MERRILL LYNCH
SPECIAL VALUE
FUND, INC.
FUND LOGO
Annual Report
March 31, 1997
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
Stock and bond market turbulence increased during the three-month
period ended March 31, 1997. Mounting evidence of stronger-than-
expected economic growth suggested to investors that the Federal
Reserve Board would make a preemptive strike to contain inflationary
pressures. These concerns were heightened by statements made by
Federal Reserve Board Chairman Alan Greenspan, and culminated in an
announced increase in the Federal Funds rate of 0.25% to 5.50% on
March 25. As investors became concerned that this might prove to be
only the first in a series of monetary policy tightening moves,
interest rates rose and stock and bond prices declined. Following
the central bank's action, investor sentiment fluctuated from
negative to more positive, depending upon whether the latest
economic data releases were perceived to suggest an overheating or
moderating trend. It appears that clear-cut signs of continued low
inflation and moderate economic growth, as well as no further
indications of monetary policy tightening, are needed before
stability returns to the financial markets.
<PAGE>
On the international front, although the Federal Reserve Board's
action triggered some weakness in the US dollar, the US currency
subsequently continued its strong advance relative to the yen and
the Deutschemark, raising concerns about the outlook for US trade.
In early February, the leading industrialized nations expressed
apparent agreement that it was time to seek a lower dollar and less
volatility in the foreign exchange markets. It remains to be seen
whether these stated intentions will be acted upon, or if the US
dollar continues to rise relative to other major currencies.
Portfolio Matters
During the quarter ended March 31, 1997, 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 -1.35%, -1.57%, -1.64% and -1.40%, respectively, compared to
the total return of -5.17% for the Russell 2000 Index. (Fund results
do not reflect sales charges; results would be lower if sales
charges were included. Complete performance information, including
average annual total returns, can be found on pages 3--7 of this
report to shareholders.)
Small-capitalization stocks, as measured by the Russell 2000 Index,
rallied early in the new year as investors remained optimistic about
the economy and the outlook for corporate profits. Record investment
flows into mutual funds also helped propel the stock market higher.
The Russell 2000 Index set an all-time high in January, only to
reverse its gains in February and March as investor euphoria gave
way to concerns that strength in the economy would cause the Federal
Reserve Board to increase interest rates. The broad stock market
averages traded sharply lower, and the Russell 2000 Index finished
the March quarter 7.5% below its peak. While the Dow Jones
Industrial Average and the unmanaged Standard and Poor's 500 (S&P
500) Composite Index both posted gains for the quarter, the
unmanaged Russell 2000 Index posted a loss.
Within the Russell 2000 Index, ten out of 12 economic sectors posted
negative returns for the quarter ended March 31, 1997. Weakness was
widespread in small-capitalization issues, with the technology and
energy sectors showing the steepest declines. The Fund's performance
during the March quarter was hindered by an underweighted position
in financial services, one of the better-performing sectors, and by
an overweighted position in technology, the weakest sector. However,
the Fund's specific stock holdings sharply outperformed the Russell
2000 Index, more than compensating for the Fund's sector
positioning.
<PAGE>
Individual stocks that most benefited the Fund's quarterly
performance, in order of their contribution to total return,
included CHS Electronics, Inc., J. Baker, Inc. and Newpark
Resources, Inc. Shares of CHS Electronics, Inc., an international
distributor of micro-computers and related products, appreciated
sharply following signs that first quarter earnings would likely
exceed the range of analysts' expectations. J. Baker, Inc., a
retailer of shoes and apparel, benefited from the divestiture of
unprofitable operations and improved prospects at its retail stores.
Shares of Newpark Resources, Inc., an environmental management and
oilfield services company, rallied following the announcement of
strong fourth-quarter financial results and the completion of an
acquisition that should benefit near-term earnings. The Fund's
performance in the March quarter was hindered by investments in
Software Spectrum, Inc. and Department 56, Inc. Shares of Software
Spectrum, Inc., a supplier of software and services to
organizations, declined as the company experienced problems
integrating a recent acquisition. We continue to hold the stock as
we anticipate a substantial increase in sales and solid earnings
improvement as the acquisition's benefits are gradually realized.
Shares of Department 56, Inc., a distributor of collectibles and
specialty giftware, were also weak as retail orders fell below
analysts' expectations. We continue to hold the stock based on its
modest valuation and solid demand for the company's new products.
While the unmanaged Russell 2000 Index scaled new heights in
January, we were particularly active selling stocks that had reached
our price targets. Sharp stock price appreciation, particularly in
the energy and technology sectors, led us to reduce some of the
Fund's largest holdings and to eliminate other stocks entirely. By
mid-quarter, the Fund's cash reserves peaked, providing increased
purchasing power entering the period of stock price weakness that
resulted late in the quarter ended March 31, 1997. At the end of the
quarter, cash holdings represented 6.5% of Fund net assets, up
slightly from 5.8% on December 31, 1996.
Fiscal Year in Review
For the 12 months ended March 31, 1997, Merrill Lynch Special Value
Fund, Inc. significantly outperformed the unmanaged Russell 2000
Index. Total returns for the Fund's Class A, Class B, Class C and
Class D Shares were +17.62%, +16.44%, +16.39% and +17.38%,
respectively, outperforming the +5.11% total return for the
benchmark index. The Fund benefited from its holdings in the energy,
financial services and technology sectors. The Fund's oil and gas
service stocks appreciated sharply based on higher petroleum prices
and increased drilling activity. The Fund's financial service stocks
rallied given favorable interest rates and continued consolidation
in the banking and insurance industries. Technology, although a poor-
performing sector in the benchmark index, was heavily weighted in
the Fund, and made a strong positive contribution to the Fund's
performance for the year. Although large-capitalization technology
stocks performed extremely well over the past 12 months, small-
capitalization technology stocks failed to keep pace with larger
bellwether issues.
<PAGE>
The 12 months ended March 31, 1997 were especially rewarding for
large-capitalization investors, as evidenced by the +19.81% total
return for the S&P 500 Composite Index and the +20.43% total return
for the Dow Jones Industrial Average. In addition, the stock market
generally favored growth stocks over value stocks during this
period. Looking ahead, there are several factors that lead us to
believe that small-capitalization stocks hold greater appreciation
potential despite their relative underperformance over the past
year. First, a strong domestic economy generally favors small-
capitalization stocks' relative performance. Second, strength in the
US dollar usually penalizes large company earnings to a greater
extent than small company earnings. Third, relative valuation
measures, such as price/book value and price/earnings ratios,
currently favor small-capitalization stocks. Although it is
difficult to predict when small-capitalization stocks will
outperform large-capitalization stocks, we remain positive on their
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
<PAGE>
May 2, 1997
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:
* 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. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" tables assume reinvestment of
all dividends and capital gains distributions at net asset value on
the ex-dividend date. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<PAGE>
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
3/31/97 12/31/96 3/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Special Value Fund, Inc. Class A Shares* $17.59 $17.83 $17.77 + 5.87%(1) -1.35%
ML Special Value Fund, Inc. Class B Shares* 16.91 17.18 17.21 + 5.34(1) -1.57
ML Special Value Fund, Inc. Class C Shares* 16.77 17.05 17.10 + 5.20(1) -1.64
ML Special Value Fund, Inc. Class D Shares* 17.56 17.81 17.74 + 5.88(1) -1.40
Russell 2000 Index** 342.56 362.61 330.77 + 3.56 -5.53
ML Special Value Fund, Inc. Class A Shares--Total Return* +17.62(2) -1.35
ML Special Value Fund, Inc. Class B Shares--Total Return* +16.44(3) -1.57
ML Special Value Fund, Inc. Class C Shares--Total Return* +16.39(4) -1.64
ML Special Value Fund, Inc. Class D Shares--Total Return* +17.38(5) -1.40
Russell 2000 Index**--Total Return + 5.11 -5.17
<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 $1.233 per share capital
gains distributions.
(2)Percent change includes reinvestment of $2.014 per share ordinary
income dividends and $1.233 per share capital gains distributions.
(3)Percent change includes reinvestment of $1.850 per share ordinary
income dividends and $1.233 per share capital gains distributions.
(4)Percent change includes reinvestment of $1.854 per share ordinary
income dividends and $1.233 per share capital gains distributions.
(5)Percent change includes reinvestment of $1.971 per share ordinary
income dividends and $1.233 per share capital gains distributions.
</TABLE>
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's
Class A Shares compared to growth of an investment in the Russell
2000 Index. Beginning and endings values are:
3/87 3/97
ML Special Value Fund, Inc.++--
Class A Shares* $ 9,475 $18,473
<PAGE>
Russell 2000 Index++++ $10,000 $24,622
A line graph depicting the growth of an investment in the Fund's
Class B Shares compared to growth of an investment in the Russell
2000 Index. Beginning and endings values are:
10/21/88** 3/97
ML Special Value Fund, Inc.++--
Class B Shares* $10,000 $21,363
Russell 2000 Index++++ $10,000 $26,953
Total Return Based on a $10,000 Investment--Class C & D Shares
A line graph depicting the growth of an investment in the Fund's Class C
and Class D Shares compared to growth of an investment in Russell
2000 Index. Beginning and ending values are:
10/21/94** 3/97
ML Special Value Fund, Inc.++--
Class C Shares* $10,000 $14,438
ML Special Value Fund, Inc.++--
Class D Shares* $ 9,475 $13,944
Russell 2000 Index $10,000 $13,984
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++ML Special Value Fund, Inc. invests in a diversified portfolio of
securities, primarily common stocks, of relatively small companies
which the Fund's management believes have special investment value,
and emerging growth companies regardless of size.
++++This unmanaged Index is comprised of common stocks of the bottom
two-thirds of the largest 3,000 publicly traded companies domiciled
in the United States.
Past performance is not predictive of future performance.
PERFORMANCE DATA (continued)
<PAGE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/97 +17.62% +11.44%
Five Years Ended 3/31/97 +13.90 +12.68
Ten Years Ended 3/31/97 + 6.91 + 6.33
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/97 +16.44% +12.53%
Five Years Ended 3/31/97 +12.75 +12.75
Inception (10/21/88) through 3/31/97 + 9.41 + 9.41
[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 3/31/97 +16.39% +15.41%
Inception (10/21/94)
through 3/31/97 +16.24 +16.24
[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**
<PAGE>
Class D Shares*
Year Ended 3/31/97 +17.38% +11.22%
Inception (10/21/94)
through 3/31/97 +17.15 +14.59
[FN]
*Maximum sales charge is 5.25%
**Assuming maximum sales charge.
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
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
1996 17.10 17.83 1.233 2.014 +23.90
1/1/97--3/31/97 17.83 17.59 -- -- - 1.35
------ ------
Total $7.912 Total $7.105
Cumulative total return as of 3/31/97: +461.02%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charge; results would be lower if
sales charge was included.
</TABLE>
PERFORMANCE DATA (continued)
<PAGE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <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
1996 16.61 17.18 1.233 1.850 +22.57
1/1/97--3/31/97 17.18 16.91 -- -- - 1.57
------ ------
Total $2.556 Total $4.187
Cumulative total return as of 3/31/97: +113.63%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</TABLE>
<TABLE>
Performance 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
1996 16.50 17.05 1.233 1.854 +22.64
1/1/97--3/31/97 17.05 16.77 -- -- -1.64
------ ------
Total $1.576 Total $2.828
Cumulative total return as of 3/31/97: +44.38%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</TABLE>
<PAGE>
<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
1996 17.09 17.81 1.233 1.971 +23.58
1/1/97--3/31/97 17.81 17.56 -- -- - 1.40
------ ------
Total $1.576 Total $3.057
Cumulative total return as of 3/31/97: +47.17%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charge; results would be lower if
sales charge was included.
</TABLE>
PERFORMANCE DATA (concluded)
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 $5,315.66 on March 31,
1997.
PORTFOLIO INFORMATION
As of March 31, 1997
Percent of
Top Ten Equity Holdings Net Assets
<PAGE>
Metromail Corp. 3.8%
CHS Electronics, Inc. 3.0
Mercer International, Inc. 2.2
Sofamor Danek Group, Inc. 2.1
Quanex Corp. 2.1
PXRE Corp. 1.9
Network Equipment Technologies, Inc. 1.7
Sybase, Inc. 1.7
VISX, Inc. 1.7
Structural Dynamics Research Corp. 1.6
Percent of
Ten Largest Industries Net Assets
Electronics 10.3%
Natural Resources 9.1
Data Processing 8.7
Computers & Computer Services 7.1
Medical Instruments 4.7
Telecommunications 4.6
Iron & Steel 4.2
Computer Software 3.9
Insurance 3.7
Building & Building Materials 3.6
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Value Percent of
Industries Shares Held Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Advertising 360,000 ++HA-LO Industries, Inc. $ 4,991,888 $ 5,490,000 0.9%
Aerospace 303,000 ++DONCASTERS PLC (ADR)(c) 5,400,178 5,870,625 0.9
475,000 ++UNC, Inc. 2,952,554 6,768,750 1.1
------------ ------------ ------
8,352,732 12,639,375 2.0
Apparel 378,900 ++Farah, Inc. 2,671,171 3,789,000 0.6
700,500 ++Norton McNaughton, Inc. (e) 10,056,577 4,290,563 0.7
------------ ------------ ------
12,727,748 8,079,563 1.3
Automotive 390,000 Walbro Corp. 7,336,592 6,873,750 1.1
Banks & Finance 166,200 Charter One Financial, Inc. 2,857,934 7,292,025 1.2
130,000 ++Civic Bancorp, Inc. 706,250 1,462,500 0.2
251,400 ++FirstFed Financial Corp. 3,600,548 5,907,900 0.9
120,000 Haven Bancorp, Inc. 3,434,038 3,855,000 0.6
------------ ------------ ------
10,598,770 18,517,425 2.9
<PAGE>
Biotechnology 239,600 ++Biomatrix, Inc. 3,664,032 3,204,650 0.5
207,000 ++COR Therapeutics, Inc. 2,084,477 1,966,500 0.3
60,000 ++Gilead Sciences, Inc. 1,783,232 1,372,500 0.2
276,600 ++NeoRx Corp. 1,782,214 1,365,712 0.2
249,200 ++Ostex International, Inc. 2,937,627 934,500 0.2
377,600 ++Scios, Inc. 1,571,726 2,572,400 0.4
------------ ------------ ------
13,823,308 11,416,262 1.8
Building & Building 650,000 ++Giant Cement Holding, Inc. (e) 7,315,281 10,075,000 1.6
Materials 602,900 ++Insituform Technologies, Inc.
(Class A) 4,197,921 3,617,400 0.6
155,000 Oakwood Homes Corp. 3,479,969 2,731,875 0.4
245,300 Ryland Group, Inc. 3,575,517 2,882,275 0.5
175,000 ++Toll Brothers, Inc. 3,381,874 3,193,750 0.5
------------ ------------ ------
21,950,562 22,500,300 3.6
Computer Software 50,200 ++Business Objects S.A. (ADR)(c) 653,110 489,450 0.1
236,900 ++MathSoft, Inc. 1,247,851 843,956 0.1
373,400 ++Software Spectrum, Inc. (e) 7,959,567 5,927,725 0.9
102,667 ++Sterling Commerce, Inc. 1,775,650 2,977,343 0.5
486,300 ++Structural Dynamics Research Corp. 9,542,964 10,090,725 1.6
138,900 ++Symantec Corp. 1,393,144 1,979,325 0.3
4,500,000 ++Versus Technology, Inc. (d)(e) 2,250,000 2,362,500 0.4
------------ ------------ ------
24,822,286 24,671,024 3.9
Computers & Computer 388,725 ++Boole & Babbage, Inc. 2,014,533 9,232,219 1.5
Services 48,950 ++Compuware Corp. 1,278,481 3,071,613 0.5
100,800 ++New Horizons Worldwide, Inc. 1,315,541 932,400 0.1
301,900 ++The Peak Technologies Group, Inc. 3,688,928 3,169,950 0.5
290,000 ++Planar Systems, Inc. 3,591,436 3,190,000 0.5
201,300 ++Storage Technology Corp. 4,120,116 7,901,025 1.2
604,700 Texlon Corp. 6,882,844 9,221,675 1.5
445,800 ++Wang Laboratories, Inc. 9,786,049 7,912,950 1.3
------------ ------------ ------
32,677,928 44,631,832 7.1
Cosmetics 1,317 ++Alfin, Inc. (Preferred)(b) 0 24,259 0.0
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Shares Held Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Data Processing 45,800 ++Cognos, Inc. $ 91,383 $ 1,190,800 0.2%
272,000 ++Hyperion Software Corp. 3,315,113 4,488,000 0.7
1,403,800 ++Metromail Corp. (e) 24,626,004 24,040,075 3.8
842,600 ++Platinum Technology, Inc. 12,037,103 10,005,875 1.6
763,800 ++Sybase, Inc. 13,488,987 10,693,200 1.7
659,700 ++VMARK Software, Inc. (e) 6,390,940 4,370,513 0.7
------------ ------------ ------
59,949,530 54,788,463 8.7
Diversified Holdings 180,000 ++ACX Technologies, Inc. 3,483,836 3,465,000 0.5
Electronics 906,100 ++Alpha Industries, Inc. (e) 6,526,312 5,549,863 0.9
403,000 ++B.I., Inc. 4,066,592 3,072,875 0.5
940,000 ++CHS Electronics, Inc. (e) 13,060,895 19,152,500 3.0
742,550 ++C.P. Clare Corp. (e) 6,361,798 7,796,775 1.2
330,000 ++DII Group, Inc. 7,412,852 8,126,250 1.3
431,300 ++ITI Technologies, Inc. 5,169,729 6,146,025 1.0
110,000 ++Marshall Industries 3,220,471 3,465,000 0.5
438,000 ++Nu Horizons Electronics, Inc. (e) 3,987,348 3,504,000 0.6
182,000 ++Rofin-Sinar Technologies, Inc. 1,729,000 2,661,750 0.4
53,200 ++Triumph Group, Inc. 1,010,800 1,336,650 0.2
134,400 Wyle Electronics 4,478,128 4,519,200 0.7
------------ ------------ ------
57,023,925 65,330,888 10.3
Environmental & 529,320 BHA Group, Inc. (Class A)(e) 7,111,261 9,660,090 1.5
Environmental Control 1,823,500 ++Envirosource, Inc. 6,792,508 3,760,969 0.6
------------ ------------ ------
13,903,769 13,421,059 2.1
Gaming 300,000 ++WMS Industries, Inc. 6,231,634 5,625,000 0.9
Healthcare-- 261,000 ++Magellan Health Services, Inc. 4,379,551 6,427,125 1.0
Hospitals & Services 100,000 ++Physician Reliance Network, Inc. 875,000 512,500 0.1
574,500 ++Ramsay Health Care, Inc. (e) 3,830,632 2,369,813 0.4
150,000 ++Sierra Health Services, Inc. 4,760,136 3,806,250 0.6
813,000 ++Transitional Hospitals Corp. 8,865,402 7,012,125 1.1
------------ ------------ ------
22,710,721 20,127,813 3.2
Home Furnishings 426,400 ++Department 56, Inc. 9,867,996 7,408,700 1.2
Identification Systems 215,000 ++Identix, Inc. 1,838,250 1,800,625 0.3
Instruments 188,000 ++Elsag Bailey Process Automation N.V. 3,019,280 3,008,000 0.4
253,000 ++VWR Scientific Products Corp. 3,607,837 3,763,375 0.6
------------ ------------ ------
6,627,117 6,771,375 1.0
<PAGE>
Insurance 40,600 American National Insurance Co. 2,442,745 3,176,950 0.5
51,900 ++Gryphon Holdings, Inc. 625,395 739,575 0.1
475,300 PXRE Corp. 9,973,497 12,179,563 1.9
167,300 Security-Connecticut Corp. 3,248,727 7,549,413 1.2
------------ ------------ ------
16,290,364 23,645,501 3.7
Iron & Steel 150,000 ++Gibraltar Steel Corp. 2,698,903 3,000,000 0.5
526,900 Quanex Corp. 10,825,242 13,238,363 2.1
707,000 ++Shiloh Industries, Inc. 9,626,145 10,074,750 1.6
------------ ------------ ------
23,150,290 26,313,113 4.2
Leasing 33,500 ++Sea Containers, Ltd. 420,385 519,250 0.1
</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>
Machinery 110,000 AGCO Corp. $ 2,383,050 $ 3,038,750 0.5%
217,100 Cincinnati Milacron, Inc. 4,681,041 4,070,625 0.6
195,000 Stewart & Stevenson Services, Inc. 4,394,675 3,900,000 0.6
------------ ------------ ------
11,458,766 11,009,375 1.7
Medical Instruments 111,000 Analogic Corp. 1,867,257 3,330,000 0.5
500,000 ++Isolyser Company, Inc. 3,047,185 2,375,000 0.4
372,800 ++Sofamor Danek Group, Inc. 9,164,341 13,467,400 2.1
468,800 ++VISX, Inc. 11,494,579 10,372,200 1.7
------------ ------------ ------
25,573,362 29,544,600 4.7
Metals 180,000 Applied Industrial Technology,
Inc.++++ 5,053,409 6,300,000 1.0
278,000 Castle (A.M.) & Company 4,673,249 4,830,250 0.7
258,400 ++Citation Corp. 3,472,430 3,746,800 0.6
328,300 Commonwealth Aluminum Corp. 5,307,677 5,622,138 0.9
142,700 ++Ryerson Tull, Inc. (Class A) 1,882,780 1,979,962 0.3
------------ ------------ ------
20,389,545 22,479,150 3.5
<PAGE>
Natural Resources 272,000 ++American Exploration Co. 3,409,753 3,060,000 0.5
225,000 ++Benton Oil & Gas Co. 3,431,250 3,487,500 0.5
221,000 ++Newpark Resources, Inc. 3,676,465 9,668,750 1.5
140,000 ++Plains Resources, Inc. 1,461,553 1,855,000 0.3
308,391 ++Plains Resources, Inc. (d) 1,806,983 3,970,534 0.6
438,400 ++Titan Exploration, Inc. 4,711,706 3,726,400 0.6
240,000 ++Tom Brown, Inc. 2,556,265 4,440,000 0.7
380,000 Total Petroleum of North
America, Ltd. 4,357,496 3,990,000 0.6
$ 8,626,000 TransAmerican Refining Corp.,
18.29%** due 2/15/2002 6,867,681 7,892,790 1.3
147,437 TransAmerican Refining Corp.
(Warrants)(a) 360,299 294,874 0.1
685,000 ++TransTexas Gas Corp. 8,165,048 9,590,000 1.5
830,076 ++Zemex Corporation (e) 7,282,851 5,603,013 0.9
------------ ------------ ------
48,087,350 57,578,861 9.1
Paper/Forest 1,437,700 Mercer International, Inc. (e) 19,356,477 13,837,862 2.2
Products 191,500 Pope & Talbot, Inc. 2,946,411 2,633,125 0.4
------------ ------------ ------
22,302,888 16,470,987 2.6
Real Estate & $ 1,000,000 Alexander Haagen Properties, Inc.,
Real Estate 7.25% due 12/27/2003 (d) 1,000,000 928,125 0.1
Investment Trusts
Restaurants 731,000 ++Au Bon Pain Company, Inc.
(Class A)(e) 4,656,455 4,705,812 0.7
1,164,900 ++TPI Enterprises, Inc. (e) 113,689 139,788 0.0
------------ ------------ ------
4,770,144 4,845,600 0.7
Retailing 1,061,200 J. Baker, Inc. (e) 12,122,487 9,550,800 1.5
579,300 CML Group, Inc. 1,766,865 1,086,187 0.2
368,100 ++Catherines Stores Corp. (e) 3,606,116 1,794,487 0.3
661,900 ++Chico's Fashions, Inc. (e) 5,035,678 1,985,700 0.3
1,344,700 ++Grossman's, Inc. 2,518,600 294,153 0.0
1,224,900 ++Levitz Furniture, Inc. 6,171,649 3,521,587 0.6
------------ ------------ ------
31,221,395 18,232,914 2.9
Telecommunications 190,000 ++Allen Telcom, Inc. 3,053,908 3,325,000 0.5
179,600 ++Applied Digital Access, Inc. 1,243,764 942,900 0.2
366,700 ++Brite Voice Systems, Inc. 5,037,951 3,850,350 0.6
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Value Percent of
Industries Shares Held Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Telecommunications 32,000 ++CellNet Data Systems, Inc. $ 399,151 $ 236,000 0.0%
(concluded) 781,300 ++Comdial Corp. (e) 4,790,363 4,785,462 0.8
793,000 ++Network Equipment Technologies, Inc. 14,133,851 10,705,500 1.7
134,100 ++Rural Cellular Corp. (Class A) 1,387,816 1,408,050 0.2
463,250 ++TALX Corp. 3,998,624 3,590,187 0.6
------------ ------------ ------
34,045,428 28,843,449 4.6
<PAGE>
Transportation 258,900 Air Express International Corp. 6,992,886 8,220,075 1.3
630,300 ++Landair Services, Inc. (e) 6,282,236 7,327,237 1.2
------------ ------------ ------
13,275,122 15,547,312 2.5
Total Stocks & Bonds 570,903,631 589,540,950 93.2
<CAPTION>
Face Amount Short-Term Securities
Commercial Paper* $ 30,000,000 Countrywide Home Loans, 5.30% due
4/15/1997 29,938,167 29,938,167 4.7
11,128,000 General Motors Acceptance Corp.,
6.75% due 4/01/1997 11,128,000 11,128,000 1.8
Total Short-Term Securities 41,066,167 41,066,167 6.5
Total Investments $611,969,798 630,607,117 99.7
============
Other Assets Less Liabilities 1,955,705 0.3
------------ ------
Net Assets $632,562,822 100.0%
============ ======
<FN>
++Non-income producing security.
++++Formerly Bearings, Inc.
*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.
(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)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.
(c)American Depositary Receipts (ADR).
(d)The security may be sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(e)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
<S> <S> <C> <C> <C>
Apparel Norton McNaughton, Inc. -- -- +++
Building & Building Giant Cement Holding, Inc. 125,000 $ 1,621,363 +++
Materials
Computer Software Software Spectrum, Inc. 373,400 7,959,567 +++
Computer Software Versus Technology, Inc. 4,500,000 2,250,000 +++
Data Processing Metromail Corp. 1,403,800 24,626,004 +++
Data Processing VMARK Software, Inc. 519,000 4,511,126 +++
Electronics Alpha Industries, Inc. 765,900 5,426,027 +++
Electronics CHS Electronics, Inc. 940,000 13,060,895 +++
Electronics C.P. Clare Corp. 742,550 6,361,798 +++
Electronics Nu Horizons Electronics, Inc. 438,000 3,987,348 +++
Environmental & BHA Group, Inc. (Class A) 342,220 4,683,772 $ 53,648
Environmental
Control
Healthcare-- Ramsay Health Care, Inc. 70,000 293,126 +++
Hospitals & Services
Paper/Forest Products Mercer International, Inc. 1,437,700 19,356,477 +++
Natural Resources Zemex Corporation 830,076 7,282,851 +++
Restaurants Au Bon Pain Company, Inc. 731,000 4,656,455 +++
(Class A)
Restaurants TPI Enterprises, Inc. -- (5,374,658) +++
Retailing J. Baker, Inc. 486,400 4,341,423 58,137
Retailing Catherines Stores Corp. (25,700) (454,141) +++
Retailing Chico's Fashions, Inc. 592,900 4,561,866 +++
Telecommunications Comdial Corp. 781,300 4,790,363 +++
Transportation Landair Services, Inc. 630,300 6,282,236 +++
<FN>
+++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<PAGE>
<TABLE>
Statement of Assets and Liabilities as of March 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$611,969,798) (Note 1a) $630,607,117
Cash 464
Receivables:
Securities sold $ 13,052,186
Capital shares sold 2,426,354
Dividends 39,000
Interest 18,922 15,536,462
------------
Prepaid registration fees and other assets (Note 1e) 40,384
------------
Total assets 646,184,427
------------
Liabilities: Payables:
Securities purchased 7,143,824
Capital shares redeemed 5,103,423
Investment adviser (Note 2) 423,439
Distributor (Note 2) 339,179 13,009,865
------------
Accrued expenses and other liabilities 611,740
------------
Total liabilities 13,621,605
------------
Net Assets: Net assets $632,562,822
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 1,270,549
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 1,997,494
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 185,934
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 228,802
Paid-in capital in excess of par 557,728,128
Undistributed realized capital gains on investments--net 52,514,596
Unrealized appreciation on investments--net 18,637,319
------------
Net assets $632,562,822
============
Net Asset Value: Class A--Based on net assets of $223,491,911 and 12,705,487
shares outstanding $ 17.59
============
Class B--Based on net assets of $337,715,568 and 19,974,939
shares outstanding $ 16.91
============
Class C--Based on net assets of $31,182,450 and 1,859,344
shares outstanding $ 16.77
============
Class D--Based on net assets of $40,172,893 and 2,288,022
shares outstanding $ 17.56
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended March 31, 1997
<S> <S> <C>
Investment Interest and discount earned $ 5,710,559
Income Dividends (net of $16,200 foreign withholding tax) 3,491,890
(Notes 1c & 1d): ------------
Total income 9,202,449
------------
Expenses: Investment advisory fees (Note 2) 4,781,445
Account maintenance and distribution fees--Class B (Note 2) 3,523,376
Transfer agent fees--Class B (Note 2) 979,585
Transfer agent fees--Class A (Note 2) 537,552
Account maintenance and distribution fees--Class C (Note 2) 336,083
Registration fees (Note 1e) 189,523
Printing and shareholder reports 181,202
Transfer agent fees--Class C (Note 2) 97,878
Custodian fees 82,147
Account maintenance fees--Class D (Note 2) 80,469
Transfer agent fees--Class D (Note 2) 80,024
Accounting services (Note 2) 73,232
Professional fees 70,539
Directors' fees and expenses 31,442
Pricing fees 286
Other 11,945
------------
Total expenses 11,056,728
------------
Investment loss--net (1,854,279)
------------
Realized & Realized gain on investments--net 129,452,799
Unrealized Change in unrealized appreciation on investments--net (31,593,968)
Gain (Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 96,004,552
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<PAGE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year
Ended March 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income (loss)--net $ (1,854,279) $ 3,851,945
Realized gain on investments--net 129,452,799 39,649,159
Change in unrealized appreciation on investments--net (31,593,968) 41,578,720
------------ ------------
Net increase in net assets resulting from operations 96,004,552 85,079,824
------------ ------------
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 (37,231,113) (5,403,183)
Class B (59,362,677) (10,567,528)
Class C (5,770,673) (748,130)
Class D (5,290,682) (650,489)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (108,340,316) (21,307,032)
------------ ------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 101,712,227 113,078,058
(Note 4): ------------ ------------
Net Assets: Total increase in net assets 89,376,463 176,850,850
Beginning of year 543,186,359 366,335,509
------------ ------------
End of year* $632,562,822 $543,186,359
============ ============
<FN>
*Undistributed investment income (loss)--net (Note 1g) -- $ 374,217
============ ============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<PAGE>
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995++++ 1994++++ 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 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 3.01 2.72 1.09 1.87 1.43
-------- -------- -------- -------- --------
Total from investment operations 3.07 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 (3.19) (.59) (1.40) (1.41) .00++
-------- -------- -------- -------- --------
Total dividends and distributions (3.25) (.82) (1.50) (1.41) (.02)
-------- -------- -------- -------- --------
Net asset value, end of year $ 17.59 $ 17.77 $ 15.63 $ 15.88 $ 15.32
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 17.62% 19.56% 8.85% 13.14% 10.69%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 1.10% 1.12% 1.15% 1.17% 1.28%
Net Assets: ======== ======== ======== ======== ========
Investment income--net .34% 1.43% 1.04% .62% .37%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $223,492 $181,297 $106,506 $ 78,804 $ 70,920
Data: ======== ======== ======== ======== ========
Portfolio turnover 97.87% 60.37% 59.79% 68.70% 42.25%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0514 $ .0503 -- -- --
======== ======== ======== ======== ========
<FN>
*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 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.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995++++ 1994++++ 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 17.21 $ 15.16 $ 15.49 $ 15.01 $ 13.70
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.12) .07 .00++ (.06) (.09)
Realized and unrealized gain on
investments--net 2.90 2.64 1.06 1.83 1.40
-------- -------- -------- -------- --------
Total from investment operations 2.78 2.71 1.06 1.77 1.31
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.07) .00++ .00++ .00++
Realized gain on investments--net (3.08) (.59) (1.39) (1.29) .00++
-------- -------- -------- -------- --------
Total dividends and distributions (3.08) (.66) (1.39) (1.29) --
-------- -------- -------- -------- --------
Net asset value, end of year $ 16.91 $ 17.21 $ 15.16 $ 15.49 $ 15.01
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 16.44% 18.37% 7.70% 12.03% 9.56%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 2.13% 2.15% 2.20% 2.19% 2.28%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net (.68%) .44% .02% (.41%) (.65%)
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $337,716 $310,174 $237,359 $112,768 $ 76,182
Data: ======== ======== ======== ======== ========
Portfolio turnover 97.87% 60.37% 59.79% 68.70% 42.25%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0514 $ .0503 -- -- --
======== ======== ======== ======== ========
<FN>
*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 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.
<PAGE>
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
March 31, March 31, March 31, March 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995++++ 1997++++ 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 (.13) .06 .01 .01 .19 .07
Realized and unrealized gain on
investments--net 2.89 2.63 .65 3.02 2.73 .66
------- ------- ------- ------- ------- -------
Total from investment operations 2.76 2.69 .66 3.03 2.92 .73
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net -- (.10) (.06) (.04) (.20) (.08)
Realized gain on investments--net (3.09) (.59) (.56) (3.17) (.59) (.56)
------- ------- ------- ------- ------- -------
Total dividends and distributions (3.09) (.69) (.62) (3.21) (.79) (.64)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 16.77 $ 17.10 $ 15.10 $ 17.56 $ 17.74 $ 15.61
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 16.39% 18.34% 4.82%+++ 17.38% 19.26% 5.13%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses 2.14% 2.16% 2.41%* 1.35% 1.37% 1.61%*
Net Assets: ======= ======= ======= ======= ======= =======
Investment income (loss)--net (.70%) .36% .14%* .07% 1.15% .95%*
======= ======= ======= ======= ======= =======
<PAGE>
Supplemental Net assets, end of period
Data: (in thousands) $31,182 $26,920 $11,434 $40,173 $24,795 $11,037
======= ======= ======= ======= ======= =======
Portfolio turnover 97.87% 60.37% 59.79% 97.87% 60.37% 59.79%
======= ======= ======= ======= ======= =======
Average commission rate paid++++++ $ .0514 $ .0503 -- $ .0514 $ .0503 --
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For 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.
+++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. 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).
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 denomi-nated 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 dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(e) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
<PAGE>
(f) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(g) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$2,165,233 have been reclassified between undistributed net realized
capital gains and accumulated net investment losses. These
reclassifications have no effect on net assets or net asset values
per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with 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 shareholder
and distribution-related services to Class B and Class C
shareholders.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended March 31, 1997, MLFD earned underwriting
discounts and commissions 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 $1,962 $ 27,609
Class D $8,139 $109,272
For the year ended March 31, 1997, MLPF&S received contingent
deferred sales charges of $1,268,783 and $27,419 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $9,588 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
March 31, 1997.
During the year ended March 31, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $60 for security
price quotations to compute the net asset value of the Fund.
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, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended March 31, 1997 were $622,721,124 and
$552,077,856, respectively.
Net realized and unrealized gains (losses) as of March 31, 1997 were
as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $129,453,019 $18,637,319
Short-term investments (220) --
------------ -----------
Total $129,452,799 $18,637,319
============ ===========
<PAGE>
As of March 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $16,330,723, of which $87,607,397 related to
appreciated securities and $71,276,674 related to depreciated
securities. At March 31, 1997, the aggregate cost of investments for
Federal income tax purposes was $614,276,394.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $101,712,227 and $113,078,058 for the years ended March 31, 1997
and March 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended March 31, 1997 Shares Amount
Shares sold 7,513,048 $138,984,315
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,927,288 34,582,403
------------ ------------
Total issued 9,440,336 173,566,718
Shares redeemed (6,938,582) (127,615,134)
------------ ------------
Net increase 2,501,754 $ 45,951,584
============ ============
Class A Shares for the Year Dollar
Ended 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
============ ============
Class B Shares for the Year Dollar
Ended March 31, 1997 Shares Amount
<PAGE>
Shares sold 6,630,575 $119,062,202
Shares issued to shareholders
in reinvestment of distributions 3,035,511 52,574,409
------------ ------------
Total issued 9,666,086 171,636,611
Shares redeemed (7,614,216) (135,651,522)
Automatic conversion
of shares (99,241) (1,783,849)
------------ ------------
Net increase 1,952,629 $ 34,201,240
============ ============
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
Year Ended Dollar
March 31, 1997 Shares Amount
Shares sold 1,075,754 $ 19,224,090
Shares issued to share-
holders in reinvestment of
distributions 299,448 5,144,748
------------ ------------
Total issued 1,375,202 24,368,838
Shares redeemed (1,090,217) (19,334,519)
------------ ------------
Net increase 284,985 $ 5,034,319
============ ============
Class C Shares for the
Year Ended Dollar
March 31, 1996 Shares Amount
<PAGE>
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
Year Ended Dollar
March 31, 1997 Shares Amount
Shares sold 2,128,192 $ 39,663,904
Automatic conversion
of shares 95,817 1,783,849
Shares issued to shareholders
in reinvestment of dividends
and distributions 262,004 4,695,473
------------ ------------
Total issued 2,486,013 46,143,226
Shares redeemed (1,595,340) (29,618,142)
------------ ------------
Net increase 890,673 $ 16,525,084
============ ============
Class D Shares for the
Year Ended Dollar
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
============ ============
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
<PAGE>
The Board of Directors and Shareholders,
Merrill Lynch Special Value Fund, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
Special Value Fund, Inc. as of March 31, 1997, the related
statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and
the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at March
31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Special Value Fund, Inc. as of March 31, 1997, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 2, 1997
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
<PAGE>
<TABLE>
The following information summarizes all per share distributions
paid by Merrill Lynch Special Value Fund, Inc. during its taxable
year ended March 31, 1997:
<CAPTION>
Domestic Interest from Domestic Total Long-Term
Record Payable Qualifying Federal Non-Qualifying Ordinary Capital
Date Date Ordinary Income Obligations Ordinary Income Income Gains
<S> <S> <S> <C> <C> <C> <C> <C>
Class A Shares: 7/01/96 7/10/96 $0.088747 $0.005962 $0.838200 $0.932909 $0.183093
12/10/96 12/18/96 $0.048596 $0.000120 $1.032479 $1.081195 $1.050163
Class B Shares: 7/01/96 7/10/96 $0.083201 $0.005590 $0.785822 $0.874613 $0.183093
12/10/96 12/18/96 $0.043839 $0.000108 $0.931411 $0.975358 $1.050163
Class C Shares: 7/01/96 7/10/96 $0.083201 $0.005590 $0.785822 $0.874613 $0.183093
12/10/96 12/18/96 $0.044027 $0.000109 $0.935418 $0.979554 $1.050163
Class D Shares: 7/01/96 7/10/96 $0.086785 $0.005830 $0.819673 $0.912288 $0.183093
12/10/96 12/18/96 $0.047576 $0.000118 $1.010822 $1.058516 $1.050163
The qualifying domestic ordinary income qualifies for the dividends
received deduction for corporations.
The law varies in each state as to whether and what percentage of
dividend income attributable to Federal obligations is exempt from
state income tax. We recommend that you consult your tax adviser to
determine if any portion of the dividends you received is exempt
from state income tax.
Please retain this information for your records.
PORTFOLIO CHANGES (unaudited)
Equity Portfolio Changes for the
Quarter Ended March 31, 1997
Additions
ACX Technologies, Inc.
American Exploration Co.
*AmerUS Life Holdings, Inc.
Applied Digital Access, Inc.
Benton Oil & Gas Co.
Business Objects S.A. (ADR)
Citation Corp.
DONCASTERS PLC (ADR)
Gilead Sciences, Inc.
HA-LO Industries, Inc.
Identix, Inc.
Isolyser Company, Inc.
*Merix Corp.
New Horizons Worldwide, Inc.
Oakwood Homes Corp.
Physical Reliance Network, Inc.
Planar Systems, Inc.
*Quick Response Services, Inc.
Toll Brothers, Inc.
VWR Scientific Products Corp.
*Yurie Systems, Inc.
<PAGE>
Deletions
*AmerUS Life Holdings, Inc.
American Freightways Corp.
Burlington Industries, Inc.
Collective Bancorp., Inc.
Crown Crafts, Inc.
Education Alternatives, Inc.
GranCare, Inc.
Greater New York Savings Bank
Healthdyne Technologies, Inc.
*Merix Corp.
Midland Financial Group, Inc.
Olympic Steel, Inc.
Pharmaceutical Product Development, Inc.
*Quick Response Services, Inc.
REX Stores Corp.
Shoney's, Inc.
Smith (A.O.) Corp.
Sterling Software, Inc.
Stratus Computer, Inc.
Voice Control Systems, Inc.
*Yurie Systems, Inc.
<FN>
*Added and deleted in the same quarter.
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, Florida 32246-6484
(800) 637-3863
</TABLE>