MERRILL LYNCH
SPECIAL VALUE
FUND, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
September 30, 1998
<PAGE>
MERRILL LYNCH SPECIAL VALUE FUND, INC.
DEAR SHAREHOLDER
During the quarter ended September 30, 1998, Merrill Lynch Special Value Fund,
Inc. trailed the unmanaged Russell 2000 Index. For the three months ended
September 30, 1998, the Fund's total returns for Class A, Class B, Class C and
Class D Shares were -25.84%, -26.00%, -26.04% and -25.87%, respectively,
compared to the total return of -20.15% for the unmanaged Russell 2000 Index.
(Fund results do not reflect sales charges and would be lower if sales charges
were included. Complete performance information can be found on pages 2 and 3 of
this report to shareholders.)
Portfolio Matters
The Russell 2000 Index of small-capitalization stocks declined sharply during
the three-month period ended September 30, 1998, marking the worst quarterly
performance since 1990. Large-capitalization stocks also declined sharply, but
their losses paled in comparison to small-capitalization stocks. The quarterly
decline of the Russell 2000 Index was nearly twice the decline of the Standard &
Poor's 500 Composite Index over the same period. Half of the stocks in the
Russell 2000 Index fell more than 30% from their 52-week highs, and a quarter of
the stocks declined by more than 50%.
Few stocks posted positive returns during the period ended September 30, 1998,
and the Fund's largest investment positions were no exception. The Fund's
investment performance was hindered by the poor performance of certain large
holdings, including Structural Dynamics Research Corp. and CHS Electronics, Inc.
Shares of Structural Dynamics Research, a provider of design automation tools,
declined following the announcement that the company's earnings would fall below
the range of analysts' expectations. We increased the Fund's investment in
Structural Dynamics Research on stock price weakness. Trading at a market
valuation and at less than trailing 12-month revenues, we believed that the
shares provided a compelling value, given the company's position as a preeminent
supplier to the automotive and aerospace industries. Shares of CHS Electronics,
an international distributor of microcomputers, also fell sharply based on
investor concerns about slowing demand for personal computers and sales to Latin
American markets.
As small-capitalization stocks declined in August, we actively accumulated
investments in which the long-term earnings growth prospects appeared favorable.
Severe price declines in our universe of small-capitalization stocks provided
ample opportunity to increase existing positions and to acquire new investments
at attractive absolute valuation levels. At the same time, we reduced the Fund's
exposure to cyclical stocks and increased exposure to interest rate-sensitive
industries including housing, insurance and financial services. The Fund closed
the quarter with $853 million in net assets and cash reserves of 6.1%, which was
down from the 12.2% level of cash reserves held on June 30, 1998.
Despite poor returns experienced during the September quarter, we believe that
long-term investors will be compensated for the greater volatility associated
with an investment in small-capitalization stocks. Small-capitalization stocks
are now trading at relative valuation levels not seen in 20 years, and on an
absolute basis small-capitalization stocks have not been this low since the
recession of 1990. If history provides a guide, valuations are probably closer
to the bottom than the top. As of September 30, 1998, the decline in
small-capitalization stocks was greater than the one that occurred in 1990 and
less than three percentage points away from the decline that occurred in 1987,
the two most recent periods of significant weakness.
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,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Daniel V. Szemis
Daniel V. Szemis
Senior Vice President and Portfolio Manager
November 9, 1998
1
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select Pricing(SM) System, which offers four pricing alternatives:
o Class A Shares incur a maximum initial sales charge (front-end load) of
5.25% and bear no ongoing distribution or account maintenance fees. Class
A Shares are available only to eligible investors.
o Class B Shares are subject to a maximum contingent deferred sales charge
of 4% if redeemed during the first year, decreasing 1% each year
thereafter to 0% after the fourth year. In addition, Class B Shares are
subject to a distribution fee of 0.75% and an account maintenance fee of
0.25%. These shares automatically convert to Class D Shares after
approximately 8 years. (There is no initial sales charge for automatic
share conversions.)
o Class C Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
o Class D Shares incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation of
future performance. Figures shown in the "Recent Performance Results" and
"Average Annual Total Return" tables assume reinvestment of all dividends
and capital gains distributions at net asset value on the ex-dividend
date. Investment return and principal value of shares will fluctuate so
that shares, when redeemed, may be worth more or less than their original
cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer agency
fees applicable to each class, which are deducted from the income
available to be paid to shareholders.
Recent Performance Results
<TABLE>
<CAPTION>
Ten Years/
12 Month 3 Month Since Inception
Total Return Total Return Total Return
====================================================================================================
<S> <C> <C> <C>
ML Special Value Fund, Inc. Class A Shares* -27.38% -25.84% +140.17%
- ----------------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class B Shares* -28.11 -26.00 +116.69
- ----------------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class C Shares* -28.15 -26.04 + 46.41
- ----------------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class D Shares* -27.55 -25.87 + 51.05
- ----------------------------------------------------------------------------------------------------
Russell 2000 Index** -19.02 -20.15 +188.05/+188.13/+52.49
====================================================================================================
</TABLE>
* Investment results shown do not reflect sales charges; results shown would be
lower if a sales charge was included. Total investment returns are based on
changes in net asset values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset value on the
ex-dividend date. The Fund's ten-year/inception periods are: Class A Shares,
for the ten years ended 9/30/98; Class B Shares, from 10/21/88 to 9/30/98;
and Class C & Class D Shares, from 10/21/94 to 9/30/98.
** An unmanaged broad-based index comprised of small-capitalization common
stocks. Total investment returns for unmanaged indexes are based on
estimates. Ten years/since inception total returns are: for the ten years
ended 9/30/98; from 10/21/88 to 9/30/98; and from 10/21/94 to 9/30/98,
respectively.
2
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
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 $5,475.60 on September
30, 1998.
[CHART OMITTED]
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 9/30/98 -27.38% -31.19%
- --------------------------------------------------------------------------------
Five Years Ended 9/30/98 +10.52 + 9.33
- --------------------------------------------------------------------------------
Ten Years Ended 9/30/98 + 9.16 + 8.57
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 9/30/98 -28.11% -30.59%
- --------------------------------------------------------------------------------
Five Years Ended 9/30/98 + 9.39 + 9.39
- --------------------------------------------------------------------------------
Inception (10/21/88) through 9/30/98 + 8.09 + 8.09
- --------------------------------------------------------------------------------
* 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 9/30/98 -28.15% -28.77%
- --------------------------------------------------------------------------------
Inception (10/21/94) through 9/30/98 +10.15 +10.15
- --------------------------------------------------------------------------------
* 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 9/30/98 -27.55% -31.36%
- --------------------------------------------------------------------------------
Inception (10/21/94) through 9/30/98 +11.03 + 9.52
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
3
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- --------------------------------------------------------------------------------------------------------------------
Auto & Transportation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
258,400 Air Express International Corp. $ 4,619,567 $ 4,134,400 0.5%
470,500 Circle International Group, Inc. 12,002,584 6,587,000 0.8
214,985 +Envirosource, Inc. 5,478,263 1,746,753 0.2
428,500 +Forward Air Corporation (c) 2,774,286 6,213,250 0.7
166,000 +Gentex Corporation 2,111,216 2,490,000 0.3
428,500 +Landair Corporation (c) 1,442,629 1,714,000 0.2
350,500 Meritor Automotive, Inc. 7,707,445 5,279,406 0.6
1,665,400 +Miller Industries, Inc. 13,186,917 7,702,475 0.9
421,900 Walbro Corp. 7,971,817 3,401,569 0.4
-------------- ------------ -----
57,294,724 39,268,853 4.6
- --------------------------------------------------------------------------------------------------------------------
Consumer Discretionary
- --------------------------------------------------------------------------------------------------------------------
1,821,600 +APAC Teleservices, Inc. 14,952,220 9,221,850 1.1
1,317 +Adrien Arpel, Inc. (Preferred) 0 24,259 0.0
1,121,700 +Au Bon Pain Company, Inc. (Class A)(c) 7,525,064 6,835,359 0.8
988,000 +Boise Cascade Office Products Corp. 15,038,187 9,015,500 1.1
1,312,800 +Caribiner International, Inc. (c) 21,646,944 11,158,800 1.3
1,953,000 Danka Business Systems PLC (ADR)(a) 31,807,625 12,328,313 1.4
453,200 Dover Downs Entertainment, Inc. 5,661,752 5,721,650 0.7
326,600 +HA-LO Industries, Inc. 4,476,002 9,553,050 1.1
1,545,000 Heilig-Meyers Company 21,148,381 11,104,688 1.3
295,400 +ITI Technologies, Inc. 4,273,172 7,089,600 0.8
469,500 +Micro Warehouse, Inc. 5,252,823 7,071,844 0.8
1,538,040 +Midway Games, Inc. 23,296,757 17,975,842 2.1
700,500 +Norton McNaughton, Inc. (c) 10,056,577 2,889,562 0.3
1,274,800 +Paxson Communications Corporation 13,764,438 11,712,225 1.4
527,700 +SITEL Corporation 4,675,234 1,616,081 0.2
506,500 +Sodak Gaming, Inc. 6,191,644 3,165,625 0.4
467,800 Unitog Company 10,972,168 9,823,800 1.2
862,000 +WMS Industries, Inc. 3,296,167 6,842,125 0.8
-------------- ------------ -----
204,035,155 143,150,173 16.8
- --------------------------------------------------------------------------------------------------------------------
Energy
- --------------------------------------------------------------------------------------------------------------------
222,200 +Barrett Resources Corp. 6,950,418 4,485,662 0.5
559,900 +Benton Oil & Gas Co. 8,510,720 3,184,431 0.4
385,000 Forcenergy, Inc. 8,623,882 2,237,813 0.3
420,000 +Key Energy Group, Inc. 6,488,857 3,911,250 0.4
457,844 +Louis Dreyfus Natural Gas Corp. 7,397,649 6,638,738 0.8
1,704,500 +Newpark Resources, Inc. (c) 17,523,346 11,718,437 1.4
308,391 +Plains Resources, Inc. (b) 1,806,983 5,107,880 0.6
140,000 +Plains Resources, Inc. 1,461,553 2,362,500 0.3
175,100 +Stone Energy Corporation 6,163,019 5,493,763 0.6
341,700 +Tom Brown, Inc. 4,564,569 4,185,825 0.5
-------------- ------------ -----
69,490,996 49,326,299 5.8
- --------------------------------------------------------------------------------------------------------------------
Financial Services
- --------------------------------------------------------------------------------------------------------------------
85,050 American National Insurance Co. 6,785,507 7,101,675 0.8
126,200 Brandywine Realty Trust 2,216,146 2,413,575 0.3
65,410 Camden Property Trust 1,701,321 1,827,392 0.2
336,273 Charter One Financial, Inc. 2,619,886 8,364,791 1.0
105,000 FelCor Lodging Trust, Inc. 2,229,376 2,552,813 0.3
260,500 HCC Insurance Holdings, Inc. 4,543,521 5,047,188 0.6
62,400 Kimco Realty Corporation 2,211,144 2,371,200 0.3
145,000 Meditrust Corporation 2,182,917 2,474,062 0.3
</TABLE>
4
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- --------------------------------------------------------------------------------------------------------------------
Financial Services (concluded)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
106,000 National Data Corporation $ 3,821,062 $ 3,272,750 0.4%
310,000 PXRE Corp. 6,393,111 7,963,125 0.9
336,100 +Primark Corporation 9,367,203 10,251,050 1.2
-------------- ------------ -----
44,071,194 53,639,621 6.3
- --------------------------------------------------------------------------------------------------------------------
Healthcare
- --------------------------------------------------------------------------------------------------------------------
267,100 +COR Therapeutics, Inc. 2,579,398 2,070,025 0.2
245,000 +DVI, Inc. 5,159,211 3,598,438 0.4
265,000 +EndoSonics Corp. 2,464,338 1,258,750 0.1
424,000 +Genome Therapeutics Corp. 3,619,214 901,000 0.1
154,400 +Gilead Sciences, Inc. 3,558,087 3,338,900 0.4
865,500 +HCIA, Inc. (c) 10,101,561 4,868,438 0.6
454,600 +Magainin Pharmaceuticals, Inc. 4,779,299 1,477,450 0.2
413,300 +Magellan Health Services, Inc. 9,780,009 4,468,806 0.5
1,270,300 +MedPartners, Inc. 12,226,540 4,128,475 0.5
538,000 +NABI, Inc. 3,708,502 1,176,875 0.1
347,400 +NeoRx Corp. 2,201,611 662,231 0.1
152,000 +Neurogen Corporation 2,017,552 2,508,000 0.3
143,300 +Pharmacopeia, Inc. 2,582,582 1,433,000 0.2
424,500 +Ramsay Health Care, Inc. 2,687,711 451,031 0.1
300,850 +Scios, Inc. 1,387,073 1,711,084 0.2
139,500 +Sierra Health Services, Inc. 2,866,479 2,746,406 0.3
831,400 +VISX, Inc. (c) 18,020,579 55,703,800 6.5
-------------- ------------ -----
89,739,746 92,502,709 10.8
- --------------------------------------------------------------------------------------------------------------------
Integrated Oils
- --------------------------------------------------------------------------------------------------------------------
340,000 Basin Exploration, Inc. 5,784,209 5,631,250 0.7
- --------------------------------------------------------------------------------------------------------------------
Materials & Processing
- --------------------------------------------------------------------------------------------------------------------
558,100 +ACX Technologies, Inc. 11,909,137 7,185,537 0.8
500,000 Apogee Enterprises, Inc. 5,946,645 6,125,000 0.7
638,277 BHA Group, Inc. (Class A)(c) 7,083,102 7,499,755 0.9
350,700 Castle (A.M.) & Company 6,346,542 5,282,419 0.6
494,500 +Citation Corp. 6,760,249 4,697,750 0.6
705,000 Commonwealth Industries, Inc. 12,360,443 5,728,125 0.7
218,800 +Dan River, Inc. (Class A) 3,282,000 2,406,800 0.3
228,300 +Giant Cement Holding, Inc. 2,261,257 4,780,031 0.6
97,665 Inland Steel Industries, Inc. 2,838,339 2,124,214 0.3
567,300 +Insituform Technologies, Inc. (Class A) 3,934,108 7,516,725 0.9
325,000 Intermet Corporation 5,866,205 4,123,438 0.5
264,700 +Novamerican Steel, Inc. 3,072,685 1,455,850 0.2
522,000 +Paxar Corp. 7,495,480 4,632,750 0.5
191,400 Quanex Corp. 5,375,408 3,792,113 0.4
205,600 +Ryerson Tull, Inc. (Class A) 2,751,227 2,711,350 0.3
672,800 +Shiloh Industries, Inc. 9,453,417 12,194,500 1.4
253,500 +Wolverine Tube, Inc. 7,470,047 5,339,344 0.6
846,677 +Zemex Corporation (c) 7,282,851 5,503,400 0.6
-------------- ------------ -----
111,489,142 93,099,101 10.9
- --------------------------------------------------------------------------------------------------------------------
Miscellaneous
- --------------------------------------------------------------------------------------------------------------------
1,609,700 Mercer International, Inc. (c) 21,053,577 10,563,656 1.2
1,200,850 +Metromedia International Group, Inc. 13,686,960 4,653,294 0.6
-------------- ------------ -----
34,740,537 15,216,950 1.8
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- --------------------------------------------------------------------------------------------------------------------
Producer Durables
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
171,300 AGCO Corp. $ 4,212,749 $ 1,134,862 0.1%
250,000 +Allen Telecom, Inc. 3,924,618 1,671,875 0.2
419,600 Applied Industrial Technologies, Inc. 8,937,144 6,844,725 0.8
606,200 +B.I., Inc. (c) 5,500,558 5,152,700 0.6
788,900 +Brown & Sharpe Manufacturing Co.
(Class A)(c) 10,150,092 5,916,750 0.7
108,400 +CUNO, Incorporated 1,490,500 1,815,700 0.2
808,800 +Comdial Corp. (c) 4,965,675 6,672,600 0.8
377,000 +DONCASTERS PLC (ADR)(a) 7,049,736 4,194,125 0.5
517,800 +ESCO Electronics Corporation 9,048,312 5,307,450 0.6
107,100 Kennametal, Inc. 4,825,389 2,885,006 0.3
210,800 +Nu Horizons Electronics Corp. 1,621,264 974,950 0.1
493,600 Oakwood Homes Corp. 10,707,785 6,478,500 0.8
272,100 Ryland Group, Inc. 3,984,616 6,632,438 0.8
259,400 +Scott Technologies, Inc. (Class A) 3,494,955 2,788,550 0.3
422,400 Stewart & Stevenson Services, Inc. 9,571,351 4,963,200 0.6
518,750 +TALX Corp. (c) 4,385,624 2,269,531 0.3
364,230 +Toll Brothers, Inc. 8,131,154 8,354,526 1.0
149,200 +Triumph Group, Inc. 3,752,560 4,438,700 0.5
-------------- ------------ -----
105,754,082 78,496,188 9.2
- --------------------------------------------------------------------------------------------------------------------
Technology
- --------------------------------------------------------------------------------------------------------------------
568,300 +Alpha Industries, Inc. (c) 4,178,383 6,322,337 0.7
497,100 +Anixter International, Inc. 7,849,509 7,736,119 0.9
619,700 +Ardent Software, Inc. (c) 5,932,128 7,746,250 0.9
434,600 +Bell Industries, Inc. 6,923,368 5,188,038 0.6
240,500 +Black Box Corporation 7,042,310 5,832,125 0.7
497,387 +Boole & Babbage, Inc. 2,917,576 11,564,248 1.3
408,700 +Brite Voice Systems, Inc. 4,994,571 4,010,369 0.5
1,776,000 +CHS Electronics, Inc. 26,555,309 19,314,000 2.3
833,150 +C.P. Clare Corp. (c) 7,758,336 5,103,044 0.6
142,700 +Cylink Corporation 1,955,715 642,150 0.1
681,100 +DII Group, Inc. 8,003,637 8,258,338 1.0
990,100 +DSP Communications, Inc. 10,520,503 8,168,325 0.9
120,000 +Electronics for Imaging, Inc. 2,139,586 2,535,000 0.3
270,700 +Hadco Corporation 8,639,247 6,564,475 0.8
774,240 +Harbinger Corp. 8,177,608 5,613,240 0.6
430,800 +Harmonic Lightwaves, Inc. 5,915,018 5,277,300 0.6
308,400 +IKOS Systems, Inc. 2,425,936 414,413 0.0
170,000 +Information Resources, Inc. 2,467,664 2,231,250 0.3
390,920 +Learning Company, Inc. (The) 6,593,432 7,745,102 0.9
1,222,800 +Mentor Graphics Corporation 12,490,597 8,483,175 1.0
650,000 +Network Equipment Technologies, Inc. 8,691,403 6,500,000 0.8
758,150 +Phoenix Technologies, Ltd. 10,073,879 4,264,594 0.5
405,100 +Planar Systems, Inc. 4,615,740 4,506,737 0.5
578,700 +Platinum Technology, Inc. 11,770,856 10,416,600 1.2
618,800 +Rational Software Corporation 8,923,567 10,403,575 1.2
665,100 +Read-Rite Corporation 6,368,988 5,196,094 0.6
277,000 +Software Spectrum, Inc. (c) 5,550,546 4,189,625 0.5
151,717 +Sterling Commerce, Inc. 3,430,396 5,253,201 0.6
357,400 +Storage Technology Corp. 5,292,519 9,091,362 1.1
1,715,200 +Structural Dynamics Research Corp. (c) 29,031,933 19,296,000 2.3
1,232,700 +Sybase, Inc. 17,535,228 7,434,722 0.9
</TABLE>
6
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- --------------------------------------------------------------------------------------------------------------------
Technology (concluded)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
463,200 Texlon Corporation $ 5,120,147 $ 9,437,700 1.1%
227,900 +TriQuint Semiconductor, Inc. 4,630,484 3,503,962 0.4
-------------- ------------ -----
264,516,119 228,243,470 26.7
- --------------------------------------------------------------------------------------------------------------------
Utilities
- --------------------------------------------------------------------------------------------------------------------
569,600 +Applied Digital Access, Inc. 4,238,174 1,637,600 0.2
- --------------------------------------------------------------------------------------------------------------------
Total Stocks 991,154,078 800,212,214 93.8
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Face
Amount Issue
- --------------------------------------------------------------------------------------------------------------------
Short-Term Securities
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial Paper** $10,000,000 Concord Minuteman Corp., 5.54% due
10/02/1998 9,998,461 9,998,461 1.2
42,249,000 General Motors Acceptance Corp.,
5.88% due 10/01/1998 42,249,000 42,249,000 4.9
- --------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities 52,247,461 52,247,461 6.1
- --------------------------------------------------------------------------------------------------------------------
Total Investments $1,043,401,539 852,459,675 99.9
==============
Other Assets Less Liabilities 632,037 0.1
------------ -----
Net Assets $853,091,712 100.0%
============ =====
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* Holdings are classified into the economic sectors found in the Russell 2000
Index.
** Commercial Paper is traded on a discount basis; the interest rates shown
reflect the discount rates paid at the time of purchase by the Fund.
(a) American Depositary Receipts (ADR).
(b) The security may be sold to "qualified institutional buyers" under Rule 144A
of the Securities Act of 1933.
(c) 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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Net Share Net Dividend
Sector Affiliate Activity Cost Income
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auto & Forward Air Corporation -- $(1,442,629) ++
Transportation
Auto & Landair Corporation 428,500 1,442,629 ++
Transportation
Consumer Au Bon Pain Company, Inc. -- -- ++
Discretionary (Class A)
Consumer Caribiner International, Inc. 1,312,800 21,646,944 ++
Discretionary
Consumer Norton McNaughton, Inc. -- -- ++
Discretionary
Energy Newpark Resources, Inc. 1,704,500 17,523,346 ++
Healthcare HCIA, Inc. 269,600 2,779,439 ++
Healthcare VISX, Inc. (233,600) (6,141,726) ++
Materials & BHA Group, Inc. (Class A) 58,025 -- $36,556
Processing
Materials & Zemex Corporation -- -- ++
Processing
Miscellaneous Mercer International, Inc. -- -- ++
Producer Durables B.I., Inc. 20,000 133,749 ++
Producer Durables Brown & Sharpe 265,300 3,109,450 ++
Manufacturing Co. (Class A)
Producer Durables Comdial Corp. -- -- ++
Producer Durables TALX Corp. -- -- ++
Technology Alpha Industries, Inc. 59,900 792,924 ++
Technology Ardent Software, Inc. (10,000) 11,939 ++
Technology C.P. Clare Corp. -- -- ++
Technology Software Spectrum, Inc. -- -- ++
Technology Structural Dynamics 536,400 6,235,254 ++
Research Corp.
- --------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
See Notes to Financial Statements.
7
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of September 30, 1998
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$1,043,401,539) (Note 1a) ........ $ 852,459,675
Receivables:
Securities sold ....................................................... $ 4,503,587
Capital shares sold ................................................... 1,183,119
Dividends ............................................................. 121,088 5,807,794
-------------
Prepaid registration fees and other assets (Note 1e) ..................... 127,306
--------------
Total assets ............................................................. 858,394,775
--------------
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Capital shares redeemed ............................................... 3,617,232
Investment adviser (Note 2) ........................................... 535,997
Distributor (Note 2) .................................................. 423,671
Securities purchased .................................................. 106,875 4,683,775
-------------
Accrued expenses and other liabilities ................................... 619,288
--------------
Total liabilities ........................................................ 5,303,063
--------------
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets ............................................................... $ 853,091,712
==============
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized ............................................................... $ 1,838,103
Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized ............................................................... 3,026,094
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized ............................................................... 348,095
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized ............................................................... 635,809
Paid-in capital in excess of par ......................................... 1,013,626,888
Accumulated investment loss--net ......................................... (3,861,280)
Undistributed realized capital gains on investments--net ................. 28,419,867
Unrealized depreciation on investments--net .............................. (190,941,864)
--------------
Net assets ............................................................... $ 853,091,712
==============
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $276,486,033 and 18,381,034 shares
outstanding .............................................................. $ 15.04
==============
Class B--Based on net assets of $432,107,194 and 30,260,940 shares
outstanding .............................................................. $ 14.28
==============
Class C--Based on net assets of $49,198,354 and 3,480,946 shares
outstanding .............................................................. $ 14.13
==============
Class D--Based on net assets of $95,300,131 and 6,358,093 shares
outstanding .............................................................. $ 14.99
==============
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (continued)
Statement of Operations for the Six Months Ended September 30, 1998
<TABLE>
<S> <C> <C> <C>
Investment Interest and discount earned ............................................. $ 3,682,750
Income Dividends (net of $26,170 foreign withholding tax) ....................... 1,772,841
(Notes 1c & 1d): -------------
Total income ............................................................. 5,455,591
-------------
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) ........................................ $ 4,237,221
Account maintenance and distribution fees--Class B (Note 2) .............. 2,883,068
Transfer agent fees--Class B (Note 2) .................................... 724,028
Transfer agent fees--Class A (Note 2) .................................... 414,746
Account maintenance and distribution fees--Class C (Note 2) .............. 334,003
Account maintenance fees--Class D (Note 2) ............................... 149,161
Transfer agent fees--Class D (Note 2) .................................... 135,913
Registration fees (Note 1e) .............................................. 104,518
Transfer agent fees--Class C (Note 2) .................................... 87,849
Printing and shareholder reports ......................................... 68,284
Custodian fees ........................................................... 58,280
Accounting services (Note 2) ............................................. 41,744
Professional fees ........................................................ 38,984
Directors' fees and expenses ............................................. 29,662
Pricing fees ............................................................. 463
Other .................................................................... 8,947
-----------
Total expenses ........................................................... 9,316,871
-------------
Investment loss--net ..................................................... (3,861,280)
-------------
- ---------------------------------------------------------------------------------------------------------------------------------
Realized & Realized gain on investments--net ........................................ 30,670,022
Unrealized Gain Change in unrealized appreciation/depreciation on investments--net ....... (375,185,248)
(Loss) on -------------
Investements--Net Net Decrease in Net Assets Resulting from Operations ..................... $(348,376,506)
(Notes 1b, 1d & 3): =============
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (continued)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: Sept. 30, 1998 March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment loss--net ................................................ $ (3,861,280) $ (6,842,149)
Realized gain on investments--net ................................... 30,670,022 123,972,911
Change in unrealized appreciation/depreciation on investments--net .. (375,185,248) 165,606,065
-------------- --------------
Net increase (decrease) in net assets resulting from operations ..... (348,376,506) 282,736,827
-------------- --------------
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to Realized gain on investments--net:
Shareholders Class A .......................................................... (19,624,603) (39,789,579)
(Note 1f): Class B .......................................................... (31,099,848) (57,233,633)
Class C .......................................................... (3,623,057) (5,666,588)
Class D .......................................................... (6,448,638) (8,409,567)
-------------- --------------
Net decrease in net assets resulting from distributions
to shareholders ..................................................... (60,796,146) (111,099,367)
-------------- --------------
- ---------------------------------------------------------------------------------------------------------------------------------
Capital Share Net increase in net assets derived from capital share transactions .. 70,360,320 387,703,762
Transactions -------------- --------------
(Note 4):
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total increase (decrease) in net assets ............................. (338,812,332) 559,341,222
Beginning of period ................................................. 1,191,904,044 632,562,822
-------------- --------------
End of period ....................................................... $ 853,091,712 $1,191,904,044
============== ==============
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A+
--------------------------------------------------------------
For the
The following per share data and ratios have been derived Six Months For the
from information provided in the financial statements. Ended Year Ended March 31,
Sept. 30, -------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ... $ 22.03 $ 17.59 $ 17.77 $ 15.63 $ 15.88
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net .......... (.01) (.03) .06 .24 .16
Realized and unrealized gain (loss) on
investments--net ....................... (5.90) 7.20 3.01 2.72 1.09
-------- -------- -------- -------- --------
Total from investment operations ....... (5.91) 7.17 3.07 2.96 1.25
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net .............. -- -- (.06) (.23) (.10)
Realized gain on investments--net ... (1.08) (2.73) (3.19) (.59) (1.40)
-------- -------- -------- -------- --------
Total dividends and distributions ...... (1.08) (2.73) (3.25) (.82) (1.50)
-------- -------- -------- -------- --------
Net asset value, end of period ......... $ 15.04 $ 22.03 $ 17.59 $ 17.77 $ 15.63
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ..... (28.06%)++ 43.18% 17.62% 19.56% 8.85%
Return:** ======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................... 1.04%* 1.02% 1.10% 1.12% 1.15%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net .......... (.07%)* (.13%) .34% 1.43% 1.04%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) $276,486 $396,198 $223,492 $181,297 $106,506
Data: ======== ======== ======== ======== ========
Portfolio turnover ..................... 22.51% 67.02% 97.87% 60.37% 59.79%
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class B++
--------------------------------------------------------------
For the
The following per share data and ratios have been derived Six Months For the
from information provided in the financial statements. Ended Year Ended March 31,
Sept. 30, -------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ... $ 21.03 $ 16.91 $ 17.21 $ 15.16 $ 15.49
Operating -------- -------- -------- -------- ---------
Performance: Investment income (loss)--net .......... (.10) (.23) (.12) .07 --+
Realized and unrealized gain (loss) on
investments--net ....................... (5.62) 6.90 2.90 2.64 1.06
-------- -------- -------- -------- ---------
Total from investment operations ....... (5.72) 6.67 2.78 2.71 1.06
-------- -------- -------- -------- ---------
Less dividends and distributions:
Investment income--net .............. -- -- -- (.07) --+
Realized gain on investments--net ... (1.03) (2.55) (3.08) (.59) (1.39)
-------- -------- -------- -------- ---------
Total dividends and distributions ...... (1.03) (2.55) (3.08) (.66) (1.39)
-------- -------- -------- -------- ---------
Net asset value, end of period ......... $ 14.28 $ 21.03 $ 16.91 $ 17.21 $ 15.16
======== ======== ======== ======== =========
Total Investment Based on net asset value per share ..... (28.43%)++ 41.72% 16.44% 18.37% 7.70%
Return:** ======== ======== ======== ======== =========
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................... 2.06%* 2.05% 2.13% 2.15% 2.20%
Net Assets: ======== ======== ======== ======== =========
Investment income (loss)--net .......... (1.10%)* (1.16%) (.68%) .44% .02%
======== ======== ======== ======== =========
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) $432,107 $611,364 $337,716 $310,174 $237,359
Data: ======== ======== ======== ======== =========
Portfolio turnover ..................... 22.51% 67.02% 97.87% 60.37% 59.79%
======== ======== ======== ======== =========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Amount is less than $.01 per share.
++ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
12
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C++
--------------------------------------------------------------
For the
For the Period
The following per share data and ratios have been derived Six Months For the Oct. 21,
from information provided in the financial statements. Ended Year Ended March 31, 1994+ to
Sept. 30, ---------------------------------- March 31,
Increase (Decrease) in Net Asset Value: 1998 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ... $ 20.83 $ 16.77 $ 17.10 $ 15.10 $ 15.06
Operating -------- -------- ------- ------- -------
Performance: Investment income (loss)--net .......... (.10) (.23) (.13) .06 .01
Realized and unrealized gain (loss) on
investments--net ....................... (5.56) 6.84 2.89 2.63 .65
-------- -------- ------- ------- -------
Total from investment operations ....... (5.66) 6.61 2.76 2.69 .66
-------- -------- ------- ------- -------
Less dividends and distributions:
Investment income--net .............. -- -- -- (.10) (.06)
Realized gain on investments--net ... (1.04) (2.55) (3.09) (.59) (.56)
-------- -------- ------- ------- -------
Total dividends and distributions ...... (1.04) (2.55) (3.09) (.69) (.62)
-------- -------- ------- ------- -------
Net asset value, end of period ......... $ 14.13 $ 20.83 $ 16.77 $ 17.10 $ 15.10
======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ..... (28.45%)++ 41.74% 16.39% 18.34% 4.82%++
Return:** ======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................... 2.08%* 2.06% 2.14% 2.16% 2.41%*
Net Assets: ======== ======== ======= ======= =======
Investment income (loss)--net .......... (1.11%)* (1.17%) (.70%) .36% .14%*
======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) $ 49,199 $ 70,159 $31,182 $26,920 $11,434
Data: ======== ======== ======= ======= =======
Portfolio turnover ..................... 22.51% 67.02% 97.87% 60.37% 59.79%
======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
13
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D++
--------------------------------------------------------------
For the
For the Period
The following per share data and ratios have been derived Six Months For the Oct. 21,
from information provided in the financial statements. Ended Year Ended March 31, 1994+ to
Sept. 30, ---------------------------------- March 31,
Increase (Decrease) in Net Asset Value: 1998 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ... $ 21.97 $ 17.56 $ 17.74 $ 15.61 $ 15.52
Operating -------- -------- ------- ------- -------
Performance: Investment income (loss)--net .......... (.03) (.08) .01 .19 .07
Realized and unrealized gain (loss) on
investments--net ....................... (5.88) 7.18 3.02 2.73 .66
-------- -------- ------- ------- -------
Total from investment operations ....... (5.91) 7.10 3.03 2.92 .73
-------- -------- ------- ------- -------
Less dividends and distributions:
Investment income--net .............. -- -- (.04) (.20) (.08)
Realized gain on investments--net ... (1.07) (2.69) (3.17) (.59) (.56)
-------- -------- ------- ------- -------
Total dividends and distributions ...... (1.07) (2.69) (3.21) (.79) (.64)
-------- -------- ------- ------- -------
Net asset value, end of period ......... $ 14.99 $ 21.97 $ 17.56 $ 17.74 $ 15.61
======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ..... (28.13%)++ 42.80% 17.38% 19.26% 5.13%++
Return:** ======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................... 1.29%* 1.27% 1.35% 1.37% 1.61%*
Net Assets: ======== ======== ======= ======= =======
Investment income (loss)--net .......... (.33%)* (.39%) .07% 1.15% .95%*
======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) $ 95,300 $114,183 $40,173 $24,795 $11,037
Data: ======== ======== ======= ======= =======
Portfolio turnover ..................... 22.51% 67.02% 97.87% 60.37% 59.79%
======== ======== ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
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
PricingSM System. Shares of Class A and Class D are sold with a front-end sales
charge. Shares of Class B and Class C may be subject to a contingent deferred
sales charge. All classes of shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions, except that Class B, Class C
and Class D Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain expenses related
to the distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments--Portfolio securities 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 or purchased are
valued at the last sale price in the case of exchange-traded options. In the
case of options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options purchased).
Short-term securities are valued at amortized cost, which approximates market
value. Other investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market 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.
o Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
o Options--The Fund is authorized to write put and covered call options and
purchase put and call options. When the Fund writes an option, an amount equal
to the premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium paid (or
received) is added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund realizes a
gain or loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of
15
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
NOTES TO FINANCIAL STATEMENTS (continued)
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
o Forward foreign exchange contracts--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters such contracts. Premium or discount is amortized over the life of
the contracts.
o 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 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.
(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 ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is 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 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.
For the six months ended September 30, 1998, 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 ........................................ $ 549 $ 7,526
Class D ........................................ $6,680 $87,789
- --------------------------------------------------------------------------------
16
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
For the six months ended September 30, 1998, MLPF&S received contingent deferred
sales charges of $495,732 and $22,778 relating to transactions in Class B and
Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of $33,177
relating to transactions subject to front-end sales charge waivers in Class A
Shares.
In addition, MLPF&S received $38,242 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended September
30, 1998.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended September 30, 1998 were $300,419,981 and $219,325,170,
respectively.
Net realized gains (losses) for the six months ended September 30, 1998 and net
unrealized losses as of September 30, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Losses
- --------------------------------------------------------------------------------
Long-term investments ......................... $30,670,053 $(190,941,864)
Short-term investments ........................ (31) --
----------- -------------
Total ......................................... $30,670,022 $(190,941,864)
=========== =============
- --------------------------------------------------------------------------------
As of September 30, 1998, net unrealized depreciation for Federal income tax
purposes aggregated $190,941,864, of which $111,100,679 related to appreciated
securities and $302,042,543 related to depreciated securities. At September 30,
1998, the aggregate cost of investments for Federal income tax purposes was
$1,043,401,539.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$70,360,320 and $387,703,762 for the six months ended September 30, 1998 and for
the year ended March 31, 1998, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended September 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ...................................... 3,336,465 $ 67,609,577
Shares issued to shareholders
in reinvestment of
distributions .................................... 931,185 18,707,508
--------- ------------
Total issued ..................................... 4,267,650 86,317,085
Shares redeemed .................................. (3,869,977) (75,400,086)
--------- ------------
Net increase ..................................... 397,673 $ 10,916,999
========= ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ..................................... 12,330,033 $257,288,064
Shares issued to shareholders
in reinvestment of
distributions ................................... 1,893,034 37,311,964
---------- ------------
Total issued .................................... 14,223,067 294,600,028
Shares redeemed ................................. (8,945,193) (182,429,269)
---------- ------------
Net increase .................................... 5,277,874 $112,170,759
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class B Shares for the Six Months Dollar
Ended September 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ...................................... 6,184,116 $120,015,944
Shares issued to shareholders
in reinvestment of
distributions .................................... 1,492,116 28,529,266
--------- ------------
Total issued ..................................... 7,676,232 148,545,210
Automatic conversion
of shares ........................................ (482,035) (8,961,393)
--------- ------------
Net increase ..................................... 1,187,661 $ 30,141,405
========= ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ..................................... 14,692,305 $296,696,571
Shares issued to shareholders
in reinvestment of
distributions ................................... 2,741,379 51,728,861
---------- ------------
Total issued .................................... 17,433,684 348,425,432
Automatic conversion
of shares ....................................... (436,386) (8,419,272)
Shares redeemed ................................. (7,898,958) (154,918,900)
---------- ------------
Net increase .................................... 9,098,340 $185,087,260
========== ============
- --------------------------------------------------------------------------------
17
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------------------------
Class C Shares for the Six Months Dollar
Ended September 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ...................................... 927,520 $ 18,083,093
Shares issued to shareholders
in reinvestment of
distributions .................................... 177,023 3,349,285
--------- ------------
Total issued ..................................... 1,104,543 21,432,378
Shares redeemed .................................. (992,163) (17,936,747)
--------- ------------
Net increase ..................................... 112,380 $ 3,495,631
========= ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ...................................... 3,631,060 $ 72,740,230
Shares issued to shareholders
in reinvestment of
distributions .................................... 279,505 5,227,949
--------- ------------
Total issued ..................................... 3,910,565 77,968,179
Shares redeemed .................................. (2,401,343) (47,574,675)
--------- ------------
Net increase ..................................... 1,509,222 $ 30,393,504
========= ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Six Months Dollar
Ended September 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ...................................... 1,660,461 $ 34,409,349
Automatic conversion
of shares ........................................ 460,168 8,961,393
Shares issued to shareholders
in reinvestment of
distributions .................................... 302,895 6,066,990
--------- ------------
Total issued ..................................... 2,423,524 49,437,732
Shares redeemed .................................. (1,261,778) (23,631,447)
--------- ------------
Net increase ..................................... 1,161,746 $ 25,806,285
========= ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ...................................... 6,877,672 $144,426,705
Automatic conversion
of shares ........................................ 418,523 8,419,272
Shares issued to shareholders
in reinvestment of
distributions .................................... 388,550 7,643,351
--------- ------------
Total issued ..................................... 7,684,745 160,489,328
Shares redeemed .................................. (4,776,420) (100,437,089)
--------- ------------
Net increase ..................................... 2,908,325 $ 60,052,239
========= ============
- --------------------------------------------------------------------------------
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
Fred G. Weiss, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Daniel V. Szemis, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
Thomas D. Jones, III, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
18
<PAGE>
Merrill Lynch Special Value Fund, Inc. September 30, 1998
PORTFOLIO INFORMATION (unaudited)
As of September 30, 1998
Percent of
Top Ten Equity Holdings Net Assets
VISX, Inc. .......................................................... 6.5%
CHS Electronics, Inc. ............................................... 2.3
Structural Dynamics Research Corp. .................................. 2.3
Midway Games, Inc. .................................................. 2.1
Danka Business Systems PLC (ADR) .................................... 1.4
Shiloh Industries, Inc. ............................................. 1.4
Newpark Resources, Inc. ............................................. 1.4
Paxson Communications Corporation ................................... 1.4
Boole & Babbage, Inc. ............................................... 1.3
Caribiner International, Inc. ....................................... 1.3
Sectors Represented Percent of
in the Portfolio Net Assets
Technology .......................................................... 26.7%
Consumer Discretionary .............................................. 16.8
Materials & Processing .............................................. 10.9
Healthcare .......................................................... 10.8
Producer Durables ................................................... 9.2
Financial Services .................................................. 6.3
Energy .............................................................. 5.8
Auto & Transportation ............................................... 4.6
Miscellaneous ....................................................... 1.8
Integrated Oils ..................................................... 0.7
Utilities ........................................................... 0.2
Equity Portfolio Changes for the Quarter
Ended September 30, 1998
Additions
*Adrien Arpel, Inc.
Adrien Arpel, Inc. (Preferred)
Brandywine Realty Trust
Camden Property Trust
Electronics for Imaging, Inc.
FelCor Lodging Trust, Inc.
Gentex Corporation
Gilead Sciences, Inc.
Kimco Realty Corporation
Landair Corporation
Meditrust Corporation
*Phycor Inc.
Deletions
AXYS Pharmaceuticals, Inc.
*Adrien Arpel, Inc.
Alfin, Inc.
Alfin, Inc. (Preferred)
BISYS Group, Inc. (The)
Biomatrix, Inc.
Broderbund Software, Inc.
General Cable Corp.
Global DirectMail Corp.
Kent Electronics Corp.
Pharmaceutical Product Development, Inc.
*Phycor Inc.
*Added and deleted in the same quarter.
19
<PAGE>
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch
Special Value Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #10253--9/98
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