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 811-3445
--------
THE MERGER FUND
---------------
(Exact name of registrant as specified in charter)
100 SUMMIT LAKE DRIVE
VALHALLA, NEW YORK 10595
------------------------
(Address of principal executive offices) (Zip code)
FREDERICK W. GREEN
THE MERGER FUND
100 SUMMIT LAKE DRIVE
VALHALLA, NEW YORK 10595
-------------------------
(Name and address of agent for service)
1-800-343-8959
--------------
Registrant's telephone number, including area code
Date of fiscal year end: September 30, 2004
Date of reporting period: September 30, 2004
ITEM 1. REPORT TO STOCKHOLDERS.
- ------------------------------
THE
MERGER
FUND(R)
ANNUAL REPORT
SEPTEMBER 30, 2004
November 16, 2004
Dear Fellow Shareholder:
The Merger Fund(R) showed a gain in fiscal 2004 but fell short of its rate-
of-return targets. As previously reported, the Fund's NAV rose 2.0% in the 12
months ended September. While merger activity continued to recover in the
period, an unusual number of failed, renegotiated, seriously delayed or
otherwise troubled transactions weighed on our performance. Out of the 106 new
arbitrage investments that we made in fiscal 2004, 16, or about 15%, fell into
one of the above categories. For perspective, during the prior fiscal year, we
experienced only one broken deal and few other takeovers that caused us anxious
moments. Since it's likely that whatever got into the water supply to cause so
many troubled mergers this past year has been flushed out of the system by now,
we believe that our fiscal 2004 results were more of an aberration than a
predictor of things to come. Fiscal 2005 is off to a good start, and we hope
that it will be a year in which The Merger Fund(R) handily meets its investment
objectives.
As is customary in these annual reports, we have included a series of charts
which reflect the nature of the arbitrage opportunities in which the Fund has
recently invested. Chart 1 shows that as of September 30, friendly transactions
represented slightly more than 95% of the dollar value of our equity holdings,
while unsolicited, or hostile, takeover attempts accounted for about 5%. The
latter figure, which is up marginally from the prior year's level, indicates
that hostile deals continue to represent a relatively small percentage of M&A
activity. Although there are numerous explanations for the scarcity of
unsolicited takeover attempts, the fundamental reality facing hostile bidders is
that the odds of success are low. Most of the common takeover defenses, such as
poison pills and staggered boards, have withstood legal challenge, and a target
company remains free to "just say no," even when presented with a richly valued
offer that a majority of its shareholders would willingly accept. And should
the target conclude that remaining independent is no longer an option, there is
still no guarantee that the original suitor will ultimately prevail; a competing
bid by a white knight may well carry the day.
Oracle's long-running effort-17 months and counting-to acquire PeopleSoft
illustrates some of the critical factors that can determine the outcome of a
hostile bid. To fend off its unwanted suitor, PeopleSoft augmented its standard
arsenal of takeover defenses with a novel "customer assurance program." Under
this plan, Oracle would be on the hook to PeopleSoft's customers for more than
$2 billion should it fail to support their existing software following a
takeover. PeopleSoft also actively lobbied federal and state regulators to
block the deal on antitrust grounds, and the company's independence appeared
secure when the Department of Justice subsequently filed suit against the
transaction. Instead of giving up, however, Oracle chose to take the DOJ to
court. Following a trial on the merits of the government's antitrust case, a
federal judge ruled in favor of Oracle and allowed its offer to proceed. Only a
highly committed acquirer would have challenged the DOJ, and Oracle, led by its
strong-willed CEO, Larry Ellison, has repeatedly demonstrated its willingness to
stay the course. Oracle has also been helped by the fact that PeopleSoft's
business has deteriorated since the offer was launched-making it harder for
PeopleSoft to convince its shareholders that they would be better off if the
takeover failed-and by the apparent absence of other potential bidders that
could realize the same synergies. But despite all of these advantages, the
battle is not yet over. Absent a negotiated transaction, Oracle may have to
wait until next spring to gain control of PeopleSoft's board and complete the
takeover. This ongoing saga is a cautionary tale for all but the most highly
motivated and well-positioned suitors contemplating a hostile transaction.
Chart 2 shows that approximately 93% of the acquisitions in which the Fund
has recently invested are strategic in nature, meaning combinations that involve
a corporate buyer-typically operating in the same industry as the target-whose
objective in doing the transaction is to enhance shareholder value on a longer-
term basis. The rest are financial deals, mostly going-private transactions in
which an investor group that includes the target's management uses large amounts
of borrowed money to buy out the public shareholders. In most cases, the goal
in such highly leveraged deals is to pay down debt and then either sell or IPO
the company, ideally within a relatively short time frame of just a few years.
The Fund's 7% exposure to financial transactions at the end of September
compares with an absence of holdings in this category a year earlier. What's
changedo To begin with, the stringent recordkeeping and corporate governance
requirements of the Sarbanes-Oxley law, coupled with a more intrusive and less
forgiving regulatory environment, may be causing a growing number of executives
to conclude that the benefits of public ownership are overrated. Stated another
way, a CEO who worries that he might be just a headline away from needing the
services of an outplacement specialist-or worse, an attorney-may be more
receptive to the idea of taking his company private. Leveraged-buyout firms
also appear to be benefiting from the fact that many publicly traded companies,
under pressure from an investment community that favors growth stories, are no
longer content to operate-let alone buy-businesses that may generate steady cash
flow but which have limited growth prospects. For an LBO player, however, even
a business that is clearly in decline can represent an attractive investment
opportunity if the company's cash flow can be milked for a sufficiently long
period of time. It is not surprising, therefore, that some of this year's
largest financial deals have involved no-growth businesses such as video
rentals, movie theaters and bowling alleys. Another factor behind the upturn in
LBO activity has been the ability of the leading players to attract massive
amounts of equity capital from institutional investors. Thanks to the ready
availability of low-cost debt financing, these funds can be leveraged several
times over, in some cases giving buyout firms the firepower to outbid their
strategic competitors. From a merger-arbitrage standpoint, we have always
favored strategic deals over LBOs on the assumption that the former are less
accident-prone. Last year's experience did little to make us think otherwise.
Although 14 of the Fund's 16 troubled deals involved strategic buyers, the two
LBOs that ran into problems represented a relatively large percentage of the
financial transactions in which we invested.
Chart 3 shows the type of consideration to be received by the selling
company's shareholders in transactions in which The Merger Fund(R) held
positions at the end of September. This year's chart looks considerably
different from the one included in our 2003 annual report. More specifically,
cash, not stock, now appears to be the preferred deal currency. A year ago,
all-stock transactions represented about 33% of the dollar value of our equity
investments, while all-cash deals accounted for just 23%. Now, however, all-
stock transactions are only 21% of the total, and the percentage of all-cash
deals has nearly doubled to 44%. Looked at another way, Chart 3 shows that
mergers and takeovers involving at least some cash make up 70% of the Fund's
portfolio. A year earlier, the comparable figure was 54%. A number of factors
appear to account for this shift in deal consideration, including the reluctance
of many acquirers to issue new shares at what they still consider to be
unattractive price levels; the fact that takeovers are often more accretive to
the buyer's bottom line when done as all-cash deals; the upturn in going-private
transactions, in which the target's shareholders typically receive only cash;
and the preference of some sellers for cash deals, whose value is unaffected by
the vagaries of the stock market. As arbitrageurs, it matters little to us
whether we are to receive cash or stock; other issues are given much greater
weight in deciding whether to invest in any given corporate reorganization.
Nonetheless, deal terms do affect the Fund's hedging strategies. When investing
in stock-for-stock mergers with fixed exchange ratios, we typically attempt to
lock in the arbitrage spread by selling short the acquirer's shares at the same
time that a long position is established in the target. In this way, the Fund
is hedged against a decline in the acquirer's stock price prior to the close of
the transaction. The use of such hedging strategies helps explain why the
performance of The Merger Fund(R) is largely uncorrelated with moves in the
market averages.
Chart 4 shows our investments grouped by economic sector. Again this year,
the Fund's holdings are well diversified, with no sector accounting for more
than 18% of the portfolio. Healthcare, which at the end of fiscal 2003
represented our third-largest exposure, has moved to first place, while
telecommunications has jumped from seventh place to second. Rounding out the
top three is financial services, the sector that over the years has provided us
with the largest number of arbitrage opportunities. In the same way that the
type of consideration to be received is not high on our list of criteria for
selecting the Fund's investments, the economic sector in which the target
company operates is typically a secondary factor in our decision-making process.
More important to us, among other things, are the strategic rationale for the
transaction, the degree to which the parties are committed to bringing the
process to a close, the way in which the merger agreement is written, antitrust
and other regulatory issues and the buyer's deal-making history.
Chart 5 shows the Fund's arbitrage investments grouped by the geographic
region in which the target company is domiciled. At the end of fiscal 2003, 91%
of the deals in our portfolio involved U.S.-based targets, while another 4%
involved acquisitions of Canadian companies. Although European transactions
totaled less than 4% of our investments as of September, earlier in the fiscal
year such deals accounted for a significantly larger percentage of the Fund's
holdings. The Merger Fund(R) has the resources and expertise to invest
globally, and we routinely look at non-U.S. transactions as part of our effort
to identify compelling arbitrage opportunities. It is true that investing
overseas often requires us to deal with a different set of political, governance
and regulatory issues, but we are careful not to get involved in a foreign
transaction unless we have done our homework and understand how the game is
played. We also regularly hedge the currency risk in cross-border deals, so
that fluctuations in exchange rates rarely have a material impact on our
returns.
Chart 6 shows the total dollar value of mergers and acquisitions in the U.S.,
by quarter, since 1991. M&A activity, which peaked at an annual rate of $1.4-
$1.5 trillion in each of the years 1998, 1999 and 2000, bottomed at about $250
billion in 2002. Calendar 2003 saw deal volume rebound 33%, and the recovery is
accelerating this year, with merger activity running at more than double 2003
levels. Following a period in which many corporate executives were focused on
internal issues and wary of the economic and geopolitical outlook, confidence
appears to be returning to the boardroom. And with it comes a greater
willingness to think strategically, a process that often includes a review of
potential corporate reorganizations. Another constraint on deal-making over the
past several years has been the failure of many earlier transactions to deliver
the promised benefits to shareholders. Against this background, Wall Street has
shown a tendency to penalize companies undertaking high-profile acquisitions,
especially if the deal is viewed as transformational in nature. It comes as
good news, therefore, that a number of recently announced mergers and takeovers
have been well received by investors. The more deals that generate positive
feedback, the easier it is for would-be acquirers to pull the trigger. Overall,
we expect that M&A activity will continue to strengthen in the months ahead.
In many respects, fiscal 2004 was an eventful year for The Merger Fund(R).
The Fund's investment adviser agreed to reduce its management fees, Morningstar
awarded us its highest grade for fund governance, our net assets reached an all-
time high and we closed the Fund to new investors. As The Merger Fund(R)
approaches its 16th anniversary, we thank our shareholders for their continued
support and encouragement. May the Fund's best years be yet to come!
Sincerely,
/s/Frederick W. Green
Frederick W. Green
President
CHART 1
PORTFOLIO COMPOSITION
BY TYPE OF DEAL*<F1>
FRIENDLY 95.2%
HOSTILE 4.8%
CHART 2
PORTFOLIO COMPOSITION
BY TYPE OF BUYER*<F1>
STRATEGIC 92.6%
FINANCIAL 7.4%
CHART 3
PORTFOLIO COMPOSITION
BY DEAL TERMS*<F1>
STOCK WITH FIXED EXCHANGE RATIO 8.3%
STOCK WITH FLEXIBLE EXCHANGE RATIO 12.6%
CASH & STOCK 26.6%
CASH 43.8%
UNDETERMINED 8.6%
*<F1> Data as of September 30, 2004
CHART 4
PORTFOLIO COMPOSITION
BY SECTOR*<F2>
HEALTHCARE 18.2%
TELECOMMUNICATIONS 18.1%
FINANCIAL SERVICES 15.4%
TECHNOLOGY 11.6%
CONSUMER SERVICES 10.8%
MEDIA & ENTERTAINMENT 7.3%
BASIC INDUSTRIES 6.5%
CONSUMER NON-DURABLES 6.2%
ENERGY 3.4%
BUSINESS SERVICES 1.8%
MULTI-SECTOR 0.7%
TRANSPORTATION 0.0%
CHART 5
PORTFOLIO COMPOSITION
BY REGION*<F2>
UNITED STATES 91.0%
EUROPE 3.6%
CANADA 4.0%
ASIA 1.3%
*<F2> Data as of September 30, 2004
CHART 6
MERGER ACTIVITY
1991 - 2004
Date First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
1991 $19.9516 $20.5286 $27.3834 $16.3747
1992 $16.6579 $30.7912 $16.1062 $20.9834
1993 $20.3626 $30.0446 $72.4562 $64.2678
1994 $43.9419 $41.2508 $79.3201 $58.3516
1995 $63.2519 $109.5822 $138.6244 $92.8259
1996 $81.5836 $147.5119 $114.5835 $180.8346
1997 $157.8150 $135.3298 $146.4147 $247.8092
1998 $207.8147 $667.8133 $273.4782 $271.3921
1999 $344.2760 $473.5610 $227.3533 $495.8469
2000 $495.6549 $238.7511 $432.3114 $264.6629
2001 $161.5246 $138.7080 $154.2153 $121.5994
2002 $45.7014 $60.8711 $95.8875 $44.3849
2003 $36.7571 $57.2983 $72.9279 $161.5566
2004 $246.3650 $108.3242 $97.1393
Source: Securities Data Corp.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN THE MERGER FUND AND THE S&P 500
Date The Merger Fund S&P 500
---- --------------- -------
9/30/1994 $10,000 $10,000
9/30/1995 $11,082 $12,975
9/30/1996 $12,324 $15,613
9/30/1997 $13,659 $21,927
9/30/1998 $13,771 $23,911
9/30/1999 $16,705 $30,559
9/30/2000 $19,904 $34,619
9/30/2001 $20,686 $25,403
9/30/2002 $18,949 $20,199
9/30/2003 $21,201 $25,126
9/30/2004 $21,623 $28,612
AVERAGE
ANNUAL TOTAL RETURN
---------------------------------
1 YR. 3 YR. 5 YR. 10 YR.
----- ----- ----- ------
The Merger Fund 1.99% 1.49% 5.30% 8.02%
The Standard & Poor's 500 Index (S&P 500) is a capitalization-weighted index,
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. This chart assumes an initial
gross investment of $10,000 made on September 30, 1994. Returns shown include
the reinvestment of all dividends. Past performance is not predictive of future
performance. The graph and table do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Investment return and principal value will fluctuate, so that your shares, when
redeemed, may be worth more or less than the original cost.
THE MERGER FUND
EXPENSE EXAMPLE
SEPTEMBER 30, 2004
As a shareholder of the Fund, you incur two types of costs: (1) redemption fees
and (2) ongoing costs, including management fees; distribution and/or service
fees; and other Fund expenses. This Example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds. The Example is
based on an investment of $1,000 for the period 4/1/04 - 9/30/04.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. Although the Fund charges no sales load or
transaction fees, you will be assessed fees for outgoing wire transfers,
returned checks and stop-payment orders at prevailing rates charged by U.S.
Bancorp Fund Services, LLC, the Fund's transfer agent. If you request that a
redemption be made by wire transfer, a $15.00 fee will be charged by the Fund's
transfer agent. You will be charged a redemption fee equal to 2.00% of the net
amount of the redemption if you redeem your shares less than 30 calendar days
after you purchase them. IRA accounts will be charged a $15.00 annual
maintenance fee. To the extent the Fund invests in shares of other investment
companies as part of its investment strategy, you will indirectly bear your
proportionate share of any fees and expenses charged by the underlying funds in
which the Fund invests in addition to the expenses of the Fund. Actual expenses
of the underlying funds are expected to vary among the various underlying funds.
These expenses are not included in the example below. The example below
includes, but is not limited to, management fees, shareholder servicing fees,
fund accounting, custody and transfer agent fees. However, the example below
does not include portfolio trading commissions and related expenses, interest
expense or dividends on short positions held by the Fund and other extraordinary
expenses as determined under generally accepted accounting principles. You may
use the information in this line, together with the amount you invested, to
estimate the expenses that you paid over the period. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number in the first line under the heading
entitled "Expenses Paid During Period'' to estimate the expenses you paid on
your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the 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, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds. Please note that the expenses shown in the table are meant
to highlight your ongoing costs only and do not reflect any transactional costs,
such as redemption fees. Therefore, the second line of the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 4/1/04 VALUE 9/30/04 PERIOD 4/1/04 - 9/30/04
----------------- -------------- -----------------------
Actual +<F3> (1)<F5> $1,000.00 $ 976.70 $9.64
Hypothetical ++<F4> (2)<F6> 1,000.00 1,015.25 9.82
+<F3> Excluding dividends on short positions, your actual cost of investment
in the Fund would be $6.82.
++<F4> Excluding dividends on short positions, your hypothetical cost of
investment in the Fund would be $6.96.
(1)<F5> Ending account values and expenses paid during period based on a
(2.33)% return. This actual return is net of expenses.
(2)<F6> Ending account values and expenses paid during period based on a 2.50%
return. This hypothetical return is a gross return before expenses.
THE MERGER FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004
SHARES VALUE
------ -----
COMMON -- 83.15%*<F7>
AIRLINES -- 0.02%*<F7>
100,453 FLYi Inc.**<F8> $ 392,771
--------------
BANKS -- 3.89%*<F7>
834,400 Gold Banc Corporation, Inc. 11,256,056
500,000 National Commerce Financial Corporation 17,105,000
1,662,262 Riggs National Corporation 36,902,216
--------------
65,263,272
--------------
BROADCASTING -- 2.06%*<F7>
1,753,170 Lin TV Corp -- Class A**<F8> 34,151,752
15,930 Viacom Inc. -- Class B 534,611
--------------
34,686,363
--------------
CABLE TV -- 3.77%*<F7>
1,505,000 Adelphia Communications
Corporation -- Class A**<F8> 556,850
1,778,250 Cox Communications, Inc. _
Class A**<F8>(3)<F13> 58,913,423
450,000 Liberty Media Corporation -- Class A**<F8> 3,924,000
--------------
63,394,273
--------------
CHEMICALS -- 2.89%*<F7>
2,294,100 Millennium Chemicals Inc.**<F8> 48,657,861
--------------
COMPUTER HARDWARE -- 0.00%*<F7>
39,158 Hewlett-Packard Company Contingent Value Rights --
--------------
COMPUTER SOFTWARE -- 3.03%*<F7>
2,566,500 PeopleSoft, Inc.**<F8>(3)<F13> 50,945,025
--------------
CONSULTING SERVICES -- 0.17%*<F7>
250,100 Gartner, Inc. -- Class B**<F8> 2,888,655
--------------
DRUG DEVELOPMENT SERVICES -- 2.04%*<F7>
930,065 Inveresk Research Group, Inc.**<F8> 34,310,098
--------------
ELECTRIC UTILITIES -- 2.17%*<F7>
1,498,450 Unisource Energy Corporation 36,487,257
--------------
ENTERTAINMENT -- 1.70%*<F7>
34,031 Blockbuster Inc. -- Class A 258,295
2,453,050 Metro-Goldwyn-Mayer Inc.**<F8> 28,381,789
--------------
28,640,084
--------------
FOOD & BEVERAGES -- 5.38%*<F7>
1,131,019 Dreyer's Grand Ice Cream Holdings, Inc.(1)<F11> 90,448,720
--------------
HOSPITALS AND NURSING HOMES -- 2.15%*<F7>
450,900 Mariner Health Care, Inc.**<F8> 12,629,709
1,126,125 Province Healthcare Company**<F8> 23,558,535
--------------
36,188,244
--------------
HOTELS & GAMING -- 6.81%*<F7>
2,586,600 Caesars Entertainment, Inc.**<F8> 43,196,220
1,039,200 Mandalay Resort Group(1)<F11> 71,341,080
--------------
114,537,300
--------------
HUMAN RESOURCES -- 0.49%*<F7>
1,579,300 Exult Inc.**<F8> 8,307,118
--------------
INFORMATION TECHNOLOGY -- 1.72%*<F7>
2,068,430 The Titan Corporation**<F8> 28,895,967
--------------
MANAGED CARE -- 5.17%*<F7>
826,390 WellPoint Health Networks Inc.**<F8>(1)<F11> 86,845,325
--------------
METALS & MINING -- 1.20%*<F7>
1,155,500 Noranda, Inc.(4)<F14>(5)<F15> 20,163,475
--------------
OFFICE PRODUCTS -- 0.18%*<F7>
507,826 Dictaphone Corporation**<F8>(3)<F13> 3,046,956
--------------
OILFIELD EQUIPMENT & SERVICES -- 0.41%*<F7>
258,100 Varco International, Inc.**<F8> 6,922,242
--------------
PAPER & FOREST PRODUCTS -- 1.52%*<F7>
766,300 Boise Cascade Corporation 25,502,464
--------------
PHARMACEUTICALS -- 5.25%*<F7>
2,719,892 ILEX Oncology, Inc.**<F8>(4)<F14> 68,459,682
1,655,800 King Pharmaceuticals, Inc.**<F8> 19,770,252
--------------
88,229,934
--------------
PHARMACY SERVICES -- 1.12%*<F7>
745,400 NeighborCare, Inc.**<F8> 18,895,890
--------------
PUBLISHING -- 1.05%*<F7>
490,900 Hollinger International Inc. -- Class A 8,487,661
339,300 Information Holdings Inc.**<F8> 9,239,139
--------------
17,726,800
--------------
REAL ESTATE INVESTMENT TRUSTS -- 6.63%*<F7>
1,112,700 Chelsea Property Group, Inc. 74,662,170
549,400 The Rouse Company(2)<F12> 36,743,872
--------------
111,406,042
--------------
SAVINGS & LOANS -- 0.36%*<F7>
129,800 GreenPoint Financial Corp. 6,004,548
--------------
SECURITY SYSTEMS -- 4.18%*<F7>
1,561,925 InVision Technologies, Inc.**<F8> 70,271,006
--------------
SEMICONDUCTORS -- 1.09%*<F7>
642,460 STATS ChipPAC Ltd. -- ADR**<F8>(5)<F15> 3,841,911
23,452,770 STATS ChipPAC Ltd.**<F8>(5)<F15> 14,487,337
--------------
18,329,248
--------------
TELECOMMUNICATIONS EQUIPMENT -- 2.70%*<F7>
2,851,700 Advanced Fibre Communications, Inc.**<F8> 45,342,030
--------------
TELEPHONY -- 12.94%*<F7>
6,612,400 AT&T Wireless Services Inc.**<F8> 97,731,272
404,793 Manitoba Telecom Services Inc.(5)<F15> 13,574,663
34,400 Microcell Telecommunications
Inc. -- Class B**<F8>(5)<F15> 967,674
2,660,000 NextWave Telecom Inc. -- Class B**<F8> 14,630,000
4,347,985 Price Communications Corporation**<F8> 66,306,771
1,255,100 Telus Corporation(5)<F15> 24,297,481
--------------
217,507,861
--------------
TRANSACTION PROCESSING -- 0.19%*<F7>
168,903 InterCept, Inc.**<F8>(2)<F12> 3,163,553
--------------
TRAVEL-RELATED SERVICES -- 0.87%*<F7>
537,900 Orbitz, Inc. -- Class A**<F8> 14,630,880
--------------
TOTAL COMMON STOCKS
(Cost $1,376,145,379) 1,398,031,262
--------------
PREFERRED STOCK -- 0.34%*<F7>
50,075 TNP Enterprises, Inc., Series D 5,670,997
--------------
TOTAL PREFERRED STOCK
(Cost $5,585,292) 5,670,997
--------------
WARRANTS -- 0.00%
241,889 Dictaphone Corporation
Expiration March 2006, Exercise Price $20.00 24,189
--------------
TOTAL WARRANTS
(Cost $26,608) 24,189
--------------
CONTRACTS (100 SHARES PER CONTRACT)
- -----------------------------------
PUT OPTIONS PURCHASED -- 0.24%*<F7>
iShares Lehman 7-10 Year Treasury Bond Fund
3,600 Expiration October 16, 2004,
Exercise Price $89.00 1,224,000
Semiconductor HOLDRs Trust
1,000 Expiration October 16, 2004,
Exercise Price $37.50 730,000
Standard and Poor's 500 Index
2,500 Expiration December 18, 2004,
Exercise Price $1,040.00 2,075,000
--------------
TOTAL PUT OPTIONS
(Cost $4,643,965) 4,029,000
--------------
PRINCIPAL AMOUNT
- ----------------
CONVERTIBLE BONDS -- 0.80%*<F7>
Adelphia Communications Corporation:
$27,125,000 6.00%, 2/15/2006 D<F9> 7,595,000
21,458,000 3.25%, 5/01/2021 D<F9> 5,793,660
--------------
TOTAL CONVERTIBLE BONDS
(Cost $19,187,585) 13,388,660
--------------
CORPORATE BONDS -- 4.70%*<F7>
Adelphia Communications Corporation:
13,318,000 9.38%, 11/15/2009(1)<F11> D<F9> 12,319,150
15,000,000 10.25%, 6/15/2011(1)<F11> D<F9> 14,175,000
11,695,000 9.25%, 10/01/2022(1)<F11> D<F9> 10,408,550
DigitalNet Holdings, Inc.
9,490,000 9.00%, 7/15/2010(1)<F11> 11,055,850
Roadway Corporation
27,195,000 8.25%, 12/01/2008(1)<F11> 31,104,281
--------------
TOTAL CORPORATE BONDS
(Cost $78,828,162) 79,062,831
--------------
SHORT-TERM INVESTMENTS -- 11.83%*<F7>
COMMERCIAL PAPER -- 3.68%*<F7>
Abbey National NA Corporation
7,500,000 1.65%, 10/06/2004 7,498,281
American General Finance
7,500,000 1.66%, 10/12/2004 7,496,196
Credit Suisse First Boston
7,500,000 1.76%, 10/24/2004 7,491,583
Duke Power Company
7,500,000 1.72%, 10/14/2004 7,495,341
Hitachi Credit America Corporation
10,000,000 1.51%, 10/04/2004 9,998,741
Kraft Foods Inc.
7,500,000 1.70%, 10/18/2004 7,493,979
Textron Financial Corporation
6,865,000 1.68%, 10/05/2004 6,863,718
Toyota Motor Credit Corporation
7,500,000 1.63%, 10/25/2004 7,491,850
--------------
61,829,689
--------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 6.06%*<F7>
Federal Home Loan Bank:
10,000,000 1.54%, 10/01/2004(1)<F11> 10,000,000
22,000,000 1.60%, 10/04/2004(1)<F11> 21,997,067
22,000,000 1.60%, 10/05/2004(1)<F11> 21,996,089
25,000,000 1.55%, 10/07/2004(1)<F11> 24,993,542
23,000,000 1.58%, 10/08/2004(1)<F11> 22,992,934
--------------
101,979,632
--------------
VARIABLE RATE DEMAND NOTES #<F10> -- 2.09%*<F7>
11,352,935 American Family Financial Services, Inc., 1.45% 11,352,935
16,110,898 U.S. Bank, 1.59% 16,110,898
7,636,235 Wisconsin Corporate Central Credit Union, 1.51% 7,636,235
--------------
35,100,068
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $198,909,389) 198,909,389
--------------
TOTAL INVESTMENTS (Cost $1,683,326,380) $1,699,116,328
--------------
--------------
ADR - American Depository Receipt
*<F7> Calculated as a percentage of net assets.
**<F8> Non-income producing security.
D<F9> - Security in default.
#<F10> Variable rate demand notes are considered short-term obligations and
are payable on demand. Interest rates change periodically on
specified dates. The rates listed above are as of September 30,
2004.
(1)<F11> All or a portion of the shares have been committed as collateral for
open short positions.
(2)<F12> All or a portion of the shares have been committed as collateral for
short foreign currency contracts.
(3)<F13> All or a portion of the shares have been committed as collateral for
written option contracts.
(4)<F14> All or a portion of the shares have been committed as collateral for
equity swap contracts.
(5)<F15> Foreign security or foreign company trading on U.S. exchange.
See notes to the financial statements.
THE MERGER FUND
SCHEDULE OF SECURITIES SOLD SHORT
SEPTEMBER 30, 2004
SHARES VALUE
------ -----
2,553,000 Adelphia Communications Corporation -- Class A $ 944,610
826,390 Anthem, Inc. 72,102,527
6,500 Banco Santander Central Hispano SA -- ADR 63,570
116,200 Blockbuster Inc. -- Class A 881,958
446,391 Charles River Laboratories International, Inc. 20,444,708
250,100 Gartner, Inc. -- Class A 2,923,669
1,186,654 Genzyme Corporation 64,565,844
536,070 Harrah's Entertainment, Inc. 28,400,989
10,900 Hewitt Associates, Inc. -- Class A 288,414
258,857 LifePoint Hospitals, Inc. 7,768,298
2,179,400 Lyondell Chemical Company 48,949,324
961,765 Mylan Laboratories Inc. 17,311,770
215,720 National-Oilwell, Inc. 7,088,559
136,500 North Fork Bancorporation, Inc. 6,067,425
427,507 PNC Financial Services Group 23,128,129
1,703 Sanofi-Aventis - ADR 62,347
342,890 Simon Property Group, Inc. 18,389,191
295,710 Simon Property Group, L.P.(1)<F16> 15,376,920
79,489 Suez SA 1,703,999
185,600 SunTrust Banks, Inc. 13,068,096
2,285,461 Tellabs, Inc. 21,003,387
1,255,100 Telus Corporation 25,983,659
25,762 Total SA 5,247,410
647,400 Verizon Communications Inc. 25,494,612
------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $382,150,228) $427,259,415
------------
------------
ADR - American Depository Receipt
(1)<F16> When Issued Preferred Stock
See notes to the financial statements.
THE MERGER FUND
SCHEDULE OF OPTIONS WRITTEN
SEPTEMBER 30, 2004
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- -----
CALL OPTIONS
Boise Cascade Corporation:
6,103 Expiration October 16, 2004, Exercise Price $32.50 $ 622,506
964 Expiration November 20, 2004, Exercise Price $32.50 144,600
Caesars Entertainment, Inc.
1,154 Expiration October 16, 2004, Exercise Price $15.00 196,180
Cox Communications, Inc. -- Class A:
1,700 Expiration October 16, 2004, Exercise Price $32.50 161,500
100 Expiration December 18, 2004, Exercise Price $35.00 3,000
King Pharmaceuticals, Inc.
120 Expiration October 16, 2004, Exercise Price $12.50 2,400
Lin TV Corp -- Class A
500 Expiration October 16, 2004, Exercise Price $20.00 11,000
NeighborCare, Inc.:
700 Expiration October 16, 2004, Exercise Price $22.50 203,000
2,529 Expiration October 16, 2004, Exercise Price $25.00 177,030
150 Expiration November 20, 2004, Exercise Price $25.00 32,250
PeopleSoft, Inc.:
990 Expiration October 16, 2004, Exercise Price $17.50 237,600
14,838 Expiration October 16, 2004, Exercise Price $20.00 519,330
6,500 Expiration November 20, 2004, Exercise Price $17.50 1,755,000
3,337 Expiration November 20, 2004, Exercise Price $20.00 333,700
Price Communications Corporation
1,680 Expiration November 20, 2004, Exercise Price $15.00 75,600
Province Healthcare Company
906 Expiration December 18, 2004, Exercise Price $20.00 115,062
The Titan Corporation:
2,620 Expiration October 16, 2004, Exercise Price $12.50 393,000
580 Expiration October 16, 2004, Exercise Price $20.00 1,160
2,080 Expiration November 20, 2004, Exercise Price $12.50 353,600
----------
5,337,518
----------
PUT OPTIONS
Standard and Poor's 500 Index
2,500 Expiration December 18, 2004, Exercise Price $995.00 1,075,000
Tellabs, Inc.
2,000 Expiration October 16, 2004, Exercise Price $10.00 170,000
----------
1,245,000
----------
TOTAL OPTIONS WRITTEN
(Premiums received $12,088,977) $6,582,518
----------
----------
See notes to the financial statements.
THE MERGER FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2004
ASSETS:
Investments, at value (Cost $1,683,326,380) $1,699,116,328
Cash 1,119,570
Deposit at brokers for short sales 72,745,222
Receivable from brokers for proceeds on securities sold short 453,841,490
Receivable for investments sold 33,606,469
Receivable for fund shares issued 2,144,277
Receivable for written options 371,023
Receivable for equity swap contracts 4,385,350
Dividends and interest receivable 2,664,448
Prepaid expenses 90,434
--------------
Total Assets 2,270,084,611
--------------
LIABILITIES:
Securities sold short, at value (Proceeds of $382,150,228) $427,259,415
Options written, at value (Premiums received $12,088,977) 6,582,518
See accompanying schedule
Payable for dividends on securities sold short 227,851
Payable for investment securities purchased 149,592,496
Payable for fund shares redeemed 2,330,594
Payable for forward currency exchange contracts 267,129
Investment advisory fee payable 1,404,056
Distribution fees payable 627,823
Accrued expenses and other payables 511,561
------------
Total Liabilities 588,803,443
--------------
NET ASSETS $1,681,281,168
--------------
--------------
NET ASSETS Consist Of:
Undistributed net investment income $ 250,581
Accumulated undistributed net realized loss on investments
sold, foreign currencies, securities sold short, equity swaps,
and option contracts expired or closed (44,654,545)
Net unrealized appreciation (depreciation) on:
Investments $ 15,789,948
Short positions (45,109,187)
Written options 5,506,459
Equity swap contracts 961,266
Foreign currency translation 23,973
Forward currency exchange contracts (267,129)
------------
Net unrealized depreciation (23,094,670)
Paid-in capital 1,748,779,802
--------------
Total Net Assets $1,681,281,168
--------------
--------------
NET ASSET VALUE, offering price and redemption price per share
($1,681,281,168/111,323,587 shares of beneficial
interest outstanding) $15.10
------
------
See notes to the financial statements.
THE MERGER FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2004
INVESTMENT INCOME:
Interest $ 6,922,365
Dividend income on long positions
(net of foreign withholding taxes of $197,882) 12,342,846
-----------
Total investment income 19,265,211
-----------
EXPENSES:
Investment advisory fee $16,115,340
Distribution fees 3,547,045
Transfer agent and shareholder servicing agent fees 446,990
Federal and state registration fees 222,558
Professional fees 257,017
Trustees' fees and expenses 35,720
Custody fees 431,490
Administration fee 667,581
Reports to shareholders 284,395
Dividends on short positions 8,067,222
Other 137,519
-----------
Total expenses before expense reimbursement by Adviser 30,212,877
-----------
Expense reimbursement by Adviser (39,824)
-----------
Net expenses 30,173,053
NET INVESTMENT LOSS (10,907,842)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions 45,375,093
Short transactions (22,943,366)
Option contracts expired or closed 26,162,429
Equity swap contracts 27,492,357
Foreign currencies (8,607,948)
-----------
Net realized gain 67,478,565
Change in unrealized appreciation / depreciation on:
Investments (8,592,307)
Short positions (41,065,866)
Written options 3,458,795
Equity swap contracts 1,629,413
Foreign currency translation 8,581
Forward currency exchange contracts 2,594,971
-----------
Net unrealized loss (41,966,413)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 25,512,152
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $14,604,310
-----------
-----------
See notes to the financial statements.
THE MERGER FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------
Net investment income (loss) $ (10,907,842) $ 1,980,221
Net realized gain (loss) on investments sold, foreign
currency translations, forward currency exchange
contracts, securities sold short, equity swap contracts,
and option contracts expired or closed 67,478,565 (37,321,867)
Change in unrealized appreciation / depreciation on
investments, foreign currencies, forward currency
exchange contracts, short positions, equity swap
contracts and written options (41,966,413) 134,156,405
-------------- --------------
Net increase in net assets resulting from operations 14,604,310 98,814,759
-------------- --------------
Distributions to shareholders from:
Net investment income (3,130,756) (11,728,173)
-------------- --------------
Net increase in net assets from capital
share transactions (Note 4) 519,817,382 208,946,909
-------------- --------------
Net increase in net assets 531,290,936 296,033,495
NET ASSETS:
Beginning of period 1,149,990,232 853,956,737
-------------- --------------
End of period (including accumulated undistributed net
investment income (loss) of $250,581 and ($10,681,814)
respectively) $1,681,281,168 $1,149,990,232
-------------- --------------
-------------- --------------
See notes to the financial statements.
THE MERGER FUND
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of beneficial interest outstanding
throughout each period.
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Net Asset Value, beginning of period $14.84 $13.46 $15.74 $16.90 $15.37
Income from investment operations:
Net investment income(1)<F17> (0.08)(3) 0.05(2)(4) 0.22(3)(4) 0.31(3)(4) 0.29(3)(4)
<F19> <F18><F20> <F19><F20> <F19><F20> <F19><F20>
Net realized and unrealized
gain (loss) on investments 0.38 1.53(4) (1.44)(4) 0.32(4) 2.46(4)
<F20> <F20> <F20> <F20>
------ ------ ------ ------ ------
Total from investment operations 0.30 1.58 (1.22) 0.63 2.75
------ ------ ------ ------ ------
Redemption fees 0.00(6) -- -- -- --
<F22>
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income (0.04) (0.20) (0.21) (0.14) (0.07)
Distributions from net realized gains -- -- (0.85) (1.65) (1.15)
------ ------ ------ ------ ------
Total distributions (0.04) (0.20) (1.06) (1.79) (1.22)
------ ------ ------ ------ ------
Net Asset Value, end of period $15.10 $14.84 $13.46 $15.74 $16.90
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return 1.99% 11.88% (8.39)% 3.86% 19.08%
Supplemental Data and Ratios:
Net assets, end of period (000's) $1,681,281 $1,149,990 $853,957 $982,893 $1,078,958
Ratio of operating expenses
to average net assets 1.87% 1.86%(4) 1.60%(4) 1.99%(4) 1.89%(4)
<F20> <F20> <F20> <F20>
Ratio of interest expense and dividends
on short positions to average net assets 0.50% 0.49%(4) 0.22%(4) 0.65%(4) 0.55%(4)
<F20> <F20> <F20> <F20>
Ratio of operating expenses to average
net assets excluding interest expense
and dividends on short positions 1.37% 1.37% 1.38% 1.34% 1.34%
Ratio of net investment income
to average net assets (0.68)% 0.22%(4) 1.31%(4) 1.91%(4) 1.83%(4)
<F20> <F20> <F20> <F20>
Portfolio turnover rate(5)<F21> 256.88% 309.18% 258.37% 383.74% 419.24%
(1)<F17> Net investment income before interest expense and dividends on short
positions for the years ended September 30, 2004, 2003, 2002, 2001 and
2000, was $0.00, $0.01, $0.16, $0.27 and $0.47, respectively.
(2)<F18> Net investment income per share is calculated using ending balances
prior to consideration of adjustments for permanent book and tax
differences.
(3)<F19> Net investment income per share represents net investment income for
the respective period divided by the monthly average shares of
beneficial interest outstanding throughout each period.
(4)<F20> As a result of recent changes in generally accepted accounting
principles, the Fund has reclassified periodic payments made under
equity swap agreements, previously included within dividend income,
interest expense on equity swap contracts, and dividends on short
positions, as a component of realized gain (loss) in the statement of
operations. The effect of this reclassification was to increase
(reduce) the net investment income ratio for the years ending
September 30, 2003, 2002, 2001 and 2000 by (0.12)%, (0.05)%, (0.32)%,
and 0.26%, respectively, and net investment income per share by
$(0.01), $(0.01), $(0.05), and $0.04, respectively. This
reclassification also reduced the ratio of interest expense and
dividends on short positions for the years ended September 30, 2003,
2002, 2001 and 2000 by 0.33%, 0.05%, 0.02%, and 0.31%, respectively.
See Note 2 M. in the footnotes.
(5)<F21> The numerator for the portfolio turnover rate includes the lesser of
purchases or sales (excluding short positions). The denominator
includes the average long positions throughout the period.
(6)<F22> Amount less than $0.005 per share.
See notes to the financial statements.
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 1 -- ORGANIZATION
The Merger Fund (the "Fund") is a no-load, open-end, non-diversified
investment company organized as a trust under the laws of the Commonwealth of
Massachusetts on April 12, 1982, and registered under the Investment Company Act
of 1940, as amended (the "1940 Act"). The Fund was formerly known as the Risk
Portfolio of The Ayco Fund. In January of 1989, the Fund's fundamental policies
were amended to permit the Fund to engage exclusively in merger arbitrage. At
the same time, Westchester Capital Management, Inc. became the Fund's investment
adviser, and the Fund began to do business as The Merger Fund. Merger arbitrage
is a highly specialized investment approach generally designed to profit from
the successful completion of proposed mergers, takeovers, tender offers,
leveraged buyouts, liquidations and other types of corporate reorganizations.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. Investment Valuation
Securities listed on the NASDAQ National Market are valued at the NASDAQ
Official Closing Price ("NOCP"). Other listed securities are valued at the last
sales price on the exchange on which such securities are primarily traded or, in
the case of options, at the higher of the intrinsic value of the option or the
last reported composite sales price. Securities not listed on an exchange and
securities for which there are no transactions are valued at the average of the
closing bid and asked prices. When pricing options, if no sales are reported or
if the last sale is outside the bid and asked parameters, the higher of the
intrinsic value of the option or the mean between the last reported bid and
asked prices will be used. Securities for which there are no such valuations
are valued at fair value as determined in good faith by management under the
supervision of the Board of Trustees. The Adviser (as defined herein) reserves
the right to value securities, including options, at prices other than last-sale
prices, intrinsic value prices, or the average of closing bid and asked prices
when such prices are believed unrepresentative of fair market value as
determined in good faith by the Adviser. When fair-valued pricing is employed,
the prices of securities used by the Fund to calculate its NAV may differ from
quoted or published prices for the same securities. In addition, due to the
subjective and variable nature of fair value pricing, it is possible that the
value determined for a particular asset may be materially different from the
value realized upon such asset's sale. At September 30, 2004, the Adviser did
not fair value any long securities. Investments in United States government
securities (other than short-term securities) are valued at the average of the
quoted bid and asked prices in the over-the-counter market. Short-term
investments are carried at amortized cost, which approximates market value.
B. Short Positions
The Fund may sell securities or currencies short for hedging purposes. For
financial statement purposes, an amount equal to the settlement amount is
included in the Statement of Assets and Liabilities as an asset and an
equivalent liability. The amount of the liability is subsequently marked-to-
market to reflect the current value of the short position. Subsequent
fluctuations in the market prices of securities or currencies sold, but not yet
purchased, may require purchasing the securities or currencies at prices which
may differ from the market value reflected on the Statement of Assets and
Liabilities.
The Fund is liable for any dividends payable on securities while those
securities are in a short position. As collateral for its short positions, the
Fund is required under the 1940 Act to maintain assets consisting of cash, cash
equivalents or liquid securities. These assets are required to be adjusted daily
to reflect changes in the value of the securities or currencies sold short.
C. Transactions with Brokers for Short Sales
The Fund's receivable from brokers for proceeds on securities sold short
and deposit at brokers for short sales are with three major securities dealers.
The Fund does not require the brokers to maintain collateral in support of the
receivable from the broker for proceeds on securities sold short.
D. Federal Income Taxes
No provision for federal income taxes has been made since the Fund has
complied to date with the provisions of the Internal Revenue Code applicable to
regulated investment companies and intends to continue to so comply in future
years and to distribute investment company net taxable income and net capital
gains to shareholders. Additionally, the Fund intends to make all required
distributions to avoid federal excise tax.
E. Written Option Accounting
The Fund writes (sells) covered call options to hedge portfolio
investments. Uncovered put options can also be written by the Fund as part of a
merger arbitrage strategy involving a pending corporate reorganization. When the
Fund writes (sells) an option, an amount equal to the premium received by the
Fund is included in the Statement of Assets and Liabilities as an asset and an
equivalent liability. The amount of the liability is subsequently marked-to-
market to reflect the current value of the option written. By writing an option,
the Fund may become obligated during the term of the option to deliver or
purchase the securities underlying the option at the exercise price if the
option is exercised. Option contracts are valued at the higher of the intrinsic
value of the option or the last sales price reported on the date of valuation.
If no sale is reported or if the last sale is outside the parameters of the
closing bid and asked prices, the option contract written is valued at the
higher of the intrinsic value of the option or the mean between the last
reported bid and asked prices on the day of valuation. When an option expires on
its stipulated expiration date or the Fund enters into a closing purchase
transaction, the Fund realizes a gain or loss if the cost of the closing
purchase transaction differs from the premium received when the option was sold
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is eliminated. When an option is exercised,
the premium originally received decreases the cost basis of the security (or
increases the proceeds on a sale of the security), and the Fund realizes a gain
or loss from the sale of the underlying security.
F. Purchased Option Accounting
The Fund purchases put options to hedge portfolio investments. Call options
may be purchased only for the purpose of closing out previously written covered
call options. Premiums paid for option contracts purchased are included in the
Statement of Assets and Liabilities as an asset. Option contracts are valued at
the higher of the intrinsic value of the option or the last sales price reported
on the date of valuation. If no sale is reported or if the last sale is outside
the parameters of the closing bid and asked prices, the option contract
purchased is valued at the higher of the intrinsic value of the option or the
mean between the last reported bid and asked prices on the day of valuation.
When option contracts expire or are closed, realized gains or losses are
recognized without regard to any unrealized gains or losses on the underlying
securities.
G. Forward Currency Exchange Contracts
The Fund may enter into forward currency exchange contracts obligating the
Fund to deliver and receive a currency at a specified future date. Forward
contracts are valued daily, and unrealized appreciation or depreciation is
recorded daily as the difference between the contract exchange rate and the
closing forward rate applied to the face amount of the contract. A realized gain
or loss is recorded at the time the forward contract is closed.
H. Distributions to Shareholders
Dividends from net investment income and net realized capital gains, if
any, are declared and paid annually. Income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are due primarily to
wash loss deferrals, constructive sales, straddle loss deferrals, adjustments on
equity swaps, and unrealized gains or losses on Section 1256 contracts, which
were realized, for tax purposes, at September 30, 2004. Accordingly,
reclassifications are made within the net asset accounts for such amounts, as
well as amounts related to permanent differences in the character of certain
income and expense items for income tax and financial reporting purposes. The
Fund may utilize earnings and profits deemed distributed to shareholders on
redemption of shares as part of the dividends-paid-deduction.
I. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
J. Foreign Securities
Investing in securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include revaluation of currencies and adverse political and economic
developments. Moreover, securities of many foreign companies and their markets
may be less liquid and their prices more volatile than those of securities of
comparable U.S. companies.
K. Foreign Currency Translations
The books and records of the Fund are maintained in U.S. dollars. Foreign
currency transactions are translated into U.S. dollars on the following basis:
(i) market value of investment securities, assets and liabilities at the daily
rates of exchange, and (ii) purchases and sales of investment securities,
dividend and interest income and certain expenses at the rates of exchange
prevailing on the respective dates of such transactions. For financial reporting
purposes, the Fund does not isolate changes in the exchange rate of investment
securities from the fluctuations arising from changes in the market prices of
securities. However, for federal income tax purposes, the Fund does isolate and
treat as ordinary income the effect of changes in foreign exchange rates on
realized gain or loss from the sale of investment securities and payables and
receivables arising from trade-date and settlement-date differences.
L. When-Issued Securities
The Fund may sell securities on a when-issued or delayed-delivery basis.
Although the payment and interest terms of these securities are established at
the time the Fund enters into the agreement, these securities may be delivered
for cash proceeds at a future date. The Fund records sales of when-issued
securities and reflects the values of such securities in determining net asset
value in the same manner as other open short-sale positions. The Fund segregates
and maintains at all times cash, cash equivalents or other liquid securities in
an amount at least equal to the market value for when-issued securities.
M. Reporting of Swap Contracts
As a result of a recent FASB Emerging Issues Task Force consensus and
subsequent related SEC staff guidance, the Fund has reclassified periodic
payments made under equity swap agreements, previously included within dividend
income, interest expense on equity swap contracts, and dividends on short
positions, as a component of realized gain (loss) in the statement of
operations. For consistency, similar reclassifications have been made to
amounts appearing in the previous year's statement of changes in net assets and
the per-share amounts in the previous years' financial highlights. The previous
years' net-investment-income ratios in the financial highlights have also been
modified accordingly. This reclassification increased (decreased) net
investment income by $(1,045,740), $(467,783), $(3,719,964) and $2,045,083 for
the years ended September 30, 2003, 2002, 2001, and 2000, respectively, but had
no effect on the Fund's net asset value, either in total or per share. The
reclassification of net investment income was offset by an increase (decrease)
in net realized gains.
N. Guarantees and Indemnifications
In the normal course of business, the Fund enters into contracts with
service providers that contain general indemnification clauses. The Fund's
maximum exposure under these arrangements is unknown, as this would involve
future claims that may be made against the Fund that have not yet occurred.
However, based on experience, the Fund expects the risk of loss to be remote.
O. Other
Investment and shareholder transactions are recorded on the trade date.
Realized gains and losses from security transactions are recorded on the
identified cost basis. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest is accounted for on the accrual
basis. Investment income includes $2,494,025 of interest earned on receivables
from brokers for proceeds on securities sold short and deposits. The Fund may
utilize derivative instruments such as options, forward currency exchange
contracts and other instruments with similar characteristics to the extent that
they are consistent with the Fund's investment objectives and limitations. The
use of these instruments may involve additional investment risks, including the
possibility of illiquid markets or imperfect correlation between the value of
the instruments and the underlying securities.
NOTE 3 -- AGREEMENTS
The Fund's investment adviser is Westchester Capital Management, Inc. (the
"Adviser") pursuant to an investment advisory agreement dated January 31, 1989.
Under the terms of this agreement, the Adviser is entitled to receive a fee,
calculated daily and payable monthly, at the annual rate of 1.00% of the Fund's
average daily net assets. Effective August 1, 2004, the Adviser agreed to
voluntarily waive 0.10% of its fee at net asset levels between $1.5 billion
through $2 billion. When net assets of the Fund exceed $2 billion, the Adviser
has voluntarily agreed to waive 0.20% of its fee. Certain officers of the Fund
are also officers of the Adviser.
U.S. Bancorp Fund Services, LLC, a subsidiary of U.S. Bancorp, a publicly
held bank holding company, serves as transfer agent, administrator and
accounting services agent for the Fund. U.S. Bank, N.A. serves as custodian for
the Fund.
Distribution services are performed pursuant to distribution contracts with
broker-dealers and other qualified institutions. Prior to its resignation on
June 30, 2003, Mercer Allied Company, L.P. served as the Fund's principal
underwriter. The Fund has not had a principal underwriter since such date.
NOTE 4 -- SHARES OF BENEFICIAL INTEREST
The Trustees have the authority to issue an unlimited amount of shares of
beneficial interest without par value.
Changes in shares of beneficial interest were as follows:
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Sold 71,059,650 $1,086,171,820 50,925,065 $724,702,611
Issued as reinvestment
of dividends 198,391 3,013,553 819,393 11,250,262
Redemption fee -- 62,200 -- --
Redeemed (37,447,925) (569,430,191) (37,670,473) (527,005,964)
----------- -------------- ----------- ------------
Net increase 33,810,116 $ 519,817,382 14,073,985 $208,946,909
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
Effective March 5, 2004, the Fund closed to new investors.
NOTE 5 -- INVESTMENT TRANSACTIONS
Purchases and sales of securities for the year ended September 30, 2004
(excluding short-term investments, options and short positions) aggregated
$3,998,064,325 and $3,433,937,199, respectively. There were no purchases or
sales of U.S. Government Securities.
At September 30, 2004, the components of accumulated losses on a tax basis
were as follows:
Cost of Investments $1,721,988,465
--------------
--------------
Gross unrealized appreciation $ 67,829,672
Gross unrealized depreciation (90,701,809)
--------------
Net unrealized depreciation $ (22,872,137)
--------------
--------------
Undistributed ordinary income $ 6,592,601
Undistributed long-term capital gain --
--------------
Total distributable earnings $ 6,592,601
--------------
--------------
Other accumulated losses $ (51,219,098)
--------------
Total accumulated losses $ (67,498,634)
--------------
--------------
The tax components of dividends paid during the years ended September 30,
2004 and 2003 were as follows:
2004 2003
---- ----
Ordinary Income $3,130,756 $11,728,173
Long-Term Capital Gains $ -- $ --
For the year ended September 30, 2004, the Fund utilized $23,804,766 of its
capital loss carryovers.
For the fiscal year ended September 30, 2004 certain dividends paid by the
Fund may be subject to a maximum tax rate of 15% as provided for by the Jobs and
Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends
declared from net investment income designated as qualified dividend income was
100% for The Merger Fund (unaudited).
For corporate shareholders, the percent of ordinary income distributions
qualifying for the corporate dividends received deduction for the fiscal year
ended September 30, 2004 was 100% for The Merger Fund (unaudited).
NOTE 6 -- OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written during the
year ended September 30, 2004, were as follows:
PREMIUM AMOUNT NUMBER OF CONTRACTS
-------------- -------------------
Options outstanding at September 30, 2003 $ 19,058,882 89,312
Options written 154,706,258 849,078
Options closed (28,819,826) (205,147)
Options exercised (98,682,458) (479,491)
Options expired (34,173,879) (201,701)
------------ --------
Options outstanding at September 30, 2004 $ 12,088,977 52,051
------------ --------
------------ --------
NOTE 7 -- DISTRIBUTION PLAN
The Fund has adopted a Plan of Distribution (the "Plan") dated July 1,
1993, as amended, pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the
Fund will compensate broker-dealers or qualified institutions with whom the Fund
has entered into a contract to distribute Fund shares ("Dealers"). Under the
Plan, the amount of such compensation paid in any one year shall not exceed
0.25% annually of the average daily net assets of the Fund, which may be payable
as a service fee for providing recordkeeping, subaccounting, subtransfer agency
and/or shareholder liaison services. For the year ended September 30, 2004, the
Fund incurred $3,547,045 pursuant to the Plan.
The Plan will remain in effect from year to year provided such continuance
is approved at least annually by a vote either of a majority of the Trustees,
including a majority of the non-interested Trustees, or a majority of the Fund's
outstanding shares.
NOTE 8 -- CREDIT FACILITY
Custodial Trust Company has made available to the Fund a $230 million
credit facility (subject to increase under certain conditions) pursuant to a
Loan and Security Agreement ("Agreement") dated March 18, 1992 (subsequently
amended) for the purpose of purchasing portfolio securities. The Agreement can
be terminated by either the Fund or Custodial Trust Company with three months'
prior notice. As collateral for the loan, the Fund is required under the 1940
Act to maintain assets consisting of cash, cash equivalents or liquid
securities. The assets are required to be adjusted daily to reflect changes in
the amount of the loan outstanding. During the year ended September 30, 2004
the Fund did not have any borrowings outstanding under the Agreement.
NOTE 9 -- FORWARD CURRENCY EXCHANGE CONTRACTS
At September 30, 2004, the Fund had entered into "position hedge" forward
currency exchange contracts that obligated the Fund to deliver or receive
currencies at a specified future date. The net unrealized depreciation of
$267,129 is included in the net unrealized appreciation (depreciation) section
of the accompanying financial statements. The terms of the open contracts are as
follows:
SETTLEMENT CURRENCY TO U.S. $ VALUE AT CURRENCY TO U.S. $ VALUE AT
DATE BE DELIVERED SEPTEMBER 30, 2004 BE RECEIVED SEPTEMBER 30, 2004
- ---------- ------------ ------------------ ----------- ------------------
11/19/04 155,000 British Pounds $ 279,285 274,056 U.S. Dollars $ 274,056
10/29/04 1,066,400 Canadian Dollars 842,451 813,239 U.S. Dollars 813,239
11/24/04 17,823,800 Canadian Dollars 14,076,040 14,054,408 U.S. Dollars 14,054,408
12/17/04 26,576,500 Canadian Dollars 20,979,737 20,841,792 U.S. Dollars 20,841,792
11/01/04 1,848,504 Euros 2,294,920 2,221,809 U.S. Dollars 2,221,809
----------- -----------
$38,472,433 $38,205,304
----------- -----------
----------- -----------
NOTE 10 -- EQUITY SWAP CONTRACTS
The Fund has entered into both long and short equity swap contracts with
multiple broker-dealers. A long equity swap contract entitles the Fund to
receive from the counterparty any appreciation and dividends paid on an
individual security, while obligating the Fund to pay the counterparty any
depreciation on the security as well as interest on the notional amount of the
contract at a rate equal to LIBOR plus 25 to 100 basis points. A short equity
swap contract obligates the Fund to pay the counterparty any appreciation and
dividends paid on an individual security, while entitling the Fund to receive
from the counterparty any depreciation on the security as well as interest on
the notional value of the contract at a rate equal to LIBOR less 25 to 100 basis
points.
The Fund may also enter into equity swap contracts whose value is
determined by the spread between a long equity position and a short equity
position. This type of swap contract obligates the Fund to pay the counterparty
an amount tied to any increase in the spread between the two securities over the
term of the contract. The Fund is also obligated to pay the counterparty any
dividends paid on the short equity holding as well as any net financing costs.
This type of swap contract entitles the Fund to receive from the counterparty
any gains based on a decrease in the spread as well as any dividends paid on the
long equity holding and any net interest income.
Fluctuations in the value of an open contract are recorded daily as a net
unrealized gain or loss. The Fund will realize a gain or loss upon termination
or reset of the contract. Either party, under certain conditions, may terminate
the contract prior to the contract's expiration date.
Credit risk may arise as a result of the failure of the counterparty to
comply with the terms of the contract. The Fund considers the creditworthiness
of each counterparty to a contract in evaluating potential credit risk. The
counterparty risk to the Fund is limited to the net unrealized gain, if any, on
the contract, along with dividends receivable on long equity contracts and
interest receivable on short equity contracts. Additionally, risk may arise from
unanticipated movements in interest rates or in the value of the underlying
securities. At September 30, 2004, the Fund had the following open equity swap
contracts:
UNREALIZED APPRECIATION
TERMINATION DATE SECURITY SHARES (DEPRECIATION)
---------------- -------- ------ --------------
10/15/04 Abbey National plc October Call (500,000) $ 94,070
11/16/04 Abbey National plc 500,000 (108,134)
11/16/04 Abbey National plc 3,650,000 251,780
10/05/04 Groupe Bruxelles SA 151,869 951,736
11/16/04 Banco Santander (3,643,500) (228,186)
---------
$ 961,266
---------
---------
For the year ended September 30, 2004, the Fund realized gains of
$27,492,357 upon the termination of equity swap contracts.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
The Merger Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedules of investments, of securities sold short, and of options written,
and the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of The Merger Fund (the "Fund") at September 30, 2004, the results of
its operations, the changes in its net assets and its financial highlights for
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements 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 are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 2004, by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
As discussed in Note 2M to the financial statements, the Fund changed its method
of accounting for amounts received and payments made under equity swap
agreements in 2004.
/s/PricewaterhouseCoopers
Milwaukee, Wisconsin
November 22, 2004
INFORMATION ABOUT TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees. Information pertaining to the Officers and Trustees of
the Fund is set forth below. The SAI includes additional information about the
Fund's Officers and Trustees and is available, without charge, upon request by
calling 1-800-343-8959.
TERM OF # OF PORTFOLIOS OTHER
POSITIONS(S) OFFICE AND IN FUND COMPLEX DIRECTORSHIPS
HELD WITH LENGTH OF PRINCIPAL OCCUPATION OVERSEEN BY HELD BY OFFICER
NAME, ADDRESS AND AGE THE FUND TIME SERVED DURING PAST FIVE YEARS OFFICER OR TRUSTEE OR TRUSTEE
- --------------------- ------------ ----------- ---------------------- ------------------ ---------------
Frederick W. Green*<F23> President One-year President of 2 None
Westchester Capital and term; Westchester Capital
Management, Inc. Trustee since 1989 Management, Inc.,
100 Summit Lake Drive the Fund's Adviser.
Valhalla, NY 10595
Age: 57
Bonnie L. Smith Vice Since 1989 Vice President of 2 None
Westchester Capital President, Westchester Capital
Management, Inc. Secretary Management, Inc.,
100 Summit Lake Drive and the Fund's Adviser.
Valhalla, NY 10595 Treasurer
Age: 56
James P. Logan, III Independent One-year President of Logan, 2 None
Logan, Chace LLC Trustee term; Chace LLC, an
420 Lexington Avenue since 1989 executive search firm;
New York, NY 10170 Chairman of J.P.
Age: 68 Logan & Company.
Michael J. Downey Independent One-year Managing Partner of 2 Chairman and
c/o Westchester Capital Trustee term; Lexington Capital Director of Asia
Management, Inc. since 1995 Investments. Pacific Fund,
100 Summit Lake Drive Inc.
Valhalla, NY 10595
Age: 60
Roy Behren Chief One-year Analyst and Trader 2 Director of
100 Summit Lake Drive Compliance term; for Westchester Capital Redback
Valhalla, NY 10595 Officer since 2004 Management, Inc., the Networks Inc.
Age: 44 Fund's Adviser.
*<F23> Denotes a trustee who is an "interested person" as that term is
defined in Section 2(a)(19) of the Investment Company Act of 1940, as
amended (the "1940 Act").
THE MERGER FUND
AVAILABILITY OF PROXY VOTING INFORMATION
Information regarding how the Fund generally votes proxies relating to portfolio
securities may be obtained without charge by calling the Fund's Transfer Agent
at 1-800-343-8959 or by visiting the SEC's website at www.sec.gov. Information
-----------
regarding how the Fund voted proxies relating to portfolio securities during the
period ended June 30, 2004 is available on the SEC's website or by calling the
toll-free number listed above.
AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULE
Beginning with the Fund's fiscal quarter ending December 31, 2004, the Fund will
file its complete schedule of portfolio holdings with the SEC for the first and
third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q will be
available on the SEC's website at www.sec.gov and may 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.
INVESTMENT ADVISER
Westchester Capital Management, Inc.
100 Summit Lake Drive
Valhalla, NY 10595
(914) 741-5600
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND PAYING
AGENT AND SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
P.O. Box 701
Milwaukee, WI 53201-0701
(800) 343-8959
CUSTODIAN
U.S. Bank, N.A.
P.O. Box 701
Milwaukee, WI 53201-0701
(800) 343-8959
TRUSTEES
Frederick W. Green
Michael J. Downey
James P. Logan, III
EXECUTIVE OFFICERS
Frederick W. Green, President
Bonnie L. Smith, Vice President,
Treasurer and Secretary
COUNSEL
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, NY 10103
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
100 East Wisconsin Avenue
Milwaukee, WI 53202
ITEM 2. CODE OF ETHICS.
- -----------------------
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial officer. The registrant has
not made any amendments to its code of ethics during the period covered by this
report. The registrant has not granted any waivers from any provisions of the
code of ethics during the period covered by this report. A copy of the
registrant's Code of Ethics is filed herewith.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
- ----------------------------------------
The registrant's board of trustees has determined that there is at least one
audit committee financial expert serving on its audit committee. Michael J.
Downey and James P. Logan, III are audit committee financial experts and are
considered to be independent as each term is defined in Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- -----------------------------------------------
The registrant has engaged its principal accountant to perform audit services
and tax services during the past two fiscal years. "Audit services" refer to
performing an audit of the registrant's annual financial statements or services
that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years. "Tax services" refer
to professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning. The following table details the
aggregate fees billed for each of the last two fiscal years for audit fees and
tax fees by the principal accountant.
FYE 9/30/2004 FYE 9/30/2003
-------------- --------------
Audit Fees $52,500 $50,060
Audit-Related Fees $0 $0
Tax Fees $8,100 $7,875
All Other Fees $0 $0
The audit committee has adopted pre-approval policies and procedures that
require the audit committee to pre-approve all audit and non-audit services of
the registrant, including services provided to any entity affiliated with the
registrant. The audit committee approved 100% of the tax services provided by
the registrant's principal accountant.
There were no non-audit fees billed by the registrant's accountant for services
rendered to the registrant and 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 for each of the last
two fiscal years. The principal accountant did not render non-audit services
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.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
- ----------------------------------------------
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
- --------------------------------
Schedule of Investments is included as part of the report to shareholders filed
under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
- -------------------------------------------------------------------------
MANAGEMENT INVESTMENT COMPANIES.
- --------------------------------
Not applicable to open-end investment companies.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
- ---------------------------------------------------------------------------
COMPANY AND AFFILIATED PURCHASERS.
- ----------------------------------
Not applicable to open-end investment companies.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's board of trustees.
ITEM 10. CONTROLS AND PROCEDURES.
- ---------------------------------
(a) The Registrant's President/Principal Executive Officer and
Treasurer/Principal Financial Officer have concluded that the Registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act")) are effective
in providing reasonable assurance that the information required to be
disclosed by the registrant in its reports or statements filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time period specified in the U.S. Securities and
Exchange Commission's rules and forms, as of a date within 90 days of the
filing date of the report that includes the disclosure required by this
paragraph, based on the evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act and Rules 13a-15(b) or
15d-15(b) under the Securities Exchange Act of 1934, as amended.
(b) There was no change in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred
during the Registrant's last fiscal half-year that has materially affected,
or is reasonably likely to materially affect, the Registrant's internal
control over financial reporting.
ITEM 11. EXHIBITS.
- -----------------
(a) (1) Any code of ethics or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit. Filed
herewith.
(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under
the 1940 Act sent or given during the period covered by the report by or on
behalf of the registrant to 10 or more persons. Not applicable to open-end
investment companies.
(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith.
SIGNATURES
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.
(Registrant) THE MERGER FUND
----------------------------------------
By (Signature and Title) /s/ Frederick W. Green
-----------------------------
Frederick W. Green, President
Date December 6, 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 (Signature and Title) /s/ Frederick W. Green
-----------------------------
Frederick W. Green, President
Date December 6, 2004
------------------------------------------------
By (Signature and Title) /s/ Bonnie L. Smith
-----------------------------
Bonnie L. Smith, Treasurer
Date December 6, 2004
------------------------------------------------