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
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THE MERGER FUND
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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)
FREDERICK W. GREEN
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THE MERGER FUND
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100 SUMMIT LAKE DRIVE
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VALHALLA, NEW YORK 10595
------------------------
(Name and address of agent for service)
1-800-343-8959
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Registrant's telephone number, including area code
Date of fiscal year end: SEPTEMBER 30
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Date of reporting period: MARCH 31, 2005
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ITEM 1. REPORT TO STOCKHOLDERS.
- ------------------------------
THE
MERGER
FUND(R)
SEMI-ANNUAL REPORT
MARCH 31, 2005
CHART 1
PORTFOLIO COMPOSITION
BY TYPE OF DEAL*<F1>
Friendly 100.0%
Hostile 0.0%
CHART 2
PORTFOLIO COMPOSITION
BY TYPE OF BUYER*<F1>
Strategic 92.8%
Financial 7.2%
CHART 3
PORTFOLIO COMPOSITION
BY DEAL TERMS*<F1>
Stock with Fixed Exchange Ratio 8.7%
Stock with Flexible Exchange Ratio 4.4%
Cash & Stock 38.9%
Cash 33.4%
Undetermined 14.6%
*<F1> Data as of March 31, 2005
CHART 4
PORTFOLIO COMPOSITION
BY SECTOR*<F2>
Consumer Services 23.4%
Healthcare 18.5%
Telecommunications 13.0%
Consumer Non-Durables 12.1%
Capital Goods 7.8%
Business Services 7.4%
Basic Industries 4.7%
Financial Services 4.2%
Technology 2.9%
Media & Entertainment 2.8%
Transportation 1.7%
Energy 1.6%
CHART 5
PORTFOLIO COMPOSITION
BY REGION*<F2>
United States 89.1%
Europe 5.9%
Canada 4.7%
Asia 0.3%
Australia 0.1%
*<F2> Data as of March 31, 2005
CHART 6
MERGER ACTIVITY
1991 - 2005
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 $188.5744
2005 $209.7712
Source: Securities Data Corp.
THE MERGER FUND
EXPENSE EXAMPLE
MARCH 31, 2005
As a shareholder of the Fund, you incur ongoing costs, including management
fees; distribution and/or service fees; redemption fees if shares are redeemed
in less than 30 days after purchasing; 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
10/01/04 - 3/31/05.
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 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 10/1/04 VALUE 3/31/05 PERIOD 10/1/04 - 3/31/05*<F7>
----------------- -------------- -----------------------------
Actual +<F3> (1)<F5> $1,000.00 $1,029.90 $9.11
Hypothetical ++<F4> (2)<F6> $1,000.00 $1,015.96 $9.05
+<F3> Excluding dividends on short positions, your actual cost of investment
in the Fund would be $6.88.
++<F4> Excluding dividends on short positions, your hypothetical cost of
investment in the Fund would be $6.84.
(1)<F5> Ending account values and expenses paid during period based on a 2.99%
return. This actual return is net of expenses.
(2)<F6> Ending account values and expenses paid during period based on a 5.00%
annual return before expenses.
*<F7> Expenses are equal to the Fund's annualized expense ratio of 1.80%,
multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
THE MERGER FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 2005
(UNAUDITED)
SHARES VALUE
------ -----
COMMON -- 83.82%*<F8>
BANKS -- 2.71%*<F8>
726,900 Gold Banc Corporation, Inc.(4)<F15> $ 10,198,407
119,100 Greater Bay Bancorp 2,907,231
100,000 Hibernia Corporation -- Class A 3,201,000
1,393,644 Riggs National Corporation**<F9> 26,604,664
--------------
42,911,302
--------------
BROADCASTING -- 2.46%*<F8>
1,577,470 Lin TV Corp -- Class A**<F9> 26,706,567
350,000 Viacom Inc. -- Class B 12,190,500
--------------
38,897,067
--------------
BROKERAGE SERVICES -- 0.98%*<F8>
2,630,071 Instinet Group Incorporated**<F9> 15,464,817
--------------
BUILDING PRODUCTS -- 1.43%*<F8>
<F8>650,000 Masonite International Corporation**<F9>(5)<F16> 22,620,000
--------------
CABLE TV -- 0.02%*<F8>
1,000,000 Adelphia Communications
Corporation -- Class A**<F9>(1)<F12> 240,000
--------------
COMPUTER SERVICES -- 1.98%*<F8>
910,100 SunGard Data System Inc.**<F9>(3)<F14> 31,398,450
--------------
COMPUTER SOFTWARE -- 0.28%*<F8>
209,200 Ascential Software Corporation**<F9> 3,876,476
25,000 VERITAS Software Corporation**<F9> 580,500
--------------
4,456,976
--------------
CONSULTING SERVICES -- 0.40%*<F8>
681,311 Gartner, Inc. -- Class B**<F9>(1)<F12> 6,370,258
--------------
COSMETICS & TOILETRIES -- 4.09%*<F8>
1,282,864 The Gillette Company 64,758,975
--------------
DEFENSE -- 4.16%*<F8>
897,600 United Defense Industries, Inc. 65,901,792
--------------
E-COMMERCE -- 0.00%*<F8>
144 eCOST.com, Inc.**<F9>(1)<F12> 981
--------------
FILM & ENTERTAINMENT -- 1.77%*<F8>
2,337,550 Metro-Goldwyn-Mayer Inc.**<F9> 27,933,723
--------------
FOOD & BEVERAGES -- 5.78%*<F8>
1,131,019 Dreyer's Grand Ice Cream Holdings, Inc. 91,352,405
--------------
HOSPITALS & NURSING HOMES -- 3.30%*<F8>
242,200 Beverly Enterprises, Inc.**<F9> 2,998,436
69,729 LifePoint Hospitals, Inc.**<F9>(1)<F12> 3,056,919
1,913,161 Province Healthcare Company**<F9>(2)<F13> 46,088,048
--------------
52,143,403
--------------
HOTELS & GAMING -- 8.74%*<F8>
2,873,450 Caesars Entertainment, Inc.**<F9>(2)<F13> 56,865,575
1,153,000 Mandalay Resort Group**<F9>(1)<F12> 81,274,970
--------------
138,140,545
--------------
MEDICAL PRODUCTS -- 7.16%*<F8>
534,318 Closure Medical Corporation**<F9>(2)<F13> 14,266,291
1,159,225 Guidant Corporation(1)<F12> 85,666,728
190,869 INAMED Corporation**<F9> 13,337,926
--------------
113,270,945
--------------
METALS & MINING -- 4.15%*<F8>
1,514,400 International Steel Group, Inc.**<F9>(3)<F14> 59,818,800
28,300 Mittal Steel Company NV -
Class A- NYS**<F9>(1)<F12> 915,505
200,000 Noranda, Inc.(5)<F16> 4,044,000
148,400 WMC Resources Limited(5)<F16> 912,622
--------------
65,690,927
--------------
OIL & GAS EXPLORATION -- 1.07%*<F8>
1,048,516 Magnum Hunter Resources, Inc.**<F9>(3)<F14> 16,891,593
--------------
PHARMACEUTICALS -- 2.87%*<F8>
2,062,350 King Pharmaceuticals, Inc.**<F9>(3)<F14> 17,138,128
493,700 Sepracor Inc.**<F9> 28,343,317
--------------
45,481,445
--------------
PHARMACY SERVICES -- 3.30%*<F8>
1,136,452 Accredo Health, Incorporated**<F9>(4)<F15> 50,469,833
31,350 Medco Health Solutions, Inc.**<F9>(1)<F12> 1,554,019
--------------
52,023,852
--------------
PRINTING EQUIPMENT -- 2.00%*<F8>
1,971,029 Creo Inc.**<F9>(5)<F16> 31,654,726
--------------
RETAIL -- 10.17%*<F8>
250,000 Circuit City Stores, Inc. 4,012,500
1,439,300 Hollywood Entertainment Corporation**<F9>(3)<F14> 18,955,581
178,600 J.C. Penney Company, Inc. 9,272,912
743,000 MAY DEPARTMENT STORES COMPANY 27,505,860
371,600 The Neiman Marcus Group, Inc. -- Class A 34,005,116
1,087,100 OfficeMax Inc.(3)<F14> 36,417,850
45,331 PC Mall, Inc.**<F9> 563,011
1,167,200 Toys "R" Us, Inc.**<F9> 30,067,072
--------------
160,799,902
--------------
SEMICONDUCTORS -- 0.26%*<F8>
6,113,910 STATS ChipPAC Ltd.**<F9>(5)<F16> 4,040,877
--------------
SPECIALTY CHEMICALS -- 0.03%*<F8>
12,145 Great Lakes Chemical Corporation 390,097
--------------
STOCK EXCHANGES -- 1.50%*<F8>
665,751 Euronext NV(5)<F16> 23,692,053
--------------
TELEPHONY -- 11.52%*<F8>
662,600 MCI Inc. 16,511,992
1,581,618 Nextel Communications, Inc. -- Class A**<F9> 44,949,584
5,905,114 NextWave Telecom Inc. -- Class B**<F9> 46,945,656
3,499,498 Price Communications Corporation**<F9> 61,241,215
250,000 Telesystem International
Wireless Inc.**<F9>(5)<F16> 3,812,500
96,900 Telus Corporation(5)<F16> 2,981,032
153,000 Western Wireless Corporation -
Class A**<F9>(3)<F14> 5,807,880
--------------
182,249,859
--------------
TRANSCRIPTION PRODUCTS & SERVICES -- 0.19%*<F8>
510,226 Dictaphone Corporation**<F9> 3,061,356
--------------
TRUCKING -- 1.50%*<F8>
490,728 USF Corporation 23,682,533
--------------
TOTAL COMMON STOCKS
(Cost $1,298,096,854) 1,325,520,859
--------------
PREFERRED STOCK -- 0.38%*<F8>
5,370 TNP Enterprises, Inc., Series D 5,962,051
--------------
TOTAL PREFERRED STOCK
(Cost $5,584,731) 5,962,051
--------------
WARRANTS -- 0.00%
241,889 Dictaphone Corporation
Expiration March 2006, Exercise Price $20.00 15,239
--------------
TOTAL WARRANTS
(Cost $26,608) 15,239
--------------
CONTRACTS (100 SHARES PER CONTRACT)
- -----------------------------------
PUT OPTIONS PURCHASED -- 0.38%*<F8>
3,600 iShares Lehman 7-10 Year Treasury Bond Fund
Expiration April 16, 2005,
Exercise Price $89.00 1,998,000
6,407 Johnson & Johnson
Expiration April 16, 2005,
Exercise Price $55.00 32,035
600 Semiconductor HOLDRs Trust
Expiration April 16, 2005,
Exercise Price $37.50 300,000
1,000 Standard and Poor's 500 Index
Expiration December 17, 2005,
Exercise Price $1,150.00 3,680,000
--------------
TOTAL PUT OPTIONS
(Cost $5,873,891) 6,010,035
--------------
PRINCIPAL AMOUNT
- ----------------
CONVERTIBLE BONDS -- 0.25%*<F8>
Adelphia Communications Corporation:
$26,225,000 6.00%, 2/15/2006 D<F10> 1,966,875
26,583,000 3.25%, 5/01/2021 D<F10> 1,993,725
--------------
TOTAL CONVERTIBLE BONDS
(Cost $20,702,146) 3,960,600
--------------
CORPORATE BONDS -- 5.11%*<F8>
Adelphia Communications Corporation:
13,818,000 9.38%, 11/15/2009 D<F10> 12,436,200
17,445,000 10.25%, 6/15/2011(1)<F12> D<F10> 16,180,237
11,695,000 9.25%, 10/01/2022 D<F10> 9,969,987
27,195,000 Roadway Corporation
8.25%, 12/01/2008(1)<F12> 30,101,466
13,500,000 Toys "R" Us, Inc.
7.88%, 4/15/2013 12,183,750
--------------
TOTAL CORPORATE BONDS
(Cost $79,744,308) 80,871,640
--------------
SHORT-TERM INVESTMENTS -- 8.70%*<F8>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 6.32%*<F8>
Federal Home Loan Bank:
50,000,000 2.25%, 04/01/2005(1)<F12> 49,996,875
25,000,000 3.00%,04/04/2005(1)<F12> 24,993,750
25,000,000 2.75%, 04/05/2005(1)<F12> 24,992,361
--------------
99,982,986
--------------
VARIABLE RATE DEMAND NOTES #<F11> -- 2.38%*<F8>
6,416,474 American Family Financial Services, Inc., 2.47% 6,416,474
28,139,428 U.S. Bank, 2.60%(1)<F12> 28,139,428
3,137,441 Wisconsin Corporate Central Credit Union, 2.52% 3,137,441
--------------
37,693,343
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $137,676,329) 137,676,329
--------------
TOTAL INVESTMENTS
(Cost $1,547,704,867) $1,560,016,753
--------------
--------------
*<F8> Calculated as a percentage of net assets.
**<F9> Non-income producing security.
D<F10> Security in default.
#<F11> 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 March 31, 2005.
NYS - New York Shares
(1)<F12> All or a portion of the shares have been committed as collateral for
open short positions.
(2)<F13> All or a portion of the shares have been committed as collateral for
short foreign currency contracts.
(3)<F14> All or a portion of the shares have been committed as collateral for
written option contracts.
(4)<F15> All or a portion of the shares have been committed as collateral for
equity swap contracts.
(5)<F16> Foreign security or foreign company trading on U.S. exchange.
See notes to the financial statements.
THE MERGER FUND
SCHEDULE OF SECURITIES SOLD SHORT
MARCH 31, 2005
(UNAUDITED)
SHARES VALUE
------ -----
2,048,000 Adelphia Communications Corporation -- Class A $ 491,520
81,800 ALLTEL Corporation 4,486,730
22,600 Capital One Financial Corporation 1,689,802
436,200 Cimarex Energy Co. 17,011,800
27,000 Crompton Corporation 394,200
55,000 eCOST.com, Inc. 374,550
91,200 Federated Department Stores, Inc. 5,803,968
681,311 Gartner, Inc. -- Class A 6,520,146
622,870 Harrah's Entertainment, Inc. 40,224,945
505,745 Johnson & Johnson 33,965,834
587,161 LifePoint Hospitals, Inc. 25,741,138
449,920 Medco Health Solutions, Inc. 22,302,534
271,805 Medicis Pharmaceutical Corporation -- Class A 8,148,714
548,925 Mittal Steel Company NV -- Class A -- NYS 17,757,724
740,850 Mylan Laboratories Inc. 13,127,862
195,273 PNC Financial Services Group, Inc. 10,052,654
1,251,225 The Procter & Gamble Company 66,314,925
1,910,220 Sprint Corporation 43,457,505
15,300 Tel Offshore Trust 125,001
96,900 Telus Corporation 3,113,899
499,795 Verizon Communications Inc. 17,742,723
221,320 Yellow Roadway Corporation 12,956,073
------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $338,827,259) $351,804,247
------------
------------
NYS - New York Shares
See notes to the financial statements.
THE MERGER FUND
SCHEDULE OF OPTIONS WRITTEN
MARCH 31, 2005
(UNAUDITED)
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- -----
CALL OPTIONS
Beverly Enterprises, Inc.:
1,200 Expiration April 16, 2005, Exercise Price $10.00 $ 290,400
650 Expiration April 16, 2005, Exercise Price $12.50 4,550
572 Expiration May 21, 2005, Exercise Price $12.50 14,300
2,500 Circuit City Stores, Inc. 337,500
Expiration April 16, 2005, Exercise Price $15.00
Hollywood Entertainment Corporation:
2,132 Expiration April 16, 2005, Exercise Price $12.50 159,900
8,261 Expiration May 21, 2005, Exercise Price $12.50 619,575
500 Instinet Group Incorporated 46,000
Expiration May 21, 2005, Exercise Price $5.00
1,786 J.C. Penney Company, Inc. 875,140
Expiration April 16, 2005, Exercise Price $47.50
4,960 King Pharmaceuticals, Inc. 24,800
Expiration April 16, 2005, Exercise Price $10.00
4,500 May Department Stores Company 1,102,500
Expiration June 18, 2005, Exercise Price $35.00
6,626 MCI Inc. 1,623,370
Expiration April 16, 2005, Exercise Price $22.50
The Neiman Marcus Group, Inc.:
2,716 Expiration April 16, 2005, Exercise Price $80.00 3,530,800
1,000 Expiration April 16, 2005, Exercise Price $85.00 685,000
OfficeMax Inc.:
491 Expiration April 16, 2005, Exercise Price $30.00 174,305
7,811 Expiration April 16, 2005, Exercise Price $32.50 913,887
2,569 Expiration May 21, 2005, Exercise Price $32.50 462,420
1,000 Sepracor Inc. 90,000
Expiration April 16, 2005, Exercise Price $60.00
SunGard Data System Inc.:
4,101 Expiration April 16, 2005, Exercise Price $30.00 1,845,450
3,000 Expiration May 21, 2005, Exercise Price $30.00 1,380,000
250 VERITAS Software Corporation 28,750
Expiration April 16, 2005, Exercise Price $22.50
3,500 Viacom Inc. 210,000
Expiration April 16, 2005, Exercise Price $35.00 -----------
14,418,647
-----------
PUT OPTIONS
1,966 Mylan Laboratories Inc. 465,942
Expiration April 16, 2005, Exercise Price $20.00
1,000 Standard and Poor's 500 Index 2,020,000
Expiration December 17, 2005, Exercise Price $1,075.00 -----------
2,485,942
-----------
TOTAL OPTIONS WRITTEN
(Premiums received $12,908,305) $16,904,589
-----------
-----------
See notes to the financial statements.
THE MERGER FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2005
(UNAUDITED)
ASSETS:
Investments, at value (Cost $1,547,704,867) $1,560,016,753
Deposit at brokers for short sales 53,285,806
Receivable from brokers for proceeds on securities sold short 342,839,586
Receivable for investments sold 57,806,158
Receivable for fund shares issued 3,843,465
Receivable for forward currency exchange contracts 234,789
Dividends and interest receivable 2,004,375
Prepaid expenses 141,784
--------------
Total Assets 2,020,172,716
--------------
LIABILITIES:
Securities sold short, at value (Proceeds of $338,827,259) $351,804,247
Options written, at value (Premiums received $12,908,305) 16,904,589
See accompanying schedule
Payable to custodian 988,889
Payable for short dividends 212,582
Payable for investment securities purchased 56,478,742
Payable for fund shares redeemed 3,620,955
Payable for equity swap contracts 6,195,785
Investment advisory fee payable 1,352,529
Distribution fees payable 589,394
Accrued expenses and other payables 582,972
------------
Total Liabilities 438,730,684
--------------
NET ASSETS $1,581,442,032
--------------
--------------
NET ASSETS Consist Of:
Accumulated undistributed net realized loss on investments
sold, foreign currencies, securities sold short, equity swaps,
and option contracts expired or closed $ (25,585,593)
Net unrealized appreciation (depreciation) on:
Investments $ 12,311,886
Short positions (12,976,988)
Written options (3,996,284)
Equity swap contracts (6,796,746)
Foreign currency translation 46
Forward currency exchange contracts 155,131
------------
Net unrealized depreciation (11,302,955)
Paid-in capital 1,618,330,580
--------------
Total Net Assets $1,581,442,032
--------------
--------------
NET ASSET VALUE, offering price and redemption price per share
($1,581,442,032/103,002,184 shares of beneficial
interest outstanding) $15.35
------
------
See notes to the financial statements.
THE MERGER FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2005
(UNAUDITED)
INVESTMENT INCOME:
Interest $ 4,912,938
Dividend income on long positions
(net of foreign withholding taxes of $122,022) 6,004,263
-----------
Total investment income 10,917,201
-----------
EXPENSES:
Investment advisory fee $ 8,146,763
Distribution fees 1,788,855
Transfer agent and shareholder servicing agent fees 220,411
Federal and state registration fees 43,643
Professional fees 157,448
Trustees' fees and expenses 21,601
Custody fees 187,276
Administration fee 340,442
Reports to shareholders 136,235
Dividends on short positions 3,615,906
Other 92,046
-----------
Total expenses before expense reimbursement by adviser 14,750,626
-----------
Expense Reimbursement by Adviser (66,731)
-----------
Net Expenses 14,683,895
-----------
NET INVESTMENT LOSS (3,766,694)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions 44,377,100
Short transactions (16,293,342)
Option contracts expired or closed 13,683,249
Equity swap contracts (15,321)
Foreign currencies (1,400,549)
-----------
Net realized gain 40,351,137
Change in unrealized appreciation / depreciation on:
Investments (3,478,062)
Short positions 32,132,199
Written options (9,502,744)
Equity swap contracts (7,758,011)
Foreign currency translation (23,927)
Forward currency exchange contracts 422,260
-----------
Net unrealized gain 11,791,715
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 52,142,852
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $48,376,158
-----------
-----------
See notes to the financial statements.
THE MERGER FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 2005 SEPTEMBER 30, 2004
---------------- ------------------
(UNAUDITED)
Net investment loss $ (3,766,694) $ (10,907,842)
Net realized gain on investments sold, foreign
currency translations, forward currency exchange
contracts, securities sold short, equity swap contracts,
and option contracts expired or closed 40,351,137 67,478,565
Change in unrealized appreciation / depreciation on
investments, foreign currencies, forward currency
exchange contracts, short positions, equity swap
contracts and written options 11,791,715 (41,966,413)
-------------- --------------
Net increase in net assets resulting from operations 48,376,158 14,604,310
-------------- --------------
Distributions to shareholders from:
Net investment income (221,569) (3,130,756)
Net realized gains (21,282,185) --
-------------- --------------
Total dividends and distributions (21,503,754) (3,130,756)
-------------- --------------
Net increase (decrease) in net assets from capital
share transactions (Note 4) (126,711,540) 519,817,382
-------------- --------------
Net increase (decrease) in net assets (99,839,136) 531,290,936
NET ASSETS:
Beginning of period 1,681,281,168 1,149,990,232
-------------- --------------
End of period (including accumulated undistributed net
investment income of $0 and $250,581, respectively) $1,581,442,032 $1,681,281,168
-------------- --------------
-------------- --------------
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.
SIX MONTHS YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2005 2004 2003 2002 2001 2000
--------- --------- --------- --------- --------- ---------
(UNAUDITED)
Net Asset Value, beginning of period $15.10 $14.84 $13.46 $15.74 $16.90 $15.37
Income from investment operations:
Net investment income(1)<F17> (0.04)(3) (0.08)(3) 0.05(2)(4) 0.22(3)(4) 0.31(3)(4) 0.29(3)(4)
<F19> <F19> <F18><F20> <F19><F20> <F19><F20> <F19><F20>
Net realized and unrealized
gain (loss) on investments 0.49 0.38 1.53(4) (1.44)(4) 0.32(4) 2.46(4)
<F20> <F20> <F20> <F20>
------ ------ ------ ------ ------ ------
Total from investment operations 0.45 0.30 1.58 (1.22) 0.63 2.75
------ ------ ------ ------ ------ ------
Redemption fees 0.00(6) 0.00(6) -- -- -- --
<F22> <F22>
------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income 0.00(6) (0.04) (0.20) (0.21) (0.14) (0.07)
<F22>
Distributions from net realized gains (0.20) -- -- (0.85) (1.65) (1.15)
------ ------ ------ ------ ------ ------
Total distributions (0.20) (0.04) (0.20) (1.06) (1.79) (1.22)
------ ------ ------ ------ ------ ------
Net Asset Value, end of period $15.35 $15.10 $14.84 $13.46 $15.74 $16.90
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Total Return 2.99%(7) 1.99% 11.88% (8.39)% 3.86% 19.08%
<F23>
Supplemental Data and Ratios:
Net assets, end of period (000's) $1,581,442 $1,681,281 $1,149,990 $853,957 $982,893 $1,078,958
Ratio of operating expenses
to average net assets 1.81%(8) 1.87% 1.86%(4) 1.60%(4) 1.99%(4) 1.89%(4)
<F24> <F20> <F20> <F20> <F20>
Ratio of interest expense and dividends
on short positions to average net assets 0.44%(8) 0.50% 0.49%(4) 0.22%(4) 0.65%(4) 0.55%(4)
<F24> <F20> <F20> <F20> <F20>
Ratio of operating expense to average
net assets excluding interest expense
and dividend on short positions
Before expense waiver 1.37%(8) 1.37% 1.37% 1.38% 1.34% 1.34%
<F24>
After expense waiver 1.36%(8) 1.37% 1.37% 1.38% 1.34% 1.34%
<F24>
Ratio of net investment income
to average net assets
Before expense waiver (0.47)%(8) (0.68)% 0.22%(4) 1.31%(4) 1.91%(4) 1.83%(4)
<F24> <F20> <F20> <F20> <F20>
After expense waiver (0.46)%(8) (0.68)% 0.22%(4) 1.31%(4) 1.91%(4) 1.83%(4)
<F24> <F20> <F20> <F20> <F20>
Portfolio turnover rate(5)<F21> 157.64% 256.88% 309.18% 258.37% 383.74% 419.24%
FOOTNOTES TO FINANCIAL HIGHLIGHTS ON FOLLOWING PAGE
(1)<F17> Net investment income before interest expense and dividends on short
positions for the six months ended March 31, 2005 and the years
ended September 30, 2004, 2003, 2002, 2001 and 2000, was $0.00,
$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.
(7)<F23> Not annualized.
(8)<F24> Annualized.
See notes to the financial statements.
THE MERGER FUND
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2005 (UNAUDITED)
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 March 31, 2005, 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 statement of changes in net assets and the per-share
amounts in the financial highlights for the years ended prior to September 30,
2004. The net-investment-income ratios in the financial highlights have also
been modified accordingly for the fiscal years ended prior to September 30,
2004. 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 $1,935,000 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:
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 2005 SEPTEMBER 30, 2004
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Sold 12,589,490 $193,275,489 71,059,650 $1,086,171,820
Issued as reinvestment
of dividends 1,355,022 20,840,244 198,391 3,013,553
Redemption fee -- 20,725 -- 62,200
Redeemed (22,265,915) (340,847,998) (37,447,925) (569,430,191)
----------- ------------- ----------- --------------
Net increase (decrease) (8,321,403) $(126,711,540) 33,810,116 $ 519,817,382
----------- ------------- ----------- --------------
----------- ------------- ----------- --------------
Effective March 5, 2004, the Fund closed to new investors.
NOTE 5 -- INVESTMENT TRANSACTIONS
Purchases and sales of securities for the six months ended March 31, 2005
(excluding short-term investments, options and short positions) aggregated
$2,197,405,182 and $2,235,390, 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 periods ended March 31,
2005 and September 30, 2004 were as follows:
2005 2004
---- ----
Ordinary Income $21,503,754 $3,130,756
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
six months ended March 31, 2005, were as follows:
PREMIUM NUMBER OF
AMOUNT CONTRACTS
------- -------
Options outstanding at September 30, 2004 $12,088,977 52,051
Options written 96,865,299 526,647
Options closed (27,125,603) (185,511)
Options exercised (52,533,750) (257,815)
Options expired (16,386,618) (72,281)
----------- --------
Options outstanding at March 31, 2005 $12,908,305 63,091
----------- --------
----------- --------
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 six months ended March 31, 2005,
the Fund incurred $1,788,855 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 six months ended March 31, 2005
the Fund did not have any borrowings outstanding under the Agreement.
NOTE 9 -- FORWARD CURRENCY EXCHANGE CONTRACTS
At March 31, 2005, 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 appreciation of
$155,131 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 MARCH 31, 2005 BE RECEIVED MARCH 31, 2005
---------- ------------ --------------- ----------- --------------
4/27/05 1,113,000 Australian Dollars $ 858,734 857,678 U.S. Dollars $ 857,678
4/15/05 10,421,500 British Pounds 19,678,861 19,488,205 U.S. Dollars 19,488,205
4/29/05 24,126,766 British Pounds 45,532,634 45,334,193 U.S. Dollars 45,334,193
5/27/05 300,000 British Pounds 565,376 567,000 U.S. Dollars 567,000
4/4/05 27,462,500 Canadian Dollars 22,693,602 22,578,227 U.S. Dollars 22,578,227
4/18/05 4,400,000 Canadian Dollars 3,637,137 3,615,745 U.S. Dollars 3,615,745
4/22/05 18,692,500 Euros 24,250,334 24,930,761 U.S. Dollars 24,930,761
------------ ------------
$117,216,678 $117,371,809
------------ ------------
------------ ------------
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 March 31, 2005, the Fund had the following open equity swap
contracts:
UNREALIZED APPRECIATION
TERMINATION DATE SECURITY SHARES (DEPRECIATION)
---------------- -------- ------ -------------
6/17/05 Euronext NV June Call (350,000) $ (152,400)
5/27/05 Hit Entertainment plc 100,000 (14,330)
5/3/05 Kidde plc 6,310,000 (241,347)
6/17/05 London Stock Exchange June Call (250,000) (4,607)
4/29/05 London Stock Exchange 2,732,520 (5,056,336)
4/29/05 London Stock Exchange 1,776,836 (1,089,453)
4/15/05 Noranda, Inc April Call (200,000) (238,273)
-----------
$(6,796,746)
-----------
-----------
For the six months ended March 31, 2005, the Fund realized losses of
$15,321 upon the termination of equity swap contracts.
THE MERGER FUND
APPROVAL OF ADVISORY CONTRACT
On January 15, 2005, at a meeting called for the purpose of voting on such
approval, the Board of Trustees, including all of the Trustees who are not
parties to the Advisory Contract or interested persons of any such party (the
non-interested Trustees), approved the continuance of the Advisory Contract for
the Fund. In so doing, the Board studied materials specifically relating to the
Advisory Contract provided by the Adviser, counsel to the non-interested
Trustees and counsel to the Fund. The Board considered a variety of factors,
including the following:
The Board considered the nature, extent and quality of the services to be
provided by the Adviser to the Fund pursuant to the Advisory Contract, including
the Adviser's competence and integrity; research capabilities; implementation
and enforcement of compliance procedures and financial-reporting controls; and
adherence to the Fund's investment objectives, policies and restrictions. The
Board also reviewed the Adviser's methodology, research and analysis that it
employs in selecting investments for the Fund. The Board considered the non-
traditional nature of the Fund's investment approach, the specialized expertise
and experience of the Fund's portfolio managers and the difficulty, were it
warranted, of selecting an alternative adviser.
The Board also evaluated the investment performance of the Fund relative to
the S&P 500 Index over the last year, three years, five years and 10 years, and
relative to the performance of alternative-investment mutual funds, including
those that engage in merger arbitrage.
Additionally, the Board reviewed information on the fee structure of the
Advisory Contract, including the costs of the services to be provided and the
profits to be realized by the Adviser and its affiliate from their relationship
with the Fund, as evidenced by the Adviser's profitability analysis. The
profitability analysis consisted of income and expenses by category for calendar
years 2004 and 2003, less expenses allocated to other funds managed by the
Adviser's affiliate, adjusted total expenses, net income, profit margin and
profit margin before payments to fund supermarkets. The Board also reviewed
comparisons of the rates of compensation paid to managers of funds in its peer
group, Lipper data relating to average expenses and advisory fees for comparable
funds and the benefit to the Adviser of the Fund's soft-dollar arrangements. It
was noted that the Adviser's future profit margin is expected to decline
modestly as the Adviser absorbs additional expenses for hardware and financial
newswires. Based on the information provided, the Board determined that the
Fund's fee structure is competitive with funds with similar investment goals and
strategies.
The Board considered the Fund's total expense ratio, contractual investment
advisory fees, 12b-1 distribution expense and service-provider fee ratio
compared to the industry average by quartile, within the appropriate Lipper
benchmark category and Lipper category range. The Board also considered the
amount and nature of fees paid by shareholders. The Board considered the fact
that the Adviser has agreed to waive a portion of its fees and noted that the
fee waiver could be discontinued at any time after January 31, 2006.
The Adviser provided information on peer-group comparisons consisting of
alternative-investment mutual funds, including those that engage in merger
arbitrage. The materials compared each fund's investment strategies; management
fee; expense ratio; total assets; whether a fund has a breakpoint, charges a
sales load and is open to new investors; returns for the one year, three years,
five years and 10 years ended November 30, 2004; and risk as measured by beta
and standard deviation. It was noted that the Fund's management fees and
expense ratio are within the average range compared to its peer funds.
The Board considered the extent to which economies of scale would be realized
with respect to operational costs as the Fund grows in the number of
shareholders and assets under management, the existence of breakpoints
previously established by the Adviser, and whether fee levels to be charged by
the Adviser reflect these economies of scale for the benefit of Fund investors
and are fair under the circumstances, which the Board, including all of the non-
interested Trustees, believed to be the case.
Based on its evaluation, in consultation with independent counsel, of all
material aspects of the Advisory Contract, including the foregoing factors and
such other information believed to be reasonably necessary to evaluate the terms
of the Advisory Contract, the Board, including all of the non-interested
Trustees voting separately, concluded that the continuation of the Advisory
Contract would be in the best interest of the Fund's shareholders, and
determined that the compensation to the Adviser provided for in the Advisory
Contract is fair and reasonable.
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 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
filed its complete schedule of portfolio holdings with the SEC on Form N-Q. The
Fund files Form N-Q for the first and third quarters of each fiscal year. The
Fund's Form 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.
- -----------------------
Not applicable for semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
- ----------------------------------------
Not applicable for semi-annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- -----------------------------------------------
Not applicable for semi-annual reports.
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 PURCHASES.
- ---------------------------------
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 directors/trustees.
ITEM 11. CONTROLS AND PROCEDURES.
- ---------------------------------
(a) The Registrant's President/Chief Executive Officer and Treasurer/Chief
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 (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 15d-15(b) under the
Securities Exchange Act of 1934, as amended.
(b) There were no significant changes in the Registrant's internal controls
over financial reporting that occurred during the Registrant's 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.
- -----------------
(a) (1) Any code of ethics or amendment thereto, that is subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy Item 2 requirements through filing an exhibit. Not Applicable.
(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 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 June 1, 2005
------------------
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 June 1, 2005
------------------
By (Signature and Title) /s/ Bonnie L. Smith
--------------------------
Bonnie L. Smith, Treasurer
Date June 1, 2005
------------------