MERRILL LYNCH
SPECIAL VALUE
FUND, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
March 31, 1999
<PAGE>
MERRILL LYNCH SPECIAL VALUE FUND, INC.
DEAR SHAREHOLDER
During the quarter ended March 31, 1999, Merrill Lynch Special Value Fund, Inc.
underperformed the unmanaged Russell 2000 Index. Total returns for the Fund's
Class A, Class B, Class C and Class D Shares were -7.03%, -7.24%, -7.26% and
- -7.11%, respectively, compared to the total return of -5.42% for the unmanaged
Russell 2000 Index. (Fund results shown do not reflect sales charges, and would
be lower if sales charges were included. Complete performance information can be
found on pages 3-5 of this report to shareholders.)
Portfolio Matters
Small-capitalization stocks failed to exhibit a January effect in the first
calendar quarter of 1999 as investors bid up valuations on large-capitalization
growth stocks. The flow of assets into index funds and out of small cap mutual
funds further magnified the performance differential. For the three-month period
ended March 31, 1999, the Dow Jones Industrial Average and the unmanaged
Standard & Poor's 500 (S&P 500) Index posted gains of +7.01% and +4.98%,
respectively, while the Russell 2000 Index posted a loss. The valuation premium
currently being ascribed to a narrow list of large cap growth stocks is
unprecedented when compared to the broad list of 2,000 small companies that make
up the Russell 2000 Index.
During the quarter ended March 31, 1999, Merrill Lynch Special Value Fund,
Inc.'s performance benefited from overweighted investments in the energy sector
relative to the Russell 2000 Index. After several quarters of severe
underperformance, the energy sector delivered strong gains in the March quarter
as the Organization of Petroleum Exporting Countries (OPEC) moved to cut
production by two million barrels of oil per day. The Fund's oil and gas stocks
rallied sharply on the expectation of reduced OPEC supply and the potential for
increased demand as Asian economies showed early signs of a recovery.
Individual stocks that most benefited the Fund's quarterly results included
PLATINUM Technology International, Inc. and Mentor Graphics Corporation. Shares
of PLATINUM Technology soared following news that Computer Associates
International, Inc. would acquire the company at a significant premium. PLATINUM
Technology provides enterprise software tools and professional services to
Fortune 500 companies. Mentor Graphics provides electronic design automation
(EDA) software tools and is the recognized leader of EDA tools for the
semiconductor industry. Shares of Mentor Graphics rallied sharply during the
March quarter as earnings surpassed consensus estimates and the company
terminated a hostile bid to acquire Quickturn Design System's, Inc.
During the March quarter, Fund performance was hindered by investments in CHS
Electronics, Inc. and HA-LO Industries, Inc. Shares of CHS Electronics, an
international distributor of microcomputers and related products, declined
abruptly during the three-month period based on concerns about the company's
accounting for vendor rebates and general weakness among computer distribution
stocks. Shares of HA-LO Industries, the nation's leading provider of promotional
products and marketing services, retreated when the company disclosed that
results in the teleservices division would be unexpectedly weak given an
industry-wide capacity glut. We continue to hold shares of HA-LO Industries
based on strength in the company's core promotional products operations and
recently implemented cost-cutting measures at the teleservices division.
Fiscal Year in Review
For the 12 months ended March 31, 1999, Merrill Lynch Special Value Fund, Inc.
trailed the Russell 2000 Index. Total returns for the Fund's Class A, Class B,
Class C and Class D Shares were -22.17%, -22.96%, -22.99% and -22.37%,
respectively, compared to the -16.26% total return for the Russell 2000 Index.
Small-capitalization stocks exhibited extreme volatility over the 12-month
period ended March 31, 1999. The Russell 2000 Index set an all-time high in
April 1998, then reversed course and declined 36.86% through early October 1998.
By March 31, 1999, the small cap index had only partially recovered from its
low. The decline in large-capitalization stocks, by comparison, proved only
temporary, as the broad market averages proceeded to set new highs after the
October sell-off. The S&P 500 Index gained 18.46% for the 12-month period as
compared to a decline of 16.26% for the Russell 2000 Index. The performance
differential has rarely been wider, with
1
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
the small cap index trailing the S&P 500 Index by nearly 35 percentage points
for the fiscal year.
Despite general weakness in small-capitalization issues, shares of VISX,
Incorporated, one of the Fund's largest positions, appreciated sharply during
the year. The company develops and markets proprietary technologies and systems
for laser vision correction. Shares of VISX appreciated more than 700% based on
strong growth in laser procedures and the settlement of a long-standing legal
dispute. We significantly reduced the Fund's holdings in VISX toward fiscal
year-end since the shares surpassed our valuation target. Unitog Company, a
provider of custom-designed uniform rentals, also made a significant
contribution to Fund performance in the fiscal year. Shares of Unitog
appreciated sharply following news that Cintas Corporation would acquire the
company at a substantial premium.
The Fund's fiscal year performance was hindered by holdings in Danka Business
Systems PLC and Midway Games, Inc. Shares of Danka Business Systems PLC, a
distributor of office equipment including copiers and fax machines, declined
after the company experienced a slowdown in equipment sales. We added to the
Fund's investment in Danka on stock price weakness and expect financial results
to improve based on cost-cutting efforts and a sales force restructuring. Shares
of Midway Games, Inc., a designer and manufacturer of video games, were also
weak as the company's results fell short of analysts' consensus earnings
expectations for the year. We continue to hold the stock in anticipation of
improved performance resulting from upcoming product releases.
Within the benchmark index, eleven out of twelve Russell 2000 economic sectors
posted declines for the fiscal year, and nine sectors posted double-digit
declines. Only the utilities sector showed a gain for the period. Losses were
widespread during the year with only a limited number of small cap industries
and specific equities offering refuge from the declines. Sector positioning had
a slightly negative effect on the Fund's full-year investment results. Merrill
Lynch Special Value Fund, Inc. was overweighted in the technology sector, which
outperformed the benchmark index, but the benefit was partially offset by
overweight investments in the economically sensitive energy and materials
processing sectors. Relative to the Russell 2000 Index, the Fund's
underweighting in utilities stocks also hampered 12-month investment results.
As small-capitalization stocks faltered during the year, we actively accumulated
investments where we believed the long-term earnings growth prospects were
favorable. Severe price declines in our universe of small-capitalization stocks
provided ample opportunities to increase existing positions and 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 financial services stocks and real
estate investment trusts.
In Conclusion
Despite the underperformance of small-capitalization stocks over the 12-month
period, we believe that investors should consider representation in this asset
class. In the past, periods of prolonged small-capitalization underperformance
have preceded some of the most powerful rallies. We believe that the disparity
between small cap and large cap stock valuations is unsustainable over the long
term. Given the unprecedented high valuations accorded to large cap stocks, and
the low valuations and favorable earnings prospects for small cap stocks, we
anticipate that the pressures encouraging consolidation will only increase, as
large companies continue to acquire smaller competitors.
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/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Daniel V. Szemis
Daniel V. Szemis
Senior Vice President and Portfolio Manager
May 12, 1999
2
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
- --------------------------------------------------------------------------------
After more than 20 years of service, Arthur Zeikel recently retired as Chairman
of Merrill Lynch Asset Management, L.P. (MLAM). Mr. Zeikel served as President
of MLAM from 1977 to 1997 and as Chairman since December 1997. Mr. Zeikel is one
of the country's most respected leaders in asset management and presided over
the growth of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500 billion. Mr.
Zeikel will remain on Merrill Lynch Special Value Fund, Inc.'s Board of
Directors. We are pleased to announce that Terry K. Glenn has been elected
President and Director of the Fund. Mr. Glenn has held the position of Executive
Vice President of MLAM since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Directors in wishing
him well in his retirement from Merrill Lynch and are pleased that he will
continue as a member of the Fund's Board of Directors.
- --------------------------------------------------------------------------------
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* -22.17% -7.03% +152.85%
- -------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class B Shares* -22.96 -7.24 +128.32
- -------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class C Shares* -22.99 -7.26 + 57.60
- -------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class D Shares* -22.37 -7.11 + 63.14
- -------------------------------------------------------------------------------------------
Russell 2000 Index** -16.26 -5.42 +196.05/+67.74
===========================================================================================
</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/since inception periods
are Class A & Class B Shares, for the ten years ended 3/31/99 and Class C
& Class D Shares, from 10/21/94 to 3/31/99.
** An unmanaged broad-based index comprised of small-capitalization common
stocks. Ten years/since inception total returns are for the ten years
ended 3/31/99 and from 10/21/94 to 3/31/99, respectively.
3
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment--Class A & Class B Shares
[GRAPHIC OMITTED]
A line graph depicting the growth of an investment in the Fund's Class A and
Class B Shares compared to growth of an investment in the Russell 2000 Index.
Beginning and ending values are:
3/89 3/99
ML Special Value Fund, Inc.+--
Class A Shares* $ 9,475 $23,957
ML Special Value Fund, Inc.+--
Class B Shares* $10,000 $22,833
Russell 2000 Index++ $10,000 $29,605
Total Return Based on a $10,000 Investment--Class C & Class D Shares
[GRAPHIC OMITTED]
A line graph depicting the growth of an investment in the Fund's Class C and
Class D Shares compared to growth of an investment in Russell 2000 Index.
Beginning and ending values are:
10/21/94** 3/99
ML Special Value Fund, Inc.+--
Class C Shares* $10,000 $15,760
ML Special Value Fund, Inc.+--
Class D Shares* $ 9,475 $15,458
Russell 2000 Index $10,000 $16,773
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ ML Special Value Fund, Inc. invests in a diversified portfolio of securities,
primarily common stocks, of relatively small companies which the Fund's
management believes have special investment value, and emerging growth
companies regardless of size.
++ This unmanaged Index is comprised of approximately 2,000 small-capitalization
common stocks from various industrial sectors.
Past performance is not predictive of future performance.
4
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
PERFORMANCE DATA (concluded)
Results of a $1,000 Investment Since Inception--Class A Shares
[GRAPHIC OMITTED]
(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 $5,923.39 on March 31, 1999.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 3/31/99 -22.17% -26.26%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/99 +11.27 +10.08
- --------------------------------------------------------------------------------
Ten Years Ended 3/31/99 + 9.72 + 9.13
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 3/31/99 -22.96% -25.85%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/99 +10.14 +10.14
- --------------------------------------------------------------------------------
Ten Years Ended 3/31/99 + 8.61 + 8.61
- --------------------------------------------------------------------------------
* 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 3/31/99 -22.99% -23.71%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 3/31/99 +10.79 +10.79
- --------------------------------------------------------------------------------
* 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 3/31/99 -22.37% -26.45%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 3/31/99 +11.65 +10.30
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
5
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
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
- -------------------------------------------------------------------------------------------------------------------------
467,100 Air Express International Corporation $ 8,104,082 $ 7,064,887 0.9%
473,600 Circle International Group, Inc. 11,958,407 6,896,800 0.9
695,000 +Forward Air Corporation (h) 2,387,811 9,121,875 1.2
83,000 +Gentex Corporation 1,039,103 1,789,687 0.2
428,500 +Landair Corporation (h) 1,270,155 2,142,500 0.3
233,500 Meritor Automotive, Inc. 5,013,528 3,619,250 0.5
2,041,700 +Miller Industries, Inc. 14,853,769 9,698,075 1.2
275,100 +Walbro Corporation 5,042,324 2,475,900 0.3
-------------- ------------- ---
49,669,179 42,808,974 5.5
- -------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary
- -------------------------------------------------------------------------------------------------------------------------
2,035,900 +APAC TeleServices, Inc. 15,777,645 6,807,541 0.9
1,317 +Adrien Arpel, Inc. (Preferred) 0 24,259 0.0
1,121,700 +Au Bon Pain Co., Inc. (Class A)(h) 7,525,064 5,888,925 0.8
1,304,200 +Boise Cascade Office Products Corp. 19,308,602 14,509,225 1.9
391,000 +Boron, LePore & Associates, Inc. 6,116,579 4,056,625 0.5
63,300 +Buffets, Inc. 631,025 625,087 0.1
1,443,800 +Caribiner International, Inc. (h) 22,859,682 13,174,675 1.7
207,700 +The Cheesecake Factory Incorporated 4,393,025 4,932,875 0.6
1,683,400 Danka Business Systems PLC (ADR)(a) 12,259,189 8,417,000 1.1
1,143,350 +HA-LO Industries, Inc. (b) 12,232,677 14,077,497 1.8
1,545,000 Heilig-Meyers Company 21,148,381 8,014,687 1.0
169,600 +ITI Technologies, Inc. 2,003,485 5,088,000 0.6
700,500 +McNaughton Apparel Group Inc. (c) 10,056,576 3,064,688 0.4
123,500 +Micro Warehouse, Inc. 1,338,169 1,991,438 0.2
1,579,540 +Midway Games, Inc. 23,732,744 13,722,254 1.8
1,274,800 +Paxson Communications Corporation 13,764,438 10,915,475 1.4
252,000 Pier 1 Imports, Inc. 1,965,600 2,047,500 0.3
527,700 +SITEL Corporation 4,675,234 1,253,288 0.2
304,200 +Sodak Gaming, Inc. 3,378,954 2,699,775 0.3
57,000 +Stein Mart, Inc. 552,187 570,000 0.1
834,000 +WMS Industries, Inc. 3,446,930 6,411,375 0.8
-------------- ------------- ---
187,166,186 128,292,189 16.5
- -------------------------------------------------------------------------------------------------------------------------
Energy
- -------------------------------------------------------------------------------------------------------------------------
315,900 +Barrett Resources Corporation 8,918,324 7,917,244 1.0
425,000 +Basin Exploration, Inc. 6,747,048 5,896,875 0.8
256,500 +Benton Oil and Gas Company 3,658,029 929,812 0.1
404,844 +Louis Dreyfus Natural Gas Corp. 6,229,600 5,870,238 0.8
1,547,300 +Newpark Resources, Inc. 13,415,404 11,217,925 1.4
140,000 +Plains Resources Inc. 1,461,553 2,100,000 0.3
308,391 +Plains Resources Inc. (d) 1,806,983 4,664,414 0.6
124,900 Santa Fe International Corporation 1,564,701 2,334,069 0.3
263,100 +Stone Energy Corporation 8,569,266 8,419,200 1.1
512,200 +Tom Brown, Inc. 6,179,380 6,210,425 0.8
-------------- ------------- ---
58,550,288 55,560,202 7.2
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
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
- -------------------------------------------------------------------------------------------------------------------------
85,050 American National Insurance Company $ 6,785,507 $ 5,687,719 0.7%
566,600 +Billing Concepts Corp. 5,437,881 6,728,375 0.9
252,400 Brandywine Realty Trust 4,490,093 4,101,500 0.5
173,200 Camden Property Trust 4,458,786 4,286,700 0.6
493,273 Charter One Financial, Inc. 7,136,367 14,235,550 1.8
157,500 FelCor Lodging Trust Inc. 3,418,074 3,652,031 0.5
340,000 HCC Insurance Holdings, Inc. 6,007,930 6,545,000 0.8
30,800 Jefferies Group, Inc. 1,325,706 1,461,075 0.2
93,600 Kimco Realty Corporation 3,446,154 3,451,500 0.5
145,000 Meditrust Corporation 2,179,231 1,803,438 0.2
39,500 National Data Corporation 1,350,065 1,659,000 0.2
355,000 PXRE Corporation 7,444,686 6,390,000 0.8
348,000 Peoples Heritage Financial Group, Inc. 6,913,473 6,264,000 0.8
419,800 +Primark Corporation 10,224,644 8,920,750 1.2
561,800 +Scottish Annuity & Life Holdings, Ltd. 8,320,578 5,477,550 0.7
-------------- ------------- ---
78,939,175 80,664,188 10.4
- -------------------------------------------------------------------------------------------------------------------------
Healthcare
- -------------------------------------------------------------------------------------------------------------------------
267,100 +COR Therapeutics, Inc. 2,579,398 2,654,306 0.3
148,500 +DVI, Inc. 2,932,610 2,208,937 0.3
475,400 +EndoSonics Corporation 3,209,799 3,090,100 0.4
57,400 +Gilead Sciences, Inc. 1,318,584 2,611,700 0.3
819,500 +HCIA, Inc. (h) 9,510,805 3,687,750 0.5
454,300 +Magellan Health Services, Inc. 10,147,114 1,902,381 0.3
1,992,500 +MedPartners, Inc. 15,404,861 9,464,375 1.2
228,200 Mentor Corporation 3,607,955 3,351,688 0.4
538,000 +NABI, Inc. 3,708,502 1,681,250 0.2
309,800 +NeoRx Corporation 1,952,280 474,381 0.1
135,500 +Neurogen Corporation 1,795,108 1,448,156 0.2
136,600 +Pharmacopeia, Inc. 2,459,714 990,350 0.1
300,850 +Scios, Inc. 1,387,073 2,726,453 0.4
48,900 Shared Medical Systems Corporation 2,327,467 2,723,119 0.4
139,500 +Sierra Health Services, Inc. 2,866,479 1,813,500 0.2
42,900 +VISX, Incorporated 403,708 4,614,431 0.6
-------------- ------------- ---
65,611,457 45,442,877 5.9
- -------------------------------------------------------------------------------------------------------------------------
Materials & Processing
- -------------------------------------------------------------------------------------------------------------------------
176,400 +ACX Technologies, Inc. 2,995,246 2,315,250 0.3
420,800 A.M. Castle & Company 7,436,597 5,075,900 0.7
550,000 Apogee Enterprises, Inc. 6,484,145 6,531,250 0.8
638,277 BHA Group Holdings, Inc. (h) 7,083,102 5,824,278 0.7
159,000 Carpenter Technology Corporation 5,304,325 4,124,062 0.5
466,600 +Citation Corporation 6,258,411 4,782,650 0.6
408,300 Commonwealth Industries, Inc. 6,696,689 3,674,700 0.5
218,800 +Dan River, Inc. (Class A) 3,282,000 1,859,800 0.2
214,000 +Giant Cement Holding, Inc. 2,576,937 3,678,125 0.5
165,600 Gibraltar Steel Corporation 3,532,254 3,301,650 0.4
382,600 +Insituform Technologies, Inc. (Class A) 2,618,121 6,695,500 0.9
559,200 Intermet Corporation 8,772,555 7,479,300 1.0
264,700 +Novamerican Steel, Inc. 3,072,685 2,911,700 0.4
522,000 +Paxar Corporation 7,495,480 3,882,375 0.5
236,600 Quanex Corporation 5,724,477 3,667,300 0.5
</TABLE>
7
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
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)
- -------------------------------------------------------------------------------------------------------------------------
1,039,881 Ryerson Tull, Inc. (e) $ 18,589,576 $ 15,273,252 2.0%
674,500 +Shiloh Industries, Inc. (h) 9,473,940 8,009,688 1.0
372,700 +Wolverine Tube, Inc. 9,872,409 7,873,288 1.0
863,610 +Zemex Corporation 7,282,851 4,695,879 0.6
-------------- ------------- ---
124,551,800 101,655,947 13.1
- -------------------------------------------------------------------------------------------------------------------------
Miscellaneous
- -------------------------------------------------------------------------------------------------------------------------
1,609,700 Mercer International, Inc. (h) 21,053,577 9,758,806 1.3
1,200,850 +Metromedia International Group, Inc. 13,686,960 5,854,144 0.7
-------------- ------------- ---
34,740,537 15,612,950 2.0
- -------------------------------------------------------------------------------------------------------------------------
Producer Durables
- -------------------------------------------------------------------------------------------------------------------------
171,300 AGCO Corporation 4,212,749 1,124,156 0.2
250,000 +Allen Telecom Inc. 3,924,619 1,515,625 0.2
613,000 Applied Industrial Technologies, Inc. 11,484,155 6,819,625 0.9
606,200 +B.I., Incorporated (h) 5,500,558 5,758,900 0.8
846,900 +Brown & Sharpe Manufacturing Company
(Class A)(h) 10,624,240 4,181,569 0.5
808,800 +Comdial Corporation (h) 4,965,675 5,257,200 0.7
189,000 +DONCASTERS PLC (ADR)(a) 3,233,968 2,905,875 0.4
517,800 +ESCO Electronics Corporation 9,048,312 4,660,200 0.6
107,100 Kennametal, Inc. 4,825,389 1,874,250 0.2
389,000 +Kent Electronics Corporation 5,030,298 3,865,688 0.5
210,800 +Nu Horizons Electronics Corp. 1,621,264 869,550 0.1
443,600 Oakwood Homes Corporation 9,257,834 6,238,125 0.8
161,200 The Ryland Group, Inc. 2,219,607 4,080,375 0.5
422,400 Stewart & Stevenson Services, Inc. 9,571,351 3,247,200 0.4
518,750 +TALX Corporation (h) 4,385,624 3,371,875 0.4
145,130 +Toll Brothers, Inc. 2,798,563 2,630,481 0.3
107,200 +Triumph Group, Inc. 2,553,040 2,519,200 0.3
-------------- ------------- ---
95,257,246 60,919,894 7.8
- -------------------------------------------------------------------------------------------------------------------------
Technology
- -------------------------------------------------------------------------------------------------------------------------
129,800 +Alpha Industries, Inc. (f) 528,774 2,320,175 0.3
887,000 +Anixter International, Inc. 13,019,629 10,588,562 1.4
394,300 +Aspen Technology, Inc. 5,995,685 5,594,131 0.7
161,147 +BMC Software, Inc. (g) 680,161 5,972,528 0.8
545,300 +Bell Industries, Inc. (h) 8,013,620 5,657,487 0.7
346,600 +Black Box Corporation 9,823,716 10,744,600 1.4
470,600 +Brite Voice Systems, Inc. 4,856,354 3,764,800 0.5
2,297,600 +CHS Electronics, Inc. 30,542,849 7,323,600 0.9
806,150 +C.P. Clare Corporation (h) 7,312,386 2,922,294 0.4
285,000 +Cognos, Inc. 6,900,270 6,697,500 0.9
433,000 +The DII Group, Inc. 4,579,139 12,665,250 1.6
1,244,100 +DSP Communications, Inc. 12,092,400 19,750,087 2.6
685,892 +Harbinger Corporation 3,426,680 4,629,771 0.6
169,900 +Harmonic Lightwaves, Inc. 1,682,332 4,693,487 0.6
1,222,800 +Mentor Graphics Corporation 12,490,597 16,507,800 2.1
240,000 +Net Manage, Inc. 621,375 577,500 0.1
727,200 +PLATINUM Technology International, Inc. 10,189,541 18,543,600 2.4
758,150 +Phoenix Technologies Ltd. 10,073,879 6,444,275 0.8
524,200 +Planar Systems, Inc. 5,585,595 4,029,788 0.5
93,400 +Rational Software Corporation 1,195,032 2,504,288 0.3
</TABLE>
8
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Technology (concluded)
- -------------------------------------------------------------------------------------------------------------------------
326,000 +Read-Rite Corporation $ 4,030,241 $ 2,149,563 0.3%
267,400 +Sensormatic Electronics Corporation 2,216,624 2,540,300 0.3
277,000 +Software Spectrum, Inc. (h) 5,550,546 3,774,125 0.5
260,717 +Sterling Commerce, Inc. 6,267,523 8,017,048 1.0
56,000 +Storage Technology Corporation 1,897,420 1,561,000 0.2
1,012,400 +Structural Dynamics Research
Corporation 14,034,529 19,298,875 2.5
1,232,700 +Sybase, Inc. 17,535,228 9,784,556 1.3
590,200 Telxon Corporation 6,561,591 5,570,013 0.7
227,900 +TriQuint Semiconductor, Inc. 4,630,484 4,216,150 0.5
-------------- ------------- ---
212,334,200 208,843,153 26.9
- -------------------------------------------------------------------------------------------------------------------------
Utilities
- -------------------------------------------------------------------------------------------------------------------------
569,600 +Applied Digital Access, Inc. 4,238,174 1,281,600 0.2
- -------------------------------------------------------------------------------------------------------------------------
Total Stocks 911,058,242 741,081,974 95.5
- -------------------------------------------------------------------------------------------------------------------------
Face
Amount
- -------------------------------------------------------------------------------------------------------------------------
Short-Term Securities
- -------------------------------------------------------------------------------------------------------------------------
Commercial Paper** $22,412,000 General Motors Acceptance Corp., 5.13%
due 4/01/1999 22,412,000 22,412,000 2.9
- -------------------------------------------------------------------------------------------------------------------------
US Government Agency 15,000,000 Federal Home Loan Mortgage Corporation,
Obligations** 4.81% due 4/14/1999 14,973,946 14,973,946 1.9
- -------------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities 37,385,946 37,385,946 4.8
- -------------------------------------------------------------------------------------------------------------------------
Total Investments $ 948,444,188 778,467,920 100.3
==============
Liabilities in Excess of Other Assets (2,372,765) (0.3)
-------------- -----
Net Assets $ 776,095,155 100.0%
============== =====
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* Holdings are classified into the economic sectors found in the Russell 2000
Index.
** Commercial Paper and certain US Government Agency Obligations are 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) HA-LO Industries, Inc. declared a three-for-two stock split during the
quarter.
(c) Name changed from Norton McNaughton, Inc.
(d) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(e) Inland Steel Industries, Inc. merged with Ryerson Tull, Inc.
(f) Alpha Industries, Inc. declared a three-for-two stock split during the
quarter.
(g) Boole & Babbage, Inc. merged with BMC Software, Inc.
(h) 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 695,000 $ 2,387,811 ++
Transportation
Auto & Landair Corporation -- (2,946,760) ++
Transportation
Consumer Au Bon Pain Co., Inc. -- -- ++
Discretionary (Class A)
Consumer Caribiner International, Inc. 1,143,000 22,859,682 ++
Discretionary
Healthcare HCIA, Inc. 223,600 2,188,683 ++
Materials & BHA Group Holdings, Inc. 58,025 -- $74,852
Processing
Materials & Shiloh Industries, Inc. 89,500 1,584,179 ++
Processing
Miscellaneous Mercer International, Inc. -- -- 64,388
Producer Durables B.I., Incorporated 20,000 133,749 ++
Producer Durables Brown & Sharpe Manufacturing 323,300 3,583,598 ++
Company (Class A)
Producer Durables Comdial Corporation -- -- ++
Producer Durables TALX Corporation -- -- ++
Technology Bell Industries, Inc. 110,700 1,090,252 ++
Technology C.P. Clare Corporation (27,000) (445,950) ++
Technology Software Spectrum, Inc. -- -- ++
- -----------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of March 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$948,444,188) (Note 1a) $ 778,467,920
Receivables:
Securities sold ............................................ $ 9,153,908
Capital shares sold ........................................ 2,149,181
Dividends .................................................. 254,526 11,557,615
-------------
Prepaid registration fees and other assets (Note 1e) .......... 35,628
-------------
Total assets .................................................. 790,061,163
-------------
- --------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased ....................................... 5,550,841
Capital shares redeemed .................................... 5,348,764
Custodian bank (Note 1g) ................................... 1,578,984
Investment adviser (Note 2) ................................ 534,708
Distributor (Note 2) ....................................... 404,802 13,418,099
-------------
Accrued expenses and other liabilities ........................ 547,909
-------------
Total liabilities ............................................. 13,966,008
-------------
- --------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets .................................................... $ 776,095,155
=============
- --------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized ............................................. $ 1,702,018
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized ............................................. 2,463,600
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized ............................................. 251,473
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized ............................................. 508,064
Paid-in capital in excess of par .............................. 865,519,935
Undistributed realized capital gains on investments--net ...... 75,626,333
Unrealized depreciation on investments--net ................... (169,976,268)
-------------
Net assets .................................................... $ 776,095,155
=============
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $276,957,037 and 17,020,185
shares outstanding ................................... $ 16.27
=============
Class B--Based on net assets of $378,609,885 and 24,636,003
shares outstanding ................................... $ 15.37
=============
Class C--Based on net assets of $38,248,813 and 2,514,734
shares outstanding ................................... $ 15.21
=============
Class D--Based on net assets of $82,279,420 and 5,080,637
shares outstanding ................................... $ 16.19
=============
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
FINANCIAL INFORMATION (continued)
Statement of Operations for the Year Ended March 31, 1999
<TABLE>
<S> <C> <C> <C>
Investment Interest and discount earned ..................................... $ 5,652,459
Income Dividends (net of $26,170 foreign withholding tax) ............... 4,163,709
(Notes 1c & 1d): -------------
Total income ..................................................... 9,816,168
-------------
- -----------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) ................................ $ 7,530,195
Account maintenance and distribution fees--Class B (Note 2) ...... 5,057,775
Transfer agent fees--Class B (Note 2) ............................ 1,450,011
Transfer agent fees--Class A (Note 2) ............................ 863,724
Account maintenance and distribution fees--Class C (Note 2) ...... 573,086
Transfer agent fees--Class D (Note 2) ............................ 283,726
Account maintenance fees--Class D (Note 2) ....................... 271,332
Transfer agent fees--Class C (Note 2) ............................ 172,108
Registration fees (Note 1e) ...................................... 140,956
Printing and shareholder reports ................................. 140,291
Custodian fees ................................................... 112,771
Accounting services (Note 2) ..................................... 100,179
Professional fees ................................................ 79,702
Directors' fees and expenses ..................................... 62,882
Pricing fees ..................................................... 763
Other ............................................................ 18,778
-------------
Total expenses ................................................... 16,858,279
-------------
Investment loss--net ............................................. (7,042,111)
-------------
- -----------------------------------------------------------------------------------------------------------------------
Realized & Unreal- Realized gain on investments--net ................................ 84,918,600
ized Gain (Loss) on Change in unrealized appreciation/depreciation on investments--net (354,219,652)
Investements--Net -------------
(Notes 1b, 1d & 3): Net Decrease in Net Assets Resulting from Operations ............. $(276,343,163)
=============
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
FINANCIAL INFORMATION (continued)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year
Ended March 31,
----------------------------------
Increase (Decrease) in Net Assets: 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment loss--net ............................................. $ (7,042,111) $ (6,842,149)
Realized gain on investments--net ................................ 84,918,600 123,972,911
Change in unrealized appreciation/depreciation on investments--net (354,219,652) 165,606,065
--------------- ---------------
Net increase (decrease) in net assets resulting from operations .. (276,343,163) 282,736,827
--------------- ---------------
- ----------------------------------------------------------------------------------------------------------------------------
Distributions Realized gain on investments--net:
to Shareholders Class A ....................................................... (19,624,603) (39,789,579)
(Note 1f): Class B ....................................................... (31,099,848) (57,233,633)
Class C ....................................................... (3,623,058) (5,666,588)
Class D ....................................................... (6,448,638) (8,409,567)
--------------- ---------------
Net decrease in net assets resulting from distributions
to shareholders .................................................. (60,796,147) (111,099,367)
--------------- ---------------
- ----------------------------------------------------------------------------------------------------------------------------
Capital Shares Net increase (decrease) in net assets derived from capital
Transactions share transactions ............................................... (78,669,579) 387,703,762
(Note 4): --------------- ---------------
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets: Total increase (decrease) in net assets .......................... (415,808,889) 559,341,222
Beginning of year ................................................ 1,191,904,044 632,562,822
--------------- ---------------
End of year ...................................................... $ 776,095,155 $ 1,191,904,044
=============== ===============
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
The following per share data and ratios have been derived Class A+
from information provided in the financial statements. ------------------------------------------------------------
For the Year Ended March 31,
------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 22.03 $ 17.59 $ 17.77 $ 15.63 $ 15.88
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net ........ (.02) (.03) .06 .24 .16
Realized and unrealized gain (loss) on
investments--net ..................... (4.66) 7.20 3.01 2.72 1.09
-------- -------- -------- -------- --------
Total from investment operations ..... (4.68) 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 year ......... $ 16.27 $ 22.03 $ 17.59 $ 17.77 $ 15.63
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... (22.17%) 43.18% 17.62% 19.56% 8.85%
Return:* ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................. 1.08% 1.02% 1.10% 1.12% 1.15%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net ........ (.10%) (.13%) .34% 1.43% 1.04%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $276,957 $396,198 $223,492 $181,297 $106,506
Data: ======== ======== ======== ======== ========
Portfolio turnover ................... 57.82% 67.02% 97.87% 60.37% 59.79%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales
loads.
+ Based on average shares outstanding.
See Notes to Financial Statements.
13
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
The following per share data and ratios have been derived Class B++
from information provided in the financial statements. ------------------------------------------------------------
For the Year Ended March 31,
------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 21.03 $ 16.91 $ 17.21 $ 15.16 $ 15.49
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net ........ (.20) (.23) (.12) .07 --+
Realized and unrealized gain (loss) on
investments--net ..................... (4.43) 6.90 2.90 2.64 1.06
-------- -------- -------- -------- --------
Total from investment operations ..... (4.63) 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 year ......... $ 15.37 $ 21.03 $ 16.91 $ 17.21 $ 15.16
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... (22.96%) 41.72% 16.44% 18.37% 7.70%
Return:* ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................. 2.10% 2.05% 2.13% 2.15% 2.20%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net ........ (1.12%) (1.16%) (.68%) .44% .02%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $378,610 $611,364 $337,716 $310,174 $237,359
Data: ======== ======== ======== ======== ========
Portfolio turnover ................... 57.82% 67.02% 97.87% 60.37% 59.79%
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales
loads.
+ Amount is less than $.01 per share.
++ Based on average shares outstanding.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
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: 1999 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 .......... (.20) (.23) (.13) .06 .01
Realized and unrealized gain (loss) on
investments--net ....................... (4.38) 6.84 2.89 2.63 .65
------- ------- ------- ------- -------
Total from investment operations ....... (4.58) 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 ......... $ 15.21 $ 20.83 $ 16.77 $ 17.10 $ 15.10
======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ..... (22.99%) 41.74% 16.39% 18.34% 4.82%++
Return:** ======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................... 2.12% 2.06% 2.14% 2.16% 2.41%*
Net Assets: ======= ======= ======= ======= =======
Investment income (loss)--net .......... (1.14%) (1.17%) (.70%) .36% .14%*
======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) $38,249 $70,159 $31,182 $26,920 $11,434
Data: ======= ======= ======= ======= =======
Portfolio turnover ..................... 57.82% 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.
15
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
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: 1999 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 .......... (.06) (.08) .01 .19 .07
Realized and unrealized gain (loss) on
investments--net ....................... (4.65) 7.18 3.02 2.73 .66
------- -------- ------- ------- -------
Total from investment operations ....... (4.71) 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 ......... $ 16.19 $ 21.97 $ 17.56 $ 17.74 $ 15.61
======= ======== ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ..... (22.37%) 42.80% 17.38% 19.26% 5.13%++
Return:** ======= ======== ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................... 1.33% 1.27% 1.35% 1.37% 1.61%*
Net Assets: ======= ======== ======= ======= =======
Investment income (loss)--net .......... (.35%) (.39%) .07% 1.15% .95%*
======= ======== ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) $82,279 $114,183 $40,173 $24,795 $11,037
Data: ======= ======== ======= ======= =======
Portfolio turnover ..................... 57.82% 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.
16
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
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's financial statements are prepared in accordance with
generally accepted accounting principles which may require the use of management
accruals and estimates. 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 (option written) or the last bid price (option 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 the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
17
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
NOTES TO FINANCIAL STATEMENTS (continued)
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.
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) Custodian bank--The Fund recorded an amount payable to the custodian bank
reflecting an overnight draft which resulted from differences in estimated
capital share transactions.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $7,042,111 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 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.
On November 4, 1998, the Board of Directors of the Fund approved a change in the
Investment Advisory Agreement so that such fee is based upon the average daily
value of the Fund's net assets at the following annual rates: 0.75% of the
Fund's average daily net assets not exceeding $1 billion; 0.725% of average
daily net assets in excess of $1 billion but not exceeding $1.5 billion; and
0.70% of average daily net assets in excess of $1.5 billion.
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% --
- --------------------------------------------------------------------------------
18
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("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 year ended March 31, 1999, 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 .............................. $1,068 $ 10,822
Class D .............................. $9,364 $126,151
- --------------------------------------------------------------------------------
For the year ended March 31, 1999, MLPF&S received contingent deferred sales
charges of $969,353 and $43,738 relating to transactions in Class B and Class C
Shares, respectively.
In addition, MLPF&S received $135,048 in commissions on the execution of
portfolio security transactions for the Fund for the year ended March 31, 1999.
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
year ended March 31, 1999 were $519,358,776 and $572,524,447, respectively.
Net realized gains (losses) for the year ended March 31, 1999 and net unrealized
losses as of March 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Losses
- --------------------------------------------------------------------------------
Long-term investments ............... $ 84,918,726 $(169,976,268)
Short-term investments .............. (126) --
------------ -------------
Total ............................... $ 84,918,600 $(169,976,268)
============ =============
- --------------------------------------------------------------------------------
As of March 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $173,390,614, of which $93,971,782 related to appreciated
securities and $267,362,396 related to depreciated securities. At March 31,
1999, the aggregate cost of investments for Federal income tax purposes was
$951,858,534.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share transactions
was $(78,669,579) and $387,703,762 for the years ended March 31, 1999 and March
31, 1998, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended March 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................. 6,897,888 $ 123,949,228
Shares issued to shareholders
in reinvestment of
distributions ........................... 931,185 18,707,508
---------- -------------
Total issued ............................ 7,829,073 142,656,736
Shares redeemed ......................... (8,792,249) (156,339,942)
---------- -------------
Net decrease ............................ (963,176) $ (13,683,206)
========== =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Year Dollar
Ended March 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 10,840,643 $ 191,992,268
Shares issued to shareholders
in reinvestment of
distributions .......................... 1,492,117 28,529,266
----------- -------------
Total issued ........................... 12,332,760 220,521,534
Automatic conversion
of shares .............................. (744,862) (13,102,293)
Shares redeemed ........................ (16,025,174) (265,368,498)
----------- -------------
Net decrease ........................... (4,437,276) $ (57,949,257)
=========== =============
- --------------------------------------------------------------------------------
19
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------------------------
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 C Shares for the Year Dollar
Ended March 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 1,513,437 $ 27,045,453
Shares issued to shareholders
in reinvestment of
distributions .......................... 177,024 3,349,285
----------- -------------
Total issued ........................... 1,690,461 30,394,738
Shares redeemed ........................ (2,544,293) (41,967,996)
----------- -------------
Net decrease ........................... (853,832) $ (11,573,258)
=========== =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Year Dollar
Ended March 31, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 2,784,551 $ 52,722,275
Automatic conversion
of shares .............................. 710,009 13,102,293
Shares issued to shareholders
in reinvestment of
distributions .......................... 302,895 6,066,990
----------- -------------
Total issued ........................... 3,797,455 71,891,558
Shares redeemed ........................ (3,913,165) (67,355,416)
----------- -------------
Net increase (decrease) ................ (115,710) $ 4,536,142
=========== =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
=========== =============
- --------------------------------------------------------------------------------
20
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
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, 1999, 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, 1999 by correspondence with the custodian and brokers or other alternative
procedures. 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, 1999, 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 14, 1999
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, 1999:
<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 7/02/98 7/10/98 $.015797 $.262349 $.278146 $.802133
- ----------------------------------------------------------------------------------------------
Class B Shares 7/02/98 7/10/98 $.013148 $.218356 $.231504 $.802133
- ----------------------------------------------------------------------------------------------
Class C Shares 7/02/98 7/10/98 $.013229 $.219696 $.232925 $.802133
- ----------------------------------------------------------------------------------------------
Class D Shares 7/02/98 7/10/98 $.015209 $.252580 $.267789 $.802133
- ----------------------------------------------------------------------------------------------
</TABLE>
The domestic qualifying ordinary income qualifies for the dividends received
deduction for corporations.
Please retain this information for your records.
* All of the Fund's long-term capital gains distributions are subject to the 20%
tax rate.
21
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
PORTFOLIO INFORMATION (unaudited)
As of March 31, 1999
Percent of
Top Ten Equity Holdings Net Assets
DSP Communications, Inc. ....................................... 2.6%
Structural Dynamics Research Corporation ....................... 2.5
PLATINUM Technology International, Inc. ........................ 2.4
Mentor Graphics Corporation .................................... 2.1
Ryerson Tull, Inc. ............................................. 2.0
Boise Cascade Office Products Corp. ............................ 1.9
Charter One Financial, Inc. .................................... 1.8
HA-LO Industries, Inc. ......................................... 1.8
Midway Games, Inc. ............................................. 1.8
Caribiner International, Inc. .................................. 1.7
Sectors Represented Percent of
in the Portfolio Net Assets
Technology ..................................................... 26.9%
Consumer Discretionary ......................................... 16.5
Materials & Processing ......................................... 13.1
Financial Services ............................................. 10.4
Producer Durables .............................................. 7.8
Energy ......................................................... 7.2
Healthcare ..................................................... 5.9
Auto & Transportation .......................................... 5.5
Miscellaneous .................................................. 2.0
Utilities ...................................................... 0.2
Stock Portfolio Changes for the Quarter
Ended March 31, 1999
Additions
*Adrien Arpel, Inc.
Aspen Technology, Inc.
Billing Concepts Corp.
Boron, LePore & Associates, Inc.
Buffets, Inc.
Carpenter Technology Corporation
The Cheesecake Factory Incorporated
Cognos, Inc.
Gibraltar Steel Corporation
Jefferies Group, Inc.
Kent Electronics Corporation
Mentor Corporation
Net Manage, Inc.
*Nvidia Corp
* Onyx Software
*Pcorder.Com Inc
Pier 1 Imports, Inc.
*Ramsay Health Care, Inc.
Sensormatic Electronics Corporation
Shared Medical Systems Corporation
Stein Mart, Inc.
Storage Technology Corporation
*Vignette Corporation
Deletions
*Adrien Arpel, Inc.
Ardent Software, Inc.
Cylink Corporation
Dover Downs Entertainment, Inc.
EnviroSource, Inc.
Forcenergy, Inc.
Genome Therapeutics Corp.
Information Resources, Inc.
Key Energy Services, Inc.
Learning Company, Inc. (The)
Magainin Pharmaceuticals, Inc.
Network Equipment Technologies, Inc.
*Nvidia Corp
*Onyx Software
*Pcorder.Com Inc
*Ramsay Health Care, Inc.
Ramsay Youth Services, Inc.
Steel Dynamics, Inc.
Unitog Company
*Vignette Corporation
*Added and deleted in the same quarter.
22
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1999
OFFICERS AND DIRECTORS
Terry K. Glenn, 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
Arthur Zeikel, Director
Daniel V. Szemis, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Thomas D. Jones, III, Secretary
- --------------------------------------------------------------------------------
Gerald M. Richard, Treasurer and Norman R. Harvey, Senior Vice President of
Merrill Lynch Special Value Fund, Inc. have recently retired. Their colleagues
at Merrill Lynch Asset Management, L.P. join the Fund's Board of Directors in
wishing Mr. Richard and Mr. Harvey well in their retirements.
- --------------------------------------------------------------------------------
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
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--3/99
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