MERRILL LYNCH
SPECIAL VALUE
FUND, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
March 31, 2000
<PAGE>
MERRILL LYNCH SPECIAL VALUE FUND, INC.
DEAR SHAREHOLDER
During the six months ended March 31, 2000, Merrill Lynch Special Value Fund,
Inc. outperformed the unmanaged Russell 2000 Index. Total returns for the Fund's
Class A, Class B, Class C and Class D Shares were +32.27%, +31.64%, +31.58% and
+32.11%, respectively, compared to the total return of +26.84% for the Russell
2000 Index. (Investment results 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 continued their strong run during the six months
ended March 31, 2000, performing significantly better than large-capitalization
stocks. For the six-month period, the Dow Jones Industrial Average and the
unmanaged Standard & Poor's 500 (S&P 500) Index posted returns of +6.45% and
+17.51%, respectively, while the Russell 2000 Index, a widely followed measure
of small-capitalization stock performance, gained 26.84%. The six-month period
began with additional strength in technology and health care stocks, leading the
Russell 2000 Index to a record high on March 9, 2000. However, in late March the
prominent "growth" stocks faltered, while many previously underperforming
"value" stocks staged a sharp recovery. In our opinion, the recovery in value
stocks may continue, given the strong economic backdrop and still exceptionally
large valuation gap between growth and value stocks.
During the six months ended March 31, 2000, the Fund's performance benefited
from strong stock selection in the consumer discretionary, transportation,
consumer staples and technology sectors. However, an underweighted position in
the technology and health care sectors negatively influenced performance. The
Fund was a net seller of technology and health care stocks during the period
because several of our holdings achieved or exceeded our established price
objectives. We made purchases in the consumer staples and consumer discretionary
sectors, based on attractive valuations and favorable company-specific
fundamentals.
Individual stocks that benefited the Fund's performance included
Intervoice-Brite, Inc., Aspen Technology, Inc. and U.S. Foodservice.
Intervoice-Brite, a provider of call automation and network service solutions,
soared following the successful integration of the Brite Voice Systems
acquisition, and subsequent to the release of quarterly earnings that showed
substantial cost savings and gross margin improvement for the combined company.
Shares of Aspen Technology, a provider of software for the process manufacturing
industries, appreciated dramatically on renewed demand from corporate customers
in the petroleum industry, and on the announcement of quarterly earnings that
surpassed the range of analysts' estimates. As a result of its significant
appreciation, we sold our shares during the six-month period. Shares of U.S.
Foodservice, a large broadline foodservice distributor in the United States,
climbed sharply after the Fund's initial purchase in February 2000 on the
announcement of an agreement for the company to be acquired by the Dutch firm
Royal Ahold at a price of $26 per share.
During the six months ended March 31, 2000, Fund performance was hindered by
investments in Safety-Kleen Corporation and Ryerson Tull, Inc. Safety-Kleen, an
industrial waste service company, declined abruptly, based on
lower-than-expected fiscal first quarter earnings resulting from
lower-than-expected sales. The company also announced that it was reviewing its
accounting policies and practices. Shares of Ryerson Tull, an international
distributor of specialty metals, were also weak as a result of margin pressures
from rising raw material prices. We eliminated our holdings in Safety-Kleen, but
increased the Fund's position in Ryerson Tull on stock price weakness.
Fiscal Year in Review
For the 12 months ended March 31, 2000, Merrill Lynch Special Value Fund, Inc.
significantly outperformed the Russell 2000 Index. Total returns for the Fund's
Class A, Class B, Class C and Class D Shares were +57.29%, +55.72%, +55.64% and
+56.98%, respectively, compared to the +37.29% total return for the Russell 2000
Index.
Small-capitalization stocks performed significantly better than
large-capitalization stocks over the 12 months ended March 31, 2000. The Russell
2000 Index's total return of +37.29% compared to a +17.94% total return for the
large-capitalization S&P 500 Index for the 12-month period. The Russell 2000
performance was driven by spectacular gains in the technology sector, and by
strong performance in the producer durables, health
1
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
care, and energy sectors. Financial services and consumer staples stocks
provided a negative contribution to the performance of the Russell 2000 for the
period. The sharp divergence in performance between growth stocks and value
stocks led to an unusually wide range of performance for small-capitalization
oriented funds over the past year. It is possible that the improved showing of
value stocks in March compared to growth stocks may be signaling that the
valuation of many technology and health care stocks is overextended.
During the 12 months ended March 31, 2000, the Fund's outperformance of the
Russell 2000 Index was attributable primarily to positive stock selection.
Strong performance was obtained from stock holdings in the consumer
discretionary, auto and transportation, health care, technology and consumer
staples sectors. Stock picks in the producer durables, financial services,
materials and processing and energy sectors hindered performance. An
overweighted position in technology and an underweighted position in financial
services benefited performance, while an overweighted position in consumer
discretionary and materials and processing stocks held back performance.
The investment philosophy of Merrill Lynch Special Value Fund, Inc. is to invest
in the stocks of small companies that we believe are currently out of favor with
investors as a result of a temporary interruption in an above-average long-term
growth trend. As a result of this approach, the Fund was overweighted in
technology stocks at the beginning of the fiscal year. Exceptionally positive
performance in the Fund's technology holdings benefited Fund shareholders
significantly during the 12 months ended March 31, 2000. However, since many of
the Fund's technology holdings rose to levels where their valuation statistics
exceeded prior highs by a significant amount, we sold a number of positions and
lowered our overall technology sector exposure to an underweighted level
compared to the Russell 2000 at March 31, 2000. Consumer discretionary, consumer
staples and financial services stocks in the Russell 2000 performed poorly over
the 12 months ended March 31, 2000. Consequently, we took advantage of the
depressed stock prices of several companies to increase the Fund's weight in
those out-of-favor sectors. At March 31, 2000, the Fund was most heavily
weighted in the consumer discretionary sector, followed by the technology sector
and the financial services sector. By contrast, as of March 31, 2000 the Russell
2000 Index was most heavily weighted in technology, followed by financial
services and health care.
In Conclusion
It is gratifying to finally have a period of performance that justifies our
previous encouragement to shareholders to remain represented in the
small-capitalization equity category. Furthermore, we are pleased that, during
the unusual circumstances of the past year, the Fund's value approach was able
to provide returns that exceeded the growth-driven returns of the Russell 2000
Index. Valuations for many small-capitalization stocks continue to appear
attractive to us, and the fundamental outlook remains positive for most
companies as well. As a result, we are optimistic about the Fund's investment
outlook.
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 semi-annual 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 2, 2000
- --------------------------------------------------------------------------------
Effective July 1, 2000, Merrill Lynch Special Value Fund, Inc. will change its
name to Merrill Lynch Small Cap Value Fund, Inc. The Fund's management believes
that the new name better reflects the Fund's main investment strategies. The
change in the Fund's name does not connote a change in its investment objective,
which remains the same: to seek long-term growth of capital by investing in a
diversified portfolio of securities, primarily common stock, of relatively small
companies that Fund management believes have special investment value and
emerging growth companies regardless of size.
- --------------------------------------------------------------------------------
2
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
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 share holders.
Recent Performance Results
<TABLE>
<CAPTION>
Ten Years/
6 Month 12 Month Since Inception
As of March 31, 2000 Total Return Total Return Total Return
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ML Special Value Fund, Inc. Class A Shares* +32.27% +57.29% +318.87%
- -------------------------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class B Shares* +31.64 +55.72 +278.25
- -------------------------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class C Shares* +31.58 +55.64 +145.29
- -------------------------------------------------------------------------------------------------------------
ML Special Value Fund, Inc. Class D Shares* +32.11 +56.98 +156.09
- -------------------------------------------------------------------------------------------------------------
Russell 2000 Index** +26.84 +37.29 +285.19/+130.30
- -------------------------------------------------------------------------------------------------------------
</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/since inception periods
are ten years for Class A & Class B Shares and from 10/21/94 for Class C &
Class D Shares, respectively.
** An unmanaged broad-based Index comprised of small-capitalization common
stocks. Ten years/since inception total return periods are ten years and
from 10/21/94, respectively.
3
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment--Class A & Class B Shares
[LINE GRAPH 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:
3/90 3/00
ML Special Value Fund, Inc.+--
Class A Shares* $ 9,475 $39,686
ML Special Value Fund, Inc.+--
Class B Shares* $10,000 $37,826
Russell 2000 Index++ $10,000 $38,519
Total Return Based on a $10,000 Investment--Class C & Class D Shares
[LINE GRAPH 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 the Russell 2000 Index.
Beginning and ending values are:
10/21/94** 3/00
ML Special Value Fund, Inc.+--
Class C Shares* $10,000 $24,529
ML Special Value Fund, Inc.+--
Class D Shares* $ 9,475 $24,266
Russell 2000 Index $10,000 $23,027
* 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 ocmprised 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, 2000
PERFORMANCE DATA (concluded)
Results of a $1,000 Investment Since Inception--Class A Shares
[LINE GRAPH 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 $9,316.86 on March 31, 2000.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
- --------------------------------------------------------------------------------
Class A Shares*
- --------------------------------------------------------------------------------
Year Ended 3/31/00 +57.29% +49.03%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/00 +19.77 +18.49
- --------------------------------------------------------------------------------
Ten Years Ended 3/31/00 +15.40 +14.78
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class A Shares
were offered at a higher sales charge. Thus, actual returns would have
been lower than shown for the ten-year period.)
** Assuming maximum sales charge.
- --------------------------------------------------------------------------------
% Return % Return
Without CDSC With CDSC**
- --------------------------------------------------------------------------------
Class C Shares*
- --------------------------------------------------------------------------------
Year Ended 3/31/00 +55.64% +54.64%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/00 +18.54 +18.54
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 3/31/00 +17.92 +17.92
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
- --------------------------------------------------------------------------------
Class B Shares*
- --------------------------------------------------------------------------------
Year Ended 3/31/00 +55.72% +51.72%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/00 +18.57 +18.57
- --------------------------------------------------------------------------------
Ten Years Ended 3/31/00 +14.23 +14.23
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
4 years.
** Assuming payment of applicable contingent deferred sales charge.
- --------------------------------------------------------------------------------
% Return Without % Return With
Sales Charge Sales Charge**
- --------------------------------------------------------------------------------
Class D Shares*
- --------------------------------------------------------------------------------
Year Ended 3/31/00 +56.98% +48.73%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/00 +19.49 +18.21
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 3/31/00 +18.86 +17.68
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
5
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
Shares Percent of
Sector* Held Stocks Value Net Assets
- --------------------------------------------------------------------------------------------------------------------------
Auto & Transportation
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
579,800 Circle International Group, Inc. $15,074,800 1.2%
35,950 +Forward Air Corporation 829,097 0.1
951,900 +Fritz Companies, Inc. 9,637,988 0.8
295,400 +Gentex Corporation 10,948,263 0.9
1,019,700 +Keystone Automotive Industries, Inc. 5,990,738 0.5
428,500 +Landair Corporation (c) 1,794,344 0.2
253,200 Meritor Automotive, Inc. 4,003,725 0.3
1,746,500 +Miller Industries, Inc. 6,658,531 0.5
18,800 +Tower Automotive, Inc. 307,850 0.0
----------- -----------
55,245,336 4.5
- --------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary
- --------------------------------------------------------------------------------------------------------------------------
661,700 +AC Nielsen Corporation 14,888,250 1.2
2,756,200 +APAC Customer Services Inc. (c) 23,944,487 2.0
1,317 Adrien Arpel, Inc. (Preferred) 28,157 0.0
555,100 +Ambassadors International, Inc. 7,216,300 0.6
606,200 +B.I., Incorporated (c) 4,470,725 0.4
1,651,400 +Boise Cascade Office Products Corp. 27,041,675 2.2
556,900 +Boron, LePore & Associates, Inc. 4,942,487 0.4
1,293,500 +Buffets, Inc. 11,681,922 1.0
274,700 +The Cheesecake Factory Incorporated 11,434,387 0.9
376,800 Dover Downs Entertainment, Inc. 4,804,200 0.4
58,700 G & K Services, Inc. (Class A) 1,147,402 0.1
1,742,250 +HA-LO Industries, Inc. 13,720,219 1.1
65,000 Harte-Hanks, Inc. 1,474,688 0.1
1,954,200 Heilig-Meyers Company 7,694,663 0.6
649,600 IKON Office Solutions, Inc. 4,019,400 0.3
250,900 +ITI Technologies, Inc. 7,464,275 0.6
69,800 +Jack in the Box Inc. 1,487,613 0.1
187,600 +Linens 'n Things Co. 6,425,300 0.5
67,000 Longs Drug Stores Corporation 1,524,250 0.1
747,200 +McNaughton Apparel Group Inc. (c) 6,164,400 0.5
491,000 +The Men's Warehouse, Inc. 14,545,875 1.2
1,258,350 +Metromedia International Group, Inc. 7,078,219 0.6
828,040 +Midway Games Inc. 10,971,530 0.9
139,100 +Modis Professional Services, Inc. 1,721,363 0.2
349,000 +Mohawk Industries, Inc. 7,808,875 0.6
1,128,000 +PETsMART, Inc. 3,384,000 0.3
1,121,700 +Panera Bread Company (Class A)(c) 8,412,750 0.7
1,264,300 +Paxson Communications Corporation 9,798,325 0.8
1,191,600 Pier 1 Imports, Inc. 12,213,900 1.0
681,200 +SITEL Corporation 4,683,250 0.4
544,500 Shaw Industries, Inc. 8,269,594 0.7
275,000 +Sinclair Broadcast Group, Inc. (Class A) 2,457,813 0.2
337,600 +Snyder Communications, Inc. 7,596,000 0.6
867,300 +Stein Mart, Inc. 7,155,225 0.6
337,300 Strayer Education, Inc. 8,769,800 0.7
123,400 +THQ Inc. 2,205,775 0.2
723,000 +Tech Data Corporation 23,768,625 1.9
848,000 +TeleSpectrum Worldwide Inc. 5,936,000 0.5
910,900 +Veterinary Centers of America, Inc. 12,524,875 1.0
1,702,500 +WMS Industries Inc. (c) 16,812,187 1.4
172,200 +West TeleServices Corporation 4,434,150 0.4
----------- -----------
342,122,931 28.0
</TABLE>
6
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
Shares Percent of
Sector* Held Stocks Value Net Assets
- --------------------------------------------------------------------------------------------------------------------------
Consumer Staples
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
245,600 Dean Foods Company $ 6,569,800 0.5%
320,300 +Suiza Foods Corporation 12,892,075 1.1
1,200,000 +U.S. Foodservice 30,900,000 2.5
------------ ------------
50,361,875 4.1
- --------------------------------------------------------------------------------------------------------------------------
Energy
- --------------------------------------------------------------------------------------------------------------------------
188,400 +Barrett Resources Corporation 5,616,675 0.5
581,000 +Basin Exploration, Inc. 8,678,687 0.7
191,300 Diamond Offshore Drilling, Inc. 7,640,044 0.6
150,600 +Evergreen Resources, Inc. 3,642,637 0.3
259,722 +Louis Dreyfus Natural Gas Corp. 8,830,548 0.7
119,200 +Nuevo Energy Company 2,562,800 0.2
308,391 Plains Resources Inc. (b) 3,854,887 0.3
158,800 +Plains Resources Inc. 1,985,000 0.2
370,350 +Tom Brown, Inc. 6,805,181 0.6
------------ ------------
49,616,459 4.1
- --------------------------------------------------------------------------------------------------------------------------
Financial Services
- --------------------------------------------------------------------------------------------------------------------------
85,050 American National Insurance Company 4,890,375 0.4
1,394,000 +Billing Concepts Corp. 9,801,562 0.8
423,300 Brandywine Reality Trust 7,249,012 0.6
259,200 Camden Property Trust 7,014,600 0.6
805,100 Capitol Federal Financial 7,598,131 0.6
972,446 Charter One Financial, Inc. 20,421,366 1.7
115,815 Commerce Bancorp, Inc. 4,285,155 0.3
215,600 FelCor Lodging Trust Inc. 3,813,425 0.3
355,300 Frontier Insurance Group, Inc. 355,300 0.0
186,500 +Investment Technology Group, Inc. 6,574,125 0.5
117,200 Kimco Realty Corporation 4,395,000 0.4
1,683,800 Meditrust Corporation 3,051,888 0.3
387,200 National Data Corporation 10,067,200 0.8
391,000 PXRE Group Limited 6,647,000 0.5
216,400 +Pegasystems Inc. 2,596,800 0.2
1,152,700 Peoples Heritage Financial Group, Inc. 17,290,500 1.4
536,500 +Primark Corporation 12,943,063 1.1
175,700 +The Profit Recovery Group International, Inc. 3,250,450 0.3
311,100 Roslyn Bancorp, Inc. 5,541,469 0.5
391,500 Scottish Annuity & Life Holdings, Ltd. 3,009,656 0.3
1,163,200 +United Rentals (North America), Inc. 20,065,200 1.6
------------ ------------
160,861,277 13.2
- --------------------------------------------------------------------------------------------------------------------------
Healthcare
- --------------------------------------------------------------------------------------------------------------------------
1,754,500 +Caremark Rx, Inc. 7,346,969 0.6
50,300 +Closure Medical Corporation 1,320,375 0.1
573,600 +Covance, Inc. 6,166,200 0.5
625,400 +EndoSonics Corporation 3,947,837 0.3
8,000 +Isis Pharmaceuticals, Inc. 112,500 0.0
312,500 Mentor Corporation 8,437,500 0.7
610,200 +Nabi 4,118,850 0.3
245,500 +Novoste Corporation 9,820,000 0.8
1,434,400 +Orthodontic Centers of America, Inc. 26,895,000 2.2
43,600 +PAREXEL International Corporation 411,475 0.0
84,300 +Pharmaceutical Product Development, Inc. 1,427,831 0.1
96,900 +Quintiles Transnational Corp. 1,653,356 0.1
</TABLE>
7
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
Shares Percent of
Sector* Held Stocks Value Net Assets
- --------------------------------------------------------------------------------------------------------------------------
Healthcare (concluded)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
300,850 +Scios, Inc. $ 1,560,659 0.1%
139,500 +Sierra Health Services, Inc. 688,781 0.1
------------ ----------
73,907,333 5.9
- --------------------------------------------------------------------------------------------------------------------------
Materials & Processing
- --------------------------------------------------------------------------------------------------------------------------
506,800 A.M. Castle & Company 6,335,000 0.5
1,046,400 AK Steel Holding Corporation 10,856,400 0.9
197,800 +Airgas, Inc. 1,644,212 0.1
110,000 Boise Cascade Corporation 3,822,500 0.3
189,700 Carpenter Technology Corporation 3,948,131 0.3
359,300 Commonwealth Industries, Inc. 3,256,156 0.3
452,100 Gibraltar Steel Corporation 7,431,394 0.6
234,800 +Insituform Technologies, Inc. (Class A) 7,190,750 0.6
644,500 Intermet Corporation 5,881,063 0.5
151,000 Kaydon Corp. 4,124,188 0.3
251,500 +Novamerican Steel, Inc. 2,577,875 0.2
713,100 +Paxar Corporation 6,863,588 0.6
466,600 Quanex Corporation 8,398,800 0.7
514,700 Rock-Tenn Company (Class A) 5,018,325 0.4
1,569,081 Ryerson Tull, Inc. (c) 24,320,756 2.0
691,300 +Shiloh Industries, Inc. 7,215,444 0.6
2,391,200 Watsco, Inc. (c) 24,958,150 2.0
169,100 +Wolverine Tube, Inc. 2,166,594 0.2
863,610 +Zemex Corporation (c) 7,232,734 0.6
------------ ----------
143,242,060 11.7
- --------------------------------------------------------------------------------------------------------------------------
Miscellaneous
- --------------------------------------------------------------------------------------------------------------------------
1,331,500 Mercer International, Inc. (c) 10,652,000 0.9
- --------------------------------------------------------------------------------------------------------------------------
Producer Durables
- --------------------------------------------------------------------------------------------------------------------------
120,100 +ANTEC Corporation 5,381,981 0.4
752,600 Applied Industrial Technologies, Inc. 12,041,600 1.0
230,600 +BE Aerospace, Inc. 1,354,775 0.1
638,277 BHA Group Holdings, Inc. (c) 5,026,431 0.4
846,900 +Brown & Sharpe Manufacturing Company (Class A)(c) 1,640,869 0.1
808,800 +Comdial Corporation (c) 10,615,500 0.9
530,400 +DONCASTERS PLC (ADR)(a) 4,607,850 0.4
2,140,800 +Danka Business Systems PLC (ADR)(a) 13,112,400 1.1
569,800 +ESCO Electronics Corporation 9,544,150 0.8
598,500 Oakwood Homes Corporation 2,281,781 0.2
198,000 The Ryland Group, Inc. 3,712,500 0.3
179,630 +Toll Brothers, Inc. 3,592,600 0.3
168,600 +Triumph Group, Inc. 4,910,475 0.4
------------ ----------
77,822,912 6.4
- --------------------------------------------------------------------------------------------------------------------------
Technology
- --------------------------------------------------------------------------------------------------------------------------
724,700 +Anixter International Inc. 20,201,012 1.7
65,200 +Black Box Corporation 4,514,081 0.4
595,450 +C.P. Clare Corporation (c) 5,061,325 0.4
172,250 +Cognos, Inc. 10,776,391 0.9
30,300 +Documentum, Inc. 2,363,400 0.2
166,750 +FileNET Corporation 4,960,812 0.4
685,453 +InterVoice-Bright, Inc. 19,792,455 1.6
399,000 +JDA Software Group, Inc. 5,835,375 0.5
1,281,400 +Mentor Graphics Corporation 19,381,175 1.6
</TABLE>
8
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<TABLE>
<CAPTION>
Shares Percent of
Sector* Held Stocks Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Technology (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1,361,000 +NetManage, Inc. $ 7,698,156 0.6%
221,340 +Nu Horizons Electronics Corp. 4,897,148 0.4
540,870 +PeopleSoft, Inc. 10,817,400 0.9
288,600 +Planar Systems Inc. 3,391,050 0.3
38,200 +Rational Software Corporation 2,922,300 0.2
714,400 +Sensormatic Electronics Corporation 16,029,350 1.3
1,664,400 +Structural Dynamics Research Corporation 22,469,400 1.8
558,650 +Sybase, Inc. 11,347,578 0.9
184,800 +Sykes Enterprises, Incorporated 3,522,750 0.3
418,250 +TALX Corporation (c) 7,946,750 0.6
327,100 +Transaction Systems Architects, Inc. (Class A) 9,445,013 0.8
-------------- ----------
193,372,921 15.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stocks (Cost--$1,084,489,974) 1,157,205,104 94.6
- ------------------------------------------------------------------------------------------------------------------------------------
Face
Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Short-Term Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial Paper** $20,000,000 CSW Credit Inc., 6.05% due 4/07/2000 19,979,833 1.6
42,023,000 General Motors Acceptance Corp., 6.38% due 4/03/2000 42,008,105 3.5
17,000,000 International Lease Finance Corporation, 6.03% due/4/11/2000 16,971,525 1.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$78,959,463) 78,959,463 6.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$1,163,449,437) 1,236,164,567 101.1
Liabilities in Excess of Other Assets (13,489,695) (1.1)
-------------- ----------
Net Assets $1,222,674,872 100.0%
============== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* Holdings are classified into the economic sectors found in the Russell
2000 Index.
** Commercial Paper is traded on a discount basis; the interest rates shown
reflect the discount rates paid at the time of purchase by the Fund.
(a) American Depositary Receipts (ADR).
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(c) Investments 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 & Landair Corporation -- -- ++
Transportation
- -------------------------------------------------------------------------------------------------------------------------
Consumer APAC Customer Services Inc. 720,300 $ 3,369,794 ++
Discretionary B.I., Incorporated -- -- ++
McNaughton Apparel Group Inc. 46,700 75,343 ++
Panera Bread Company 1,121,700 7,525,064 ++
(Class A)
WMS Industries Inc. 868,500 10,125,025 ++
- -------------------------------------------------------------------------------------------------------------------------
Materials & Ryerson Tull, Inc. 529,200 7,907,256 $ 114,667
Processing Watsco, Inc. 2,391,200 27,129,836 63,018
Zemex Corporation -- -- ++
- -------------------------------------------------------------------------------------------------------------------------
Miscellaneous Mercer International, Inc. (278,200) (5,284,815) 80,485
- -------------------------------------------------------------------------------------------------------------------------
Producer Durables BHA Group Holdings, Inc. -- -- 76,593
Brown & Sharpe Manufacturing -- -- ++
Company (Class A)
Comdial Corporation -- -- ++
- -------------------------------------------------------------------------------------------------------------------------
Technology C.P. Clare Corporation (210,700) (2,287,434) ++
TALX Corporation (100,500) (940,372) ++
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.*
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of March 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$1,163,449,437) .......... $1,236,164,567
Receivables:
Securities sold .............................................. $ 5,115,484
Capital shares sold .......................................... 3,479,666
Dividends .................................................... 151,454 8,746,604
--------------
Prepaid registration fees and other assets ....................... 68,733
--------------
Total assets ..................................................... 1,244,979,904
--------------
- -------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased ......................................... 16,354,336
Capital shares redeemed ...................................... 3,899,640
Investment adviser ........................................... 684,657
Distributor .................................................. 514,727
Custodian bank ............................................... 471,781 21,925,141
--------------
Accrued expenses and other liabilities ........................... 379,891
--------------
Total liabilities ................................................ 22,305,032
--------------
- -------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets ....................................................... $1,222,674,872
==============
- -------------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of Common Stock, $.10 par value, 100,000,000 shares
Consist of: authorized ....................................................... $ 2,150,188
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized ....................................................... 2,370,994
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized ....................................................... 316,027
Class D Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized ....................................................... 665,211
Paid-in capital in excess of par ................................. 990,230,630
Undistributed investment income--net ............................. 9,675,762
Undistributed realized capital gains on investments--net ......... 144,550,930
Unrealized appreciation on investments--net ...................... 72,715,130
--------------
Net assets ....................................................... $1,222,674,872
==============
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $491,855,059 and 21,501,882 shares
outstanding ............................................. $ 22.87
==============
Class B--Based on net assets of $511,779,939 and 23,709,944 shares
outstanding ............................................. $ 21.59
==============
Class C--Based on net assets of $67,390,143 and 3,160,271 shares
outstanding ............................................. $ 21.32
==============
Class D--Based on net assets of $151,649,731 and 6,652,112 shares
outstanding ............................................. $ 22.80
==============
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
FINANCIAL INFORMATION (continued)
Statement of Operations for the Year Ended March 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investment Dividends ........................................................ $ 5,943,011
Income: Interest and discount earned ..................................... 3,371,857
-------------
Total income ..................................................... 9,314,868
-------------
- -------------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees ......................................... $ 7,208,238
Account maintenance and distribution fees--Class B ............... 4,356,503
Transfer agent fees--Class B ..................................... 1,232,740
Transfer agent fees--Class A ..................................... 935,539
Account maintenance and distribution fees--Class C ............... 490,449
Transfer agent fees--Class D ..................................... 285,219
Account maintenance fees--Class D ................................ 279,034
Printing and shareholder reports ................................. 261,393
Transfer agent fees--Class C ..................................... 144,566
Professional fees ................................................ 128,382
Accounting services .............................................. 119,537
Custodian fees ................................................... 116,139
Registration fees ................................................ 90,048
Directors' fees and expenses ..................................... 14,416
Pricing fees ..................................................... 4,481
Other ............................................................ 21,915
-------------
Total expenses ................................................... 15,688,599
-------------
Investment loss--net ............................................. (6,373,731)
-------------
- -------------------------------------------------------------------------------------------------------------------------
Realized & Realized gain on investments--net ................................ 185,241,778
Unrealized Gain on Change in unrealized appreciation/depreciation on investments--net 242,691,398
Investments--Net: -------------
Net Increase in Net Assets Resulting from Operations ............. $ 421,559,445
=============
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
FINANCIAL INFORMATION (continued)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year
Ended March 31,
----------------------------------
Increase (Decrease) in Net Assets: 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment loss--net ............................................. $ (6,373,731) $ (7,042,111)
Realized gain on investments--net ................................ 185,241,778 84,918,600
Change in unrealized appreciation/depreciation on investments--net 242,691,398 (354,219,652)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations .. 421,559,445 (276,343,163)
--------------- ---------------
- -------------------------------------------------------------------------------------------------------------------------------
Distributions Realized gain on investments--net:
to Shareholders: Class A ...................................................... (40,545,567) (19,624,603)
Class B ...................................................... (43,612,826) (31,099,848)
Class C ...................................................... (4,788,746) (3,623,058)
Class D ...................................................... (11,320,549) (6,448,638)
--------------- ---------------
Net decrease in net assets resulting from distributions
to shareholders .................................................. (100,267,688) (60,796,147)
--------------- ---------------
- -------------------------------------------------------------------------------------------------------------------------------
Capital Share Net increase (decrease) in net assets derived from capital
Transactions: share transactions ............................................... 125,287,960 (78,669,579)
--------------- ---------------
- -------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total increase (decrease) in net assets .......................... 446,579,717 (415,808,889)
Beginning of year ................................................ 776,095,155 1,191,904,044
--------------- ---------------
End of year ...................................................... $ 1,222,674,872 $ 776,095,155
=============== ===============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
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: 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 16.27 $ 22.03 $ 17.59 $ 17.77 $ 15.63
Operating --------- --------- --------- ---------- ---------
Performance: Investment income (loss)--net ........ (.02) (.02) (.03) .06 .24
Realized and unrealized gain (loss) on
investments--net ..................... 8.84 (4.66) 7.20 3.01 2.72
--------- --------- --------- ---------- ---------
Total from investment operations ..... 8.82 (4.68) 7.17 3.07 2.96
--------- --------- --------- ---------- ---------
Less dividends and distributions:
Investment income--net ........... -- -- -- (.06) (.23)
Realized gain on investments--net (2.22) (1.08) (2.73) (3.19) (.59)
--------- --------- --------- ---------- ---------
Total dividends and distributions .... (2.22) (1.08) (2.73) (3.25) (.82)
--------- --------- --------- ---------- ---------
Net asset value, end of year ......... $ 22.87 $ 16.27 $ 22.03 $ 17.59 $ 17.77
========= ========= ========= ========== =========
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 57.29% (22.17%) 43.18% 17.62% 19.56%
Return:* ========= ========= ========= ========== =========
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................. 1.08% 1.08% 1.02% 1.10% 1.12%
Net Assets: ========= ========= ========= ========== =========
Investment income (loss)--net ........ (.12%) (.10%) (.13%) .34% 1.43%
========= ========= ========= ========== =========
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental
Data: Net assets, end of year (in thousands) $ 491,855 $ 276,957 $ 396,198 $ 223,492 $ 181,297
========= ========= ========= ========== =========
Portfolio turnover ................... 89.18% 57.82% 67.02% 97.87% 60.37%
========= ========= ========= ========== =========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding.
See Notes to Financial Statements.
13
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
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: 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 15.37 $ 21.03 $ 16.91 $ 17.21 $ 15.16
Operating --------- --------- --------- --------- ---------
Performance: Investment income (loss)--net ........ (.21) (.20) (.23) (.12) .07
Realized and unrealized gain (loss) on
investments--net ..................... 8.35 (4.43) 6.90 2.90 2.64
--------- --------- --------- --------- ---------
Total from investment operations ..... 8.14 (4.63) 6.67 2.78 2.71
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net ........... -- -- -- -- (.07)
Realized gain on investments--net (1.92) (1.03) (2.55) (3.08) (.59)
--------- --------- --------- --------- ---------
Total dividends and distributions .... (1.92) (1.03) (2.55) (3.08) (.66)
--------- --------- --------- --------- ---------
Net asset value, end of year ......... $ 21.59 $ 15.37 $ 21.03 $ 16.91 $ 17.21
========= ========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 55.72% (22.96%) 41.72% 16.44% 18.37%
Return:* ========= ========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................. 2.11% 2.10% 2.05% 2.13% 2.15%
Net Assets: ========= ========= ========= ========= =========
Investment income (loss)--net ........ (1.14%) (1.12%) (1.16%) (.68%) .44%
========= ========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 511,780 $ 378,610 $ 611,364 $ 337,716 $ 310,174
Data: ========= ========= ========= ========= =========
Portfolio turnover ................... 89.18% 57.82% 67.02% 97.87% 60.37%
========= ========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C+
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: 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 15.21 $ 20.83 $ 16.77 $ 17.10 $ 15.10
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income (loss)--net ........ (.21) (.20) (.23) (.13) .06
Realized and unrealized gain (loss) on
investments--net ..................... 8.25 (4.38) 6.84 2.89 2.63
---------- ---------- ---------- ---------- ----------
Total from investment operations ..... 8.04 (4.58) 6.61 2.76 2.69
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net ........... -- -- -- -- (.10)
Realized gain on investments--net (1.93) (1.04) (2.55) (3.09) (.59)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions .... (1.93) (1.04) (2.55) (3.09) (.69)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ......... $ 21.32 $ 15.21 $ 20.83 $ 16.77 $ 17.10
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 55.64% (22.99%) 41.74% 16.39% 18.34%
Return:* ========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................. 2.12% 2.12% 2.06% 2.14% 2.16%
Net Assets: ========== ========== ========== ========== ==========
Investment income (loss)--net ........ (1.16%) (1.14%) (1.17%) (.70%) .36%
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 67,390 $ 38,249 $ 70,159 $ 31,182 $ 26,920
Data: ========== ========== ========== ========== ==========
Portfolio turnover ................... 89.18% 57.82% 67.02% 97.87% 60.37%
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding.
See Notes to Financial Statements.
15
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D+
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: 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ... $ 16.19 $ 21.97 $ 17.56 $ 17.74 $ 15.61
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income (loss)--net ........ (.07) (.06) (.08) .01 .19
Realized and unrealized gain (loss) on
investments--net ..................... 8.82 (4.65) 7.18 3.02 2.73
---------- ---------- ---------- ---------- ----------
Total from investment operations ..... 8.75 (4.71) 7.10 3.03 2.92
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net ........... -- -- -- (.04) (.20)
Realized gain on investments--net (2.14) (1.07) (2.69) (3.17) (.59)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions .... (2.14) (1.07) (2.69) (3.21) (.79)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ......... $ 22.80 $ 16.19 $ 21.97 $ 17.56 $ 17.74
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ... 56.98% (22.37%) 42.80% 17.38% 19.26%
Return:* ========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ............................. 1.33% 1.33% 1.27% 1.35% 1.37%
Net Assets: ========== ========== ========== ========== ==========
Investment income (loss)--net ........ (.37%) (.35%) (.39%) .07% 1.15%
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $ 151,650 $ 82,279 $ 114,183 $ 40,173 $ 24,795
Data: ========== ========== ========== ========== ==========
Portfolio turnover ................... 89.18% 57.82% 67.02% 97.87% 60.37%
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding.
See Notes to Financial Statements.
16
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
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
accounting principles generally accepted in the United States of America, 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 that 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 that 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
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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
17
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
NOTES TO FINANCIAL STATEMENTS (continued)
(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.
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 overdraft, which resulted from management estimates of
available cash.
(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 $16,049,493 have been reclassified between undistributed
net realized capital gains and undistributed net investment income. 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 the "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
upon the average daily value of the Fund's net assets at the following annual
rates:
18
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
.75% of the Fund's average net assets not exceeding $1 billion, .725% of average
daily net assets in excess of $1 billion but not exceeding $1.5 billion; and
.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 .............................. .25% .75%
Class C .............................. .25 .75
Class D .............................. .25 --
- --------------------------------------------------------------------------------
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, 2000, MLFD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:
- --------------------------------------------------------------------------------
MLFD MLPF&S
- --------------------------------------------------------------------------------
Class A .............................. $ 658 $ 10,207
Class D .............................. $ 8,400 $121,998
- --------------------------------------------------------------------------------
For the year ended March 31, 2000, MLPF&S received contingent deferred sales
charges of $681,686 and $16,359 relating to transactions in Class B and Class C
Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $240 relating to transactions subject to front-end sales charge
waivers in Class D Shares.
In addition, MLPF&S received $239,441 in commissions on the execution of
portfolio security transactions for the Fund for the year ended March 31, 2000.
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, 2000 were $806,328,047 and $814,616,768, respectively.
Net realized gains for the year ended March 31, 2000 and net unrealized gains as
of March 31, 2000 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments ............ $185,241,758 $ 72,715,130
Short-term investments ........... 20 --
------------ ------------
Total ............................ $185,241,778 $ 72,715,130
============ ============
- --------------------------------------------------------------------------------
As of March 31, 2000, net unrealized appreciation for Federal income tax
purposes aggregated $71,455,989, of which $232,436,904 related to appreciated
securities and $160,980,915 related to depreciated securities. At March 31,
2000, the aggregate cost of investments for Federal income tax purposes was
$1,164,708,578.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share transactions
was $125,287,960 and $(78,669,579) for the years ended March 31, 2000 and March
31, 1999, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended March 31, 2000 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 10,103,371 $ 203,331,023
Shares issued to shareholders
in reinvestment of
distributions .......................... 2,039,531 38,805,868
------------- -------------
Total issued ........................... 12,142,902 242,136,891
Shares redeemed ........................ (7,661,205) (144,838,770)
------------- -------------
Net increase ........................... 4,481,697 $ 97,298,121
============= =============
- --------------------------------------------------------------------------------
19
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------------------------
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 B Shares for the Year Dollar
Ended March 31, 2000 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 9,098,702 $ 167,159,527
Shares issued to shareholders
in reinvestment of
distributions .......................... 2,221,372 39,948,523
------------- -------------
Total issued ........................... 11,320,074 207,108,050
Automatic conversion
of shares .............................. (1,227,324) (22,600,580)
Shares redeemed ........................ (11,018,809) (200,063,962)
------------- -------------
Net decrease ........................... (926,059) $ (15,556,492)
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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)
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended March 31, 2000 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 1,934,589 $ 35,243,945
Shares issued to shareholders
in reinvestment of
distributions .......................... 240,541 4,275,572
------------ ------------
Total issued ........................... 2,175,130 39,519,517
Shares redeemed ........................ (1,529,593) (26,990,092)
------------ ------------
Net increase ........................... 645,537 $ 12,529,425
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 D Shares for the Year Dollar
Ended March 31, 2000 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 2,260,570 $ 44,449,029
Automatic conversion
of shares .............................. 1,162,848 22,600,580
Shares issued to shareholders
in reinvestment of
distributions .......................... 555,550 10,538,920
------------ ------------
Total issued ........................... 3,978,968 77,588,529
Shares redeemed ........................ (2,407,493) (46,571,623)
------------ ------------
Net increase ........................... 1,571,475 $ 31,016,906
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
============ ============
- --------------------------------------------------------------------------------
5. Organizational Change:
On or about July 1, 2000, the Fund will change its name to Merrill Lynch Small
Cap Value Fund, Inc.
20
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
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 invest ments, of Merrill Lynch Special Value Fund, Inc. as of
March 31, 2000, 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 auditing standards generally accepted
in the United States of America. 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, 2000 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, 2000, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in accordance with accounting principles generally accepted in
the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
May 8, 2000
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, 2000:
<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: 7/07/99 7/15/99 $.163877 $.000003 $.163880 $1.580135
12/03/99 12/09/99 $.009895 $.234643 $.244538 $ .231551
- -------------------------------------------------------------------------------------------------------------------------------
Class B Shares: 7/07/99 7/15/99 -- -- -- $1.580135
12/03/99 12/09/99 $.004483 $.106306 $.110789 $ .231551
- -------------------------------------------------------------------------------------------------------------------------------
Class C Shares: 7/07/99 7/15/99 -- -- -- $1.580135
12/03/99 12/09/99 $.004815 $.114185 $.119000 $ .231551
- -------------------------------------------------------------------------------------------------------------------------------
Class D Shares: 7/07/99 7/15/99 $.110751 $.000002 $.110753 $1.580135
12/03/99 12/09/99 $.008612 $.204205 $.212817 $ .231551
- -------------------------------------------------------------------------------------------------------------------------------
</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, 2000
PORTFOLIO INFORMATION (unaudited)
As of March 31, 2000
Percent of
Top Ten Equity Holdings Net Assets
U.S. Foodservice................................ 2.5%
Boise Cascade Office Products Corp.............. 2.2
Orthodontic Centers of America, Inc............. 2.2
Watsco, Inc..................................... 2.0
Ryerson Tull, Inc............................... 2.0
APAC Customer Services Inc...................... 2.0
Tech Data Corporation........................... 1.9
Structural Dynamics Research Corporation........ 1.8
Charter One Financial, Inc...................... 1.7
Anixter International Inc....................... 1.7
Sectors Represented Percent of
in the Portfolio Net Assets
Consumer Discretionary.......................... 28.0%
Technology...................................... 15.8
Financial Services.............................. 13.2
Materials & Processing.......................... 11.7
Producer Durables............................... 6.4
Healthcare...................................... 5.9
Auto & Transportation........................... 4.5
Consumer Staples................................ 4.1
Energy.......................................... 4.1
Miscellaneous................................... 0.9
22
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 2000
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
M. Colyer Crum, Director
Laurie Simon Hodricks, Director
Jack B. Sunderland, Director
J. Thomas Touchton, Director
Fred G. Weiss, Director
Arthur Zeikel, Director
Robert E. Doll, Senior Vice President
Daniel V. Szemis, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Thomas D. Jones, III, Secretary
- --------------------------------------------------------------------------------
Donald Cecil and Edward H. Meyer, Directors of Merrill Lynch Special Value Fund,
Inc. have recently retired. The Fund's Board of Directors wishes Mr. Cecil and
Mr. Meyer 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--3/00
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