MERRILL LYNCH
SPECIAL VALUE
FUND, INC.
FUND LOGO
Quarterly Report
June 30, 1996
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
<PAGE>
Merrill Lynch
Special Value Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH SPECIAL VALUE FUND, INC.
DEAR SHAREHOLDER
The US economy demonstrated surprising strength during the first
half of 1996. As a result, investors are focusing on prospects for
an overheating economy, increasing inflationary pressures, and the
potential for monetary policy tightening by the Federal Reserve
Board. With more robust economic growth, a sharp rise in prices for
crude oil and agricultural commodities, and expectations of
escalating wage pressures, long-term interest rates (as measured by
the yield on the 30-year US Treasury bond) are in excess of 7%.
Inflationary concerns were heightened further shortly after the
close of the June quarter with the report of a stronger-than-
expected employment report for June. Unemployment fell to a six-year
low, and hourly wages rose sharply. This mounting evidence of a
tighter labor market and rising labor costs suggested to many
investors that the US central bank would be forced to raise short-
term interest rates in the coming months. In the weeks ahead,
investors will continue to monitor economic data releases to
determine the potential for monetary policy tightening by the
Federal Reserve Board. A significant development in this area may be
the slowdown in the technology sector, and its potential impact on
other areas of the economy. Evidence of more moderate, but
sustained, economic activity would be a beneficial development for
the US stock and bond markets.
<PAGE>
Portfolio Matters
During the quarter ended June 30, 1996, Merrill Lynch Special Value
Fund, Inc. outperformed the unmanaged Russell 2000 Index. Total
returns for the Fund's Class A, Class B, Class C and Class D Shares
were +7.88%, +7.61%, +7.60% and +7.84%, respectively. This compares
to the total return of +5.00% for the Russell 2000 Index. (Fund
results do not include sales charges; results would be lower if
sales charges were included. Complete performance information,
including average annual total returns, can be found on pages 4--7
of this report to shareholders.)
During the June quarter, we reduced the Fund's cash position from
22.5% of net assets at March 31, 1996 to 13.1% on June 30, 1996.
Including cash reserves, we estimate that the Fund had approximately
95% of the volatility of the Russell 2000 Index.
The June quarter showed a continuation of economic cross-currents,
with some indicators signaling a strong economy and others showing
signs of economic weakness. Investors' expectations no doubt were
widely divergent as a result of the low visibility in the economic
outlook. Interest rates continued the uptrend begun in January and
February despite the lack of action in recent months by the Federal
Reserve Board to change the discount rate. The equity market,
ignoring the gradual rise in interest rates, moved higher.
Small-capitalization stocks outperformed the large-capitalization
indexes during the first half of the June quarter. After peaking in
late May, however, small-capitalization stock indexes declined
through the end of the June quarter while large-capitalization stock
indexes held their gains. As a result, by the end of June, the total
returns for small-capitalization stock indexes were only modestly
ahead of those for large-capitalization stock indexes. Thus, the
Russell 2000 Index total return of +5.00% for the June quarter was
just slightly ahead of the +4.43% total return of the unmanaged
Standard & Poor's 500 Index.
During the June quarter, there were an increasing number of signs of
speculative excess in the equity market, with a record level of
initial public offering (IPO) activity and a rising number of IPOs
closing below their offering prices after several days of trading.
Shares of companies that announced earnings disappointments sold off
sharply. The difficult market conditions late in the June quarter
benefited value-oriented funds' relative performance. In June, the
unmanaged Wilshire Small Company Value Index gained 0.27% while the
unmanaged Wilshire Small Company Growth Index fell 5.98%. A
continuation of this trend could further benefit Merrill Lynch
Special Value Fund, Inc.'s relative performance, as the Fund
concentrates its investments in value situations.
<PAGE>
Within the Russell 2000 Index, the energy, retail and consumer
services sectors extended first-quarter advances. Oil and gas
producers benefited from a favorable pricing environment. Retail
stocks rose further from the depressed valuations reached during the
prior year. Strong performances were also turned in by the consumer
durables and business equipment and services sectors. Financial
stocks have generally moved sideways since February when interest
rates began to move up. The technology sector moved only modestly
higher in the June quarter.
The Fund's performance in the June quarter was helped by holdings in
the technology, raw materials and consumer non-durables sectors,
which performed significantly better than their respective Russell
2000 Index sectors. Notable performers in order of their
contribution to the portfolio's total return were Olympic Steel,
Inc. (up 162%), The Wet Seal, Inc. (up 87%), Compuware Corp. (up
72%) and Storage Technology Corp. (up 50%). Shares of Storage
Technology Corp., a manufacturer of information storage and
retrieval subsystems, rose on sharply higher earnings and the
announcement that International Business Machines will distribute
the company's disk storage products. Shares of The Wet Seal, Inc., a
specialty retailer to the young women's market, continued to climb
as the company posted better-than-expected sales and increased
earnings, aided by efficiencies generated by last summer's
acquisition of Contempo Casuals. By the end of the quarter, the Fund
had sold its position in The Wet Seal, Inc. Olympic Steel, Inc., a
steel processor, benefited from an improvement in results at its
Lafayette Steel division, which was acquired in the previous year.
Compuware Corp., a global provider of software products and
professional services, benefited from strong year-over-year growth
in the mainframe and client/server product groups, and fiscal fourth
quarter earnings, which sharply exceeded consensus estimates.
For the quarter ended June 30, 1996, the Fund's performance was
hindered by its investments in Hyperion Software Corp. (down 43%)
and Norton McNaughton, Inc. (down 33%). Shares of Hyperion Software
retreated as the company announced that sales of its enterprise
software and client/server software products would fall below the
ranges of inves-tors' expectations. The company is currently in the
midst of a major product transition and a related restructuring of
the sales force. The Fund added to its position in Hyperion Software
on price weakness, as the company has a solid balance sheet and a
compelling valuation selling at one and one-half times trailing 12-
month sales. Norton McNaughton, a supplier of moderately priced
women's apparel, announced disappointing revenues and earnings in
response to weakness in department store sales of moderately priced
career women's apparel this spring. We maintained the Fund's holding
in this stock based on rising orders from several key customers and
low valuation multiples.
<PAGE>
As in the March quarter, the Fund continued to sell selected retail
and energy holdings into stock price strength, reducing the number
of holdings and portfolio weights in these two sectors. The Fund
took advantage of volatility in the technology sector, selling
stocks that had reached our price targets, and building positions in
stocks that still trade at low valuation levels relative to company
fundamentals. In particular, we increased the Fund's holdings in
selected software companies and reinstituted a position in
semiconductor stocks. On balance, the Fund's weighting in technology
is up modestly from the end of the March quarter. The Fund initiated
investments in 46 new holdings and added to existing positions in 57
securities.
Relative to the Russell 2000 Index, the Fund is overweighted in
technology and raw materials, and is underweighted in consumer
services, utilities, business equipment and services, shelter,
financial services and healthcare. Positions were built in several
new industries to the Fund including steel processors, aluminum
producers, environmental control companies, freight forwarders,
paper manufacturers and fertilizer companies. The steel processing
industry is undergoing rapid consolidation and is benefiting from
increased outsourcing by customers such as auto manufacturers in
their drive to reduce labor and inventory costs. Aluminum and paper
producers' stock valuations are exceptionally low despite early
signs of a recovery in fundamentals. The international freight
forwarding industry continues to enjoy a favorable set of conditions
including good growth in international trade, attractive acquisition
economics and a trend toward the outsourcing of logistical functions
by major corporations. The Fund's positions in the environmental
control industry are in niche distribution, service or manufacturing
companies whose stocks are at valuations that do not reflect their
competitive advantages. Fertilizer stocks have traded off sharply
and are now at exceptionally low valuations as a result of product
pricing pressures caused by increased imports from the Caribbean and
the former Soviet Union. We have concentrated the Fund's recent
purchases in nitrogen fertilizer companies that are upgrading their
products to higher-margin specialty fertilizers, and which are
located in geographic areas where import price competition is
minimal.
Other changes to the Fund included a further reduction in the number
of positions to 117 at June 30, 1996 from 144 at March 31, 1996. The
Fund pared positions in 14 stocks and eliminated holdings in 74
positions. We reduced the Fund's cash position during the June
quarter, and we expect to reduce it further as attractive investment
opportunities are identified. During the June quarter, the Fund
experienced regular inflows of assets from shareholders. For the
quarter ended June 30, 1996, Merrill Lynch Special Value Fund,
Inc.'s net assets increased 11.9% to $608 million.
<PAGE>
The Fund's performance was strong on both an absolute and relative
basis, industry and sector weights were shifted modestly as directed
by our bottom-up, value-oriented investment discipline, and the
number of securities held and proportion of assets held in cash were
both reduced. Recent volatility in certain sectors provided
opportunities to improve the Fund's positioning, and a recent shift
in sentiment toward value stocks and away from more expensive stocks
with higher-projected earnings growth adds to our optimism on the
Fund's outlook.
In Conclusion
We thank you for your continued investment in Merrill Lynch Special
Value Fund, Inc., and we look forward to reviewing our outlook and
strategy with you again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Daniel V. Szemis)
Daniel V. Szemis
Vice President and Portfolio Manager
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:
<PAGE>
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 8 years.
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. 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.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/96 +23.39% +16.91%
Five Years Ended 6/30/96 +16.77 +15.52
Ten Years Ended 6/30/96 + 5.64 + 5.07
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/96 +22.12% +18.12%
Five Years Ended 6/30/96 +15.57 +15.57
Inception (10/21/88) through 6/30/96 + 9.24 + 9.24
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/96 +22.12% +21.12%
Inception (10/21/94)
through 6/30/96 +18.59 +18.59
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/96 +23.05% +16.59%
Inception (10/21/94)
through 6/30/96 +19.50 +15.75
[FN]
*Maximum sales charge is 5.25%
**Assuming maximum sales charge.
<PAGE>
PERFORMANCE DATA (continued)
Results of a $1,000 Investment Since Inception--Class A Shares
(5.25% sales charge--$947.50 net amount invested; assuming
reinvestment of all dividends and capital gains distributions)
A mountain chart depicting the growth of an investment in the Fund's
Class A Shares from $947.50 on May 5, 1978 to $4,875.46 on June
30,1996.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
6/30/96 3/31/96 6/30/95 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Special Value Fund, Inc. Class A Shares* $19.17 $17.77 $15.84 +21.02% +7.88%
ML Special Value Fund, Inc. Class B Shares* 18.52 17.21 15.38 +20.42 +7.61
ML Special Value Fund, Inc. Class C Shares* 18.40 17.10 15.29 +20.34 +7.60
ML Special Value Fund, Inc. Class D Shares* 19.13 17.74 15.83 +20.85 +7.84
Russell 2000 Index** 346.62 330.77 283.63 +22.21 +4.79
ML Special Value Fund, Inc. Class A Shares--Total Return* +23.39(1) +7.88
ML Special Value Fund, Inc. Class B Shares--Total Return* +22.12(2) +7.61
ML Special Value Fund, Inc. Class C Shares--Total Return* +22.12(3) +7.60
ML Special Value Fund, Inc. Class D Shares--Total Return* +23.05(4) +7.84
Russell 2000 Index**--Total Return +23.89 +5.00
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
**An unmanaged broad-based index comprised of common stocks. Total
investment returns for unmanaged indexes are based on estimates.
(1)Percent change includes reinvestment of $0.327 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.231 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.239 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.306 per share ordinary
income dividends.
</TABLE>
<PAGE>
PERFORMANCE DATA (continued)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
5/5/78--12/31/78 $ 9.60 $ 8.70 -- $0.190 - 7.63%
1979 8.70 10.16 $0.370 0.320 +25.67
1980 10.16 12.54 0.500 0.195 +33.62
1981 12.54 10.58 0.890 0.390 - 6.27
1982 10.58 10.67 0.650 0.380 +12.70
1983 10.67 12.45 0.610 0.070 +22.40
1984 12.45 11.10 0.290 0.120 - 7.60
1985 11.10 14.29 0.340 0.090 +33.14
1986 14.29 13.97 0.620 0.050 + 1.88
1987 13.97 10.32 1.086 0.143 -18.52
1988 10.32 11.83 0.017 0.233 +17.06
1989 11.83 11.65 -- 0.237 + 0.42
1990 11.65 8.32 -- 0.148 -27.52
1991 8.32 12.80 -- 0.080 +54.87
1992 12.80 14.96 -- 0.019 +17.04
1993 14.96 15.66 0.594 0.811 +14.26
1994 15.66 14.70 0.561 0.940 + 3.81
1995 14.70 17.10 0.151 0.675 +22.34
1/1/96--6/30/96 17.10 19.17 -- -- +12.11
------ ------
Total $6.679 Total $5.091
Cumulative total return as of 6/30/96: +414.56%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/21/88--12/31/88 $12.01 $11.82 $0.017 $0.095 - 0.62%
1989 11.82 11.61 -- 0.140 - 0.64
1990 11.61 8.29 -- 0.050 -28.26
1991 8.29 12.69 -- 0.019 +53.32
1992 12.69 14.70 -- -- +15.84
1993 14.70 15.31 0.594 0.692 +13.07
1994 15.31 14.30 0.561 0.828 + 2.79
1995 14.30 16.61 0.151 0.513 +21.12
1/1/96--6/30/96 16.61 18.52 -- -- +11.50
------ ------
Total $1.323 Total $2.337
Cumulative total return as of 6/30/96: +97.43%**
<PAGE>
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $15.06 $14.24 $0.192 $0.430 - 1.15%
1995 14.24 16.50 0.151 0.544 +21.09
1/1/96--6/30/96 16.50 18.40 -- -- +11.52
------ ------
Total $0.343 Total $0.974
Cumulative total return as of 6/30/96: +33.48%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<TABLE>
Performance Summary--Class D Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $15.52 $14.69 $0.192 $0.447 - 1.06%
1995 14.69 17.09 0.151 0.639 +22.09
1/1/96--6/30/96 17.09 19.13 -- -- +11.94
------ ------
Total $0.343 Total $1.086
Cumulative total return as of 6/30/96: +35.21%**
<PAGE>
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Held/ Percent of
Industries Face Amount Stocks & Bonds Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Aerospace 116,300 BE Aerospace, Inc. $ 1,538,095 $ 1,511,900 0.2%
475,000 UNC, Inc. 2,952,554 3,978,125 0.7
------------ ------------ ------
4,490,649 5,490,025 0.9
Apparel 815,000 Farah, Inc. 6,680,057 6,010,625 1.0
700,500 Norton McNaughton, Inc. 10,056,577 5,078,625 0.8
------------ ------------ ------
16,736,634 11,089,250 1.8
Automotive 125,000 Smith (A.O.) Corp. 2,606,732 3,125,000 0.5
Banks & Finance 76,200 American Federal Bank, FSB 874,500 1,276,350 0.2
173,100 Bankers Corp. 1,033,803 3,029,250 0.5
364,000 Charter One Financial, Inc. 7,317,533 12,694,500 2.1
170,000 Civic Bancorp, Inc. 926,250 1,381,250 0.2
88,000 Collective Bancorp., Inc. 1,929,051 2,079,000 0.3
251,400 FirstFed Financial Corp. 3,600,548 4,368,075 0.7
300,000 Roosevelt Financial Group, Inc. 3,868,458 5,775,000 1.0
133,000 Walden Bancorp, Inc. 1,918,713 2,722,344 0.5
------------ ------------ ------
21,468,856 33,325,769 5.5
Biotechnology 172,700 Biomatrix, Inc. 2,630,443 2,784,788 0.5
157,000 COR Therapeutics, Inc. 1,570,102 1,785,875 0.3
193,100 Ostex International, Inc. 2,448,664 2,027,550 0.3
560,000 Scios, Inc. 2,474,401 3,710,000 0.6
------------ ------------ ------
9,123,610 10,308,213 1.7
Building & Building 650,000 Giant Cement Holding, Inc. 7,315,281 8,206,250 1.4
Materials 561,700 Redman Industries, Inc. 4,523,620 11,655,275 1.9
245,300 Ryland Group, Inc. 3,575,517 3,679,500 0.6
------------ ------------ ------
15,414,418 23,541,025 3.9
<PAGE>
Business Services 822,600 Applied Bioscience
International, Inc. 4,698,404 8,637,300 1.4
Chemicals 150,000 Arcadian Corp. 3,026,479 2,962,500 0.5
194,400 Mississippi Chemical Corp. 4,188,491 3,888,000 0.6
------------ ------------ ------
7,214,970 6,850,500 1.1
Commercial Services 111,200 Education Alternatives, Inc. 370,299 375,300 0.1
Computers & Computer 310,000 Amdahl Corp. 2,362,903 3,332,500 0.5
Services 458,150 Boole & Babbage, Inc. 5,573,205 10,995,600 1.8
$ 4,000,000 Cellnet Data Systems, Inc.,
13%** due 6/15/2005 (d) 2,427,560 2,860,000 0.5
405,000 Storage Technology Corp. 9,670,507 15,491,250 2.5
334,100 Stratus Computer, Inc. 8,893,159 9,688,900 1.6
504,700 Texlon Corp. 5,612,823 5,930,225 1.0
------------ ------------ ------
34,540,157 48,298,475 7.9
Cosmetics 1,317 Alfin, Inc. (Preferred) (c) 0 24,259 0.0
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Percent of
Industries Face Amount Stocks & Bonds Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Data Processing 150,000 Cognos, Inc. (f) $ 304,938 $ 3,450,000 0.6%
304,000 Compuware Corp. 8,768,497 12,008,000 2.0
521,900 Hyperion Software Corp. 7,904,524 6,458,513 1.0
150,000 Information Resources, Inc. 1,941,632 1,837,500 0.3
433,200 Platinum Technology, Inc. 7,301,753 6,552,150 1.1
345,100 Software Spectrum, Inc. 7,207,848 8,023,575 1.3
57,000 Sterling Software, Inc. 2,387,182 4,389,000 0.7
427,000 Symantec Corp. 6,855,561 5,337,500 0.9
180,700 VMARK Software, Inc. 2,242,314 1,648,888 0.3
------------ ------------ ------
44,914,249 49,705,126 8.2
Electronics 82,800 Alpha Industries, Inc. 660,134 734,850 0.1
218,300 B.I., Inc. 2,155,922 2,892,475 0.5
523,000 CHS Electronics, Inc. 7,322,486 7,060,500 1.2
47,400 ITI Technologies, Inc. 1,294,575 1,564,200 0.3
453,000 VLSI Technology, Inc. 6,222,526 6,285,375 1.0
------------ ------------ ------
17,655,643 18,537,400 3.1
<PAGE>
Environmental & 529,320 BHA Group, Inc. (Class A) (g) 7,111,261 7,013,490 1.2
Environmental Control 1,625,000 Envirosource, Inc. 6,288,633 5,687,500 0.9
------------ ------------ ------
13,399,894 12,700,990 2.1
Gaming 513,500 Players International, Inc. 5,111,376 5,006,625 0.8
Healthcare-- 185,000 Beverly Enterprises, Inc. 2,453,303 2,220,000 0.4
Products & Services 813,000 Community Psychiatric Centers 8,865,402 7,723,500 1.3
471,000 Magellan Health Services, Inc. 9,153,820 10,126,500 1.6
574,500 Ramsay Health Care, Inc. 3,830,632 1,723,500 0.3
------------ ------------ ------
24,303,157 21,793,500 3.6
Home Furnishings 300,000 Crown Crafts, Inc. 3,979,886 3,075,000 0.5
159,800 Department 56, Inc. 3,723,568 3,615,475 0.6
------------ ------------ ------
7,703,454 6,690,475 1.1
Insurance 40,600 American National Insurance Co. 2,442,745 2,639,000 0.5
161,000 First Colony Corp. 4,177,074 4,991,000 0.8
275,200 Omni Insurance Group, Inc. 1,950,522 2,545,600 0.4
700,300 PXRE Corp. 15,443,271 16,982,275 2.8
267,300 Security-Connecticut Corp. 5,441,464 7,283,925 1.2
------------ ------------ ------
29,455,076 34,441,800 5.7
Iron & Steel 295,000 Gibraltar Steel Corp. 5,428,372 5,973,750 1.0
233,300 Olympic Steel, Inc. 2,567,613 6,503,237 1.1
500,000 Quanex Corp. 10,154,188 11,812,500 1.9
396,500 Shiloh Industries, Inc. 5,582,933 6,393,562 1.1
------------ ------------ ------
23,733,106 30,683,049 5.1
Leasing 244,000 Sea Containers, Ltd. 4,237,586 4,636,000 0.8
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Percent of
Industries Face Amount Stocks & Bonds Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Machinery 110,000 AGCO Corp. $ 2,383,050 $ 3,052,500 0.5%
240,800 Bearings, Inc. 6,886,362 6,501,600 1.1
218,100 Cincinnati Milacron, Inc. 5,348,357 5,234,400 0.8
------------ ------------ ------
14,617,769 14,788,500 2.4
<PAGE>
Medical 235,000 Analogic Corp. 4,319,877 6,286,250 1.0
79,100 Healthdyne Technologies, Inc. 948,027 1,028,300 0.2
225,000 Medex, Inc. 2,515,711 2,896,875 0.5
145,000 Sierra Health Services, Inc. 4,627,336 4,567,500 0.7
------------ ------------ ------
12,410,951 14,778,925 2.4
Metals 298,900 Castech Aluminum Group, Inc. 4,905,900 4,408,775 0.7
309,600 Commonwealth Aluminum Corp. 5,188,574 4,837,500 0.8
96,800 Handy & Harman 1,565,778 1,645,600 0.3
------------ ------------ ------
11,660,252 10,891,875 1.8
Miscellaneous 45,000 PHH Corp. 1,541,238 2,565,000 0.4
Natural Resources 240,000 Tom Brown, Inc. 2,556,265 4,110,000 0.7
70,700 Grant Tensor Geophysical Corp.
(Convertible Preferred) 1,175,940 1,343,300 0.2
587,000 Landmark Graphics Corp. 12,346,168 11,299,750 1.9
$ 2,625,000 NS Group, Inc., 13.50%
due 7/15/2003 (b) 2,511,079 2,546,250 0.4
270,200 Newpark Resources, Inc. 4,639,350 9,929,850 1.6
308,391 Plains Resources, Inc. 1,806,983 3,662,143 0.6
140,000 Plains Resources, Inc. 1,461,553 1,820,000 0.3
$ 900,000 Swift Energy Corp., Convertible
Bonds, 6.50% due 6/30/2003 924,000 1,307,250 0.2
380,000 Total Petroleum of North
America, Ltd. 4,357,496 3,705,000 0.6
147,437 Transamerican Refining
Corp. (Warrants) (e) 360,299 294,874 0.1
$ 8,626,000 Transamerican Refining
Corp., 18.29%** due 2/15/2002 5,833,205 5,391,250 0.9
685,000 TransTexas Gas Corp. 8,165,048 6,507,500 1.1
739,700 Zemex Corporation 6,741,758 5,640,212 0.9
------------ ------------ ------
52,879,144 57,557,379 9.5
Paper/Forest Products 220,000 Arbatax International Inc. (a) 1,364,366 1,056,000 0.2
576,000 Mercer International, Inc. 10,311,900 7,776,000 1.3
290,000 Pope & Talbot, Inc. 4,797,501 4,386,250 0.7
------------ ------------ ------
16,473,767 13,218,250 2.2
Pharmaceuticals 260,000 NeoRx Corp. 1,691,952 1,495,000 0.2
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Percent of
Industries Face Amount Stocks & Bonds Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Real Estate & $ 1,000,000 Alexander Haagen Properties,
Real Estate Inc., 7.25% due 12/27/2003 $ 1,000,000 $ 920,000 0.1%
Investment Trusts 133,400 Bay Apartment Communities, Inc. 2,623,816 3,451,725 0.6
88,000 Catellus Development Corp.
(Convertible Preferred) (Class B) 3,200,250 4,708,000 0.8
80,000 Manufactured Home Communities,
Inc. 1,266,250 1,540,000 0.3
50,000 Mid-America Apartment
Communities, Inc. 1,253,000 1,268,750 0.2
$ 3,000,000 National Health Corp., Convertible
Bonds, 7.75% due 1/01/2001 3,000,000 3,105,000 0.5
40,000 Spieker Properties, Inc. 804,350 1,090,000 0.2
------------ ------------ ------
13,147,666 16,083,475 2.7
Restaurants 140,000 Shoney's, Inc. 1,406,643 1,522,500 0.2
1,164,900 TPI Enterprises, Inc. 5,488,347 4,186,359 0.7
------------ ------------ ------
6,894,990 5,708,859 0.9
Retailing 1,068,500 J. Baker, Inc. 12,266,646 8,013,750 1.3
232,400 Bon-Ton Stores, Inc. 2,429,684 1,191,050 0.2
579,300 CML Group, Inc. 1,766,865 2,462,025 0.4
393,800 Catherines Stores Corp. 4,060,257 3,888,775 0.6
537,800 Chico's Fashions, Inc. 4,115,379 5,445,225 0.9
1,363,000 Grossman's, Inc. 3,768,377 2,214,875 0.4
796,400 Levitz Furniture, Inc. 4,027,303 3,683,350 0.6
121,100 Movie Gallery, Inc. 2,961,614 2,543,100 0.4
102,000 REX Stores Corp. 1,315,670 1,568,250 0.3
------------ ------------ ------
36,711,795 31,010,400 5.1
Telecommunications 263,000 Network Equipment Technologies,
Equipment Inc. 6,794,692 5,588,750 0.9
Textiles 450,000 Burlington Industries, Inc. 5,117,552 6,356,250 1.0
Transportation 253,900 Air Express International Corp. 6,897,887 7,172,675 1.2
100,000 Expeditors International of
Washington, Inc. 2,904,588 3,100,000 0.5
200,000 Kirby Corp. 2,814,824 3,375,000 0.6
------------ ------------ ------
12,617,299 13,647,675 2.3
<PAGE>
Utilities 46,000 American Water Works Co., Inc. 180,682 1,851,500 0.3
70,000 Wicor, Inc. 2,049,562 2,642,500 0.4
------------ ------------ ------
2,230,244 4,494,000 0.7
Total Stocks & Bonds 481,967,581 533,444,419 87.8
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Percent of
Face Amount Short-Term Securities Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Commercial Paper* $ 20,169,000 General Electric Capital Corp.,
5.56% due 7/01/1996 $ 20,162,770 $ 20,162,770 3.3%
15,000,000 International Securitization
Corp., 5.43% due 7/29/1996 14,932,125 14,932,125 2.4
20,000,000 National Fleet Funding Corp.,
5.40% due 7/22/1996 19,931,000 19,931,000 3.3
15,000,000 Preferred Receivable Funding
Corp., 5.32% due 7/01/1996 14,995,567 14,995,567 2.5
------------ ------------ ------
70,021,462 70,021,462 11.5
US Government & 10,000,000 Federal Home Loan Mortgage Corp.,
Agency Obligations* 5.26% due 7/15/1996 9,976,622 9,976,622 1.6
Total Short-Term Securities 79,998,084 79,998,084 13.1
Total Investments $561,965,665 613,442,503 100.9
============
Liabilities in Excess of Other Assets (5,715,867) (0.9)
------------ ------
Net Assets $607,726,636 100.0%
============ ======
Net Asset Class A--Based on net assets of $205,170,510 and
Value: 10,704,718 shares outstanding $ 19.17
============
Class B--Based on net assets of $341,457,548 and
18,439,668 shares outstanding $ 18.52
============
Class C--Based on net assets of $32,546,201 and
1,769,092 shares outstanding $ 18.40
============
Class D--Based on net assets of $28,552,377 and
1,492,559 shares outstanding $ 19.13
============
<PAGE>
<FN>
(a)The Fund received this security as a special stock dividend from
our Mercer International, Inc. holding.
(b)Each $1,000 face amount contains 1 warrant of NS Group, Inc.
(c)Security represents 14.5% Cumulative Preferred Stock. For each
share of preferred stock, the Fund will receive an annual dividend
of approximately 9.43 shares of common stock.
(d)Each $1,000 face amount contains 4 warrants of Cellnet Data
Systems, Inc.
(e)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock. The purchase price and the number of shares
are subject to adjustment under certain conditions until the
expiration date.
(f)The company declared a three-for-one stock split during the
quarter.
(g)The company declared a 10% stock dividend during the quarter.
*Commercial Paper and certain US Government & Agency Obligations are
traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
**Represents a zero coupon or step bond; the interest rate shown is
the effective yield at the time of purchase by the Fund.
</TABLE>
PORTFOLIO CHANGES
Equity Portfolio Changes for the Quarter
Ended June 30, 1996
Additions
*Affinity Technology Group,
Inc.
*Affymetrix, Inc.
Air Express International
Corp.
Arcadian Corp.
*Aspect Development, Inc.
BE Aerospace, Inc.
Bearings, Inc.
Biomatrix, Inc.
CHS Electronics, Inc.
CML Group, Inc.
*CardioGenesis Corp.
Castech Aluminum Group,
Inc.
Cincinnati Milacron, Inc.
<PAGE>
Commonwealth Aluminum
Corp.
Compuware Corp.
*Donna Karan International, Inc.
Expeditors International
of Washington, Inc.
*Garden Botanika, Inc.
Gibraltar Steel Corp.
*Harper Group, Inc.
Healthdyne Technologies,
Inc.
*Heartport, Inc.
*i2 Technologies, Inc.
ITI Technologies, Inc.
*Infoseek Corp.
Levitz Furniture, Inc.
*Lukens, Inc.
Mercer International, Inc.
*Millennium Pharmaceuticals,
Inc.
Mississippi Chemical Corp.
Network Equipment
Technologies, Inc.
*Neurocrine Biosciences, Inc.
*Open Market, Inc.
*Outdoor Systems, Inc.
*Planet Hollywood
International, Inc.
*Planning Science
International PLC (ADR)
Players International, Inc.
*SS&C Technologies, Inc.
*Saks Holdings, Inc.
Shiloh Industries, Inc.
Sierra Health Services, Inc.
Texlon Corp.
Transamerican Refining Corp.
(Warrants)
*Transition Systems, Inc.
*Urologix, Inc.
Zemex Corporation
<PAGE>
Deletions
Abraxas Petroleum Corp.
Ace, Ltd.
*Affinity Technology Group,
Inc.
*Affymetrix, Inc.
Alden Electronics, Inc.
*Aspect Development, Inc.
Atwood Oceanics, Inc.
Banknorth Group, Inc.
Benchmark Electronics,
Inc.
Blount, Inc. (Class A)
CML Group, Inc.
Cali Realty Corp.
*CardioGenesis Corp.
Celestial Seasonings, Inc.
Charming Shoppes, Inc.
Comptek Research, Inc.
Consilium, Inc.
Control Data Systems, Inc.
DH Technology, Inc.
DII Group, Inc.
*Donna Karan
International, Inc.
Dress Barn, Inc.
Duff & Phelps Credit
Rating Co.
Duke Realty Investments,
Inc.
Duplex Products, Inc.
*Garden Botanika, Inc.
General DataComm Industries,
Inc.
Gerrity Oil & Gas Corp.
Global Natural Resources,
Inc.
Hancock Fabrics, Inc.
Harleysville Group, Inc.
*Harper Group, Inc.
Healthcare Services
Group, Inc.
*Heartport, Inc.
*i2 Technologies, Inc.
*Infoseek Corp.
Innkeepers USA Trust
Input/Output, Inc.
Instron Corp.
International Petroleum Corp.
<PAGE>
Just Toys, Inc.
Kellwood Co.
Lesco, Inc.
*Lukens, Inc.
Marisa Christina, Inc.
Merry Land & Investment Co., Inc.
Micronics Computers, Inc.
*Millennium Pharmaceuticals, Inc.
NSC Corp.
*Neurocrine Biosciences, Inc.
Noble Drilling Corp.
Nuevo Energy Co.
OfficeMax, Inc.
*Open Market, Inc.
*Outdoor Systems, Inc.
ParcPlace Systems, Inc.
Pharmacopeia, Inc.
Pier 1 Imports, Inc.
*Planet Hollywood International, Inc.
*Planning Science International PLC
(ADR)
Progress Software Corp.
Ramsay Managed Care, Inc.
*SS&C Technologies, Inc.
*Saks Holdings, Inc.
Service Merchandise Co., Inc.
Sterling Commerce, Inc.
Technitrol, Inc.
*Transition Systems, Inc.
Unilab Corp.
*Urologix, Inc.
The Warnaco Group, Inc. (Class A)
Washington Homes, Inc.
The Wet Seal, Inc. (Class A)
Whole Foods Market, Inc.
[FN]
*Added and deleted in the
same quarter.
<PAGE>
PORTFOLIO INFORMATION
As of June 30, 1996
Percent of
Top Ten Equity Holdings Net Assets
PXRE Corp. 2.8%
Storage Technology Corp. 2.5
Charter One Financial, Inc. 2.1
Compuware Corp. 2.0
Quanex Corp. 1.9
Redman Industries, Inc. 1.9
Landmark Graphics Corp. 1.9
Boole & Babbage, Inc. 1.8
Magellan Health Services, Inc. 1.6
Newpark Resources, Inc. 1.6
Percent of
Ten Largest Industries Net Assets
Natural Resources 9.5%
Data Processing 8.2
Computers & Computer Services 7.9
Insurance 5.7
Banks & Finance 5.5
Retailing 5.1
Iron & Steel 5.1
Building & Building Materials 3.9
Healthcare--Products & Services 3.6
Electronics 3.1
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Donald Cecil, Director
M. Colyer Crum, Director
Edward H. Meyer, Director
Jack B. Sunderland, Director
J. Thomas Touchton, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Daniel V. Szemis, Vice President and
Portfolio Manager
Gerald M. Richard, Treasurer
Mark B. Goldfus, Secretary
<PAGE>
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, New York 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Forida 32246-6484
(800) 637-3863
