MERRILL LYNCH
SPECIAL VALUE
FUND, INC.
FUND LOGO
Semi-Annual Report
September 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
Printed on post-consumer recycled paper
MERRILL LYNCH SPECIAL VALUE FUND, INC.
DEAR SHAREHOLDER
Although the US stock and bond markets rallied as the September
quarter drew to a close, much of the period was marked by volatility
in the capital markets. The US economy demonstrated surprising
resilience during the first half of the year. As a result, when
economic data releases appeared to indicate that the US economy was
expanding at a stronger-than-expected (and potentially inflationary)
rate, investors focused on the increasing possibility of monetary
policy tightening by the Federal Reserve Board. During these
periods, stock prices declined and long-term interest rates moved
higher. However, with inflationary pressures still under control,
the US central bank did not tighten monetary policy at its September
24 meeting. This development, coupled with several economic data
releases that showed growth was at or below expectations, helped to
assuage investors' concerns about an overheating economy. Stock and
bond prices improved, with stock market averages reaching historic
high levels.
<PAGE>
The shifts in perceptions were exemplified by investors' reactions
to the release of recent employment reports. Inflationary concerns
were heightened in early July with the release of a stronger-than-
expected employment report for June. However, more subdued job
growth and decelerating hourly wage gains were subsequently reported
for the month of July. Although the employment report for August
showed that unemployment had dropped to its lowest level since 1989,
these results were generally in line with expectations, and were
received favorably by investors. The greatest boost in investor
confidence occurred in early October with the release of September's
employment report, which showed a slight increase in unemployment.
Investors will continue to monitor economic data releases to
determine the probable direction of the US economy. The outcome of
the upcoming November election will also increasingly influence
investor psychology in the weeks ahead.
Portfolio Matters
During the quarter ended September 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 +5.15%, +4.88%, +4.85%, and +5.09%, respectively. This
compares to the total return of +0.34% 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 September quarter, we reduced the Fund's cash position
from 13.1% of net assets at June 30, 1996 to 6.4% on September 30,
1996. Including cash reserves, we estimate that the Fund's
volatility was approximately equal to that of the Russell 2000
Index.
Early in the September quarter, the major stock market indexes fell
sharply following preannounced earnings disappointments from
Motorola, Inc. and Hewlett-Packard Co. Small-capitalization stocks
were especially hard-hit in July when the Russell 2000 Index
declined sharply both in absolute terms and relative to the large-
capitalization stock indexes. In the subsequent rally during the
months of August and September, small-capitalization stocks
recovered some of the ground lost relative to the large-
capitalization stock indexes. Unlike the large-capitalization stock
indexes, which repeatedly attained new highs late in the quarter
ended September 30, 1996, small-capitalization stocks, as measured
by the Russell 2000 Index, ended the quarter well below the highs
achieved in May 1996. Small-capitalization value stocks outperformed
small-capitalization growth stocks early in the September quarter
because the broad stock market decline impacted growth stocks more
severely. However, as the market recovered, small-capitalization
growth stocks reasserted their leadership and ended the September
quarter modestly ahead of small-capitalization value stocks.
<PAGE>
Overall, Merrill Lynch Special Value Fund, Inc. outperformed the
Russell 2000 Index during the quarter ended September 30, 1996. The
Fund's performance was helped by holdings in the raw materials,
transportation and technology sectors, which performed better than
their respective Russell 2000 sectors. The Fund was hindered by
holdings in the retail and consumer non-durables sectors, which
underperformed their respective Russell 2000 sectors.
As noted in the June 30, 1996 report to shareholders, we increased
the Fund's holdings in natural resources, which during the September
quarter represented the Fund's second-largest sector weighting. The
Fund's investments in this sector span a variety of industries
including aluminum producers, steel processors and fertilizer
stocks, all of which performed well during the quarter. Shares of
Castech Aluminum Group, Inc., a manufacturer of continuous cast
aluminum sheet metal, were particularly strong in the quarter
following the announcement that Commonwealth Aluminum Corp., also a
Fund holding, would acquire the company. We eliminated the Fund's
position in Castech because of the takeover announcement, but
continued to hold aluminum stocks as further industry consolidation
is anticipated and valuations remain low even as the group shows
signs of improving fundamentals.
Fertilizer companies also benefited from merger announcements in the
quarter ended September 30, 1996. During the months of July and
August, Arcadian Corp. and Mississippi Chemical Corp., two
fertilizer stocks which we purchased in the June quarter, declared
merger intentions. Arcadian Corp. announced a definitive agreement
to be acquired by Potash Corporation of Saskatchewan, and
Mississippi Chemical Corp. announced plans to acquire the fertilizer
operations of First Mississippi Corporation. The Fund continues to
emphasize investments in fertilizer stocks trading at a low multiple
of enterprise value to cash flow.
The transportation sector, though a weak performer in the Russell
2000 benchmark index, contributed positively to Merrill Lynch
Special Value Fund, Inc.'s performance in the September quarter. We
focused the Fund's investments on the freight forwarding industry,
which continued to benefit from growth in international trade,
favorable acquisition economics, and a continued trend toward the
outsourcing of logistical functions.
Data processing, the Fund's most heavily weighted sector,
outperformed the respective Russell 2000 sector during the quarter
ended September 30, 1996. Despite the downward pressure on
technology stocks in July, we remained committed to the Fund's core
technology holdings, and took advantage of price declines by adding
to holdings such as Storage Technology Corp. and Compuware Corp.,
where we anticipate strong earnings comparisons in upcoming
quarters. We continued to emphasize investments in systems
integration companies and client/server software companies, while
minimizing investments in semiconductors and computer peripherals,
where profit margins are under pressure because of severe price
competition.
<PAGE>
Notable changes to the Fund's investment positions during the
quarter ended September 30, 1996, included increases in healthcare
stocks, a sector which was previously underweighted relative to the
Russell 2000 Index. We initiated holdings in two medical device
companies. Sofamor Danek Group, Inc., a producer of spinal implant
devices, was purchased after an unfavorable court ruling drove the
stock price down sharply. We added VISX, Inc., a manufacturer of
laser equipment for vision correction, after company-specific
problems caused the shares to fall. We also purchased shares of Gran-
Care Inc., a provider of specialty medical services and long-term
care. GranCare has a modest valuation and improving fundamentals,
and should attract increased investor attention when it implements
its plans to spin out its high-growth institutional pharmacy
business. We reduced holdings in the shelter and financial services
sectors in the September quarter. In particular, we eliminated
shares of Redman Industries, Inc., a producer of manufactured
housing, which attained our internal price objectives. In the
financial services sector, we trimmed holdings in savings and loan
institutions, and reduced holdings in the life insurance industry on
takeover speculation.
The Fund enjoyed a positive September quarter both in absolute terms
and relative to the Russell 2000 benchmark index. The Fund's value-
oriented investment style benefited performance during the brief
period of market weakness early in the quarter ended September 30,
1996, and the Fund furthered its lead over the benchmark index later
in the quarter even though growth stocks led the market recovery. We
implemented minor changes in industry and sector weights as the Fund
reinvested proceeds from the normal turnover of investments. The
Fund ended the September quarter nearly fully invested, in line with
our basic strategy.
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
<PAGE>
(Daniel V. Szemis)
Daniel V. Szemis
Vice President and Portfolio Manager
October 29, 1996
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
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, Florida 32246-6484
(800) 637-3863
PERFORMANCE DATA
About Fund Performance
<PAGE>
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* 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. (There is no initial
sales charge for automatic share conversions.)
* 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.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
9/30/96 6/30/96 9/30/95 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Special Value Fund, Inc. Class A Shares* $18.99 $19.17 $17.15 +11.84%(1) +0.06%(1)
ML Special Value Fund, Inc. Class B Shares* 18.32 18.52 16.61 +11.44(1) -0.05(1)
ML Special Value Fund, Inc. Class C Shares* 18.19 18.40 16.51 +11.33(1) -0.10(1)
ML Special Value Fund, Inc. Class D Shares* 18.96 19.13 17.12 +11.86(1) +0.11(1)
Russell 2000 Index** 346.39 346.62 310.38 +11.60 -0.07
ML Special Value Fund, Inc. Class A Shares--Total Return* +19.83(2) +5.15(3)
ML Special Value Fund, Inc. Class B Shares--Total Return* +18.59(4) +4.88(5)
ML Special Value Fund, Inc. Class C Shares--Total Return* +18.58(6) +4.85(7)
ML Special Value Fund, Inc. Class D Shares--Total Return* +19.58(8) +5.09(9)
Russell 2000 Index**--Total Return +13.13 +0.34
<PAGE>
<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 $0.183 per share capital
gains distributions.
(2)Percent change includes reinvestment of $1.260 per share ordinary
income dividends and $0.183 per share capital gains distributions.
(3)Percent change includes reinvestment of $0.933 per share ordinary
income dividends and $0.183 per share capital gains distributions.
(4)Percent change includes reinvestment of $1.105 per share ordinary
income dividends and $0.183 per share capital gains distributions.
(5)Percent change includes reinvestment of $0.875 per share ordinary
income dividends and $0.183 per share capital gains distributions.
(6)Percent change includes reinvestment of $1.114 per share ordinary
income dividends and $0.183 per share capital gains distributions.
(7)Percent change includes reinvestment of $0.875 per share ordinary
income dividends and $0.183 per share capital gains distributions.
(8)Percent change includes reinvestment of $1.218 per share ordinary
income dividends and $0.183 per share capital gains distributions.
(9)Percent change includes reinvestment of $0.912 per share ordinary
income dividends and $0.183 per share capital gains distributions.
</TABLE>
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 $5,126.26 on September
30, 1996.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/96 +19.83% +13.54%
Five Years Ended 9/30/96 +15.68 +14.44
Ten Years Ended 9/30/96 + 7.63 + 7.05
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/96 +18.59% +14.59%
Five Years Ended 9/30/96 +14.49 +14.49
Inception (10/21/88) through 9/30/96 + 9.59 + 9.59
[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 9/30/96 +18.58% +17.58%
Inception (10/21/94)
through 9/30/96 +18.86 +18.86
[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 9/30/96 +19.58% +13.30%
Inception (10/21/94)
through 9/30/96 +19.79 +16.52
[FN]
*Maximum sales charge is 5.25%
**Assuming maximum sales charge.
PERFORMANCE DATA (continued)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
<PAGE>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <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--9/30/96 17.10 18.99 0.183 0.933 +17.87
------ ------
Total $6.862 Total $6.024
Cumulative total return as of 9/30/96: +441.03%**
<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>
Performace Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
0/21/88--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--9/30/96 16.61 18.32 0.183 0.875 +16.93
------ ------
Total $1.506 Total $3.212
<PAGE>
Cumulative total return as of 9/30/96: +107.06%**
<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>
Performace Summary--Class C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <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--9/30/96 16.50 18.19 0.183 0.875 +16.92
------ ------
Total $0.526 Total $1.849
Cumulative total return as of 9/30/96: +39.95%**
<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**
<S> <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--9/30/96 17.09 18.96 0.183 0.912 +17.64
------ ------
Total $0.526 Total $1.998
Cumulative total return as of 9/30/96: +42.09%**
<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>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Aerospace 153,800 ++BE Aerospace, Inc. $ 2,024,739 $ 3,172,125 0.5%
475,000 ++UNC, Inc. 2,952,554 4,215,625 0.6
------------ ------------ ------
4,977,293 7,387,750 1.1
Apparel 815,000 ++Farah, Inc. (f) 6,680,057 6,010,625 0.9
700,500 ++Norton McNaughton, Inc. (f) 10,056,577 5,691,563 0.9
------------ ------------ ------
16,736,634 11,702,188 1.8
Automotive 125,000 Smith (A.O.) Corp. 2,606,732 3,109,375 0.5
73,100 Walbro Corp. 1,367,899 1,388,900 0.2
------------ ------------ ------
3,974,631 4,498,275 0.7
Banks & Finance 76,200 American Federal Bank, FSB 874,500 1,343,025 0.2
173,100 Bankers Corp. 1,033,803 3,159,075 0.5
328,200 Charter One Financial, Inc. 5,752,211 13,128,000 2.0
170,000 ++Civic Bancorp, Inc. 926,250 1,508,750 0.2
88,000 Collective Bancorp., Inc. 1,929,051 2,508,000 0.4
251,400 FirstFed Financial Corp. 3,600,548 4,965,150 0.8
300,000 Roosevelt Financial Group, Inc. 3,868,458 5,137,500 0.8
------------ ------------ ------
17,984,821 31,749,500 4.9
Biotechnology 197,100 ++Biomatrix, Inc. 2,967,802 3,301,425 0.5
157,000 ++COR Therapeutics, Inc. 1,570,102 1,570,000 0.3
249,200 ++Ostex International, Inc. 2,937,627 1,993,600 0.3
517,600 ++Scios, Inc. 2,262,401 3,202,650 0.5
------------ ------------ ------
9,737,932 10,067,675 1.6
Building & Building 650,000 ++Giant Cement Holding, Inc. (f) 7,315,281 9,668,750 1.5
Materials 385,400 ++Insituform Technologies, Inc. (Class A) 2,719,538 3,083,200 0.5
245,300 Ryland Group, Inc. 3,575,517 3,648,838 0.6
------------ ------------ ------
13,610,336 16,400,788 2.6
Business Services 221,997 ++Pharmaceutical Product Development
Inc. (g) 2,835,426 5,993,920 0.9
Chemicals 165,000 Arcadian Corp. 3,249,945 4,104,375 0.6
215,000 Mississippi Chemical Corp. 4,595,341 5,025,625 0.8
------------ ------------ ------
7,845,286 9,130,000 1.4
<PAGE>
Commercial Services 111,200 ++Education Alternatives, Inc. 370,299 423,950 0.1
Computer Software 369,000 ++Structural Dynamics Research Corp. 7,463,772 8,809,875 1.4
4,500,000 ++Versus Technology, Inc. (e) 2,250,000 2,880,000 0.4
------------ ------------ ------
9,713,772 11,689,875 1.8
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Computers & Computer 458,150 ++Boole & Babbage, Inc. $ 5,573,205 $ 11,453,750 1.8%
Services $ 4,000,000 Cellnet Data Systems, Inc., 13%**
due 6/15/2005 (c)(e) 2,507,337 3,080,000 0.5
300,000 ++InterVoice, Inc. 4,569,412 4,425,000 0.7
515,000 ++Storage Technology Corp. 13,393,107 19,505,625 3.0
287,000 ++Stratus Computer, Inc. 7,587,436 5,668,250 0.9
504,700 Texlon Corp. 5,612,823 7,065,800 1.1
150,200 ++Voice Control Systems, Inc. 788,550 901,200 0.1
38,000 ++Wang Laboratories, Inc. 747,080 741,000 0.1
------------ ------------ ------
40,778,950 52,840,625 8.2
Cosmetics 1,317 ++Alfin, Inc. (Preferred)(d) 0 24,259 0.0
Data Processing 85,800 ++Cognos, Inc. 173,050 2,799,225 0.4
254,000 ++Compuware Corp. 7,078,770 11,620,500 1.8
570,000 ++Hyperion Software Corp. 8,463,687 8,763,750 1.3
150,000 ++Information Resources, Inc. 1,941,632 1,968,750 0.3
712,700 ++Platinum Technology, Inc. 10,411,932 8,997,838 1.4
345,100 ++Software Spectrum, Inc. (f) 7,207,848 10,353,000 1.6
72,000 ++Sterling Software, Inc. 3,375,595 5,499,000 0.9
594,000 ++Symantec Corp. 8,533,218 6,459,750 1.0
180,700 ++VMARK Software, Inc. 2,242,314 1,242,313 0.2
------------ ------------ ------
49,428,046 57,704,126 8.9
Educational Software 236,900 ++MathSoft, Inc. 1,247,850 1,243,725 0.2
Electronics 216,200 ++Alpha Industries, Inc. 1,793,557 1,648,525 0.2
403,000 ++B.I., Inc. 4,066,592 3,324,750 0.5
557,400 ++CHS Electronics, Inc. 7,757,231 7,594,575 1.2
47,400 ++ITI Technologies, Inc. 1,294,575 1,670,850 0.3
52,400 ++Marshall Industries 1,535,053 1,578,550 0.2
337,200 ++Rofin-Sinar Technologies, Inc. 3,203,400 3,667,050 0.6
464,200 ++VLSI Technology, Inc. 5,934,921 7,543,250 1.2
48,200 Wyle Electronics 1,521,674 1,548,425 0.2
------------ ------------ ------
27,107,003 28,575,975 4.4
<PAGE>
Environmental & 529,320 BHA Group, Inc. (Class A)(f) 7,111,261 7,675,140 1.2
Environmental Control 1,625,000 ++Envirosource, Inc. 6,288,633 6,093,750 0.9
------------ ------------ ------
13,399,894 13,768,890 2.1
Healthcare-- 185,000 ++Beverly Enterprises, Inc. 2,453,303 2,011,875 0.3
Products & Services 813,000 ++Community Psychiatric Centers 8,865,402 7,621,875 1.2
641,000 ++Magellan Health Services, Inc. 12,208,917 13,300,750 2.0
574,500 ++Ramsay Health Care, Inc. (f) 3,830,632 1,364,438 0.2
------------ ------------ ------
27,358,254 24,298,938 3.7
Home Furnishings 300,000 Crown Crafts, Inc. 3,979,886 2,850,000 0.4
338,400 ++Department 56, Inc. 7,878,714 8,417,700 1.3
------------ ------------ ------
11,858,600 11,267,700 1.7
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Insurance 40,600 American National Insurance Co. $ 2,442,745 $ 2,760,800 0.4%
144,400 ++Gryphon Holdings, Inc. 1,744,902 1,985,500 0.3
70,100 Midland Financial Group, Inc. 556,419 665,950 0.1
700,300 PXRE Corp. (f) 15,443,271 16,019,363 2.5
217,300 Security-Connecticut Corp. 4,318,664 6,817,788 1.1
------------ ------------ ------
24,506,001 28,249,401 4.4
Iron & Steel 295,000 ++Gibraltar Steel Corp. 5,428,372 6,637,500 1.0
232,700 ++Olympic Steel, Inc. 3,973,953 6,253,813 1.0
639,300 Quanex Corp. 13,849,303 17,181,187 2.6
678,500 ++Shiloh Industries, Inc. 9,213,683 10,856,000 1.7
------------ ------------ ------
32,465,311 40,928,500 6.3
Leasing 244,000 Sea Containers, Ltd. 4,237,586 4,788,500 0.7
Machinery 110,000 AGCO Corp. 2,383,050 2,805,000 0.5
277,300 Bearings, Inc. 7,875,310 7,833,725 1.2
218,100 Cincinnati Milacron, Inc. 5,348,357 4,116,637 0.6
------------ ------------ ------
15,606,717 14,755,362 2.3
Medical 235,000 Analogic Corp. 4,319,877 6,697,500 1.0
279,850 ++GranCare, Inc. 4,827,476 5,387,112 0.9
93,200 ++Healthdyne Technologies, Inc. 1,120,752 780,550 0.1
216,000 Medex, Inc. 2,403,258 3,159,000 0.5
150,000 ++Sierra Health Services, Inc. 4,760,136 5,156,250 0.8
168,500 ++Sofamor Danek Group, Inc. 3,877,304 5,202,437 0.8
316,800 ++VISX, Inc. 7,272,145 8,553,600 1.3
------------ ------------ ------
28,580,948 34,936,449 5.4
<PAGE>
Metals 276,800 Castle (A.M.) & Company 4,650,240 5,570,600 0.8
311,000 Commonwealth Aluminum Corp. 5,193,708 5,248,125 0.8
96,800 Handy & Harman 1,565,778 1,730,300 0.3
------------ ------------ ------
11,409,726 12,549,025 1.9
Miscellaneous 90,000 PHH Corp. 1,541,238 2,677,500 0.4
Natural Resources 240,000 ++Tom Brown, Inc. 2,556,265 4,530,000 0.7
70,700 ++Grant Tensor Geophysical Corp.
(Convertible Preferred) 1,175,940 1,290,275 0.2
505,200 Newpark Resources, Inc. 11,689,350 18,376,650 2.8
308,391 ++Plains Resources, Inc. (e) 1,806,983 4,201,827 0.7
140,000 ++Plains Resources, Inc. 1,461,553 1,942,500 0.3
73,349 ++Swift Energy Co. 927,807 1,760,376 0.3
380,000 Total Petroleum of North America, Ltd. 4,357,496 3,942,500 0.6
$ 8,626,000 TransAmerican Refining Corp., 18.29%**
due 2/15/2002 6,167,792 6,426,370 1.0
147,437 TransAmerican Refining Corp. (Warrants)(a) 360,299 294,874 0.0
685,000 ++TransTexas Gas Corp. 8,165,048 7,877,500 1.2
813,800 Zemex Corporation (f) 7,282,851 6,306,950 1.0
------------ ------------ ------
45,951,384 56,949,822 8.8
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Paper/Forest Products 220,000 ++Arbatax International, Inc. (b) $ 1,364,366 $ 1,551,000 0.2%
597,700 ++Mercer International, Inc. 10,596,665 8,143,662 1.3
380,000 Pope & Talbot, Inc. 6,102,561 5,842,500 0.9
------------ ------------ ------
18,063,592 15,537,162 2.4
Pharmaceuticals 276,600 ++NeoRx Corp. 1,782,214 1,504,012 0.2
Real Estate & $ 1,000,000 Alexander Haagen Properties, Inc., 7.25%
Real Estate due 12/27/2003 (e) 1,000,000 958,750 0.2
Investment Trusts 63,400 Bay Apartment Communities, Inc. 1,125,321 1,806,900 0.3
88,000 Catellus Development Corp. (Convertible
Preferred)(Class B)(e) 3,200,250 4,752,000 0.7
80,000 Manufactured Home Communities, Inc. 1,244,794 1,540,000 0.2
50,000 Mid-America Apartment Communities, Inc. 1,246,125 1,256,250 0.2
$ 3,000,000 National Health Corp., Convertible
Bonds, 7.75% due 1/01/2001 3,000,000 3,120,000 0.5
------------ ------------ ------
10,816,490 13,433,900 2.1
<PAGE>
Restaurants 591,700 ++Au Bon Pain Company, Inc. (Class A)(f) 3,969,056 4,141,900 0.7
140,000 ++Shoney's, Inc. 1,406,643 1,277,500 0.2
1,164,900 ++TPI Enterprises, Inc. (f) 5,488,347 3,421,894 0.5
------------ ------------ ------
10,864,046 8,841,294 1.4
Retailing 1,068,500 J. Baker, Inc. (f) 12,266,646 6,527,867 1.0
232,400 ++Bon-Ton Stores, Inc. 2,429,684 1,336,300 0.2
579,300 CML Group, Inc. 1,766,865 2,824,087 0.4
393,800 ++Catherines Stores Corp. (f) 4,060,257 2,855,050 0.4
661,900 ++Chico's Fashions, Inc. (f) 5,035,678 4,964,250 0.8
1,344,700 ++Grossman's, Inc. (f) 2,518,600 2,017,050 0.3
1,274,900 ++Levitz Furniture, Inc. 6,434,404 4,940,237 0.8
102,000 ++REX Stores Corp. 1,315,670 1,122,000 0.2
------------ ------------ ------
35,827,804 26,586,841 4.1
Telecommunications 241,200 ++Allen Group, Inc. 4,198,353 4,462,200 0.7
Equipment 770,000 ++Comdial Corp. 4,716,250 5,197,500 0.8
663,000 ++Network Equipment Technologies, Inc. 12,208,696 9,033,375 1.4
------------ ------------ ------
21,123,299 18,693,075 2.9
Textiles 450,000 ++Burlington Industries, Inc. 5,117,552 4,443,750 0.7
Transportation 268,900 Air Express International Corp. 7,281,636 7,596,425 1.2
100,000 Expeditors International of Washington,
Inc. 2,904,588 3,525,000 0.5
200,000 ++Kirby Corp. 2,814,824 3,525,000 0.5
------------ ------------ ------
13,001,048 14,646,425 2.2
Utilities 92,000 American Water Works Co., Inc. 180,682 1,989,500 0.3
70,000 Wicor, Inc. 2,049,562 2,546,250 0.4
------------ ------------ ------
2,230,244 4,535,750 0.7
Total Stocks & Bonds 542,090,227 602,824,927 93.0
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Value Percent of
Face Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Commercial Paper* $ 20,000,000 Delaware Funding Corp., 5.35% due
10/15/1996 $ 19,958,389 $ 19,958,389 3.1%
21,174,000 General Electric Capital Corp.,
5.80% due 10/01/1996 21,174,000 21,174,000 3.3
<PAGE>
Total Short-Term Securities 41,132,389 41,132,389 6.4
Total Investments $583,222,616 643,957,316 99.4
============
Other Assets Less Liabilities 4,184,386 0.6
------------ ------
Net Assets $648,141,702 100.0%
============ ======
<FN>
*Commercial Paper is 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.
++Non-income producing security.
(a)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.
(b)The Fund received this security as a special stock dividend from
our Mercer International, Inc. holding.
(c)Each $1,000 face amount contains 4 warrants of Cellnet Data
Systems, Inc.
(d)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.
(e)Restricted securities as to resale. The value of the Fund's
investments in restricted securities was approximately $15,873,000,
representing 2.4% of net assets.
Acquisition Value
Issue Date(s) Cost (Note 1a)
Alexander Haagan Properties, Inc.,
7.25% due 12/27/2003 12/27/1993 $ 1,000,000 $ 958,750
Catellus Development Corp.
(Convertible Preferred) (Class B) 12/14/1994-2/02/1995 3,200,250 4,752,000
Cellnet Data Systems, Inc.,
13% due 6/15/2005 6/06/1995 2,507,337 3,080,000
Plains Resources, Inc. 5/25/1992-1/18/1995 1,806,983 4,201,827
Versus Technology, Inc. 8/26/1996 2,250,000 2,880,000
Total $10,764,570 $15,872,577
=========== ===========
(f)Investment in companies 5% or more of whose outstanding
securities are held by the Fund (such companies are defined as
"Affiliated Companies" in section 2(a)(3) of the Investment Company
Act of 1940) are as follows:
<PAGE>
Net Share Net Dividend
Industry Affiliate Activity Cost Income
Apparel Farah, Inc. -- -- +++
Apparel Norton McNaughton, Inc. -- -- +++
Building & Building Giant Cement Holding, Inc. 125,000 $1,621,363 +++
Materials
Data Processing Software Spectrum, Inc. 74,100 1,453,182 +++
Environmental & BHA Group, Inc. (Class A) 342,220 4,683,772 $ 21,889
Environmental
Control
Healthcare-- Ramsay Health Care, Inc. 70,000 293,126 +++
Products & Services
Insurance PXRE Corp. 40,000 1,040,000 252,108
Natural Zemex Corporation 813,800 7,282,851 +++
Resources
Restaurants Au Bon Pain Company,
Inc. (Class A) 591,700 3,969,056 +++
Restaurants TPI Enterprises, Inc. -- -- +++
Retailing J. Baker, Inc. 493,700 4,485,582 26,082
Retailing Catherines Stores Corp. -- -- +++
Retailing Chico's Fashions, Inc. 592,900 4,561,866 +++
Retailing Grossman's, Inc. 281,700 (733,212) +++
+++Non-income producing security.
(g)During the quarter, Pharmaceutical Product Development, Inc.
acquired Applied Bioscience International, Inc.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of September 30, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$583,222,616) (Note 1a) $643,957,316
Receivables:
Securities sold $ 9,482,779
Capital shares sold 2,768,568
Interest 77,142
Dividends 67,760 12,396,249
------------
Prepaid registration fees and other assets (Note 1e) 136,526
------------
Total assets 656,490,091
------------
<PAGE>
Liabilities: Payables:
Securities purchased 6,400,377
Capital shares redeemed 885,455
Investment adviser (Note 2) 398,092
Distributor (Note 2) 329,112 8,013,036
------------
Accrued expenses and other liabilities 335,353
------------
Total liabilities 8,348,389
------------
Net Assets: Net assets $648,141,702
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 1,176,992
Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 1,950,165
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 193,679
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 169,388
Paid-in capital in excess of par 523,712,236
Accumulated investment loss--net (322,427)
Undistributed realized capital gains on investments--net 60,526,969
Unrealized appreciation on investments--net 60,734,700
------------
Net assets $648,141,702
============
Net Asset Value: Class A--Based on net assets of $223,523,895 and 11,769,922 shares
outstanding $ 18.99
============
Class B--Based on net assets of $357,265,114 and 19,501,650 shares
outstanding $ 18.32
============
Class C--Based on net assets of $35,236,030 and 1,936,792 shares
outstanding $ 18.19
============
Class D--Based on net assets of $32,116,663 and 1,693,877 shares
outstanding $ 18.96
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Six Months Ended September 30, 1996
<S> <S> <C>
Investment Interest and discount earned $ 3,362,854
Income Dividends (net of $7,650 foreign withholding tax) 1,779,847
(Notes 1c & 1d): ------------
Total income 5,142,701
------------
Expenses: Investment advisory fees (Note 2) 2,264,363
Account maintenance and distribution fees--Class B (Note 2) 1,693,965
Transfer agent fees--Class B (Note 2) 417,054
Transfer agent fees--Class A (Note 2) 215,624
Account maintenance and distribution fees--Class C (Note 2) 159,625
Printing and shareholder reports 87,231
Registration fees (Note 1e) 86,467
Transfer agent fees--Class C (Note 2) 41,351
Custodian fees 40,170
Account maintenance fees--Class D (Note 2) 35,466
Professional fees 31,759
Accounting services (Note 2) 31,221
Transfer agent fees--Class D (Note 2) 29,865
Directors' fees and expenses 14,732
Pricing fees 109
Other 5,172
------------
Total expenses 5,154,174
------------
Investment loss--net (11,473)
------------
Realized & Realized gain on investments--net 62,061,762
Unrealized Gain on Change in unrealized appreciation on investments--net 10,503,413
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 72,553,702
============
See Notes to Financial Statements.
</TABLE
FINANCIAL INFORMATION (continued)
</TABLE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: Sept. 30, 1996 March 31, 1996
<S> <S> <C> <C>
Operations: Investment income (loss)--net $ (11,473) $ 3,851,945
Realized gain on investments--net 62,061,762 39,649,159
Change in unrealized appreciation on investments--net 10,503,413 41,578,720
------------ ------------
Net increase in net assets resulting from operations 72,553,702 85,079,824
------------ ------------
<PAGE>
Dividends & Investment income--net:
Distributions to Class A (626,240) (2,232,929)
Shareholders Class B -- (1,325,529)
(Note 1f): Class C -- (137,548)
Class D (58,931) (241,696)
Realized gain on investments--net:
Class A (11,362,317) (5,403,183)
Class B (19,520,403) (10,567,528)
Class C (1,879,787) (748,130)
Class D (1,654,460) (650,489)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (35,102,138) (21,307,032)
------------ ------------
Capital Share Net increase in net assets derived from capital shares
Transactions transactions 67,503,779 113,078,058
(Note 4): ------------ ------------
Net Assets: Total increase in net assets 104,955,343 176,850,850
Beginning of period 543,186,359 366,335,509
------------ ------------
End of period* $648,141,702 $543,186,359
============ ============
<FN>
*Undistributed (Accumulated) investment income (loss)--net $ (322,427) $ 374,217
------------ ------------
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<PAGE>
<TABLE>
Financial Highlights
<CAPTION>
Class A
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
Sept. 30, For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1996++++ 1995++++ 1994++++ 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 17.77 $ 15.63 $ 15.88 $ 15.32 $ 13.86
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .06 .24 .16 .10 .05
Realized and unrealized gain on
investments--net 2.28 2.72 1.09 1.87 1.43
-------- -------- -------- -------- --------
Total from investment operations 2.34 2.96 1.25 1.97 1.48
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.06) (.23) (.10) .00++ (.02)
Realized gain on investments--net (1.06) (.59) (1.40) (1.41) .00++
-------- -------- -------- -------- --------
Total dividends and distributions (1.12) (.82) (1.50) (1.41) (.02)
-------- -------- -------- -------- --------
Net asset value, end of period $ 18.99 $ 17.77 $ 15.63 $ 15.88 $ 15.32
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 13.43%+++ 19.56% 8.85% 13.14% 10.69%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.06%* 1.12% 1.15% 1.17% 1.28%
Net Assets: ======== ======== ======== ======== ========
Investment income--net .64%* 1.43% 1.04% .62% .37%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $223,524 $181,297 $106,506 $ 78,804 $ 70,920
Data: ======== ======== ======== ======== ========
Portfolio turnover 49.22% 60.37% 59.79% 68.70% 42.25%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0506 $ .0503 -- -- --
======== ======== ======== ======== ========
<PAGE>
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Amount is less than $.01 per share.
++++Based on average shares outstanding during the period.
++++++For fiscal year beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity securities.
The "Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US dollars using
the prevailing exchange rate on the date of the transaction. Such
conversions may materially affect the rate shown.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class B
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
Sept. 30, For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1996++++ 1995++++ 1994++++ 1993++++
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 17.21 $ 15.16 $ 15.49 $ 15.01 $ 13.70
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.03) .07 .00++ (.06) (.09)
Realized and unrealized gain on
investments--net 2.20 2.64 1.06 1.83 1.40
-------- -------- -------- -------- --------
Total from investment operations 2.17 2.71 1.06 1.77 1.31
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.07) .00++ .00++ .00++
Realized gain on investments--net (1.06) (.59) (1.39) (1.29) .00++
-------- -------- -------- -------- --------
Total dividends and distributions (1.06) (.66) (1.39) (1.29) --
-------- -------- -------- -------- --------
Net asset value, end of period $ 18.32 $ 17.21 $ 15.16 $ 15.49 $ 15.01
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 12.86%+++ 18.37% 7.70% 12.03% 9.56%
Return:** ======== ======== ======== ======== ========
<PAGE>
Ratios to Average Expenses 2.09%* 2.15% 2.20% 2.19% 2.28%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net (.39%)* .44% .02% (.41%) (.65%)
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $357,265 $310,174 $237,359 $112,768 $ 76,182
Data: ======== ======== ======== ======== ========
Portfolio turnover 49.22% 60.37% 59.79% 68.70% 42.25%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0506 $ .0503 -- -- --
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Amount is less than $.01 per share.
++++Based on average shares outstanding during the period.
++++++For the years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity securities.
The "Average Commission Rate Paid" includes commissions paid
in foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may materially affect
the rate shown.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATIONS (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the
For the For the Period For the For the Period
The following per share data and ratios have been derived Six Months Year Oct. 21, Six Months Year Oct. 21,
from information provided in the financial statements. Ended Ended 1994++ to Ended Ended 1994++ to
Sept. 30, March 31, March 31, Sept. 30, March 31, March 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1996++++ 1995++++ 1996++++ 1996++++ 1995++++
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 17.10 $ 15.10 $ 15.06 $ 17.74 $ 15.61 $ 15.52
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income (loss)--net (.04) .06 .01 .04 .19 .07
Realized and unrealized gain on
investments--net 2.19 2.63 .65 2.28 2.73 .66
------- ------- ------- ------- ------- -------
Total from investment operations 2.15 2.69 .66 2.32 2.92 .73
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net -- (.10) (.06) (.04) (.20) (.08)
Realized gain on investments--net (1.06) (.59) (.56) (1.06) (.59) (.56)
------- ------- ------- ------- ------- -------
Total dividends and distributions (1.06) (.69) (.62) (1.10) (.79) (.64)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 18.19 $ 17.10 $ 15.10 $ 18.96 $ 17.74 $ 15.61
======= ======= ======= ======= ======= =======
<PAGE>
Total Investment Based on net asset value per share 12.82%+++ 18.34% 4.82%+++ 13.33%+++ 19.26% 5.13%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses 2.11%* 2.16% 2.41%* 1.31%* 1.37% 1.61%*
Net Assets: ======= ======= ======= ======= ======= =======
Investment income (loss)--net (.42%)* .36% .14%* .39%* 1.15% .95%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $35,236 $26,920 $11,434 $32,117 $24,795 $11,037
======= ======= ======= ======= ======= =======
Portfolio turnover 49.22% 60.37% 59.79% 49.22% 60.37% 59.79%
======= ======= ======= ======= ======= =======
Average commission rate paid++++++ $ .0506 $ .0503 -- $ .0506 $ .0503 --
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For the fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission rate
per share for purchases and sales of equity securities. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US dollars
using the prevailing exchange rate on the date of the transaction.
Such conversions may materially affect the rate shown.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Special Value Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature.
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.
<PAGE>
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. Securities traded in the NASDAQ National
Market System are valued at the last sale price, or lacking any
sales, at the closing bid price. 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
Directors as the primary market. Securities which are traded both in
the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market. Options
written are valued at the last sale price in the case of exchange-
traded options or, in the case of options traded in the over-the-
counter market, the last asked price. Options purchased are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
bid price. Short-term securities are valued at amortized cost, which
approximates market value. Other investments, including futures
contracts and related options, are stated at market value.
Securities and assets for which market value quotations are not
available are valued at their fair value as determined in good faith
by or under the direction of the Fund's Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell futures
contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended
purchase of securities. Futures contracts are contracts for delayed
delivery of securities at a specific future date and at a specific
price or yield. Upon entering into a contract, the Fund deposits and
maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
<PAGE>
* Options--The Fund is authorized to write covered call and purchase
put 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).
NOTES TO FINANCIAL STATEMENTS (continued)
Written and purchased options are non-income producing investments.
* 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 such contracts.
Premium or discount is amortized over the life of the contracts.
* Foreign currency options and futures--The Fund may 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.
(c) 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.
(d) 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 date, except that if the ex-dividend date has passed,
certain dividends from foreign securities are recorded as soon as
the Fund is informed of 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.
<PAGE>
(e) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(f) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 0.75%, on an annual basis,
of the average daily value of the Fund's net assets.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing share-
holder and distribution-related services to Class B and Class C
shareholders.
<PAGE>
For the six months ended September 30, 1996, MLFD earned
underwriting discounts and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class D shares as follows:
MLFD MLPF&S
Class A $ 941 $13,790
Class D $3,641 $49,291
For the six months ended September 30, 1996, MLPF&S received
contingent deferred sales charges of $297,454 and $10,577 relating
to transactions in Class B and Class C Shares, respectively. Further-
more, MLPF&S received contingent deferred sales charges of $800
relating to transactions subject to front-end sales charge waivers
in Class D Shares.
In addition, MLPF&S received $9,588 in commis-sions on the execution
of portfolio security transactions for the Fund for the six months
ended September 30, 1996.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended Sep-tember 30, 1996 were $363,490,225 and
$253,601,448, respectively.
Net realized and unrealized gains (losses) as of September 30, 1996
were as follows:
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $62,061,957 $60,734,700
Short-term investments (195) --
----------- -----------
Total $62,061,762 $60,734,700
=========== ===========
<PAGE>
As of September 30, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $60,734,700, of which $102,532,885
related to appreciated securities and $41,798,185 related to
depreciated securities. At September 30, 1996, the aggregate cost of
investments for Federal income tax purposes was $583,412,616.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $67,503,779 and $113,078,058 for the six months ended September
30, 1996 and the year ended March 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Six Months Ended Dollar
September 30, 1996 Shares Amount
Shares sold 2,018,378 $ 37,312,713
Shares issued to shareholders
in reinvestment of dividends
and distributions 604,797 10,989,170
------------ ------------
Total issued 2,623,175 48,301,883
Shares redeemed (1,056,986) (19,526,528)
------------ ------------
Net increase 1,566,189 $ 28,775,355
============ ============
Class A Shares for the
Year Ended Dollar
March 31, 1996 Shares Amount
Shares sold 6,440,754 $105,924,815
Shares issued to shareholders
in reinvestment of dividends
and distributions 420,869 6,827,898
------------ ------------
Total issued 6,861,623 112,752,713
Shares redeemed (3,473,788) (58,594,494)
------------ ------------
Net increase 3,387,835 $ 54,158,219
============ ============
NOTES TO FINANCIAL STATEMENTS (concluded)
<PAGE>
Class B Shares for the Six Months Dollar
Ended September 30, 1996 Shares Amount
Shares sold 3,189,576 $ 57,206,071
Shares issued to shareholders
in reinvestment of
distributions 982,745 17,266,830
------------ ------------
Total issued 4,172,321 74,472,901
Shares redeemed (2,658,962) (47,286,773)
Automatic conversion
of shares (34,019) (600,693)
------------ ------------
Net increase 1,479,340 $ 26,585,435
============ ============
Class B Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
Shares sold 8,847,890 $141,111,187
Shares issued to shareholders
in reinvestment of dividends
and distributions 671,486 10,542,063
------------ ------------
Total issued 9,519,376 151,653,250
Shares redeemed (6,931,949) (113,068,363)
Automatic conversion
of shares (218,662) (3,473,457)
------------ ------------
Net increase 2,368,765 $ 35,111,430
============ ============
Class C Shares for the Six Months Dollar
Ended September 30, 1996 Shares Amount
Shares sold 578,646 $ 10,348,164
Shares issued to shareholders
in reinvestment of
distributions 92,733 1,618,187
------------ ------------
Total issued 671,379 11,966,351
Shares redeemed (308,946) (5,467,811)
------------ ------------
Net increase 362,433 $ 6,498,540
============ ============
<PAGE>
Class C Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
Shares sold 1,482,478 $ 23,589,611
Shares issued to shareholders
in reinvestment of dividends
and distributions 50,565 791,271
------------ ------------
Total issued 1,533,043 24,380,882
Shares redeemed (715,916) (11,679,944)
------------ ------------
Net increase 817,127 $ 12,700,938
============ ============
Class D Shares for the Six Months Dollar
Ended September 30, 1996 Shares Amount
Shares sold 1,112,592 $ 20,836,055
Automatic conversion
of shares 32,936 600,693
Shares issued to shareholders
in reinvestment of dividends
and distributions 80,504 1,461,153
------------ ------------
Total issued 1,226,032 22,897,901
Shares redeemed (929,504) (17,253,452)
------------ ------------
Net increase 296,528 $ 5,644,449
============ ============
Class D Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
Shares sold 1,716,390 $ 28,556,422
Automatic conversion
of shares 212,202 3,473,457
Shares issued to shareholders
in reinvestment of dividends
and distributions 48,666 790,721
------------ ------------
Total issued 1,977,258 32,820,600
Shares redeemed (1,286,898) (21,713,129)
------------ ------------
Net increase 690,360 $ 11,107,471
============ ============
<PAGE>
PORTFOLIO INFORMATION
As of September 30, 1996
Percent of
Top Ten Equity Holdings Net Assets
Storage Technology Corp. 3.0%
Newpark Resources, Inc. 2.8
Quanex Corp. 2.6
PXRE Corp. 2.5
Magellan Health Services, Inc. 2.0
Charter One Financial, Inc. 2.0
Compuware Corp. 1.8
Boole & Babbage, Inc. 1.8
Shiloh Industries, Inc. 1.7
Software Spectrum, Inc. 1.6
Percent of
Ten Largest Industries Net Assets
Data Processing 8.9%
Natural Resources 8.8
Computers & Computer Services 8.2
Iron & Steel 6.3
Medical 5.4
Banks & Finance 4.9
Electronics 4.4
Insurance 4.4
Retailing 4.1
Healthcare--Products & Services 3.7
Equity Portfolio Changes for the
Quarter Ended September 30, 1996
Additions
<PAGE>
Allen Group, Inc.
Au Bon Pain Company, Inc. (Class A)
Castle (A.M.) & Company
Comdial Corp.
*Control Data Systems, Inc.
*Cypress Semiconductor Corp.
GranCare, Inc.
Gryphon Holdings, Inc.
Insituform Technologies, Inc. (Class A)
InterVoice, Inc.
Marshall Industries
MathSoft, Inc.
Midland Financial Group, Inc.
Rofin-Sinar Technologies, Inc.
Sofamor Danek Group, Inc.
Stuctural Dynamics Research Corp.
Swift Energy Co.
VISX, Inc.
Versus Technology, Inc.
Voice Control Systems, Inc.
Walbro Corp.
Wang Laboratories, Inc.
Wyle Electronics
Deletions
Amdahl Corp.
Castech Aluminum Group, Inc.
*Control Data Systems, Inc.
*Cypress Semiconductor Corp.
First Colony Corp.
Landmark Graphics Corp.
Movie Gallery, Inc.
Omni Insurance Group, Inc.
Players International, Inc.
Redman Industries, Inc.
Spieker Properties, Inc.
Walden Bancorp, Inc.
[FN]
*Added and deleted in the same quarter.
