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 811-21279
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THE MERGER FUND VL
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(Exact name of registrant as specified in charter)
100 SUMMIT LAKE DRIVE
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VALHALLA, NEW YORK 10595
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(Address of principal executive offices) (Zip code)
BONNIE L. SMITH
100 SUMMIT LAKE DRIVE
VALHALLA, NEW YORK 10595
------------------------
(Name and address of agent for service)
914-741-5600
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Registrant's telephone number, including area code
Date of fiscal year end: DECEMBER 31
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Date of reporting period: DECEMBER 31, 2004
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ITEM 1. REPORT TO STOCKHOLDERS.
- -------------------------------
THE MERGER FUND VL
ANNUAL REPORT
DECEMBER 31, 2004
February 8, 2005
Dear Fellow Shareholder:
The Merger Fund VL met its investment objectives in 2004. As previously
reported, the Fund's NAV rose 6.0% from inception on May 26 to the end of
December. The Fund's solid performance was fueled in part by an upturn in
merger activity, which gave us more potential investments from which to choose.
We also were able to take advantage of trading opportunities that were created
when arbitrage spreads-the per-share profit to be made if a deal goes through-
showed wide fluctuations, sometimes for no good reason.
We have included in this report a series of charts which reflect the nature
of the arbitrage situations in which the Fund has recently invested. Chart 1
shows that as of December 31, friendly transactions represented slightly less
than 95% of the dollar value of our equity holdings, while unsolicited, or
hostile, takeover attempts accounted for about 5%. The latter figure 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 18-month effort 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, repeatedly demonstrated its willingness to stay the course. Oracle
was also helped by the fact that PeopleSoft's business had 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
absence of other potential bidders that could realize the same synergies.
PeopleSoft apparently saw the handwriting on the wall and agreed to be acquired
by Oracle at a sweetened price of $26.50 a share, $10.50 above the initial
offer. This 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 92% 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. The typical 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 8% exposure to financial transactions at the end of December, though
still small relative to our total investments, reflects a meaningful increase in
the number of such deals over the past year or so. What has caused this
stepped-up activity by financial buyerso 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 benefitting 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
continue to favor strategic deals over LBOs on the assumption that the former
are less accident-prone.
Chart 3 shows the type of consideration to be received by the selling
company's shareholders in transactions in which The Merger Fund VL held
positions at the end of December. Cash, not stock, now appears to be the
preferred deal currency. All-stock transactions are only 15% of the total, and
the percentage of all-cash deals is slightly more than 25%. Looked at another
way, Chart 3 shows that mergers and takeovers involving at least some cash make
up 74% of the Fund's portfolio. 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 our
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 Fund's performance should be largely
uncorrelated with moves in the market averages.
Chart 4 shows our investments grouped by economic sector. The Fund's
holdings are well diversified, spread among 11 sectors. Healthcare occupies
first place, while telecommunications is in second. Rounding out the top three
is consumer services. 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 2004,
approximately 83% of the deals in our portfolio involved U.S.-based targets,
another 4% involved acquisitions of Canadian companies, and European
transactions totaled slightly more than 10%. Westchester Capital Management,
investment adviser to the Fund, has the resources and expertise to invest
globally for the Fund, 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
accelerated in 2004, with merger activity nearly doubling. 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 run at healthy levels in the months ahead.
Sincerely,
/s/Frederick W. Green
Frederick W. Green
President
CHART 1
PORTFOLIO COMPOSITION
BY TYPE OF DEAL*<F1>
Friendly 94.9%
Hostile 5.1%
CHART 2
PORTFOLIO COMPOSITION
BY TYPE OF BUYER*<F1>
Strategic 92.2%
Financial 7.8%
CHART 3
PORTFOLIO COMPOSITION
BY DEAL TERMS*<F1>
Stock with Fixed Exchange Ratio 10.5%
Stock with Flexible Exchange Ratio 4.3%
Cash & Stock 48.6%
Cash 25.5%
Undetermined 11.1%
CHART 4
PORTFOLIO COMPOSITION
BY SECTOR*<F1>
Healthcare 25.6%
Telecommunications 15.5%
Consumer Services 15.4%
Basic Industries 11.0%
Technology 8.2%
Business Services 7.7%
Financial Services 6.5%
Energy 4.1%
Multi-sector 2.7%
Capital Goods 2.7%
Media & Entertainment 0.6%
CHART 5
PORTFOLIO COMPOSITION
BY REGION*<F1>
United States 82.7%
Europe 10.3%
Canada 3.7%
Australia 2.3%
Asia 1.0%
*<F1> Data as of December 31, 2004
CHART 6
MERGER ACTIVITY
1991 - 2004
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 $250.4977 $109.3510 $99.8604 $186.5095
Source: Securities Data Corp.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN THE MERGER FUND VL AND THE S&P 500
Date The Merger Fund VL S&P 500
---- ------------------ -------
5/26/2004 $10,000 $10,000
6/30/2004 $9,990 $10,248
9/30/2004 $10,080 $10,057
12/31/2004 $10,600 $10,985
CUMULATIVE RETURN FOR THE PERIOD
MAY 26, 2004 THROUGH DECEMBER 31, 2004
--------------------------------------
The Merger Fund VL 6.00%
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 May 26, 2004. 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 VL
EXPENSE EXAMPLE
DECEMBER 31, 2004
As a shareholder of the Fund, you incur ongoing costs, including management 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 7/1/04 - 12/31/04.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. 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, 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 7/1/04 VALUE 12/31/04 PERIOD 7/1/04 - 12/31/04*<F6>
------------ -------------- -----------------------------
Actual +<F2> (1)<F4> $1,000.00 $1,061.10 $8.39
Hypothetical ++<F3> (2)<F5> 1,000.00 1,016.86 8.21
+<F2> Excluding dividends on short positions, your actual cost of investment
in the Fund would be $7.25.
++<F3> Excluding dividends on short positions, your hypothetical cost of
investment in the Fund would be $7.10.
(1)<F4> Ending account values and expenses paid during period based on a 6.11%
return. This actual return is net of expenses.
(2)<F5> Ending account values and expenses paid during period based on a 2.50%
return. This hypothetical return is a gross return before expenses.
*<F6> Expenses are equal to the Fund's annualized expense ratio of 1.40%,
multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
THE MERGER FUND VL
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004
SHARES VALUE
------ -----
COMMON STOCKS -- 72.94%*<F7>
AEROSPACE -- 0.91%*<F7>
500 Societe Nationale d'Etude et de Construction
de Moteurs d'Avion**<F8>(1)<F10> $ 12,356
----------
BANKS -- 2.74%*<F7>
1,758 Riggs National Corporation**<F8>(3)<F12> 37,375
----------
BROADCASTING -- 0.46%*<F7>
330 Lin TV Corp**<F8> 6,303
----------
COMPUTER SERVICES -- 1.67%*<F7>
800 SunGard Data Systems Inc.**<F8>(4)<F13> 22,664
----------
COMPUTER SOFTWARE -- 2.73%*<F7>
1,300 VERITAS Software Corporation**<F8>(3)<F12> 37,115
----------
CONSULTING SERVICES -- 1.49%*<F7>
1,650 Gartner, Inc. -- Class B**<F8>(2)<F11> 20,278
----------
ELECTRIC UTILITIES -- 1.02%*<F7>
575 Unisource Energy Corporation(3)<F12> 13,864
----------
ELECTRONIC PRODUCTS AND DISTRIBUTION -- 0.39%*<F7>
250 Sagem SA(1)<F10>(2)<F11> 5,328
----------
HOSPITALS AND NURSING HOMES -- 2.67%*<F7>
1,625 Province Healthcare Company**<F8>(4)<F13> 36,319
----------
HOTELS & GAMING -- 7.86%*<F7>
2,164 Caesars Entertainment, Inc.**<F8>(2)<F11> 43,583
900 Mandalay Resort Group**<F8> 63,387
----------
106,970
----------
INTERNET SERVICES -- 2.55%*<F7>
2,600 T-Online International AG**<F8>(1)<F10>(3)<F12> 34,775
----------
MEDICAL PRODUCTS -- 7.94%*<F7>
1,500 Guidant Corporation(2)<F11> 108,150
----------
MEDICAL SERVICES -- 4.52%*<F7>
3,500 Select Medical Corporation(3)<F12> 61,600
----------
METALS AND MINING -- 4.25%*<F7>
1,970 Noranda, Inc.(1)<F10> 34,672
500 WMC Resources Limited(1)<F10> 2,824
900 WMC Resources Limited -- ADR(5)<F14> 20,331
----------
57,827
----------
OFFICE PRODUCTS -- 2.52%*<F7>
1,095 OfficeMax Inc. 34,361
----------
OIL & GAS EXPLORATION -- 2.00%*<F7>
1,900 Magnum Hunter Resources, Inc.**<F8>(5)<F14> 24,510
40 Penn West Petroleum Ltd.(1)<F10> 2,646
----------
27,156
----------
PHARMACEUTICALS -- 3.66%*<F7>
1,880 King Pharmaceuticals, Inc.**<F8> 23,312
1,500 Mylan Laboratories Inc.(2)<F11> 26,520
----------
49,832
----------
PHARMACY SERVICES -- 2.03%*<F7>
900 NeighborCare, Inc.**<F8> 27,648
----------
RETAIL -- 3.50%*<F7>
1,300 Hollywood Entertainment Corporation**<F8> 17,017
600 Sears, Roebuck and Co. 30,618
----------
47,635
----------
SEMICONDUCTORS -- 0.74%*<F7>
10,800 STATS ChipPAC Ltd.**<F8>(1)<F10> 6,609
568 STATS ChipPAC Ltd. -- ADR**<F8> 3,476
----------
10,085
----------
SPECIALTY STEEL -- 3.87%*<F7>
1,300 International Steel Group, Inc.**<F8>(2)<F11> 52,728
----------
TELEPHONY -- 11.41%*<F7>
1,400 Nextel Communications, Inc. _ Class
A**<F8>(3)<F12> 42,000
7,400 NextWave Telecom Inc. -- Class B**<F8> 54,982
2,345 Price Communications Corporation**<F8>(4)<F13> 43,593
840 Telewest Global, Inc.**<F8>(2)<F11> 14,767
----------
155,342
----------
TITLE INSURANCE -- 2.01%*<F7>
600 Fidelity National Financial, Inc. 27,402
----------
TOTAL COMMON STOCKS (Cost $952,369) 993,113
----------
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- -----
PUT OPTIONS PURCHASED -- 0.06%*<F7>
9 Johnson & Johnson $ 405
Expiration April 16, 2005, Exercise Price $55.00
1 Semiconductor HOLDRs Trust 420
----------
Expiration January 22, 2005, Exercise Price $37.50
TOTAL PUT OPTIONS (Cost $1,014) 825
----------
PRINCIPAL
AMOUNT
------
CORPORATE BONDS -- 1.75%*<F7>
$ 24,000 Adelphia Communications Corporation 23,820
----------
9.38%, 11/15/2009 D<F9>
TOTAL CORPORATE BONDS (Cost $22,760) 23,820
----------
SHORT-TERM INVESTMENTS -- 11.54%*<F7>
157,167 First American Prime Obligations Fund 157,167
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $157,167) 157,167
----------
TOTAL INVESTMENTS (Cost $1,133,310) $1,174,925
----------
----------
- ----------------------
ADR - American Depository Receipt
*<F7> Calculated as a percentage of net assets.
**<F8> Non-income producing security.
D<F9> Security in default.
(1)<F10> Foreign security.
(2)<F11> All or a portion of the shares have been committed as collateral for
open short positions.
(3)<F12> All or a portion of the shares have been committed as collateral for
written option contracts.
(4)<F13> All or a portion of the shares have been committed as collateral for
short foreign currency contracts.
(5)<F14> All or a portion of the shares have been committed as collateral for
equity swap contracts.
See notes to the financial statements.
THE MERGER FUND VL
SCHEDULE OF SECURITIES SOLD SHORT
DECEMBER 31, 2004
SHARES VALUE
------ -----
1,560 Deutsche Telekom AG $ 35,305
300 Falconbridge Limited 7,787
1,650 Gartner, Inc. -- Class A 20,559
460 Harrah's Entertainment, Inc. 30,769
329 LifePoint Hospitals, Inc. 11,456
100 Mittal Steel Company NV 3,865
2,125 Mylan Laboratories Inc. 37,570
114 NTL Incorporated 8,317
250 Omnicare, Inc. 8,655
467 PNC Financial Services Group, Inc. 26,825
750 Sagem SA 15,985
20 Sprint Corporation 497
555 Staples, Inc. 18,709
850 Symantec Corporation 21,896
346 Verizon Communications Inc. 14,017
--------
TOTAL SECURITIES SOLD SHORT (Proceeds $241,557) $262,212
--------
--------
See notes to the financial statements.
THE MERGER FUND VL
SCHEDULE OF OPTIONS WRITTEN
DECEMBER 31, 2004
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- -----
CALL OPTIONS WRITTEN
6 Fidelity National Financial, Inc. $ 630
Expiration January 22, 2005, Exercise Price $45.00
4 Guidant Corporation 940
Expiration January 22, 2005, Exercise Price $70.00
8 King Pharmaceuticals, Inc. 1,920
Expiration January 22, 2005, Exercise Price $10.00
1 Magnum Hunter Resources, Inc. 100
Expiration March 19, 2005, Exercise Price $12.50
2 Mittal Steel Company NV 170
Expiration March 19, 2005, Exercise Price $45.00
6 NeighborCare, Inc. 2,010
Expiration January 22, 2005, Exercise Price $27.50
9 PeopleSoft, Inc. 3,600
Expiration January 22, 2005, Exercise Price $22.50
6 Sears, Roebuck and Co. 750
Expiration January 22, 2005, Exercise Price $50.00
17 Sprint Corporation 4,029
Expiration January 22, 2005, Exercise Price $22.50
4 SunGard Data Systems Inc. 1,340
Expiration January 22, 2005, Exercise Price $25.00
7 VERITAS Software Corporation 2,590
-------
Expiration January 22, 2005, Exercise Price $25.00
TOTAL OPTIONS WRITTEN (Premiums received $17,132) $18,079
-------
-------
See notes to the financial statements.
THE MERGER FUND VL
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004
ASSETS:
Investments, at value (Cost $1,133,310) $1,174,925
Cash 920
Deposit at brokers for short sales 201,147
Receivable from brokers for proceeds on
securities sold short 241,557
Receivable for investments sold 10,874
Receivable for equity swap contracts 606
Receivable from investment adviser 77,138
Dividends and interest receivable 1,073
Prepaid expenses 163
----------
Total Assets 1,708,403
----------
LIABILITIES:
Securities sold short, at value
(Proceeds of $241,557) $262,212
Options written, at value
(Premiums received $17,132) 18,079
Payable for dividends on securities sold short 64
Payable for investment securities purchased 272
Payable for fund shares redeemed 243
Payable for forward currency exchange contracts 1,354
Accrued expenses and other payables 64,646
--------
Total Liabilities 346,870
----------
NET ASSETS $1,361,533
----------
----------
NET ASSETS Consist of:
Accumulated undistributed net realized
gain on investments sold $ 58,248
Undistributed net investment income 248
Net unrealized appreciation (depreciation) on:
Investments $ 41,615
Short positions (20,655)
Written options (947)
Equity swap contracts 606
Forward currency exchange contracts (1,354)
--------
Net unrealized appreciation 19,265
Paid-in capital 1,283,772
----------
Total Net Assets $1,361,533
----------
----------
NET ASSET VALUE, offering price and redemption
price per share ($1,361,533/128,485 shares of
beneficial interest outstanding) $10.60
------
------
See notes to the financial statements.
THE MERGER FUND VL
STATEMENT OF OPERATIONS
FOR THE PERIOD MAY 26, 2004(1)<F15> THROUGH DECEMBER 31, 2004
INVESTMENT INCOME:
Interest $ 1,636
Dividend income on long positions
(net of foreign withholding taxes of $170) 4,350
---------
Total investment income 5,986
---------
EXPENSES:
Investment advisory fee $ 6,443
Transfer agent and shareholder
servicing agent fees 41,552
Federal and state registration fees 526
Professional fees 134,600
Trustees' fees and expenses 9,028
Custody fees 137
Administration fee 26,714
Reports to shareholders 3,034
Dividends on short positions 1,128
--------
Total operating expenses 223,162
Less: Expenses waived (Note 6) (214,818)
---------
Total expenses 8,344
---------
NET INVESTMENT LOSS (2,358)
---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain (loss) on:
Long transactions 68,323
Short transactions (11,190)
Option contracts expired or closed 4,671
Equity swap contracts 114
Foreign currencies (1,064)
--------
Net realized gain 60,854
Change in unrealized appreciation /
depreciation on:
Investments 41,615
Short positions (20,655)
Written options (947)
Equity swap contracts 606
Forward currency exchange contracts (1,354)
--------
Net unrealized gain 19,265
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 80,119
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 77,761
---------
---------
(1)<F15> Commencement of Operations.
See notes to the financial statements.
THE MERGER FUND VL
STATEMENT OF CHANGES IN NET ASSETS
PERIOD MAY 26,
2004(1)<F16>
THROUGH DECEMBER 31,
2004
--------------------
Net investment loss $ (2,358)
Net realized gain on investments sold, option contracts
expired or closed, foreign currency exchange contracts,
securities sold short and equity swap contracts 60,854
Change in unrealized appreciation / depreciation
on investments, forward currency exchange contracts,
short positions, equity swap contracts and written options 19,265
----------
Net increase in net assets resulting from operations 77,761
----------
Net increase in net assets from capital share
transactions (Note 4) 1,183,772
----------
Net increase in net assets
1,261,533
NET ASSETS:
Beginning of period 100,000
----------
End of period (including accumulated undistributed
net investment income of $248) $1,361,533
----------
----------
(1)<F16> Commencement of Operations.
See notes to the financial statements.
THE MERGER FUND VL
FINANCIAL HIGHLIGHTS
FOR THE PERIOD
MAY 26, 2004(1)<F17>
THROUGH
DECEMBER 31, 2004
--------------------
PER SHARE DATA:
Net Asset Value, beginning of period $10.00
------
Income from investment operations:
NET INVESTMENT LOSS (0.02)
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 0.62
------
TOTAL FROM INVESTMENT OPERATIONS 0.60
------
Net Asset Value, end of period $10.60
------
------
Total Return 6.00%(3)<F19>
Supplemental data and ratios:
Net assets, end of period (000's) $1,362
Ratio of operating expenses to average net assets
including dividends on short positions:
BEFORE EXPENSE WAIVER 43.30%(2)<F18>
AFTER EXPENSE WAIVER 1.62%(2)<F18>
Ratio of net investment income to average net assets
excluding dividends on short positions:
BEFORE EXPENSE WAIVER 43.08%(2)<F18>
AFTER EXPENSE WAIVER 1.40%(2)<F18>
Ratio of net investment loss to average net assets:
BEFORE EXPENSE WAIVER (42.14)%(2)<F18>
AFTER EXPENSE WAIVER (0.46)%(2)<F18>
PORTFOLIO TURNOVER RATE(4)<F20> 501.71%(3)<F19>
- -----------------
(1)<F17> Commencement of Operations.
(2)<F18> Annualized.
(3)<F19> Not Annualized.
(4)<F20> 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.
See notes to the financial statements.
THE MERGER FUND VL
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1 -- ORGANIZATION
The Merger Fund VL (the "Fund") is a no-load, open-end, non-diversified
investment company organized as a statutory trust under the laws of Delaware on
November 22, 2002, and registered under the Investment Company Act of 1940 (the
"1940 Act"), as amended. The Fund commenced operations on May 26, 2004. The
investment objective of the Fund is to seek to achieve capital growth by
engaging in merger arbitrage. Shares of the Fund are not offered directly to
the public. The Fund's shares are currently offered only to separate accounts
funding variable annuity and variable life insurance contracts. At December 31,
2004 92.2% of the shares outstanding of the Fund were owned by one insurance
company.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies 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 December 31, 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 one major securities dealer. 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.
E. Written Option Accounting
The Fund writes (sells) call options to hedge portfolio investments. 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 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 mean of 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 or call options to hedge portfolio investments.
Premiums paid for option contracts purchased are included in the Statement of
Assets and Liabilities as an asset. Option contracts are valued at 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 mean of 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 or 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, and unrealized
gains or losses on Section 1256 contracts, which were realized, for tax
purposes, at December 31, 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.
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 and foreign governments involves
special risks and considerations not typically associated with investing in U.S.
companies and the U.S. government. These risks include revaluation of currencies
and adverse political and economic developments. Moreover, securities of many
foreign companies and foreign governments and their markets may be less liquid
and their prices more volatile than those of securities of comparable U.S.
companies and the U.S. government.
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. 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.
N. 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. The Fund may utilize derivative instruments including 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 July 1, 2003.
Under the terms of this agreement, the Adviser is entitled to receive a fee,
calculated daily and payable monthly, at the annual rate of 1.25% of the Fund's
average daily net assets. Certain officers of the Fund are also officers of the
Adviser.
The Adviser has agreed to reduce its fees and reimburse The Merger FundVL to
the extent total annualized expenses exceed 1.40% of average daily net assets.
The agreement expires on July 1, 2013. The agreement permits the Adviser to
recover the expenses paid in excess of the cap on expenses for the three
previous years, as long as the recovery does not cause the Fund's operating
expenses, excluding dividends on short positions and interest expense, to exceed
the cap on expenses. For the period ended December 31, 2004 the Adviser
reimbursed $214,818 to the Fund.
Reimbursed expenses subject to potential recovery by year of expiration is as
follows:
YEAR OF EXPIRATION POTENTIAL RECOVERY
------------------ ------------------
12/31/07 $214,818
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.
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:
PERIOD ENDED
DECEMBER 31, 2004
-----------------
SHARES AMOUNT
------ ------
Sold 119,198 $1,191,029
Redeemed (713) (7,257)
------- ----------
Net Increase 118,485 $1,183,772
------- ----------
------- ----------
NOTE 5 -- INVESTMENT TRANSACTIONS
Purchases and sales of securities for the period ended December 31, 2004
(excluding short-term investments, options and short positions) aggregated
$3,899,062 and $2,901,567, respectively. There were no purchases or sales of
U.S. Government Securities.
At December 31, 2004, the components of accumulated earnings on a tax basis
were as follows:
Cost of investments $1,135,522
----------
----------
Gross unrealized appreciation $ 49,084
Gross unrealized depreciation (9,681)
----------
Net unrealized appreciation $ 39,403
----------
----------
Undistributed ordinary income $ 60,588
Undistributed long-term capital gains --
----------
Total distributable earnings $ 60,588
----------
----------
Other accumulated losses and temporary differences $ (22,230)
----------
Total accumulated earnings $ 77,761
----------
----------
The Merger Fund VL had a post-October currency loss deferral of $1,105 as of
December 31, 2004.
NOTE 6 -- OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written during the
period ended December 31, 2004, were as follows:
PREMIUM NUMBER OF
AMOUNT CONTRACTS
------- ---------
Options outstanding at May 26, 2004 $-- --
Options written 44,089 240
Options closed (4,842) (40)
Options exercised (17,406) (92)
Options expired (4,709) (38)
------- ---
Options outstanding at December 31, 2004 $17,132 70
------- ---
------- ---
NOTE 7 -- FORWARD CURRENCY EXCHANGE CONTRACTS
At December 31, 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 $1,354
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 DECEMBER 31, 2004 BE RECEIVED DECEMBER 31, 2004
---------- ------------ ----------------- ----------- -----------------
1/19/05 27,810 Australian Dollars $21,762 21,022 U.S. Dollars $21,022
1/18/05 2,960 Canadian Dollars 2,471 2,455 U.S. Dollars 2,455
2/18/05 35,527 Canadian Dollars 29,651 28,955 U.S. Dollars 28,955
2/23/05 2,300 Euros 3,127 2,933 U.S. Dollars 2,933
3/18/05 13,500 British Pounds 25,793 26,075 U.S. Dollars 26,075
3/24/05 7,590 British Pounds 14,496 14,506 U.S. Dollars 14,506
NOTE 8 -- 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 December 31, 2004, the Fund had the following open equity swap
contracts:
UNREALIZED
APPRECIATION
TERMINATION DATE SECURITY SHARES (DEPRECIATION)
- ---------------- -------- ------ -------------
3/18/05 Gus plc Mar.900p swap (1,500) $(375)
3/18/05 Gus plc 1,500 352
2/28/05 Kidde plc 4,600 629
-----
$ 606
-----
-----
For the period ended December 31, 2004, the Fund realized gains of $114 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 VL
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 VL (the "Fund") at December 31, 2004, the results of
its operations, the changes in its net assets and the financial highlights for
the period from May 26, 2004 (commencement of operations) to December 31, 2004,
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 audit. We conducted our audit 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 audit, which included confirmation of securities at December
31, 2004 by correspondence with the custodian and brokers, provides a reasonable
basis for our opinion.
/s/PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 18, 2005
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*<F21> President Indefinite; President of 2 None
Westchester Capital and since Westchester Capital
Management, Inc. Trustee inception Management, Inc.,
100 Summit Lake Drive the Fund's Adviser.
Valhalla, NY 10595
Age: 58
Bonnie L. Smith Vice One-year Vice President of 2 None
Westchester Capital President, term; since Westchester Capital
Management, Inc. Secretary inception Management, Inc.,
100 Summit Lake Drive and the Fund's Adviser.
Valhalla, NY 10595 Treasurer
Age: 57
James P. Logan, III Independent Indefinite; President of Logan, 2 None
Logan, Chace LLC Trustee since Chace LLC, an
420 Lexington Avenue inception executive search firm;
New York, NY 10170 Chairman of J.P.
Age: 68 Logan & Company.
Michael J. Downey Independent Indefinite; Managing Partner of 2 Chairman and
c/o Westchester Capital Trustee since Lexington Capital Director of Asia
Management, Inc. inception Investments. Pacific Fund,
100 Summit Lake Drive Inc.; Director of
Valhalla, NY 10595 Alliance
Age: 60 Bernstein Core
Mutual Fund
Group
Roy Behren Chief One-year Analyst and Trader 2 Director of
Westchester Capital Compliance term; for Westchester Capital Redback
Management, Inc. Officer since 2004 Management, Inc., the Networks Inc.
100 Summit Lake Drive Fund's Adviser.
Valhalla, NY 10595
Age: 44
*<F21> 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 VL
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 September 30, 2004, the Fund
filed its complete schedule of portfolio holdings with the SEC on Form N-Q. The
Fund will file Form N-Q for the first and third quarters of each fiscal year.
The Fund's Forms N-Q are 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 the "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. "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 audit committee approved 100% of the audit services and
tax services. The following table details the aggregate fees billed for audit
fees and tax fees by the principal accountant.
FYE 12/31/2004 FYE 12/31/2003 *<F22>
Audit Fees $16,000 $6,000
Audit-Related Fees $0 N/A
Tax Fees $2,000 N/A
All Other Fees $0 N/A
*<F22> The Reigstrant's shares became effective on August 28, 2003 and began
operations on May 26, 2004.
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.
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. 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 to open-end investment companies.
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. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
- -------------------------------------------------------------------------
Not applicable to open-end investment companies.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
- --------------------------------------------------------------------------
COMPANY AND AFFILIATED PURCHASERS.
- ----------------------------------
Not applicable to open-end investment companies.
ITEM 10. 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 11. 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 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 were no changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred
during the second fiscal quarter 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 12. EXHIBITS.
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(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 VL
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By (Signature and Title) /s/Frederick W. Green
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Frederick W. Green, President
Date March 1, 2005
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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
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Frederick W. Green, President
Date March 1, 2005
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By (Signature and Title) /s/Bonnie L. Smith
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Bonnie L. Smith, Treasurer
Date March 1, 2005
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