1,461,250 0.9
------------ -----
7,940,250 4.8
-------------------------------------------------------------------------------------------------------------------
Utilities-- 62,000 AT&T Corp. 1,918,125 1.2
Telecommunications 52,000 BellSouth Corporation 2,070,250 1.3
77,000 SBC Communications Inc. 3,277,313 2.0
50,000 Verizon Communications 2,350,000 1.4
------------ -----
9,615,688 5.9
-------------------------------------------------------------------------------------------------------------------
Total Investments in North America 139,579,918 85.0
====================================================================================================================================
Total Investments in Common Stocks
(Cost--$119,527,115) 152,423,195 92.8
====================================================================================================================================
Face
Amount Short-Term Securities
====================================================================================================================================
Repurchase $3,667,000 Warburg Dillon Read LLC, purchased on 7/31/2000
Agreements* to yield 6.55% to 8/01/2000 3,667,000 2.2
-------------------------------------------------------------------------------------------------------------------
US Government 4,000,000 Federal Home Loan Mortgage Corporation,
Agency Obligations** 6.395% due 8/08/2000 3,994,316 2.5
4,000,000 Federal National Mortgage Association,
6.38% due 8/28/2000 3,980,151 2.4
-------------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities
(Costs--$11,641,467) 11,641,467 7.1
====================================================================================================================================
Total Investments (Cost--$131,168,582) 164,064,662 99.9
Other Assets Less Liabilities 149,748 0.1
------------ -----
Net Assets $164,214,410 100.0%
============ =====
====================================================================================================================================
</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 rates shown reflect the
discount rates paid at the time of purchase by the Fund.
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of July 31, 2000
========================================================================================================
<S> <C> <C>
Assets: Investments, at value (identified cost--$131,168,582) ..... $164,064,662
Cash ...................................................... 219
Foreign cash .............................................. 689,082
Receivables:
Dividends ............................................... $ 376,946
Beneficial interest sold ................................ 31,765 408,711
------------
Prepaid registration fees and other assets ................ 32,488
------------
Total assets .............................................. 165,195,162
------------
========================================================================================================
Liabilities: Payables:
Beneficial interest redeemed ............................ 660,827
Investment adviser ...................................... 85,771
Distributor ............................................. 62,899 809,497
------------
Accrued expenses and other liabilities .................... 171,255
------------
Total liabilities ......................................... 980,752
------------
========================================================================================================
Net Assets: Net assets ................................................ $164,214,410
============
========================================================================================================
Net Assets Class A Shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized ..................... $ 150,464
Class B Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized ..................... 340,053
Class C Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized ..................... 34,131
Class D Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized ..................... 767,955
Paid-in capital in excess of par .......................... 117,742,687
Undistributed investment income--net ...................... 314,545
Undistributed realized capital gains on investments
and foreign currency transactions--net .................... 12,010,410
Unrealized appreciation on investments and foreign currency
transactions--net ......................................... 32,854,165
------------
Net assets ................................................ $164,214,410
============
========================================================================================================
Net Asset Class A--Based on net assets of $19,114,568 and 1,504,635
Value: shares of beneficial interest outstanding ................. $ 12.70
============
Class B--Based on net assets of $43,288,765 and 3,400,534
shares of beneficial interest outstanding ................. $ 12.73
============
Class C--Based on net assets of $4,293,642 and 341,310
shares of beneficial interest outstanding ................. $ 12.58
============
Class D--Based on net assets of $97,517,435 and 7,679,545
shares of beneficial interest outstanding ................. $ 12.70
============
========================================================================================================
</TABLE>
See Notes to Financial Statements.
10 & 11
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 2000
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended July 31, 2000
=============================================================================================================
<S> <C> <C> <C>
Investment Dividends (net of $37,754 foreign withholding tax) . $ 5,641,988
Income: Interest and discount earned ....................... 935,709
-------------
Total income ....................................... 6,577,697
-------------
=============================================================================================================
Expenses: Investment advisory fees ........................... $ 1,193,351
Account maintenance and distribution fees--Class B . 599,449
Account maintenance fees--Class D .................. 280,714
Transfer agent fees--Class D ....................... 181,803
Accounting services ................................ 108,677
Transfer agent fees--Class B ....................... 108,126
Professional fees .................................. 90,579
Printing and shareholder reports ................... 81,106
Account maintenance and distribution fees--Class C . 47,281
Transfer agent fees--Class A ....................... 35,537
Registration fees .................................. 31,683
Custodian fees ..................................... 29,300
Trustees' fees and expenses ........................ 26,025
Transfer agent fees--Class C ....................... 9,005
Pricing fees ....................................... 1,832
Other .............................................. 7,926
------------
Total expenses ..................................... 2,832,394
-------------
Investment income--net ............................. 3,745,303
-------------
=============================================================================================================
Realized & Realized gain (loss) from:
Unrealized Gain (Loss) Investments--net ................................. 12,249,248
On Investments & Foreign currency transactions--net ............... (23,675) 12,225,573
Foreign Currency ------------
Transactions--Net: Change in unrealized appreciation/depreciation on:
Investments--net ................................. (27,915,950)
Foreign currency transactions--net ............... (39,893) (27,955,843)
------------ -------------
Net Decrease in Net Assets Resulting from
Operations ......................................... $ (11,984,967)
=============
=============================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended July 31,
-------------------------------
Increase (Decrease) in Net Assets: 2000 1999
=======================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ........................................ $ 3,745,303 $ 4,265,532
Realized gain on investments and foreign currency
transactions--net ............................................. 12,225,573 13,630,909
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net ............ (27,955,843) 9,183,280
------------- -------------
Net increase (decrease) in net assets resulting from
operations .................................................... (11,984,967) 27,079,721
------------- -------------
=======================================================================================================================
Dividends & Investment income--net:
Distributions to Class A ..................................................... (528,692) (615,334)
Shareholders: Class B ..................................................... (806,274) (1,107,518)
Class C ..................................................... (67,551) (71,147)
Class D ..................................................... (2,425,560) (2,447,831)
Realized gain on investments--net:
Class A ..................................................... (1,077,347) (3,916,159)
Class B ..................................................... (3,294,547) (11,960,245)
Class C ..................................................... (242,920) (691,392)
Class D ..................................................... (5,531,722) (16,343,239)
------------- -------------
Net decrease in net assets resulting from dividends
and distributions to shareholders ............................. (13,974,613) (37,152,865)
------------- -------------
=======================================================================================================================
Beneficial Interest Net increase (decrease) in net assets derived from
Transactions: beneficial interest transactions .............................. (43,722,667) 41,649,071
------------- -------------
=======================================================================================================================
Net Assets: Total increase (decrease) in net assets ....................... (69,682,247) 31,575,927
Beginning of year ............................................. 233,896,657 202,320,730
------------- -------------
End of year* .................................................. $ 164,214,410 $ 233,896,657
============= =============
=======================================================================================================================
* Undistributed investment income--net .......................... $ 314,545 $ 420,994
============= =============
=======================================================================================================================
</TABLE>
See Notes to Financial Statements.
12 & 13
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 2000
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A+
The following per share data and ratios have ---------------------------------------------------------
been derived from information provided in the For the Year Ended July 31,
financial statements. ---------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........... $ 14.27 $ 15.36 $ 15.21 $ 12.43 $ 12.24
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ....................... .31 .35 .39 .38 .38
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ............................ (.94) 1.42 1.37 4.17 1.55
-------- -------- -------- -------- --------
Total from investment operations ............. (.63) 1.77 1.76 4.55 1.93
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ..................... (.32) (.36) (.39) (.39) (.36)
Realized gain on investments--net .......... (.62) (2.50) (1.22) (1.38) (1.38)
-------- -------- -------- -------- --------
Total dividends and distributions ............ (.94) (2.86) (1.61) (1.77) (1.74)
-------- -------- -------- -------- --------
Net asset value, end of year ................. $ 12.70 $ 14.27 $ 15.36 $ 15.21 $ 12.43
======== ======== ======== ======== ========
============================================================================================================================
Total Investment Based on net asset value per share ........... (4.44%) 14.15% 12.03% 40.42% 16.98%
Return:* ======== ======== ======== ======== ========
============================================================================================================================
Ratios to Average Expenses ..................................... .95% .87% .88% .90% 1.04%
Net Assets: ======== ======== ======== ======== ========
Investment income--net ....................... 2.35% 2.50% 2.51% 2.87% 3.04%
======== ======== ======== ======== ========
============================================================================================================================
Supplemental Net assets, end of year (in thousands) ....... $ 19,114 $ 25,477 $ 24,233 $ 28,940 $ 18,106
Data: ======== ======== ======== ======== ========
Portfolio turnover ........................... 32.33% 20.11% 32.66% 14.29% 26.42%
======== ======== ======== ======== ========
============================================================================================================================
Class B+
The following per share data and ratios have ---------------------------------------------------------
been derived from information provided in the For the Year Ended July 31,
financial statements. ---------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
============================================================================================================================
Per Share Net asset value, beginning of year ........... $ 14.29 $ 15.38 $ 15.22 $ 12.44 $ 12.23
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ....................... .18 .21 .23 .25 .26
Realized and unrealized gain (loss) on
investments and foreign
currency transactions--net ................... (.94) 1.41 1.38 4.16 1.55
-------- -------- -------- -------- --------
Total from investment operations ............. (.76) 1.62 1.61 4.41 1.81
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ..................... (.18) (.21) (.23) (.25) (.22)
Realized gain on investments--net .......... (.62) (2.50) (1.22) (1.38) (1.38)
-------- -------- -------- -------- --------
Total dividends and distributions ............ (.80) (2.71) (1.45) (1.63) (1.60)
-------- -------- -------- -------- --------
Net asset value, end of year ................. $ 12.73 $ 14.29 $ 15.38 $ 15.22 $ 12.44
======== ======== ======== ======== ========
============================================================================================================================
Total Investment Based on net asset value per share ........... (5.39%) 12.96% 10.94% 38.90% 15.89%
Return:* ======== ======== ======== ======== ========
============================================================================================================================
Ratios to Average Expenses ..................................... 1.97% 1.89% 1.90% 1.94% 2.08%
Net Assets: ======== ======== ======== ======== ========
Investment income--net ....................... 1.35% 1.48% 1.50% 1.89% 2.06%
======== ======== ======== ======== ========
============================================================================================================================
Supplemental Net assets, end of year (in thousands) ....... $ 43,289 $ 75,330 $ 73,067 $ 93,509 $ 96,461
Data: ======== ======== ======== ======== ========
Portfolio turnover ........................... 32.33% 20.11% 32.66% 14.29% 26.42%
======== ======== ======== ======== ========
============================================================================================================================
Class C+
The following per share data and ratios have ---------------------------------------------------------
been derived from information provided in the For the Year Ended July 31,
financial statements. ---------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
============================================================================================================================
Per Share Net asset value, beginning of year ........... $ 14.14 $ 15.25 $ 15.11 $ 12.37 $ 12.20
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ....................... .17 .20 .23 .24 .24
Realized and unrealized gain (loss) on
investments and foreign
currency transactions--net ................... (.93) 1.40 1.37 4.13 1.55
-------- -------- -------- -------- --------
Total from investment operations ............. (.76) 1.60 1.60 4.37 1.79
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ..................... (.18) (.21) (.24) (.25) (.24)
Realized gain on investments--net .......... (.62) (2.50) (1.22) (1.38) (1.38)
-------- -------- -------- -------- --------
Total dividends and distributions ............ (.80) (2.71) (1.46) (1.63) (1.62)
-------- -------- -------- -------- --------
Net asset value, end of year ................. $ 12.58 $ 14.14 $ 15.25 $ 15.11 $ 12.37
======== ======== ======== ======== ========
============================================================================================================================
Total Investment Based on net asset value per share ........... (5.39%) 12.96% 10.96% 38.84% 15.78%
Return:* ======== ======== ======== ======== ========
============================================================================================================================
Ratios to Average Expenses ..................................... 1.98% 1.90% 1.90% 1.95% 2.08%
Net Assets: ======== ======== ======== ======== ========
Investment income--net ....................... 1.33% 1.45% 1.47% 1.83% 1.91%
======== ======== ======== ======== ========
============================================================================================================================
Supplemental Net assets, end of year (in thousands) ....... $ 4,294 $ 5,347 $ 4,379 $ 3,025 $ 1,953
Data: ======== ======== ======== ======== ========
Portfolio turnover ........................... 32.33% 20.11% 32.66% 14.29% 26.42%
======== ======== ======== ======== ========
============================================================================================================================
</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, 2000
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
Class D+
The following per share data and ratios have ------------------------------------------------------------
been derived from information provided in the For the Year Ended July 31,
financial statements. ------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........... $ 14.27 $ 15.36 $ 15.20 $ 12.43 $ 12.24
Operating -------- --------- --------- -------- --------
Performance: Investment income--net ....................... .28 .32 .35 .35 .34
Realized and unrealized gain (loss) on
investments and foreign
currency transactions--net ................... (.95) 1.41 1.38 4.16 1.57
-------- --------- --------- -------- --------
Total from investment operations ............. (.67) 1.73 1.73 4.51 1.91
-------- --------- --------- -------- --------
Less dividends and distributions:
Investment income--net ..................... (.28) (.32) (.35) (.36) (.34)
Realized gain on investments--net .......... (.62) (2.50) (1.22) (1.38) (1.38)
-------- --------- --------- -------- --------
Total dividends and distributions ............ (.90) (2.82) (1.57) (1.74) (1.72)
-------- --------- --------- -------- --------
Net asset value, end of year ................. $ 12.70 $ 14.27 $ 15.36 $ 15.20 $ 12.43
======== ========= ========= ======== ========
===============================================================================================================================
Total Investment Based on net asset value per share ........... (4.68%) 13.88% 11.84% 39.99% 16.73%
Return:* ======== ========= ========= ======== ========
===============================================================================================================================
Ratios to Average Expenses ..................................... 1.20% 1.12% 1.12% 1.15% 1.28%
Net Assets: ======== ========= ========= ======== ========
Investment income--net ....................... 2.10% 2.26% 2.25% 2.62% 2.62%
======== ========= ========= ======== ========
===============================================================================================================================
Supplemental Net assets, end of year (in thousands) ....... $ 97,517 $ 127,743 $ 100,642 $ 74,577 $ 44,691
Data: ======== ========= ========= ======== ========
Portfolio turnover ........................... 32.33% 20.11% 32.66% 14.29% 26.42%
======== ========= ========= ======== ========
===============================================================================================================================
</TABLE>
* Total investment returns exclude the effects of sales
charges.
+ Based on average shares outstanding.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Strategic Dividend Fund (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, 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. If the counterparty defaults and the fair value of the
collateral declines, liquidation of the collateral by the Fund may be delayed or
limited.
(c) Derivative financial instruments--The Fund may engage in various portfolio
strategies to increase or decrease the level of risk to which the Fund is
exposed more quickly and efficiently than transactions in other types of
instruments. 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
16 & 17
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 2000
NOTES TO FINANCIAL STATEMENTS (continued)
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 $23,675 have been reclassified between undistributed net
investment income and undistributed net realized capital gains. 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
Investment Managers, L.P. ("MLIM"). The general partner of MLIM 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 FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
MLIM 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, 2000, FAMD earned underwriting discounts and direct
commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
--------------------------------------------------------------------------------
FAMD MLPF&S
--------------------------------------------------------------------------------
Class A ....................................... $533 $ 382
Class D ....................................... $925 $11,064
--------------------------------------------------------------------------------
For the year ended July 31, 2000, MLPF&S received contingent deferred sales
charges of $120,786 and $3,312 relating to transactions in Class B and Class C
Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $363 relating to transactions subject to front-end sales waivers in
Class D shares.
In addition, MLPF&S received $7,680 in commissions on the execution of portfolio
security transactions for the Fund for the year ended July 31, 2000.
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 MLIM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2000 were $58,327,114 and $95,658,727, respectively.
Net realized gains (losses) for the year ended July 31, 2000 and net unrealized
gains (losses) as of July 31, 2000 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
--------------------------------------------------------------------------------
Long-term investments .............. $12,249,047 $32,896,080
Short-term investments ............. 201 --
Foreign currency transactions ...... (23,675) (41,915)
----------- -----------
Total .............................. $12,225,573 $32,854,165
=========== ===========
--------------------------------------------------------------------------------
As of July 31, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $32,896,080, of which $38,833,329 related to appreciated securities
and $5,937,249 related to depreciated securities. At July 31, 2000, the
aggregate cost of investments for Federal income tax purposes was $131,168,582.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $(43,722,667) and $41,649,071 for the years ended July 31, 2000
and July 31, 1999, respectively.
18 & 19
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
Transactions in shares of beneficial interest for each class were as follows:
--------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ......................................... 288,047 $ 3,697,920
Shares issued to shareholders in reinvestment of
dividends and distributions ......................... 107,422 1,392,833
-------- ----------
Total issued ........................................ 395,469 5,090,753
Shares redeemed ..................................... (675,680) (8,736,855)
-------- ----------
Net decrease ........................................ (280,211) $(3,646,102)
======== ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 B Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ...................................... 770,285 $ 10,296,917
Shares issued to shareholders in reinvestment of
dividends and distributions ...................... 258,353 3,361,477
---------- ------------
Total issued ..................................... 1,028,638 13,658,394
Automatic conversion of shares ................... (517,344) (6,637,863)
Shares redeemed .................................. (2,381,354) (30,657,519)
---------- ------------
Net decrease ..................................... (1,870,060) $(23,636,988)
========== ============
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 C Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ......................................... 161,392 $ 2,074,230
Shares issued to shareholders in reinvestment of
dividends and distributions ......................... 20,304 261,233
-------- -----------
Total issued ........................................ 181,696 2,335,463
Shares redeemed ..................................... (218,425) (2,758,889)
-------- -----------
Net decrease ........................................ (36,729) $ (423,426)
======== ===========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 D Shares for the Year Dollar
Ended July 31, 2000 Shares Amount
--------------------------------------------------------------------------------
Shares sold ...................................... 1,097,043 $ 14,458,399
Automatic conversion of shares ................... 518,336 6,637,863
Shares issued to shareholders in reinvestment of
dividends and distributions ...................... 516,852 6,701,852
---------- ------------
Total issued ..................................... 2,132,231 27,798,114
Shares redeemed .................................. (3,406,408) (43,814,265)
---------- ------------
Net decrease ..................................... (1,274,177) $(16,016,151)
========== ============
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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
========== ============
--------------------------------------------------------------------------------
5. Short-Term Borrowings:
On December 3, 1999, the Fund, along with certain other funds managed by MLIM
and its affiliates, entered into a one-year, unsecured $1,000,000,000 credit
agreement with The Bank of New York and other lenders. The funds may borrow
money for temporary or emergency purposes to meet shareholder redemptions. Each
fund may borrow up to the maximum amount allowable under the fund's current
prospectus and statement of additional information, subject to various other
legal, regulatory or contractual limits. The funds collectively pay a commitment
fee of .09% per annum on the available portion of the facility. Amounts borrowed
under the facility bear interest at the Federal Funds rate plus .50%. The Fund
did not borrow from the facility during the year ended July 31, 2000.
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, 2000, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2000 by correspondence with the custodian. 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, 2000, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with accounting principles generally accepted in
the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
September 14, 2000
20 & 21
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 2000
IMPORTANT TAX INFORMATION (unaudited)
Of the ordinary income distributions paid quarterly by Merrill Lynch Strategic
Dividend Fund during its taxable year ended July 31, 2000, 98.20% qualify for
the dividends received deduction for corporations.
Additionally, the following table summarizes the long-term capital gains
distributions paid by the Fund during its taxable year ended July 31, 2000:
--------------------------------------------------------------------------------
Record Payable Long-Term
Date Date Capital Gains*
--------------------------------------------------------------------------------
10/04/99 10/13/99 $.608277
12/15/99 12/21/99 $.014670
--------------------------------------------------------------------------------
* This entire distribution is subject to a maximum 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, Jr., Senior Vice President
Walter D. Rogers, Senior Vice President and Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Ira P. Shapiro, 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--7/00
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