UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-3450
Name of Fund: Merrill Lynch Focus Value Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Merrill Lynch
Focus Value Fund, Inc., 800 Scudders Mill Road, Plainsboro, NJ 08536.
Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 07/31/04
Date of reporting period: 08/01/03 - 07/31/04
Item 1 - Report to Stockholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Merrill Lynch
Focus Value Fund, Inc.
Annual Report
July 31, 2004
[LOGO] Merrill Lynch Investment Managers
Merrill Lynch Focus Value Fund, Inc.
Portfolio Information as of July 31, 2004
Percent of
Ten Largest Equity Holdings Net Assets
- --------------------------------------------------------------------------------
The Topps Company, Inc. ..................................... 4.7%
Raytheon Company ............................................ 4.6
Exxon Mobil Corporation ..................................... 4.0
Viacom, Inc. (Class B) ...................................... 3.7
Norfolk Southern Corporation ................................ 3.4
Citigroup Inc. .............................................. 3.2
J.P. Morgan Chase & Co. ..................................... 3.1
GlobalSantaFe Corporation ................................... 3.1
Kimberly-Clark Corporation .................................. 3.0
Hewlett-Packard Company ..................................... 2.9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Percent of
Asset Mix Net Assets
- --------------------------------------------------------------------------------
Stocks ...................................................... 96.7%
Bonds ....................................................... 0.8
Cash & Cash Equivalents ..................................... 2.5
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries* Net Assets
- --------------------------------------------------------------------------------
Media ....................................................... 9.8%
Aerospace & Defense ......................................... 9.8
Diversified Financial Services .............................. 6.3
Capital Markets ............................................. 5.9
Oil & Gas ................................................... 5.7
- --------------------------------------------------------------------------------
* For Fund compliance purposes, "Industries" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease. These
industry classifications are unaudited.
2 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
A Letter From the President
Dear Shareholder
The year is more than half behind us, and it seems appropriate to take a step
back and put 2004 into context. In recent months, the Federal Reserve Board (the
Fed) has taken center stage as it shifts away from its long-accommodative
monetary stance. In a much-anticipated move, the Fed raised the Federal Funds
rate 25 basis points (.25%) on June 30, representing the first interest rate
increase in four years. Shortly after period-end, the Fed announced an
additional 25 basis point interest rate hike, bringing the target short-term
interest rate to 1.50% -- still low by historical standards. The Fed has been
very deliberate in telegraphing its intention to take a "measured" approach to
interest rate increases in order to avoid upsetting the economy or the financial
markets. Still, the Fed has stated that it may move more aggressively if
inflation and economic growth accelerate more than anticipated.
While inflation has moved up on a cyclical basis, this is an indication that the
Fed has been successful in avoiding deflation -- just as it set out to do a year
ago. The challenge now is to normalize interest rates in order to keep inflation
within acceptable limits. The futures curve currently projects further increases
in short-term interest rates before year-end.
In addition to the Fed policy change, the financial markets recently have had to
grapple with a tense geopolitical environment, higher oil prices and the worry
and anticipation that accompanies a presidential election. Notwithstanding these
concerns, equities were due for a pause given that the Standard & Poor's 500
(S&P 500) Index rose nearly 50% between its March 2003 low and the highs of
early 2004. Under the circumstances, the market decline in recent months has
been minor. For the six-month and 12-month periods ended July 31, 2004, the S&P
500 Index returned -1.78% and +13.17%, respectively. Supporting the stock
market, despite the aforementioned uncertainties, was continued strong corporate
earnings growth. Company reports have continued to surprise investors, in many
cases still exceeding consensus earnings forecasts.
As always, our investment professionals are closely monitoring the markets, the
economy and the overall environment in an effort to make well-informed decisions
for the portfolios they manage. Our goal is to provide shareholders with
competitive returns, while always keeping one eye on managing the unavoidable
risk inherent in investing.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Managers
Merrill Lynch Focus Value Fund, Inc. provided competitive returns for the
fiscal year, benefiting from a focus on stocks leveraged to an economic
recovery.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended July 31, 2004, Merrill Lynch Focus Value Fund,
Inc.'s Class A, Class B, Class C, Class I and Class R Shares had total returns
of +17.09%, +16.11%, +16.14%, +17.37% and +16.68%, respectively. (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 6 - 9 of this
report to shareholders.) Fund performance exceeded the +13.17% return of the
Standard & Poor's 500 (S&P 500) Index and were generally competitive with the
+17.68% return of the Russell 1000 Value Index for the same period. In addition,
Fund results were slightly ahead of the +16.61% average return of the Lipper
Multi-Cap Value Funds category for the 12-month period ended July 31, 2004.
(Funds in this Lipper category invest in companies in a variety of
market-capitalization ranges and that are considered to be undervalued relative
to a major unmanaged stock index.)
We entered the period positioned to benefit from an economic upturn. In fact,
the economically sensitive areas of the market did perform quite well during the
past 12 months. Sectors such as consumer discretionary, industrials, materials,
technology and energy were all positively influenced by a recovering economy.
Amid these conditions, our procyclical bias paid off.
Fund performance during the past year was primarily driven by four industry
groups -- industrials, consumer discretionary, materials and consumer staples.
The industrials and materials areas of the stock market are particularly
sensitive to economic activity, and the Fund's investments in these sectors
contributed positively to performance. An uptick in the economy led to improving
business conditions in the aerospace segment, benefiting companies such as The
Boeing Company, Goodrich Corporation, Honeywell International Inc. and Raytheon
Company. On the materials side, the earnings of Arch Coal, Inc. increased
significantly due to higher coal prices, which were prompted by increased
economic activity and restrained incremental supply -- that is, prices rose with
increasing demand, but supply continued to lag.
In the consumer discretionary sector, our retail investments provided positive
performance. In particular, Foot Locker, Inc. performed well as the company
transitioned from a multi-concept retail model to a focus on one vital business
- -- athletic footwear and apparel. That core business is growing, especially
internationally, and the company's stock remains attractively valued. Toys 'R'
Us, Inc. also performed extremely well. It appears that investors began to
recognize the value inherent in the company's real estate as Toys 'R' Us
considered potential property sales. The company's international toy retailing
business and its Babies 'R' Us concept also continue to do well.
In consumer staples, performance benefited primarily from three investments --
ConAgra Foods, Inc., Tyson Foods and Kimberly-Clark Corporation. ConAgra Foods
and Tyson both benefited from rising poultry prices during the past year.
Kimberly-Clark, maker of Huggies products and Kleenex tissues, among other
things, continued its transition from highly capital-intensive businesses toward
those that are generating superior returns. The company remains valued somewhat
like a paper company, as Wall Street continues to underappreciate its
transformation into a branded products company.
In the health care sector, Beverly Enterprises, Inc. performed exceptionally
well. Like Kimberly-Clark, Beverly is reallocating its capital away from the
capital-intensive business of nursing homes and toward the less-intensive and
higher-return business of hospice care. The company's balance sheet has been
repaired, free cash flow is growing and the valuation remains attractive. Select
technology stocks also contributed positively to performance as they came off
the very low base set a year ago. Business conditions improved in the
communication equipment sector, benefiting companies such as 3Com Corporation
and Lucent Technologies Inc. We successfully traded positions in Nokia and
Celestica during the period.
Although no major themes detracted from performance during the year, relative
results were hindered somewhat by a few individual stock decisions. Our
repurchase of Viacom, Inc. in December proved to be premature, as the recovery
in advertising spending had been slower than expected given the level of
economic improvement. We also took a position in Delta Airlines, based on our
belief that an improving economy and increasing passenger traffic would lead to
a recovery in the company's fortunes. We were aware of the need for cost-cutting
by the company, but felt that once the lower costs
4 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
were coupled with the high revenues, earnings would recover to attractive
levels. However, the pilots in the company have been unwilling to accept cuts in
their memberships or pay scale, and the company remains close to bankruptcy. As
a result, we liquidated our position in Delta at a loss.
Two technology stocks -- Agere Systems Inc., bought later in the period, and LSI
Logic Corporation, a long-time holding -- negatively impacted performance as
investors recently became concerned about the direction of the economic recovery
and the seasonally slower demand that the industry experiences during the
summer. We continue to believe that the current stock prices do not reflect the
long-term earnings potential of these companies; therefore, we maintained our
positions as of period-end.
What changes were made to the portfolio during the year?
Throughout the period, we took the opportunity to shift assets among sectors
based on the normal vagaries of the market. As stocks came in and out of favor
during the course of the year, we did just what you would expect a contrarian
investor to do. That is, during periods of aggressiveness by the market, we
played defense. During periods of defensiveness by the market, we got a little
more aggressive, buying economically sensitive stocks.
For example, when investors were becoming more comfortable with risk and started
chasing beta (that is, riskier investments) in pursuit of higher returns,
certain consumer staples stocks began to look attractively priced, in our view.
Therefore, we added stocks such as Coca-Cola Enterprises, Unilever, ConAgra
Foods and Tyson Foods. These all represent very stable stocks trading at
attractive multiples to free cash flow and with good dividend yields. When
market sentiment changed and investors shifted their focus to some of the
safe-haven names, the more cyclical areas of the market became more appealing to
us. At this point, we purchased railroad company Norfolk Southern Corporation,
International Paper Company, Viacom, Inc. and General Electric Company. The
portfolio started acquiring stocks that were more sensitive to changes in the
overall economy, bringing us to where we stand now, which is leveraged toward a
continually improving economic backdrop.
How would you characterize the portfolio's position at the close of the period?
We ended the period positioned for a continued improvement in the economy.
Corporate earnings have clearly surpassed expectations, driven in part by
increasing demand and an improving economy, but also by a major corporate
restructuring that has taken place in the United States over the past few years.
This included cost controls, debt restructuring and reduction, and strengthening
of balance sheets on the part of U.S. companies. With 30% earnings growth in the
first quarter of 2004, the second quarter will be hard pressed to follow.
Nonetheless, corporate earnings are still expected to exceed expectations in the
second quarter, with similar numbers projected for the third and fourth
quarters. Historically, when the rate of earnings growth declines, the market
goes through a digestive period where investors need to be convinced that what
they're seeing is a slowdown and not the start of a march toward recession.
Coming out of the last recession, for example, corporate profits peaked in 1993.
This was followed by a very difficult 1994 for the equity markets. However, as
it became clear to investors that the economy was poised for moderate growth
(not too hot, not too cold), the stock market generated very attractive returns
over the five years that followed.
In summary, we have been and continue to be exposed to companies that we believe
will benefit the most from an expanding economy. Despite recently sluggish
employment numbers and high oil prices, cyclical stocks remain attractively
priced, in our view, given their earnings and cash-generating potential. We
believe the economic softness in June and July represents a typical slowdown as
the economy transitions from a rapid growth phase to a more moderate and
sustainable pace. Employment growth, although weak, is still rising; interest
rates remain low on a historical basis; consumer confidence is trending higher;
and Corporate America is flush with cash, which companies are deploying in
shareholder-friendly ways. While we acknowledge that the rate of earnings growth
might have peaked, the market historically has performed well during periods of
positive, albeit modest, earnings growth.
The Fund remains overweight relative to the benchmark in consumer discretionary
(primarily media-related stocks), industrials and information technology, as we
believe stocks in these sectors are trading at modest valuation levels. The
portfolio is underweight in financials, telecommunication services and
utilities.
Robert J. Martorelli
Vice President and Co-Portfolio Manager
Kevin M. Rendino
Vice President and Co-Portfolio Manager
August 9, 2004
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 5
[LOGO] Merrill Lynch Investment Managers
Performance Data
About Fund Performance
Investors are able to purchase shares of the Fund through multiple pricing
alternatives:
o Class A Shares incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).
o Class B Shares are subject to a maximum contingent deferred sales charge
of 4% declining to 0% after six years. All Class B Shares purchased prior
to June 1, 2001 will maintain the four-year schedule. 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 A
Shares after approximately eight 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 I Shares incur a maximum initial sales charge (front-end load) of
5.25% and bear no ongoing distribution or account maintenance fees. Class
I Shares are available only to eligible investors.
o Class R Shares do not incur a maximum sales charge (front-end load) or
deferred sales charge. These shares are subject to a distribution fee of
0.25% and an account maintenance fee of 0.25%. Class R Shares are
available only to certain retirement plans.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain more current performance
information. Performance results do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Figures shown in each of the following tables assume reinvestment of all
dividends and capital gain distributions, if any, 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. The Fund's Administrator voluntarily waived a portion of its
administrative fee. Without such waiver, the Fund's performance would have been
lower.
Recent Performance Results
6-Month 12-Month 10-Year/ Since Inception
As of July 31, 2004 Total Return Total Return Total Return
==============================================================================================================
ML Focus Value Fund, Inc. Class A Shares* -3.05% +17.09% +172.26%
- --------------------------------------------------------------------------------------------------------------
ML Focus Value Fund, Inc. Class B Shares* -3.46 +16.11 +156.37
- --------------------------------------------------------------------------------------------------------------
ML Focus Value Fund, Inc. Class C Shares* -3.44 +16.14 +152.12
- --------------------------------------------------------------------------------------------------------------
ML Focus Value Fund, Inc. Class I Shares* -2.95 +17.37 +183.88
- --------------------------------------------------------------------------------------------------------------
ML Focus Value Fund, Inc. Class R Shares* -3.25 +16.68 + 30.68
- --------------------------------------------------------------------------------------------------------------
Russell 1000(R) Value Index** +0.70 +17.68 +214.45/+216.44/+29.25
- --------------------------------------------------------------------------------------------------------------
S&P 500(R) Index*** -1.78 +13.17 +186.30/+180.31/+24.62
- --------------------------------------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results 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 10-year/since inception total
return periods are 10 years for Class B & Class I Shares; from 10/21/94
for Class A & Class C Shares and from 1/03/03 for Class R Shares.
** This unmanaged Index measures the performance of those Russell 1000
companies with lower price-to-book ratios and lower forecasted growth
values. Ten-year/since inception total returns are for 10 years, from
10/21/94 and from 1/03/03, respectively.
*** This unmanaged Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues), representing
about 75% of NYSE market capitalization and 30% of NYSE issues.
Ten-year/since inception total returns are for 10 years, from 10/21/94 and
from 1/03/03, respectively.
Russell 1000 is a registered trademark of the Frank Russell Company.
S&P 500 is a registered trademark of McGraw-Hill Companies.
6 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Performance Data (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class C Shares compared to growth of an investment in the Russell 1000 Value
Index and the S&P 500 Index. Values are from October 21, 1994 to July 2004:
10/21/94** 7/95 7/96 7/97 7/98 7/99
ML Focus Value Fund, Inc.+--
Class A Shares* $ 9,475 $10,585 $11,061 $14,318 $15,850 $19,633
ML Focus Value Fund, Inc.+--
Class C Shares* $10,000 $11,099 $11,509 $14,777 $16,239 $19,965
7/00 7/01 7/02 7/03 7/04
ML Focus Value Fund, Inc.+--
Class A Shares* $22,141 $23,852 $18,353 $22,032 $25,797
ML Focus Value Fund, Inc.+--
Class C Shares* $22,330 $23,872 $18,206 $21,709 $25,212
10/31/94 7/95 7/96 7/97 7/98 7/99
Russell 1000 Value
Index++ $10,000 $12,166 $14,099 $20,983 $24,699 $28,401
S&P 500 Index+++ $10,000 $12,347 $14,393 $21,897 $26,120 $31,397
7/00 7/01 7/02 7/03 7/04
Russell 1000 Value
Index++ $26,982 $29,340 $24,282 $26,891 $31,644
S&P 500 Index+++ $34,215 $29,312 $22,386 $24,768 $28,031
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ ML Focus Value Fund, Inc. invests in a diversified portfolio of equity and
fixed income securities, including municipal securities, of issues in weak
financial condition or experiencing poor operating results that management
of the Fund believes are undervalued relative to management's assessment
of the current or prospective condition of such issuers.
++ This unmanaged Index measures the performance of those Russell 1000
companies with lower price-to-book ratios and lower forecasted growth
values.
+++ This unmanaged Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues), representing
about 75% of NYSE market capitalization and 30% of NYSE issues.
Past performance is not predictive of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 7/31/04 +17.09% +10.94%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/04 + 5.61 + 4.48
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 7/31/04 +10.79 +10.18
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 7/31/04 +16.14% +15.14%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/04 + 4.78 + 4.78
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 7/31/04 + 9.92 + 9.92
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
** Assuming payment of applicable contingent deferred sales charge.
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 7
[LOGO] Merrill Lynch Investment Managers
Performance Data (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class B Shares
and Class I Shares compared to growth of an investment in the Russell 1000 Value
Index and the S&P 500 Index. Values are from July 1994 to July 2004:
7/94 7/95 7/96 7/97 7/98
ML Focus Value Fund, Inc.+--
Class B Shares* $10,000 $11,283 $11,697 $15,028 $16,507
ML Focus Value Fund, Inc.+--
Class I Shares* $ 9,475 $10,793 $11,309 $14,677 $16,289
7/99 7/00 7/01 7/02 7/03 7/04
ML Focus Value Fund, Inc.+--
Class B Shares* $20,298 $22,704 $24,272 $18,522 $22,080 $25,637
ML Focus Value Fund, Inc.+--
Class I Shares* $20,223 $22,859 $24,688 $19,023 $22,916 $26,897
7/94 7/95 7/96 7/97 7/98
Russell 1000 Value
Index++ $10,000 $12,090 $14,010 $20,851 $24,544
S&P 500 Index+++ $10,000 $12,611 $14,700 $22,365 $26,678
7/99 7/00 7/01 7/02 7/03 7/04
Russell 1000 Value
Index++ $28,222 $26,812 $29,155 $24,129 $26,722 $31,445
S&P 500 Index+++ $32,068 $34,946 $29,938 $22,864 $25,298 $28,630
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
+ ML Focus Value Fund, Inc. invests in a diversified portfolio of equity and
fixed income securities, including municipal securities, of issues in weak
financial condition or experiencing poor operating results that management
of the Fund believes are undervalued relative to management's assessment
of the current or prospective condition of such issuers.
++ This unmanaged Index measures the performance of those Russell 1000
companies with lower price-to-book ratios and lower forecasted growth
values.
+++ This unmanaged Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues), representing
about 75% of NYSE market capitalization and 30% of NYSE issues.
Past performance is not predictive of future results.
Average Annual Total Return
Return Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 7/31/04 +16.11% +12.11%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/04 + 4.78 + 4.50
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/04 + 9.87 + 9.87
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class I Shares*
================================================================================
One Year Ended 7/31/04 +17.37% +11.21%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/04 + 5.87 + 4.73
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/04 +11.00 +10.40
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
8 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Performance Data (concluded)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class R Shares
compared to growth of an investment in the Russell 1000 Value Index and the S&P
500 Index. Values are from January 3, 2003 to July 2004:
1/03/03** 7/03 7/04
ML Focus Value Fund, Inc.+--
Class R Shares* $10,000 $11,200 $13,068
Russell 1000 Value
Index++ $10,000 $10,983 $12,925
S&P 500 Index+++ $10,000 $11,012 $12,462
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ ML Focus Value Fund, Inc. invests in a diversified portfolio of equity and
fixed income securities, including municipal securities, of issues in weak
financial condition or experiencing poor operating results that management
of the Fund believes are undervalued relative to management's assessment
of the current or prospective condition of such issuers.
++ This unmanaged Index measures the performance of those Russell 1000
companies with lower price-to-book ratios and lower forecasted growth
values.
+++ This unmanaged Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues), representing
about 75% of NYSE market capitalization and 30% of NYSE issues.
Past performance is not predictive of future results.
Average Annual Total Return
Class R Shares Return
================================================================================
One Year Ended 7/31/04 +16.68%
- --------------------------------------------------------------------------------
Inception (1/03/03) through 7/31/04 +18.55%
- --------------------------------------------------------------------------------
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 9
[LOGO] Merrill Lynch Investment Managers
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses related
to transactions, including sales charges, redemption fees, and exchange fees;
and (b) operating expenses including advisory fees, distribution fees including
12(b)-1 fees, and other Fund expenses. The following example (which is based on
a hypothetical investment of $1,000 invested on February 1, 2004 and held
through July 31, 2004) is intended to assist shareholders both in calculating
expenses based on an investment in the Fund and in comparing these expenses with
similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during the
period covered by this report, shareholders can divide their account value by
$1,000 and then multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders ongoing
costs only and do not reflect any transactional expenses, such as sales charges,
redemption fees, or exchange fees. Therefore, the second table is useful in
comparing ongoing expenses only, and will not help shareholders determine the
relative total expenses of owning different funds. If these transactional
expenses were included, shareholder expenses would have been higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value February 1, 2004
February 1, 2004 July 31, 2004 to July 31, 2004
================================================================================
Actual
================================================================================
Class A $1,000 $ 969.50 $ 6.48
- --------------------------------------------------------------------------------
Class B $1,000 $ 965.40 $10.24
- --------------------------------------------------------------------------------
Class C $1,000 $ 965.60 $10.24
- --------------------------------------------------------------------------------
Class I $1,000 $ 970.50 $ 5.26
- --------------------------------------------------------------------------------
Class R $1,000 $ 967.50 $ 7.70
================================================================================
Hypothetical (5% annual return before expenses)**
================================================================================
Class A $1,000 $1,018.35 $ 6.64
- --------------------------------------------------------------------------------
Class B $1,000 $1,014.51 $10.50
- --------------------------------------------------------------------------------
Class C $1,000 $1,014.51 $10.50
- --------------------------------------------------------------------------------
Class I $1,000 $1,019.60 $ 5.39
- --------------------------------------------------------------------------------
Class R $1,000 $1,017.10 $ 7.90
- --------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (1.32% for Class A, 2.09% for Class B, 2.09% for Class
C, 1.07% for Class I and 1.57% for Class R), multiplied by the average
account value over the period, multiplied by 182/365 (to reflect the
one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by multiplying
the number of days in the most recent fiscal half-year divided by 365.
10 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Schedule of Investments
Industry* Shares Held Common Stocks Value
===================================================================================================================================
Discount to Communications Equipment--1.8% 1,438,900 +3Com Corporation $ 7,093,777
Assets--7.4% ---------------------------------------------------------------------------------------------------------
Energy Equipment & Service--3.1% 449,500 GlobalSantaFe Corporation (e) 12,316,300
---------------------------------------------------------------------------------------------------------
Media--2.5% 1,164,460 +Liberty Media Corporation (Class A) 9,874,621
---------------------------------------------------------------------------------------------------------
Total Discount to Assets 29,284,698
===================================================================================================================================
Earnings Aerospace & Defense--5.2% 360,800 Goodrich Corporation 11,664,664
Turnaround--54.4% 243,100 Honeywell International Inc. 9,142,991
---------------------------------------------------------------------------------------------------------
Capital Markets--3.8% 35,400 The Goldman Sachs Group, Inc. 3,121,926
217,400 Mellon Financial Corporation (e) 5,974,152
124,500 Morgan Stanley 6,141,585
---------------------------------------------------------------------------------------------------------
Commercial Banks--1.6% 222,600 U.S. Bancorp 6,299,580
---------------------------------------------------------------------------------------------------------
Electric Utilities--0.3% 41,400 The Southern Company 1,212,192
---------------------------------------------------------------------------------------------------------
Energy Equipment & 429,900 +Grant Prideco, Inc. (e) 8,120,811
Service--2.0%
---------------------------------------------------------------------------------------------------------
Food & Staples Retailing--4.7% 2,008,400 The Topps Company, Inc. 18,959,296
---------------------------------------------------------------------------------------------------------
Food Products--1.5% 98,400 Unilever NV (NY Registered Shares) 6,034,872
---------------------------------------------------------------------------------------------------------
Hotels, Restaurants & 144,400 McDonald's Corporation 3,971,000
Leisure--1.0%
---------------------------------------------------------------------------------------------------------
Industrial Conglomerates--2.2% 260,300 General Electric Company 8,654,975
---------------------------------------------------------------------------------------------------------
Insurance--1.6% 241,400 Aon Corporation (e) 6,382,616
---------------------------------------------------------------------------------------------------------
Media--3.7% 443,800 Viacom, Inc. (Class B) 14,907,242
---------------------------------------------------------------------------------------------------------
Oil & Gas--5.7% 349,100 Exxon Mobil Corporation 16,163,330
126,300 Kerr-McGee Corporation 6,630,750
---------------------------------------------------------------------------------------------------------
Paper & Forest Products--2.0% 187,200 International Paper Company (e) 8,092,656
---------------------------------------------------------------------------------------------------------
Pharmaceuticals--1.0% 100,400 GlaxoSmithKline PLC (ADR) (a) 4,111,380
---------------------------------------------------------------------------------------------------------
Road & Rail--3.4% 513,500 Norfolk Southern Corporation 13,705,315
---------------------------------------------------------------------------------------------------------
Semiconductors & 266,200 +Advanced Micro Devices, Inc. (e) 3,324,838
Semiconductor Equipment--5.0% 5,402,600 +Agere Systems Inc. (Class B) 6,104,938
2,166,900 +LSI Logic Corporation (e) 11,029,521
---------------------------------------------------------------------------------------------------------
Software--5.3% 1,150,800 +Borland Software Corporation 9,517,116
2,519,400 +Parametric Technology Corporation 11,438,076
---------------------------------------------------------------------------------------------------------
Specialty Retail--4.4% 453,600 Foot Locker, Inc. 10,206,000
466,200 +Toys 'R' Us, Inc. (e) 7,673,652
---------------------------------------------------------------------------------------------------------
Total Earnings Turnaround 218,585,474
===================================================================================================================================
Financial Construction & Engineering--0.0% 750,366 +New Millennium Homes, LLC (g) 750
Restructuring--0.0% ---------------------------------------------------------------------------------------------------------
Total Financial Restructuring 750
===================================================================================================================================
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 11
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued)
Industry* Shares Held Common Stocks Value
===================================================================================================================================
Operational Aerospace & Defense--4.6% 553,900 Raytheon Company (e) $ 18,583,365
Restructuring--29.4% ---------------------------------------------------------------------------------------------------------
Capital Markets--2.1% 293,600 The Bank of New York Company, Inc. 8,435,128
---------------------------------------------------------------------------------------------------------
Chemicals--2.0% 186,600 E.I. du Pont de Nemours and Company 7,999,542
---------------------------------------------------------------------------------------------------------
Computers & Peripherals--2.9% 580,500 Hewlett-Packard Company (e) 11,697,075
---------------------------------------------------------------------------------------------------------
Diversified Financial 331,440 J.P. Morgan Chase & Co. 12,372,655
Services--3.1%
---------------------------------------------------------------------------------------------------------
Diversified Telecommunication 326,900 Sprint Corporation (e) 6,106,492
Services--1.5%
---------------------------------------------------------------------------------------------------------
Food Products--1.2% 185,700 ConAgra Foods, Inc. 4,828,200
---------------------------------------------------------------------------------------------------------
Health Care Providers & 1,386,000 +Beverly Enterprises, Inc. 10,921,680
Services--2.7%
---------------------------------------------------------------------------------------------------------
Household Products--3.0% 183,300 Kimberly-Clark Corporation 11,744,031
---------------------------------------------------------------------------------------------------------
IT Services--2.6% 998,600 +Unisys Corporation 10,225,664
---------------------------------------------------------------------------------------------------------
Media--3.7% 252,000 +Comcast Corporation (Special Class
A) (e) 6,753,600
489,500 +Time Warner Inc. (e) 8,150,175
---------------------------------------------------------------------------------------------------------
Total Operational Restructuring 117,817,607
===================================================================================================================================
Price to Book--5.5% Diversified Financial 290,600 Citigroup Inc. 12,812,554
Services--3.2%
---------------------------------------------------------------------------------------------------------
Insurance--1.3% 144,445 The St. Paul Companies, Inc. 5,354,576
---------------------------------------------------------------------------------------------------------
Metals & Mining--1.0% 113,900 Arch Coal, Inc. 3,846,403
---------------------------------------------------------------------------------------------------------
Total Price to Book 22,013,533
=========================================================================================================
Total Common Stocks
(Cost--$343,078,376)--96.7% 387,702,062
=========================================================================================================
Face Amount Corporate Bonds
===================================================================================================================================
Financial Construction & $ 5,021,000 +New Millennium Homes, 0%
Restructuring--0.8% Engineering--0.8% due 12/31/2007 (b)(g) 3,163,230
---------------------------------------------------------------------------------------------------------
Total Corporate Bonds
(Cost--$4,396,479)--0.8% 3,163,230
=========================================================================================================
Shares Held Preferred Stock
===================================================================================================================================
Financial Construction & 5,414 +New Millennium Homes (Convertible)
Restructuring--0.0% Engineering--0.0% (g) 135,350
---------------------------------------------------------------------------------------------------------
Total Preferred Stock
(Cost--$395)--0.0% 135,350
=========================================================================================================
Beneficial Interest Other Interests (f)
===================================================================================================================================
Financial Oil & Gas--0.0% $ 1,981,437 WRT--Litigation Trust Certificates 0
Restructuring--0.0% ---------------------------------------------------------------------------------------------------------
Total Other Interests
(Cost--$202,416)--0.0% 0
===================================================================================================================================
12 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Schedule of Investments (concluded)
Beneficial Interest Short-Term Securities Value
=========================================================================================================
$ 9,476,694 Merrill Lynch Liquidity Series,
LLC Cash Sweep (c) $ 9,476,694
66,726,550 Merrill Lynch Liquidity Series,
LLC Money Market Series (c)(d) 66,726,550
---------------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$76,203,244)--19.0% 76,203,244
=========================================================================================================
Total Investments (Cost--$423,880,910**)--116.5% 467,203,886
Liabilities in Excess of Other Assets--(16.5%) (66,112,256)
-------------
Net Assets--100.0% $ 401,091,630
=============
+ Non-income producing security.
* For Fund compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease. These
industry classifications are unaudited.
** The cost and unrealized appreciation/depreciation of investments as of
July 31, 2004, as computed for federal income tax purposes were as
follows:
-------------------------------------------------------------------------
Aggregate cost .................................... $424,536,091
============
Gross unrealized appreciation ..................... $ 61,547,716
Gross unrealized depreciation ..................... (18,879,921)
------------
Net unrealized appreciation ....................... $ 42,667,795
============
(a) American Depositary Receipts (ADR).
(b) Represents a zero coupon bond.
(c) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) are as follows:
--------------------------------------------------------------------------
Interest/
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $(20,551,509) $ 238,381
Merrill Lynch Liquidity Series, LLC
Money Market Series $ 34,283,890 $ 33,470
Merrill Lynch Premier
Institutional Fund (21,628,440) $ 10,731
--------------------------------------------------------------------------
(d) Security was purchased with the cash proceeds from securities loans.
(e) Security, or a portion of security, is on loan.
(f) Other interests represent beneficial interest in liquidation trusts and
other reorganizational entities and are non-income producing.
(g) Restricted securities as to resale.
--------------------------------------------------------------------------
Acquisition
Issue Date(s) Cost Value
--------------------------------------------------------------------------
New Millennium 4/26/1996 -
Homes, LLC 8/29/1997 $2,891,337 $ 750
New Millennium 8/29/1997 -
Homes, LLC (Preferred) 3/05/1999 395 135,350
New Millennium
Homes, LLC 8/29/1997 -
0% due 12/31/07 3/05/1999 4,396,479 3,163,230
--------------------------------------------------------------------------
Total $7,288,211 $3,299,330
========================
See Notes to Financial Statements.
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 13
[LOGO] Merrill Lynch Investment Managers
Statement of Assets and Liabilities
As of July 31, 2004
============================================================================================================================
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (including
securities loaned of $64,996,215) (identified cost--$347,677,666) $ 391,000,642
Investments in affiliated securities, at value (identified
cost--$76,203,244) .............................................. 76,203,244
Receivables:
Securities sold ............................................... $ 1,421,103
Dividends ..................................................... 720,702
Capital shares sold ........................................... 179,405
Interest from affiliates ...................................... 20,364
Securities lending--net ....................................... 1,967 2,343,541
-------------
Prepaid expenses and other assets ................................ 29,427
-------------
Total assets ..................................................... 469,576,854
-------------
============================================================================================================================
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Collateral on securities loaned, at value ........................ 66,726,550
Payables:
Securities purchased .......................................... 837,823
Capital shares redeemed ....................................... 359,017
Investment adviser ............................................ 293,748
Distributor ................................................... 105,793
Other affiliates .............................................. 101,551 1,697,932
-------------
Accrued expenses ................................................. 60,742
-------------
Total liabilities ................................................ 68,485,224
-------------
============================================================================================================================
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets ....................................................... $ 401,091,630
=============
============================================================================================================================
Net Assets Consist of
- ----------------------------------------------------------------------------------------------------------------------------
Class A Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized ...................................................... $ 1,133,762
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized ...................................................... 517,520
Class C Shares of Common Stock, $.10 par value, 50,000,000 shares
authorized ...................................................... 312,537
Class I Shares of Common Stock, $.10 par value, 50,000,000 shares
authorized ...................................................... 1,414,848
Class R Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized ...................................................... 3,437
Paid-in capital in excess of par ................................. 394,017,142
Accumulated realized capital losses on investments--net .......... $ (39,630,592)
Unrealized appreciation on investments--net ...................... 43,322,976
-------------
Total accumulated earnings--net .................................. 3,692,384
-------------
Net Assets ....................................................... $ 401,091,630
=============
============================================================================================================================
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $136,688,048 and 11,337,619 shares
outstanding ..................................................... $ 12.06
=============
Class B--Based on net assets of $57,811,858 and 5,175,201 shares
outstanding ..................................................... $ 11.17
=============
Class C--Based on net assets of $34,178,630 and 3,125,365 shares
outstanding ..................................................... $ 10.94
=============
Class I--Based on net assets of $172,023,671 and 14,148,481 shares
outstanding ..................................................... $ 12.16
=============
Class R--Based on net assets of $389,423 and 34,368 shares
outstanding ..................................................... $ 11.33
=============
See Notes to Financial Statements.
14 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Statement of Operations
For the Year Ended July 31, 2004
============================================================================================================================
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------
Dividends (net of $28,185 foreign withholding tax) ............... $ 5,605,642
Interest from affiliates ......................................... 238,381
Securities lending--net .......................................... 44,201
-------------
Total income ..................................................... 5,888,224
-------------
============================================================================================================================
Expenses
- ----------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ......................................... $ 4,141,868
Account maintenance and distribution fees--Class B ............... 679,720
Account maintenance and distribution fees--Class C ............... 348,493
Account maintenance fees--Class A ................................ 339,234
Transfer agent fees--Class I ..................................... 248,711
Transfer agent fees--Class A ..................................... 192,252
Accounting services .............................................. 172,424
Transfer agent fees--Class B ..................................... 110,617
Professional fees ................................................ 74,877
Custodian fees ................................................... 70,217
Registration fees ................................................ 60,026
Transfer agent fees--Class C ..................................... 59,335
Printing and shareholder reports ................................. 51,616
Directors' fees and expenses ..................................... 18,749
Pricing fees ..................................................... 1,261
Account maintenance and distribution fees--Class R ............... 955
Transfer agent fees--Class R ..................................... 269
Other ............................................................ 40,147
-------------
Total expenses before waiver ..................................... 6,610,771
Waiver of expenses ............................................... (692,801)
-------------
Total expenses after waiver ...................................... 5,917,970
-------------
Investment loss--net ............................................. (29,746)
-------------
============================================================================================================================
Realized & Unrealized Gain on Investments--Net
- ----------------------------------------------------------------------------------------------------------------------------
Realized gain from investments--net .............................. 44,470,394
Change in unrealized appreciation from investments--net .......... 19,365,944
-------------
Total realized and unrealized gain on investments--net ........... 63,836,338
-------------
Net Increase in Net Assets Resulting from Operations ............. $ 63,806,592
=============
See Notes to Financial Statements.
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 15
[LOGO] Merrill Lynch Investment Managers
Statements of Changes in Net Assets
For the Year Ended
July 31,
-------------------------------
Increase (Decrease) in Net Assets: 2004 2003
============================================================================================================================
Operations
- ----------------------------------------------------------------------------------------------------------------------------
Investment loss--net ............................................. $ (29,746) $ (1,261,569)
Realized gain (loss) on investments--net ......................... 44,470,394 (43,272,143)
Change in unrealized appreciation on investments--net ............ 19,365,944 109,769,837
-------------------------------
Net increase in net assets resulting from operations ............. 63,806,592 65,236,125
-------------------------------
============================================================================================================================
Capital Share Transactions
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease in net assets derived from capital share
transactions .................................................... (43,505,395) (59,592,424)
-------------------------------
============================================================================================================================
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ..................................... 20,301,197 5,643,701
Beginning of year ................................................ 380,790,433 375,146,732
-------------------------------
End of year* ..................................................... $ 401,091,630 $ 380,790,433
===============================
* Accumulated investment loss--net ............................ -- $ (371,452)
===============================
See Notes to Financial Statements.
16 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Financial Highlights
Class A
The following per share data and ratios have been derived -----------------------------------------------------------------------
from information provided in the financial statements. For the Year Ended July 31,
-----------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003+ 2002+ 2001+ 2000+
=================================================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ... $ 10.30 $ 8.58 $ 12.01 $ 13.86 $ 13.67
-----------------------------------------------------------------------
Investment income(loss)--net** ....... .01 (.02) (.01) .05 .08
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ................... 1.75 1.74 (2.70) .94 1.56
-----------------------------------------------------------------------
Total from investment operations ..... 1.76 1.72 (2.71) .99 1.64
-----------------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............ -- -- -- (.05) (.14)
In excess of investment income--net -- -- -- (.04) (.01)
Realized gain on investments--net . -- -- (.72) (2.75) (1.30)
-----------------------------------------------------------------------
Total dividends and distributions .... -- -- (.72) (2.84) (1.45)
-----------------------------------------------------------------------
Net asset value, end of year ......... $ 12.06 $ 10.30 $ 8.58 $ 12.01 $ 13.86
=======================================================================
=================================================================================================================================
Total Investment Return*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ... 17.09% 20.05% (23.06%) 7.73% 12.77%
=======================================================================
=================================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver .............. 1.34% 1.42% 1.41% 1.49% 1.46%
=======================================================================
Expenses ............................. 1.51% 1.57% 1.54% 1.49% 1.46%
=======================================================================
Investment income (loss)--net ........ .08% (.23%) (.12%) .45% .55%
=======================================================================
=================================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $136,688 $120,193 $109,033 $119,272 $106,748
=======================================================================
Portfolio turnover ................... 91.79% 54.67% 123.59% 112.13% 95.11%
=======================================================================
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
+ Effective April 14, 2003, Class D Shares were redesignated Class A Shares.
See Notes to Financial Statements.
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 17
[LOGO] Merrill Lynch Investment Managers
Financial Highlights (continued)
Class B
The following per share data and ratios have been derived -----------------------------------------------------------------------
from information provided in the financial statements. For the Year Ended July 31,
-----------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
=================================================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ... $ 9.62 $ 8.07 $ 11.36 $ 13.23 $ 13.06
-----------------------------------------------------------------------
Investment loss--net** ............... (.08) (.09) (.09) (.03) (.02)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ................... 1.63 1.64 (2.54) .89 1.47
-----------------------------------------------------------------------
Total from investment operations ..... 1.55 1.55 (2.63) .86 1.45
-----------------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. -- -- -- (.01) --+
In excess of investment income--net . -- -- -- (.01) --+
Realized gain on investments--net ... -- -- (.66) (2.71) (1.28)
-----------------------------------------------------------------------
Total dividends and distributions .... -- -- (.66) (2.73) (1.28)
-----------------------------------------------------------------------
Net asset value, end of year ......... $ 11.17 $ 9.62 $ 8.07 $ 11.36 $ 13.23
=======================================================================
=================================================================================================================================
Total Investment Return*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ... 16.11% 19.21% (23.69%) 6.91% 11.85%
=======================================================================
=================================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver .............. 2.11% 2.20% 2.18% 2.26% 2.23%
=======================================================================
Expenses ............................. 2.27% 2.35% 2.30% 2.26% 2.23%
=======================================================================
Investment loss--net ................. (.70%) (1.02%) (.89%) (.27%) (.12%)
=======================================================================
=================================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 57,812 $ 67,382 $ 79,617 $132,202 $165,524
=======================================================================
Portfolio turnover ................... 91.79% 54.67% 123.59% 112.13% 95.11%
=======================================================================
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
+ Amount is less than $(.01) per share.
See Notes to Financial Statements.
18 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Financial Highlights (continued)
Class C
The following per share data and ratios have been derived -----------------------------------------------------------------------
from information provided in the financial statements. For the Year Ended July 31,
-----------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
=================================================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ... $ 9.42 $ 7.90 $ 11.17 $ 13.07 $ 12.94
-----------------------------------------------------------------------
Investment loss--net** ............... (.08) (.08) (.09) (.04) (.03)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ................... 1.60 1.60 (2.50) .88 1.47
-----------------------------------------------------------------------
Total from investment operations ..... 1.52 1.52 (2.59) .84 1.44
-----------------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............ -- -- -- (.02) (.01)
In excess of investment income--net -- -- -- (.01) --+
Realized gain on investments--net . -- -- (.68) (2.71) (1.30)
-----------------------------------------------------------------------
Total dividends and distributions .... -- -- (.68) (2.74) (1.31)
-----------------------------------------------------------------------
Net asset value, end of year ......... $ 10.94 $ 9.42 $ 7.90 $ 11.17 $ 13.07
=======================================================================
=================================================================================================================================
Total Investment Return*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ... 16.14% 19.24% (23.73%) 6.90% 11.85%
=======================================================================
=================================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver .............. 2.12% 2.21% 2.19% 2.27% 2.24%
=======================================================================
Expenses ............................. 2.28% 2.36% 2.32% 2.27% 2.24%
=======================================================================
Investment loss--net ................. (.70%) (1.02%) (.88%) (.39%) (.24%)
=======================================================================
=================================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 34,179 $ 31,492 $ 31,763 $ 16,776 $ 11,570
=======================================================================
Portfolio turnover ................... 91.79% 54.67% 123.59% 112.13% 95.11%
=======================================================================
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
+ Amount is less than $(.01) per share.
See Notes to Financial Statements.
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 19
[LOGO] Merrill Lynch Investment Managers
Financial Highlights (continued)
Class I
The following per share data and ratios have been derived -----------------------------------------------------------------------
from information provided in the financial statements. For the Year Ended July 31,
-----------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003++ 2002++ 2001++ 2000++
=================================================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ... $ 10.36 $ 8.60 $ 12.04 $ 13.89 $ 13.71
-----------------------------------------------------------------------
Investment income--net** ............. .04 --+ .01 .09 .12
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ................... 1.76 1.76 (2.71) .93 1.55
-----------------------------------------------------------------------
Total from investment operations ..... 1.80 1.76 (2.70) 1.02 1.67
-----------------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............ -- -- -- (.06) (.18)
In excess of investment income--net -- -- -- (.05) (.01)
Realized gain on investments--net . -- -- (.74) (2.76) (1.30)
-----------------------------------------------------------------------
Total dividends and distributions .... -- -- (.74) (2.87) (1.49)
-----------------------------------------------------------------------
Net asset value, end of year ......... $ 12.16 $ 10.36 $ 8.60 $ 12.04 $ 13.89
=======================================================================
=================================================================================================================================
Total Investment Return*
- ---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ... 17.37% 20.47% (22.95%) 8.00% 13.03%
=======================================================================
=================================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver .............. 1.09% 1.17% 1.16% 1.24% 1.21%
=======================================================================
Expenses ............................. 1.26% 1.32% 1.28% 1.24% 1.21%
=======================================================================
Investment income--net ............... .33% .02% .14% .74% .87%
=======================================================================
=================================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $172,024 $161,723 $154,734 $192,820 $223,134
=======================================================================
Portfolio turnover ................... 91.79% 54.67% 123.59% 112.13% 95.11%
=======================================================================
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
+ Amount is less than $.01 per share.
++ Effective April 14, 2003, Class A Shares were redesignated Class I Shares.
See Notes to Financial Statements.
20 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Financial Highlights (concluded)
Class R
----------------------------------
The following per share data and ratios have been derived For the For the Period
from information provided in the financial statements. Year Ended January 3, 2003+
July 31, to July 31,
Increase (Decrease) in Net Asset Value: 2004 2003
============================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ........... $ 9.71 $ 8.67
---------------------------------
Investment income (loss)--net*** ............... --@@ .04
Realized and unrealized gain on investments--net 1.62 1.00
---------------------------------
Total from investment operations ............... 1.62 1.04
---------------------------------
Net asset value, end of period ................. $ 11.33 $ 9.71
=================================
============================================================================================================
Total Investment Return**
- ------------------------------------------------------------------------------------------------------------
Based on net asset value per share ............. 16.68% 12.00%@
=================================
============================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------
Expenses, net of waiver ........................ 1.57% 1.67%*
=================================
Expenses ....................................... 1.75% 1.82%*
=================================
Investment loss--net ........................... (.05%) (.27%)*
=================================
============================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ....... $ 389 $ --++
=================================
Portfolio turnover ............................. 91.79% 54.67%
=================================
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
+ Commencement of operations.
++ Amount is less than $1,000.
@ Aggregate total investment return.
@@ Amount is less than $(.01) per share.
See Notes to Financial Statements.
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 21
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Focus Value Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may require
the use of management accruals and estimates. Actual results may differ from
these estimates. The Fund offers multiple classes of shares. Shares of Class A
and Class I are sold with a front-end sales charge. Shares of Class B and Class
C may be subject to a contingent deferred sales charge. Class R Shares are sold
only to certain retirement plans. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that Class A, Class B, Class C and Class R Shares bear certain expenses related
to the account maintenance of such shares, and Class B, Class C and Class R
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. Income, expenses (other than
expenses attributable to a specific class) and realized and unrealized gains and
losses on investments are allocated daily to each class based on its relative
net assets. The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments -- Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available ask
price for short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Directors of the Fund.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Directors of the Fund. Short positions traded in the OTC market are valued at
the last available ask price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market.
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last ask price.
Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued daily based upon quotations from
market makers. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Fund's Board of Directors. Such
valuations and procedures will be reviewed periodically by the Board of
Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the New York Stock Exchange ("NYSE").
The values of such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Foreign currency exchange rates
also are generally determined prior to the close of business on the NYSE.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and the close of
business on the NYSE that may not be reflected in the computation of the Fund's
net asset value. If events (for example, a company announcement, market
volatility or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Fund's Board of Directors
or by the Investment Adviser using a pricing service and/or procedures approved
by the Fund's Board of Directors.
22 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Notes to Financial Statements (continued)
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Options -- The Fund may write and purchase call and put options. When the
Fund writes an option, an amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market
value of the option written. When a security is purchased or sold through
an exercise of an option, the related premium paid (or received) is added
to (or deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option expires
(or the Fund enters into a closing transaction), the Fund realizes a gain
or loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
(d) 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 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.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. 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 is recognized on the accrual basis.
(f) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(h) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
(i) Reclassifications -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the current
year, $371,452 has been reclassified between accumulated net realized capital
losses on investments and accumulated net investment loss and $29,746 has been
reclassified between paid-in capital in excess of par and accumulated net
investment loss as a result of permanent differences attributable to
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 23
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
amortization methods on fixed income securities and net operating losses. These
reclassifications have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor") 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
1.00%, on an annual basis, of the average daily value of the Fund's net assets.
For the period August 1, 2003 to May 31, 2004, FAM waived .15% of its fee
resulting in an annual fee equal to .85% of the average daily net assets of the
Fund. Effective June 1, 2004, FAM agreed to waive .25% of its fee resulting in
an annual fee equal to .75% of the average daily net assets of the Fund. This
contract has a one year term and is renewable. For the year ended July 31, 2004,
FAM earned fees of $4,141,868, of which $692,801 was waived. FAM has entered
into a Sub-Advisory Agreement with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an affiliate of FAM, pursuant to which MLAM U.K. provides
investment advisory services to FAM with respect to the Fund. There is no
increase in the aggregate fees paid by the Fund for these services.
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 A ................................ .25% --
Class B ................................ .25% .75%
Class C ................................ .25% .75%
Class R ................................ .25% .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 A, Class B, Class C and Class R shareholders. The
ongoing distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B, Class C and Class R
shareholders.
For the year ended July 31, 2004, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class I Shares as
follows:
- --------------------------------------------------------------------------------
FAMD MLPF&S
- --------------------------------------------------------------------------------
Class A ............................ $ 1,425 $18,522
Class I ............................ $ 628 $ 3,245
- --------------------------------------------------------------------------------
For the year ended July 31, 2004, MLPF&S received contingent deferred sales
charges of $73,344 and $2,008 relating to transactions in Class B and Class C
Shares, respectively.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to MLPF&S, or its
affiliates. As of July 31, 2004, the Fund lent securities with a value of
$10,271,070 to MLPF&S or its affiliates. Pursuant to that order, the Fund also
has retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate
of FAM, as the securities lending agent for a fee based on a share of the
returns on investment of cash collateral. MLIM, LLC may, on behalf of the Fund,
invest cash collateral received by the Fund for such loans, among other things,
in a private investment company managed by MLIM, LLC or in registered money
market funds advised by MLIM or its affiliates. For the year ended July 31,
2004, MLIM, LLC received $19,225 in securities lending agent fees.
For the year ended July 31, 2004, the Fund reimbursed FAM $8,470 for certain
accounting services.
In addition, MLPF&S received $252,694 in commissions on the execution of
portfolio security transactions for the Fund for the year ended July 31, 2004.
24 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Notes to Financial Statements (continued)
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, MLAM U.K., FDS, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2004 were $354,949,200 and $374,536,692, respectively.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$43,505,395 and $59,592,424 for the year ended July 31, 2004 and for the year
ended July 31, 2003, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 716,143 $ 8,534,193
Automatic conversion of shares ......... 1,073,783 12,779,849
------------------------------
Total issued ........................... 1,789,926 21,314,042
Shares redeemed ........................ (2,121,354) (25,217,807)
------------------------------
Net decrease ........................... (331,428) $ (3,903,765)
==============================
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 1,115,902 $ 10,008,293
Automatic conversion of shares ......... 1,361,432 12,141,237
------------------------------
Total issued ........................... 2,477,334 22,149,530
Shares redeemed ........................ (3,523,252) (31,438,321)
------------------------------
Net decrease ........................... (1,045,918) $ (9,288,791)
==============================
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended July 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 798,733 $ 8,796,123
Shares redeemed ........................ (1,474,994) (16,377,636)
Automatic conversion of shares ......... (1,154,991) (12,779,849)
------------------------------
Net decrease ........................... (1,831,252) $(20,361,362)
==============================
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended July 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 1,415,246 $ 12,132,676
Shares redeemed ........................ (2,824,190) (23,919,437)
Automatic conversion of shares ......... (1,451,579) (12,141,237)
------------------------------
Net decrease ........................... (2,860,523) $(23,927,998)
==============================
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended July 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 425,220 $ 4,605,702
Shares redeemed ........................ (644,419) (6,947,219)
------------------------------
Net decrease ........................... (219,199) $ (2,341,517)
==============================
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended July 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 379,209 $ 3,177,634
Shares redeemed ........................ (1,054,882) (8,592,904)
------------------------------
Net decrease ........................... (675,673) $ (5,415,270)
==============================
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended July 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 1,628,933 $ 19,598,346
Shares redeemed ........................ (3,087,919) (36,904,286)
------------------------------
Net decrease ........................... (1,458,986) $(17,305,940)
==============================
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended July 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 1,542,400 $ 14,042,891
Shares redeemed ........................ (3,917,048) (35,003,356)
------------------------------
Net decrease ........................... (2,374,648) $(20,960,465)
==============================
- --------------------------------------------------------------------------------
Class R Shares for the Year Dollar
Ended July 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 48,440 $ 570,646
Shares redeemed ........................ (14,083) (163,457)
------------------------------
Net increase ........................... 34,357 $ 407,189
==============================
- --------------------------------------------------------------------------------
Class R Shares for the
Period January 3, 2003 Dollar
to July 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 12 $ 100
------------------------------
Net increase ........................... 12 $ 100
==============================
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 25
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by FAM and its affiliates, is a
party to a $500,000,000 credit agreement with Bank One, N.A. and certain other
lenders. The Fund may borrow under the credit agreement to fund shareholder
redemptions and for other lawful purposes other than for leverage. The Fund may
borrow up to the maximum amount allowable under the Fund's current prospectus
and statement of additional information, subject to various other legal,
regulatory or contractual limits. The Fund pays a commitment fee of .09% per
annum based on the Fund's pro rata share of the unused portion of the credit
agreement. Amounts borrowed under the credit agreement bear interest at a rate
equal to, at each fund's election, the Federal Funds rate plus .50% or a base
rate as determined by Bank One, N.A. On November 28, 2003, the credit agreement
was renewed for one year under the same terms. The Fund did not borrow under the
credit agreement during the year ended July 31, 2004.
6. Distributions to Shareholders:
As of July 31, 2004, the components of accumulated earnings on a tax basis were
as follows:
- -----------------------------------------------------------------------------
Undistributed ordinary income--net ...................... $ --
Undistributed long-term capital gains--net .............. --
------------
Total undistributed earnings--net ....................... --
Capital loss carryforward ............................... (38,975,411)*
Unrealized gains--net ................................... 42,667,795**
------------
Total accumulated earnings--net ......................... $ 3,692,384
============
* On July 31, 2004, the Fund had a net capital loss carryforward of
$38,975,411, of which $8,284,542 expires in 2010 and $30,690,869 expires
in 2011. This amount will be available to offset like amounts of any
future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales.
26 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Merrill Lynch Focus Value Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Focus Value Fund, Inc. as of July
31, 2004, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and 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 as of July 31, 2004, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Focus Value Fund, Inc. as of July 31, 2004, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 17, 2004
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 27
[LOGO] Merrill Lynch Investment Managers
Officers and Directors (unaudited)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
- ------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 1999 to President of the Merrill Lynch Investment Managers, 125 Funds None
Glenn* Princeton, NJ and present L.P. ("MLIM")/Fund Asset Management, L.P. 160 Portfolios
08543-9011 Director and ("FAM")--Advised Funds since 1999; Chairman
Age: 63 1985 to (Americas Region) of MLIM from 2000 to 2002;
present Executive Vice President of MLIM and FAM (which
terms as used herein include their corporate
predecessors) from 1983 to 2002; President of
FAM Distributors, Inc. ("FAMD") from 1986 to 2002
and Director thereof from 1991 to 2002; Executive
Vice President and Director of Princeton Services,
Inc. ("Princeton Services") from 1993 to 2002;
President of Princeton Administrators, L.P. from
1989 to 2002; Director of Financial Data Services,
Inc. since 1985.
------------------------------------------------------------------------------------------------------------------------
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which MLIM
or FAM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of
the Fund based on his present and former positions with MLIM, FAM, FAMD, Princeton Services and Princeton
Administrators, L.P. The Director's term is unlimited. Directors serve until their resignation, removal or death, or
until December 31 of the year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board
of Directors.
====================================================================================================================================
Independent Directors*
- ------------------------------------------------------------------------------------------------------------------------------------
James H. P.O. Box 9095 Director 2002 to Director, The China Business Group, Inc. since 38 Funds None
Bodurtha Princeton, NJ present 1996 and Executive Vice President thereof from 55 Portfolios
08543-9095 1996 to 2003; Chairman of the Board, Berkshire
Age: 60 Holding Corporation since 1980; Partner, Squire,
Sanders & Dempsey from 1980 to 1993.
- ------------------------------------------------------------------------------------------------------------------------------------
Joe Grills P.O. Box 9095 Director 1994 to Member of the Committee of Investment of 38 Funds Kimco Realty
Princeton, NJ present Employee Benefit Assets of the Association of 55 Portfolios Corporation
08543-9095 Financial Professionals ("CIEBA") since 1986;
Age: 69 Member of CIEBA's Executive Committee since
1988 and its Chairman from 1991 to 1992;
Assistant Treasurer of International Business
Machines Corporation ("IBM") and Chief
Investment Officer of IBM Retirement Funds
from 1986 to 1993; Member of the Investment
Advisory Committee of the State of New York
Common Retirement Fund since 1989; Member
of the Investment Advisory Committee of the
Howard Hughes Medical Institute from 1997 to
2000; Director, Duke University Management
Company from 1992 to 2004, Vice Chairman
thereof from 1998 to 2004 and Director Emeritus
thereof since 2004; Director, LaSalle Street Fund
from 1995 to 2001; Director, Kimco Realty
Corporation since 1997; Member of the Investment
Advisory Committee of the Virginia Retirement
System since 1998 and Vice Chairman thereof since
2002; Director, Montpelier Foundation since 1998
and its Vice Chairman since 2000; Member of the
Investment Committee of the Woodberry Forest
School since 2000; Member of the Investment
Committee of the National Trust for Historic
Preservation since 2000.
28 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Officers and Directors (unaudited) (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Independent Directors* (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
Herbert I. P.O. Box 9095 Director 2002 to John M. Olin Professor of Humanities, New York 38 Funds None
London Princeton, NJ present University since 1993 and Professor thereof since 55 Portfolios
08543-9095 1980; President, Hudson Institute since 1997
Age: 65 and Trustee thereof since 1980; Dean, Gallatin
Division of New York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corp.
from 1991 to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993; Director, Level Playing
Field (education) from 2000 to 2003.
- ------------------------------------------------------------------------------------------------------------------------------------
Andre F. P.O. Box 9095 Director 2002 to Harvard Business School: George Gund Professor 38 Funds None
Perold Princeton, NJ present of Finance and Banking since 2000; Senior 55 Portfolios
08543-9095 Associate Dean, Director of Faculty Recruiting
Age: 52 since 2001; Finance Area Chair from 1996 to
2001; Sylvan C. Coleman Professor of Financial
Management from 1993 to 2000; Director,
Genbel Securities Limited and Gensec Bank from
1999 to 2003; Director, Stockback, Inc. from 2000
to 2002; Director, Sanlam Limited from 2001 to
2003; Trustee, Commonfund from 1989 to 2001;
Director, Sanlam Investment Management from
1999 to 2001; Director, Bulldogresearch.com from
2000 to 2001; Director, Quantec Limited from 1991
to 1999; Director and Chairman of the Board of
UNX Inc. since 2003.
- ------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9095 Director 2002 to Shareholder of Modrall, Sperling, Roehl, Harris & 38 Funds None
Cooper Princeton, NJ present Sisk, P.A. since 1993; President, American Bar 55 Portfolios
Ramo 08543-9095 Association from 1995 to 1996 and Member of
Age: 61 the Board of Governors thereof from 1994 to 1997;
Shareholder of Poole, Kelly & Ramo, Attorneys at Law,
P.C. from 1977 to 1993; Director, Coopers, Inc.
since 1999; Director of ECMC Group (service
provider to students, schools and lenders) since
2001; Director, United New Mexico Bank (now
Wells Fargo) from 1983 to 1988; Director, First
National Bank of New Mexico (now Wells Fargo)
from 1975 to 1976.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Director 1996 to Principal of STI Management (investment adviser) 38 Funds None
Salomon, Princeton, NJ present since 1994; Chairman and CEO of Salomon 55 Portfolios
Jr. 08543-9095 Brothers Asset Management from 1992 to 1995;
Age: 67 Chairman of Salomon Brothers equity mutual funds
from 1992 to 1995; regular columnist with Forbes
Magazine from 1992 to 2002; Director of Stock
Research and U.S. Equity Strategist at Salomon
Brothers from 1975 to 1991; Trustee, Commonfund
from 1980 to 2001.
- ------------------------------------------------------------------------------------------------------------------------------------
Stephen B. P.O. Box 9095 Director 1984 to Chairman of Fernwood Advisors (investment 39 Funds None
Swensrud Princeton, NJ present adviser) since 1996; Principal, Fernwood Associates 56 Portfolios
08543-9095 (financial consultants) since 1975; Chairman of
Age: 71 R.P.P. Corporation (manufacturing) since 1978;
Director of International Mobile Communications,
Incorporated (telecommunications) since 1998.
------------------------------------------------------------------------------------------------------------------------
* The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of
the year in which they turn 72.
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 29
[LOGO] Merrill Lynch Investment Managers
Officers and Directors (unaudited) (concluded)
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1993 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999; Vice
08543-9011 and and President of FAMD since 1999; Director of MLIM Taxation since 1990.
Age: 44 Treasurer 1999 to
present
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 Senior 1999 to President of MLIM and member of the Executive Management Committee of ML & Co.,
Doll, Jr. Princeton, NJ Vice present Inc. since 2001; Global Chief Investment Officer and Senior Portfolio Manager of
08543-9011 President MLIM since 1999; Chief Investment Officer of Equities at Oppenheimer Funds, Inc.
Age: 49 from 1990 to 1999 and Chief Investment Officer thereof from 1998 to 1999; Executive
Vice President of Oppenheimer Funds, Inc. from 1991 to 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert J. P.O. Box 9011 Vice 1986 to Managing Director of MLIM since 2000; Director (Equities) of MLIM from 1997
Martorelli Princeton, NJ President present to 2000.
08543-9011
Age: 47
- ------------------------------------------------------------------------------------------------------------------------------------
Kevin M. P.O. Box 9011 Vice 2002 to Managing Director of MLIM since 2000; Director (Equities) of MLIM from 1997
Rendino Princeton, NJ President present to 2000.
08543-9011
Age: 37
- ------------------------------------------------------------------------------------------------------------------------------------
Phillip S. P.O. Box 9011 Secretary 2003 to First Vice President of MLIM since 2001; Director (Legal Advisory) of MLIM from
Gillespie Princeton, NJ present 2000 to 2001; Vice President of MLIM from 1999 to 2000 and Attorney associated with
08543-9011 MLIM since 1998.
Age: 40
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
- ------------------------------------------------------------------------------------------------------------------------------------
Further information about the Fund's Officers and Directors is available in the Fund's Statement of Additional
Information, which can be obtained without charge by calling 1-800-MER-FUND.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
J.P. Morgan Chase Bank
4 Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
30 MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site http://www.icsdelivery.com/live and follow the instructions. When you visit
this site, you will obtain a personal identification number (PIN). You will need
this PIN should you wish to update your e-mail address, choose to discontinue
this service and/or make any other changes to the service. This service is not
available for certain retirement accounts at this time.
MERRILL LYNCH FOCUS VALUE FUND, INC. JULY 31, 2004 31
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch Focus Value Fund, Inc.
Box 9011
Princeton, NJ
08543
#10263 -- 7/04
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Joe Grills,
(2) Andre F. Perold, (3) Robert S. Salomon, Jr., and (4) Stephen B.
Swensrud.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending July 31, 2004 - $37,000
Fiscal Year Ending July 31, 2003 - $38,300
(b) Audit-Related Fees - Fiscal Year Ending July 31, 2004 - $0
Fiscal Year Ending July 31, 2003 - $0
(c) Tax Fees - Fiscal Year Ending July 31, 2004 - $5,800
Fiscal Year Ending July 31, 2003 - $15,400
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending July 31, 2004 - $0
Fiscal Year Ending July 31, 2003 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending July 31, 2004 - $15,735,706
Fiscal Year Ending July 31, 2003 - $18,108,889
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $945,000, 0%
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 10 - Controls and Procedures
10(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
10(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - See Item 2
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Merrill Lynch Focus Value Fund, Inc.
By: /s/ Terry K. Glenn
-----------------------------
Terry K. Glenn,
President of
Merrill Lynch Focus Value Fund, Inc.
Date: September 17, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Terry K. Glenn
-----------------------------
Terry K. Glenn,
President of
Merrill Lynch Focus Value Fund, Inc.
Date: September 17, 2004
By: /s/ Donald C. Burke
-----------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Focus Value Fund, Inc.
Date: September 17, 2004