MERRILL LYNCH
SPECIAL VALUE
FUND, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
March 31, 1998
<PAGE>
MERRILL LYNCH SPECIAL VALUE FUND, INC.
DEAR SHAREHOLDER
During the quarter ended March 31, 1998, 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 +12.80%, +12.52%,
+12.53% and +12.72%, respectively, compared to the total return of +10.06% 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 3-5 of this report
to shareholders.)
Overall, the Russell 2000 Index of small-capitalization stocks showed
considerable strength in the March quarter. The only sector to post negative
returns was the energy sector, where stock price declines early in the quarter
were nearly erased late in the quarter on announced production cutbacks by the
Organization of Petroleum Exporting Countries. The other economic sectors of the
Russell 2000 all posted positive results for the March quarter, led by strength
in the consumer discretionary, technology and transportation sectors. Merrill
Lynch Special Value Fund, Inc.'s quarterly performance was helped by
overweighted investments in the consumer discretionary and technology sectors
and by underweighted investments in the poor-performing energy sector.
Relative to the Russell 2000 Index, the Fund entered the quarter with an
underweighted position in energy stocks and closed the quarter with an
overweighted position. Forcenergy, Inc. and Barrett Resources Corp. are two oil
and gas exploration companies, trading at low multiples of cash flow, that we
purchased during the March quarter. Fund sales in the quarter focused on
technology stocks that had reached our price targets. For example, we eliminated
Platinum Technology, Inc., a software provider, and reduced our position in Wang
Laboratories, Inc., a computer integration company. In the consumer
discretionary sector, we purchased a new holding in Callaway Golf Company. The
company manufactures and markets precision-engineered golf clubs for both
skilled and average players. Shares of Callaway Golf Company have been weak
recently given adverse weather conditions in California and Florida. We
anticipate share price improvement, based on new product demand and a return to
more typical weather patterns.
Specific stocks that most benefited the Fund's quarterly investment results
included WMS Industries, Inc. and Paxson Communications Corporation. Shares of
WMS Industries, Inc., a manufacturer of video games and lottery devices, rallied
sharply in anticipation of new products and the planned spin-off to shareholders
of Midway Games, an interactive software publisher. Shares of Paxson
Communications Corporation, a broadcast television network, rebounded sharply in
the March quarter. Recent station acquisitions have drawn attention to the value
of the company's broadcast properties and to the potential for increased cash
flow from the launch of family-oriented programming later this year.
Fund performance in the March quarter was hindered by our investment in
Physician Computer Network, Inc., a provider of healthcare information systems.
Shares of Physician Computer Network declined abruptly following the
announcement that March 1998 results would fall substantially below the range of
analysts' estimates and that prior quarters' results would be restated. Because
our investment rationale was based on results as previously reported and on
unsustainable expectations looking forward, we eliminated the Fund's entire
investment in Physician Computer Network.
1
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
Fiscal Year in Review
For the 12 months ended March 31, 1998, Merrill Lynch Special Value Fund, Inc.
performed in-line with the unmanaged benchmark Russell 2000 Index. Total returns
for Class A, Class B, Class C and Class D Shares were +43.18%, +41.72%, +41.74%
and +42.80%, respectively, compared to the +42.01% total return for the Russell
2000 Index.
Specific stocks that most benefited the Fund's 12-month investment performance
included Platinum Technology, Inc., Landair Services, Inc. and Metromail Corp.
Shares of Platinum Technology, Inc., a provider of distributed software
solutions, were strong as revenue growth accelerated and the company announced a
key strategic alliance with Intel Corporation. Meanwhile, Landair Services, Inc.
shares continued to climb following repeated strong earnings reports and the
announcement that a committee had been formed to consider breaking the company
into two separate businesses. The company provides scheduled trucking services
to air freight forwarders. Shares of Metromail Corp., a provider of consumer
databases and marketing information, also appreciated sharply after the company
received rival takeover offers from American Business Information, Inc. and
Great Universal Stores PLC. We largely eliminated the Fund's position in
Metromail Corp. following news of a "sweetened" bid from Great Universal Stores
PLC.
In Conclusion
For the first three quarters of the Fund's fiscal year, small-capitalization
stocks delivered strong profits growth. If consensus expectations for the March
quarter are realized, it will mark one full year in which earnings growth for
the Russell 2000 small-capitalization stocks has exceeded large-capitalization
companies' earnings growth, as measured by composite earnings for the Standard &
Poor's 500 Index. Although it is not possible to predict precisely when the
period of large-capitalization outperformance will reverse, small-capitalization
stock prices are likely to follow earnings over the long run.
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
May 4, 1998
2
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 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 "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* +43.18% +12.80% +243.91%
- ---------------------------------------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class B Shares* +41.72 +12.52 +202.75
- ---------------------------------------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class C Shares* +41.74 +12.53 +104.63
- ---------------------------------------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class D Shares* +42.80 +12.72 +110.16
- ---------------------------------------------------------------------------------------------------------------------------
Russell 2000 Index** +42.01 +10.06 +299.73/+278.46/+100.30
===========================================================================================================================
</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 dates are:
Class A Shares, ten years ended 3/31/98; Class B Shares, 10/21/88; and
Class C and Class D Shares, 10/21/94.
** An unmanaged broad-based index comprised of common stocks. Total
investment returns for unmanaged indexes are based on estimates. Ten
years/since inception total returns are for the ten years ended 3/31/98;
from 10/21/88 to 3/31/98; and from 10/21/94 to 3/31/98, respectively.
3
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
Class A Shares
[LINE GRAPH OMITTED]
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
ending values are:
3/88 3/98
ML Special Value Fund, Inc.+--
Class A Shares* $ 9,475 $32,582
Russell 2000 Index++ $10,000 $39,973
Class B Shares
[LINE GRAPH OMITTED]
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
ending values are:
10/21/88** 3/98
ML Special Value Fund, Inc.+--
Class B Shares* $10,000 $30,275
Russell 2000 Index++ $10,000 $37,847
Class C & Class D Shares
[LINE GRAPH OMITTED]
A line graph depicting the growth of an investment in the Fund's Class C and D
Shares compared to growth of an investment in the Russell 2000 Index. Beginning
and ending values are:
10/21/94** 3/98
ML Special Value Fund, Inc.+--
Class C Shares* $10,000 $20,463
ML Special Value Fund, Inc.+--
Class D Shares* $ 9,475 $19,912
Russell 2000 Index $10,000 $20,029
* 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 has 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.
4
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 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)
[MOUNTAIN CHART OMITTED]
A mountain chart depicting the growth of an investment in the Fund's Class A
Shares from $947.50 on May 5, 1978 to $7,611.08 on March 31, 1998.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 3/31/98 +43.18% +35.67%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/98 +19.92 +18.63
- --------------------------------------------------------------------------------
Ten Years Ended 3/31/98 +13.15 +12.54
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
- --------------------------------------------------------------------------------
Year Ended 3/31/98 +41.72% +37.72%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/98 +18.71 +18.71
- --------------------------------------------------------------------------------
Inception (10/21/88) through 3/31/98 +12.45 +12.45
- --------------------------------------------------------------------------------
* 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 3/31/98 +41.74% +40.74%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 3/31/98 +23.13 +23.13
- --------------------------------------------------------------------------------
* 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 3/31/98 +42.80% +35.30%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 3/31/98 +24.09 +22.16
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
5
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Auto & Transportation
- ------------------------------------------------------------------------------------------------------------------------------------
252,500 Air Express International Corp. $ 4,472,800 $ 6,707,031 0.6%
431,300 Circle International Group, Inc. 11,191,474 11,429,450 1.0
1,676,400 +Envirosource, Inc. 6,185,721 3,876,675 0.3
428,500 +Landair Services, Inc. (d) 4,216,915 14,140,500 1.2
350,500 Meritor Automotive, Inc. 7,707,445 9,310,156 0.8
745,000 +Miller Industries, Inc. 7,231,255 5,447,813 0.4
434,800 Walbro Corp. (d) 8,254,004 5,326,300 0.4
-------------- -------------- ------
49,259,614 56,237,925 4.7
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary
- ------------------------------------------------------------------------------------------------------------------------------------
507,000 +APAC Teleservices, Inc. 6,926,423 6,559,313 0.5
1,317 Alfin, Inc. (Preferred)(a) 0 24,259 0.0
1,121,700 +Au Bon Pain Company, Inc. (Class A)(d) 7,525,064 9,464,344 0.8
128,300 +Axiom, Inc. 1,501,780 801,875 0.1
434,500 J. Baker, Inc. 3,619,080 3,421,688 0.3
21,200 +Boise Cascade Office Products Corp. 366,710 402,800 0.0
371,000 Callaway Golf Company 10,593,814 10,759,000 0.9
15,800 +The Cheesecake Factory 355,500 526,338 0.0
1,135,000 Danka Business Systems PLC (ADR)(b) 21,306,323 20,855,625 1.7
133,100 +Department 56, Inc. 2,953,023 5,057,800 0.4
132,000 Dover Downs Entertainment, Inc. 2,794,937 3,894,000 0.3
235,000 +Farah, Inc. 1,606,481 1,483,438 0.1
34,400 Fingerhut Companies, Inc. 658,330 892,250 0.1
130,100 +Global DirectMail Corp. 2,818,693 2,406,850 0.2
326,600 +HA-LO Industries, Inc. 4,476,002 11,410,588 1.0
830,000 Heilig-Meyers Company 12,066,876 11,671,875 1.0
295,400 +ITI Technologies, Inc. 4,273,172 7,680,400 0.7
34,900 +Metromail Corp. 542,695 1,208,413 0.1
1,111,600 +Micro Warehouse, Inc. 13,665,799 18,132,975 1.5
93,400 +New Horizons Worldwide, Inc. 1,205,232 1,225,875 0.1
700,500 +Norton McNaughton, Inc. (d) 10,056,577 3,371,156 0.3
1,284,800 +Paxson Communications Corporation 13,894,938 14,293,400 1.2
500 +QuickResponse Services, Inc. 17,205 26,750 0.0
543,300 +SITEL Corporation 5,075,810 6,927,075 0.6
506,500 +Sodak Gaming, Inc. 6,191,644 3,577,156 0.3
467,800 Unitog Company 10,972,169 10,817,875 0.9
439,200 +Viking Office Products, Inc. 8,648,861 10,156,500 0.9
651,600 +WMS Industries, Inc. 12,651,543 20,403,225 1.7
3,300 +West Teleservices Corp. 46,200 55,275 0.0
-------------- -------------- ------
166,810,881 187,508,118 15.7
- ------------------------------------------------------------------------------------------------------------------------------------
Energy
- ------------------------------------------------------------------------------------------------------------------------------------
222,200 +Barrett Resources Corp. 6,950,418 7,763,113 0.6
559,900 +Benton Oil & Gas Co. 8,510,720 6,193,894 0.5
385,000 +Forcenergy, Inc. 8,623,882 10,202,500 0.9
135,400 +Key Energy Group, Inc. 2,005,263 2,208,713 0.2
457,844 +Louis Dreyfus Natural Gas Corp. 7,397,649 8,355,653 0.7
140,000 +Plains Resources, Inc. 1,461,553 2,380,000 0.2
308,391 +Plains Resources, Inc. (c) 1,806,983 5,165,549 0.4
175,100 +Stone Energy Corporation 6,163,019 6,839,844 0.6
341,700 +Tom Brown, Inc. 4,564,569 7,645,537 0.7
-------------- -------------- ------
47,484,056 56,754,803 4.8
====================================================================================================================================
</TABLE>
6
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Services
- ------------------------------------------------------------------------------------------------------------------------------------
80,050 American National Insurance Co. $ 6,324,332 $ 7,814,881 0.7%
208,500 +The BISYS Group, Inc. 6,611,599 7,349,625 0.6
160,130 Charter One Financial, Inc. 2,619,886 10,718,702 0.9
111,500 +Civic Bancorp, Inc. 575,298 2,048,813 0.2
173,500 HCC Insurance Holdings, Inc. 2,877,363 3,990,500 0.3
147,000 National Data Corporation 5,553,865 6,109,688 0.5
344,000 PXRE Corp. 7,458,860 10,664,000 0.9
105,990 Reliastar Financial Corp. 1,347,361 4,882,164 0.4
1,400 Trenwick Group, Inc. 51,275 52,500 0.0
-------------- -------------- ------
33,419,839 53,630,873 4.5
- ------------------------------------------------------------------------------------------------------------------------------------
Healthcare
- ------------------------------------------------------------------------------------------------------------------------------------
272,835 +AXYS Pharmaceuticals, Inc. 2,547,239 2,319,098 0.2
143,200 +Biomatrix, Inc. 2,138,507 4,278,100 0.4
267,100 +COR Therapeutics, Inc. 2,579,398 3,305,363 0.3
273,700 +Cephalon, Inc. 2,738,179 3,831,800 0.3
188,800 +EndoSonics Corp. 1,764,585 1,958,800 0.2
424,000 +Genome Therapeutics Corp. 3,619,214 3,657,000 0.3
595,900 +HCIA, Inc. (d) 7,322,122 8,789,525 0.7
500,000 +Isolyser Company, Inc. 3,047,185 1,312,500 0.1
454,600 +Magainin Pharmaceuticals, Inc. 4,779,299 2,528,713 0.2
540,200 +Magellan Health Services, Inc. 13,710,500 14,045,200 1.2
704,500 +MedPartners, Inc. 7,375,356 7,221,125 0.6
538,000 +NABI, Inc. 3,708,502 1,647,625 0.1
347,400 +NeoRx Corp. 2,201,611 1,856,419 0.2
167,500 +Neurogen Corporation 2,228,092 2,575,313 0.2
236,700 +Ostex International, Inc. 2,734,502 591,750 0.0
274,400 +Pharmaceutical Product Development, Inc. 3,539,578 6,414,100 0.5
574,500 +Ramsay Health Care, Inc. (d) 3,830,632 1,795,313 0.2
300,850 +Scios, Inc. 1,387,073 3,666,609 0.3
93,000 +Sierra Health Services, Inc. 2,866,480 3,708,375 0.3
1,065,000 +VISX, Inc. (d) 24,162,305 26,625,000 2.2
568,300 +Vivus, Inc. 13,161,340 6,677,525 0.6
-------------- -------------- ------
111,441,699 108,805,253 9.1
- ------------------------------------------------------------------------------------------------------------------------------------
Integrated Oils
- ------------------------------------------------------------------------------------------------------------------------------------
176,800 +Basin Exploration, Inc. 3,031,324 3,646,500 0.3
- ------------------------------------------------------------------------------------------------------------------------------------
Materials & Processing
- ------------------------------------------------------------------------------------------------------------------------------------
468,100 +ACX Technologies, Inc. 9,970,461 11,205,144 0.9
500,000 Apogee Enterprises, Inc. 5,946,645 6,625,000 0.6
580,252 BHA Group, Inc. (Class A) (d) 7,083,104 10,372,005 0.9
42,700 +Cameron Ashley Building Products, Inc. 677,862 781,944 0.1
237,200 Castle (A.M.) & Company 3,984,960 5,485,250 0.5
329,500 +Citation Corp. 4,725,918 7,393,156 0.6
705,000 Commonwealth Industries, Inc. 12,360,443 12,293,437 1.0
16,700 Foamex International, Inc. 220,425 293,294 0.0
302,700 +Giant Cement Holding, Inc. 3,059,895 8,097,225 0.7
</TABLE>
7
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Materials & Processing (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
264,000 Inland Steel Industries, Inc. $ 7,692,626 $ 7,293,000 0.6%
938,600 +Insituform Technologies, Inc. (Class A) 6,994,439 10,500,587 0.9
98,900 +Novamerican Steel, Inc. 1,070,588 1,273,337 0.1
385,510 +Paxar Corp. 5,621,296 5,469,423 0.5
157,000 Quanex Corp. 4,307,020 4,719,812 0.4
208,900 +Ryerson Tull, Inc. (Class A) 2,807,419 4,021,325 0.3
585,000 +Shiloh Industries, Inc. 7,889,761 13,162,500 1.1
253,500 +Wolverine Tube, Inc. 7,470,047 10,171,687 0.8
846,677 +Zemex Corporation (d) 7,282,851 8,043,431 0.7
-------------- -------------- ------
99,165,760 127,201,557 10.7
- ------------------------------------------------------------------------------------------------------------------------------------
Miscellaneous
- ------------------------------------------------------------------------------------------------------------------------------------
425,000 +Dan River, Inc. (Class A) 6,396,243 8,075,000 0.7
528,000 +Figgie International, Inc. (Class A) 7,351,804 7,260,000 0.6
346,600 +MasTec, Inc. 8,453,253 10,917,900 0.9
1,609,700 Mercer International, Inc. (d) 21,053,577 15,795,181 1.3
982,650 +Metromedia International Group, Inc. 11,475,786 14,923,997 1.2
235,800 +Primark Corporation 6,336,889 10,080,450 0.9
147,900 +Waddell & Reed Financial, Inc. 3,449,048 3,845,400 0.3
-------------- -------------- ------
64,516,600 70,897,928 5.9
- ------------------------------------------------------------------------------------------------------------------------------------
Producer Durables
- ------------------------------------------------------------------------------------------------------------------------------------
171,300 AGCO Corp. 4,212,749 5,085,469 0.4
178,700 +Allen Telecom, Inc. 3,163,312 2,814,525 0.2
419,600 Applied Industrial Technologies, Inc. 8,937,144 11,302,975 1.0
586,200 +B.I., Inc. (d) 5,366,809 6,155,100 0.5
523,600 +Brown & Sharpe Manufacturing Company
(Class A) 7,040,642 6,217,750 0.5
131,600 +CUNO, Incorporated 1,809,500 2,895,200 0.2
808,800 +Comdial Corp. (d) 4,965,675 8,896,800 0.8
317,000 +DONCASTERS PLC (ADR)(b) 5,766,768 8,281,625 0.7
511,000 +ESCO Electronics Corporation 8,934,284 8,431,500 0.7
162,450 General Cable Corp. 3,411,450 7,371,169 0.6
107,100 Kennametal, Inc. 4,825,389 5,636,137 0.5
225,200 +Nu Horizons Electronics Corp. 1,738,264 1,460,281 0.1
149,600 Oakwood Homes Corp. 3,232,033 5,479,100 0.5
272,100 Ryland Group, Inc. 3,984,616 7,516,762 0.6
16,800 +Southern Energy Homes, Inc. 203,337 203,700 0.0
522,400 Stewart & Stevenson Services, Inc. 12,162,255 12,570,250 1.1
518,750 +TALX Corp. (d) 4,385,624 2,528,906 0.2
216,800 +Toll Brothers, Inc. 4,208,656 6,097,500 0.5
149,200 +Triumph Group, Inc. 3,752,560 6,620,750 0.6
-------------- -------------- ------
92,101,067 115,565,499 9.7
====================================================================================================================================
</TABLE>
8
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Technology
- ------------------------------------------------------------------------------------------------------------------------------------
508,400 +Alpha Industries, Inc. $ 3,385,459 $ 7,848,425 0.7%
497,100 +Anixter International, Inc. 7,849,509 9,165,281 0.8
629,700 +Ardent Software, Inc. (d) 5,920,189 9,130,650 0.8
434,600 +Bell Industries, Inc. 6,923,368 6,138,725 0.5
427,388 +Boole & Babbage, Inc. 1,352,577 10,470,994 0.9
442,100 +Brite Voice Systems, Inc. 5,650,961 4,255,212 0.3
473,300 +Business Objects S.A. (ADR)(b) 5,908,381 7,158,662 0.6
1,082,500 +CHS Electronics, Inc. 15,596,087 20,296,875 1.7
833,150 +C.P. Clare Corp. (d) 7,758,336 11,559,956 1.0
142,700 +Cylink Corporation 1,955,715 2,060,231 0.2
552,800 +DII Group, Inc. 6,041,762 11,885,200 1.0
684,600 +DSP Communications, Inc. 6,176,523 11,680,987 1.0
187,000 +Hadco Corporation 7,803,236 7,409,875 0.6
220,160 +Harbinger Corp. 4,402,009 8,311,040 0.7
65,400 +Harmonic Lightwaves, Inc. 999,966 1,054,575 0.1
536,000 +IKOS Systems, Inc. 4,698,851 3,618,000 0.3
26,200 +Identix, Inc. 224,010 222,700 0.0
512,700 +Learning Company, Inc. (The) 6,571,267 11,856,187 1.0
236,900 +MathSoft, Inc. 1,247,850 814,344 0.1
1,183,500 +Mentor Graphics Corporation 12,093,439 11,613,094 1.0
849,100 +Network Equipment Technologies, Inc. 12,073,349 13,797,875 1.1
661,550 +Phoenix Technologies Ltd. 9,038,406 7,938,600 0.7
541,600 +Planar Systems, Inc. (d) 6,312,648 6,905,400 0.6
277,000 +Software Spectrum, Inc. (d) 5,550,546 6,024,750 0.5
151,717 +Sterling Commerce, Inc. 3,430,396 7,035,876 0.6
134,700 +Storage Technology Corp. 2,591,422 10,245,619 0.8
1,178,800 +Structural Dynamics Research Corp. 22,796,679 29,322,650 2.4
1,093,500 +Sybase, Inc. 16,386,324 10,559,109 0.9
709,300 Texlon Corp. 9,253,708 18,796,450 1.6
55,000 +Wang Laboratories, Inc. 979,551 1,701,562 0.1
431,700 +Wonderware Corporation 7,272,884 10,306,837 0.8
-------------- -------------- ------
208,245,408 279,185,741 23.4
- ------------------------------------------------------------------------------------------------------------------------------------
Utilities
- ------------------------------------------------------------------------------------------------------------------------------------
524,800 +Applied Digital Access, Inc. 3,912,965 4,198,400 0.4
====================================================================================================================================
Total Stocks 879,389,213 1,063,632,597 89.2
====================================================================================================================================
</TABLE>
9
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-Term Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial Paper** $ 25,000,000 Atlantic Asset Securitization Corp.,
5.55% due 4/14/1998 $ 24,949,896 $ 24,949,896 2.1%
20,000,000 Falcon Asset Securitization Corp., 5.60%
due 4/24/1998 19,928,445 19,928,445 1.7
24,526,000 General Motors Acceptance Corp., 6.13%
due 4/01/1998 24,526,000 24,526,000 2.0
17,638,000 Park Avenue Receivables Corp., 5.58% due
4/01/1998 17,638,000 17,638,000 1.5
20,000,000 Republic Industries, Inc., 5.56% due
4/02/1998 19,996,911 19,996,911 1.7
` 20,000,000 Riverwoods Funding Corp., 5.55% due
4/15/1998 19,956,833 19,956,833 1.7
====================================================================================================================================
Total Short-Term Securities 126,996,085 126,996,085 10.7
====================================================================================================================================
Total Investments $1,006,385,298 1,190,628,682 99.9
==============
Other Assets Less Liabilities 1,275,362 0.1
-------------- ------
Net Assets $1,191,904,044 100.0%
============== ======
====================================================================================================================================
</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 are
the discount rates paid at the time of purchase by the Fund.
(a) 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.
(b) American Depositary Receipts (ADR).
(c) The security may be sold to "qualified institutional buyers" under Rule 144A
of the Securities Act of 1933.
(d) 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:
- --------------------------------------------------------------------------------
Net Share Net Dividend
Sector Affiliate Activity Cost Income
- --------------------------------------------------------------------------------
Auto & Landair Services, Inc. $(201,800) $(2,065,321) ++
Transportation
Auto & Walbro Corp. 44,800 917,412 $165,960
Transportation
Consumer Au Bon Pain Company, Inc. 390,700 2,868,609 ++
Discretionary (Class A)
Consumer Norton McNaughton, Inc. -- -- ++
Discretionary
Healthcare HCIA, Inc. 595,900 7,322,122 ++
Healthcare Ramsay Health Care, Inc. -- -- ++
Healthcare VISX, Inc. 596,200 12,667,726 ++
Materials & BHA Group, Inc. (Class A) 50,932 (28,157) ++
Processing
Materials & Zemex Corporation 16,601 -- ++
Processing
Miscellaneous Mercer International, Inc. 172,000 1,697,100 43,131
Producer Durables B.I., Inc. 183,200 1,300,217 ++
Producer Durables Comdial Corp. 27,500 175,312 ++
Producer Durables TALX Corp. 55,500 387,000 ++
Technology Ardent Software, Inc. 629,700 5,920,189 ++
Technology C.P. Clare Corp. 90,600 1,396,538 ++
Technology Planar Systems, Inc. 251,600 2,721,212 ++
Technology Software Spectrum, Inc. (96,400) (2,409,021) ++
- --------------------------------------------------------------------------------
++ Non-income producing security.
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities as of March 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$1,006,385,298) (Note 1a).......... $1,190,628,682
Receivables:
Securities sold......................................................... $ 5,280,294
Capital shares sold..................................................... 4,510,129
Dividends............................................................... 6,940 9,797,363
--------------
Prepaid registration fees and other assets (Note 1e)....................... 126,244
--------------
Total assets............................................................... 1,200,552,289
--------------
===================================================================================================================================
Liabilities: Payables:
Securities purchased.................................................... 4,114,232
Capital shares redeemed................................................. 2,715,304
Investment adviser (Note 2)............................................. 762,524
Distributor (Note 2).................................................... 605,775 8,197,835
--------------
Accrued expenses and other liabilities..................................... 450,410
--------------
Total liabilities.......................................................... 8,648,245
--------------
===================================================================================================================================
Net Assets: Net assets................................................................. $1,191,904,044
==============
===================================================================================================================================
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized................................................................. $ 1,798,336
Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized................................................................. 2,907,328
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized................................................................. 336,857
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized................................................................. 519,635
Paid-in capital in excess of par........................................... 943,552,513
Undistributed realized capital gains on investments--net................... 58,545,991
Unrealized appreciation on investments--net................................ 184,243,384
--------------
Net assets................................................................. $1,191,904,044
==============
===================================================================================================================================
Net Asset Value: Class A--Based on net assets of $396,198,106 and 17,983,361 shares
outstanding....................................................... $ 22.03
==============
Class B--Based on net assets of $611,363,727 and 29,073,279 shares
outstanding....................................................... $ 21.03
==============
Class C--Based on net assets of $70,158,953 and 3,368,566 shares
outstanding....................................................... $ 20.83
==============
Class D--Based on net assets of $114,183,258 and 5,196,347 shares
outstanding....................................................... $ 21.97
==============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Statement of Operations for the Year Ended March 31, 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Interest and discount earned ...................................................... $ 5,676,368
Income Dividends (net of $4,275 foreign withholding tax) ................................. 2,607,177
--------------
(Notes 1c & 1d): Total income ...................................................................... 8,283,545
--------------
==========================================================================================================================
Expenses: Investment advisory fees (Note 2) ................................................. 6,981,534
Account maintenance and distribution fees--Class B (Note 2) ....................... 4,795,850
Transfer agent fees--Class B (Note 2) ............................................. 1,099,578
Transfer agent fees--Class A (Note 2) ............................................. 666,546
Account maintenance and distribution fees--Class C (Note 2) ....................... 493,922
Registration fees (Note 1e) ....................................................... 202,784
Account maintenance fees--Class D (Note 2) ........................................ 184,325
Transfer agent fees--Class D (Note 2) ............................................. 151,674
Transfer agent fees--Class C (Note 2) ............................................. 117,986
Printing and shareholder reports .................................................. 110,193
Custodian fees .................................................................... 103,708
Accounting services (Note 2) ...................................................... 98,897
Professional fees ................................................................. 73,285
Directors' fees and expenses ...................................................... 32,023
Pricing fees ...................................................................... 822
Other ............................................................................. 12,567
--------------
Total expenses .................................................................... 15,125,694
--------------
Investment loss--net .............................................................. (6,842,149)
--------------
==========================================================================================================================
Realized & Realized gain on investments--net ................................................. 123,972,911
Unrealized Gain on Change in unrealized appreciation on investments--net ............................. 165,606,065
Investments--Net --------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations .............................. $ 282,736,827
==============
==========================================================================================================================
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
For the Year
Ended March 31,
--------------------------------
Increase (Decrease) in Net Assets: 1998 1997
=============================================================================================================================
<S> <C> <C> <C>
Operations: Investment loss--net ................................................ $ (6,842,149) $ (1,854,279)
Realized gain on investments--net ................................... 123,972,911 129,452,799
Change in unrealized appreciation on investments--net ............... 165,606,065 (31,593,968)
-------------- --------------
Net increase in net assets resulting from operations ................ 282,736,827 96,004,552
-------------- --------------
=============================================================================================================================
Dividends & Investment income--net:
Distributions to Class A .......................................................... -- (626,240)
Shareholders Class D .......................................................... -- (58,931)
(Note 1f): Realized gain on investments--net:
Class A .......................................................... (39,789,579) (37,231,113)
Class B .......................................................... (57,233,633) (59,362,677)
Class C .......................................................... (5,666,588) (5,770,673)
Class D .......................................................... (8,409,567) (5,290,682)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders ....................................... (111,099,367) (108,340,316)
-------------- --------------
=============================================================================================================================
Capital Shares Net increase in net assets derived from capital share transactions .. 387,703,762 101,712,227
Transactions -------------- --------------
(Note 4):
=============================================================================================================================
Net Assets: Total increase in net assets ........................................ 559,341,222 89,376,463
Beginning of year ................................................... 632,562,822 543,186,359
-------------- --------------
End of year ......................................................... $1,191,904,044 $ 632,562,822
============== ==============
=============================================================================================================================
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------
Class A++
The following per share data and ratios have been derived -------------------------------------------------------
from information provided in the financial statements. For the Year Ended March 31,
-------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ....... $ 17.59 $ 17.77 $ 15.63 $ 15.88 $ 15.32
Operating -------- -------- -------- -------- -------
Performance: Investment income (loss)--net ............ (.03) .06 .24 .16 .10
Realized and unrealized gain on
investments--net ......................... 7.20 3.01 2.72 1.09 1.87
-------- -------- -------- -------- -------
Total from investment operations ......... 7.17 3.07 2.96 1.25 1.97
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net ................ -- (.06) (.23) (.10) .00+
Realized gain on investments--net ..... (2.73) (3.19) (.59) (1.40) (1.41)
-------- -------- -------- -------- -------
Total dividends and distributions ........ (2.73) (3.25) (.82) (1.50) (1.41)
-------- -------- -------- -------- -------
Net asset value, end of year ............. $ 22.03 $ 17.59 $ 17.77 $ 15.63 $ 15.88
======== ======== ======== ======== =======
========================================================================================================================
Total Investment Based on net asset value per share ....... 43.18% 17.62% 19.56% 8.85% 13.14%
Return:* ======== ======== ======== ======== =======
========================================================================================================================
Ratios to Average Expenses ................................. 1.02% 1.10% 1.12% 1.15% 1.17%
Net Assets: ======== ======== ======== ======== =======
Investment income (loss)--net ............ (.13%) .34% 1.43% 1.04% .62%
======== ======== ======== ======== =======
========================================================================================================================
Supplemental Net assets, end of year (in thousands) ... $396,198 $223,492 $181,297 $106,506 $78,804
Data: ======== ======== ======== ======== =======
Portfolio turnover ....................... 67.02% 97.87% 60.37% 59.79% 68.70%
======== ======== ======== ======== =======
Average commission rate paid+++ .......... $ .0523 $ .0514 $ .0503 -- --
======== ======== ======== ======== =======
========================================================================================================================
</TABLE>
* Total investment returns exclude the effects of sales
loads.
+ Amount is less than $.01 per share.
++ Based on average shares outstanding.
+++ 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.
14
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
- -------------------------------------------------------------------------------------------------------------------------
Class B++
The following per share data and ratios have been derived --------------------------------------------------------
from information provided in the financial statements. For the Year Ended March 31,
--------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ....... $ 16.91 $ 17.21 $ 15.16 $ 15.49 $ 15.01
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net ............ (.23) (.12) .07 .00+ (.06)
Realized and unrealized gain on
investments--net ......................... 6.90 2.90 2.64 1.06 1.83
-------- -------- -------- -------- --------
Total from investment operations ......... 6.67 2.78 2.71 1.06 1.77
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ................ -- -- (.07) .00+ .00+
Realized gain on investments--net ..... (2.55) (3.08) (.59) (1.39) (1.29)
-------- -------- -------- -------- --------
Total dividends and distributions ........ (2.55) (3.08) (.66) (1.39) (1.29)
-------- -------- -------- -------- --------
Net asset value, end of year ............. $ 21.03 $ 16.91 $ 17.21 $ 15.16 $ 15.49
======== ======== ======== ======== ========
=========================================================================================================================
Total Investment Based on net asset value per share ....... 41.72% 16.44% 18.37% 7.70% 12.03%
Return:* ======== ======== ======== ======== ========
=========================================================================================================================
Ratios to Average Expenses ................................. 2.05% 2.13% 2.15% 2.20% 2.19%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net ............ (1.16%) (.68%) .44% .02% (.41%)
======== ======== ======== ======== =======
=========================================================================================================================
Supplemental Net assets, end of year (in thousands) ... $611,364 $337,716 $310,174 $237,359 $112,768
Data: ======== ======== ======== ======== ========
Portfolio turnover ....................... 67.02% 97.87% 60.37% 59.79% 68.70%
======== ======== ======== ======== ========
Average commission rate paid+++ .......... $ .0523 $ .0514 $ .0503 -- --
======== ======== ======== ======== ========
=========================================================================================================================
</TABLE>
* Total investment returns exclude the effects of sales
loads.
+ Amount is less than $.01 per share.
++ Based on average shares outstanding.
+++ 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.
15
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
- ---------------------------------------------------------------------------------------------------------
Class C++
----------------------------------------
For the
Period
The following per share data and ratios have been derived For the Year Oct. 21,
from information provided in the financial statements. Ended March 31, 1994+ to
---------------------------- March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ..... $ 16.77 $ 17.10 $ 15.10 $ 15.06
Operating ------- ------- ------- -------
Performance: Investment income (loss)--net ............ (.23) (.13) .06 .01
Realized and unrealized gain on
investments--net ......................... 6.84 2.89 2.63 .65
------- ------- ------- -------
Total from investment operations ......... 6.61 2.76 2.69 .66
------- ------- ------- -------
Less dividends and distributions:
Investment income--net ................ -- -- (.10) (.06)
Realized gain on investments--net ..... (2.55) (3.09) (.59) (.56)
------- ------- ------- -------
Total dividends and distributions ........ (2.55) (3.09) (.69) (.62)
------- ------- ------- -------
Net asset value, end of period ........... $ 20.83 $ 16.77 $ 17.10 $ 15.10
======= ======= ======= =======
=========================================================================================================
Total Investment Based on net asset value per share ....... 41.74% 16.39% 18.34% 4.82%#
Return:** ======= ======= ======= =======
=========================================================================================================
Ratios to Average Expenses ................................. 2.06% 2.14% 2.16% 2.41%*
Net Assets: ======= ======= ======= =======
Investment income (loss)--net ............ (1.17%) (.70%) .36% .14%*
======= ======= ======= =======
=========================================================================================================
Supplemental Net assets, end of period (in thousands) . $70,159 $31,182 $26,920 $11,434
Data: ======= ======= ======= =======
Portfolio turnover ....................... 67.02% 97.87% 60.37% 59.79%
======= ======= ======= =======
Average commission rate paid+++ .......... $ .0523 $ .0514 $ .0503 --
======= ======= ======= =======
=========================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ 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.
16
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
- ---------------------------------------------------------------------------------------------------------
Class D++
----------------------------------------
For the
Period
The following per share data and ratios have been derived For the Year Oct. 21,
from information provided in the financial statements. Ended March 31, 1994+ to
---------------------------- March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ..... $ 17.56 $ 17.74 $ 15.61 $ 15.52
Operating ------- ------- ------- -------
Performance: Investment income (loss)--net ............ (.08) .01 .19 .07
Realized and unrealized gain on
investments--net ......................... 7.18 3.02 2.73 .66
------- ------- ------- -------
Total from investment operations ......... 7.10 3.03 2.92 .73
------- ------- ------- -------
Less dividends and distributions:
Investment income--net ................ -- (.04) (.20) (.08)
Realized gain on investments--net ..... (2.69) (3.17) (.59) (.56)
------- ------- ------- -------
Total dividends and distributions ........ (2.69) (3.21) (.79) (.64)
------- ------- ------- -------
Net asset value, end of period ........... $ 21.97 $ 17.56 $ 17.74 $ 15.61
======= ======= ======= =======
=========================================================================================================
Total Investment Based on net asset value per share ....... 42.80% 17.38% 19.26% 5.13%#
Return:** ======= ======= ======= =======
=========================================================================================================
Ratios to Average Expenses ................................. 1.27% 1.35% 1.37% 1.61%*
Net Assets: ======= ======= ======= =======
Investment income (loss)--net ............ (.39%) .07% 1.15% .95%*
======= ======= ======= =======
=========================================================================================================
Supplemental Net assets, end of period (in thousands) . $114,183 $40,173 $24,795 $11,037
Data: ======= ======= ======= =======
Portfolio turnover ....................... 67.02% 97.87% 60.37% 59.79%
======= ======= ======= =======
Average commission rate paid+++ .......... $ .0523 $ .0514 $ .0503 --
======= ======= ======= =======
=========================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ 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.
17
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 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. 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 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.
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 the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
18
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
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.
(g) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accord ingly, current year's permanent
book/tax differences of $6,842,149 have been reclassified between undistributed
net realized capital gains and accumulated net investment loss. 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 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.
19
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended March 31, 1998, MLFD earned underwriting discounts and direct
commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
- --------------------------------------------------------------------------------
MLFD MLPF&S
- --------------------------------------------------------------------------------
Class A ............................... $ 2,430 $ 33,772
Class D ............................... $28,752 $389,882
- --------------------------------------------------------------------------------
For the year ended March 31, 1998, MLPF&S received contingent deferred sales
charges of $989,090 and $17,130 relating to transactions in Class B and Class C
Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of $10,209
relating to transactions subject to front-end sales charge waivers in Class A
Shares.
In addition, MLPF&S received $75,023 in commissions on the execution of
portfolio security transactions for the Fund for the year ended March 31, 1998.
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, 1998 were $748,299,027 and $564,122,193, respectively. Net
realized gains for the year ended March 31, 1998 and net unrealized gains as of
March 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments ............... $123,972,911 $184,243,384
------------ ------------
Total ............................... $123,972,911 $184,243,384
============ ============
- --------------------------------------------------------------------------------
As of March 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $181,993,284, of which $242,340,779 related to appreciated
securities and $60,347,495 related to depreciated securities. At March 31, 1998,
the aggregate cost of investments for Federal income tax purposes was
$1,008,635,398.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$387,703,762 and $101,712,227 for the years ended March 31, 1998 and March 31,
1997, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
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 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 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
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended March 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
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
Automatic conversion
of shares .................................... (99,241) (1,783,849)
Shares redeemed .............................. (7,614,216) (135,651,522)
------------- -------------
Net increase ................................. 1,952,629 $ 34,201,240
============= =============
- --------------------------------------------------------------------------------
20
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
- --------------------------------------------------------------------------------
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 C Shares for the Year Dollar
Ended March 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................................. 1,075,754 $ 19,224,090
Shares issued to shareholders
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 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
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended 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
============= =============
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
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, 1998, the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year period then
ended. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with 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, 1998 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, 1998, 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 8, 1998
21
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
IMPORTANT TAX INFORMATION (unaudited)
The following information summarizes all per share distributions paid by Merrill
Lynch Special Value Fund, Inc. during its taxable year ended March 31, 1998:
<TABLE>
<CAPTION>
==================================================================================================================
Domestic Domestic Total Long-Term
Record Payable Qualifying Non-Qualifying Ordinary Capital
Date Date Ordinary Income Ordinary Income Income Gains
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A Shares: 7/02/97 7/11/97 $0.042479 $0.902554 $0.945033 $0.580698*
12/09/97 12/17/97 $0.038996 $0.647656 $0.686652 $0.516027**
- ------------------------------------------------------------------------------------------------------------------
Class B Shares: 7/02/97 7/11/97 $0.040343 $0.857155 $0.897498 $0.580698*
12/09/97 12/17/97 $0.031443 $0.522206 $0.553649 $0.516027**
- ------------------------------------------------------------------------------------------------------------------
Class C Shares: 7/02/97 7/11/97 $0.040268 $0.855557 $0.895825 $0.580698*
12/09/97 12/17/97 $0.031793 $0.528019 $0.559812 $0.516027**
- ------------------------------------------------------------------------------------------------------------------
Class D Shares: 7/02/97 7/11/97 $0.042049 $0.893402 $0.935451 $0.580698*
12/09/97 12/17/97 $0.037219 $0.618140 $0.655359 $0.516027**
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The domestic qualifying ordinary income qualifies for the dividends received
deduction for corporations.
Please retain this information for your records.
* All of this long-term capital gain distribution is subject to the 28% tax
rate.
** Of this long-term gain distribution, 56.58% is subject to the 28% tax rate
and 43.42% is subject to the 20% tax rate.
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
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
22
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
PORTFOLIO INFORMATION (unaudited)
As of March 31, 1998
Percent of
Top Ten Equity Holdings Net Assets
Structural Dynamics Research Corp........ 2.4%
VISX, Inc................................ 2.2
Danka Business Systems PLC (ADR)......... 1.7
WMS Industries, Inc...................... 1.7
CHS Electronics, Inc..................... 1.7
Texlon Corp.............................. 1.6
Micro Warehouse, Inc..................... 1.5
Mercer International, Inc................ 1.3
Metromedia International Group, Inc...... 1.2
Paxson Communications Corporation........ 1.2
Sectors Represented Percent of
in the Portfolio Net Assets
Technology............................... 23.4%
Consumer Discretionary................... 15.7
Materials & Processing................... 10.7
Producer Durables........................ 9.7
Healthcare............................... 9.1
Miscellaneous............................ 5.9
Energy................................... 4.8
Auto & Transportation.................... 4.7
Financial Services....................... 4.5
Utilities................................ 0.4
Integrated Oils.......................... 0.3
Equity Portfolio Changes for the Quarter
Ended March 31, 1998
Additions
AXYS Pharmaceuticals, Inc.
Ardent Software, Inc.
Barrett Resources Corp.
Basin Exploration, Inc.
Boise Cascade Office Products Corp.
Callaway Golf Company
Cameron Ashley Building Products, Inc.
*Coram Healthcare Corp.
Danka Business Systems PLC (ADR)
EndoSonics Corp.
Fingerhut Companies, Inc.
Foamex International Inc.
Forcenergy, Inc.
HCC Insurance Holdings, Inc.
Hadco Corporation
Harmonic Lightwaves, Inc.
Inland Steel Industries, Inc.
Key Energy Group Inc.
MedPartners, Inc.
*Newpark Resources, Inc.
Paxar Corp.
Southern Energy Homes, Inc.
Stone Energy Corporation
Trenwick Group, Inc.
Waddell & Reed Financial, Inc.
West Teleservices Corp.
Deletions
Catalina Marketing Corporation
Cincinnati Milacron, Inc.
*Coram Healthcare Corp.
Emerson Electric Co.
FirstFed Financial Corp.
Gilead Sciences, Inc.
Haven Bancorp, Inc.
*Newpark Resources, Inc.
Physician Computer Network, Inc.
Platinum Technology, Inc.
Sano Corporation
Sequana Therapeutics, Inc.
VMark Software, Inc.
Vanstar Corporation
Veterinary Centers of America, Inc.
*Added and deleted in the same quarter.
23
<PAGE>
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch
Special Value Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #10253--3/98
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