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
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
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(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: JUNE 30, 2005
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ITEM 1. REPORT TO STOCKHOLDERS.
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THE MERGER FUND VL
SEMI-ANNUAL REPORT
JUNE 30, 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 84.1%
FINANCIAL 15.9%
CHART 3
PORTFOLIO COMPOSITION
BY DEAL TERMS*<F1>
STOCK WITH FIXED EXCHANGE RATIO 11.2%
STOCK WITH FLEXIBLE EXCHANGE RATIO 4.2%
CASH & STOCK 40.1%
CASH 38.6%
UNDETERMINED 5.9%
*<F1> Data as of June 30, 2005
CHART 4
PORTFOLIO COMPOSITION
BY SECTOR*<F2>
HEALTHCARE 23.3%
TELECOMMUNICATIONS 17.0%
CONSUMER NON-DURABLES 15.4%
CONSUMER SERVICES 12.9%
BUSINESS SERVICES 6.7%
ENERGY 6.1%
TECHNOLOGY 5.9%
MEDIA & ENTERTAINMENT 5.6%
TRANSPORTATION 4.0%
FINANCIAL SERVICES 2.7%
CAPITAL GOODS 0.4%
CHART 5
PORTFOLIO COMPOSITION
BY REGION*<F2>
UNITED STATES 78.3%
EUROPE 15.6%
CANADA 6.1%
*<F2> Data as of June 30, 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 $250.4977 $109.3510 $99.8604 $186.5095
2005 $215.1986 $225.5347
Source: Securities Data Corp.
THE MERGER FUND VL
EXPENSE EXAMPLE
JUNE 30, 2005
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 1/1/05 - 6/30/05.
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 1/1/05 VALUE 6/30/05 PERIOD 1/1/05 - 6/30/05*<F7>
------------ ------------- ----------------------------
Actual +<F3> (1)<F5> $1,000.00 $1,028.30 $8.85
Hypothetical ++<F4> (2)<F6> $1,000.00 $1,016.07 $8.80
+<F3> Excluding dividends on short positions, your actual cost of investment
in the Fund would be $7.04.
++<F4> Excluding dividends on short positions, your hypothetical cost of
investment in the Fund would be $7.00.
(1)<F5> Ending account values and expenses paid during period based on a 2.83%
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 1.76%,
multiplied by the average account value over the period, multiplied by
181/365 (to reflect the one-half year period).
THE MERGER FUND VL
SCHEDULE OF INVESTMENTS
JUNE 30, 2005
(UNAUDITED)
SHARES VALUE
------ -----
COMMON STOCKS -- 83.55%*<F8>
BANKS -- 1.22%*<F8>
2,325 Bayerische Hypo - und Vereinsbank AG(1)<F11>**<F9> $ 61,034
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BROADCASTING -- 1.48%*<F8>
4,100 Lin TV Corp -- Class A(4)<F14>**<F9> 56,949
1,038 News Corporation -- Class A(2)<F12> 16,795
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73,744
----------
CABLE TV -- 2.26%*<F8>
3,500 Cablevision Systems Corporation(2)<F12>**<F9> 112,700
----------
COMPUTER HARDWARE -- 1.24%*<F8>
1,700 Storage Technology Corporation **<F9> 61,693
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COMPUTER SERVICES -- 2.75%*<F8>
3,900 SunGard Data Systems Inc.(5)<F15>**<F9> 137,163
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CONSULTING SERVICES -- 0.35%*<F8>
1,650 Gartner, Inc. -- Class B**<F9> 17,474
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DATABASE MARKETING SERVICES -- 1.48%*<F8>
6,300 InfoUSA Inc.(4)<F14>**<F9> 73,710
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DIALYSIS PRODUCTS & SERVICES -- 5.55%*<F8>
7,352 Medicore, Inc.(5)<F15>**<F9> 92,562
4,000 Renal Care Group(5)<F15>**<F9> 184,400
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276,962
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DIVERSIFIED CONSUMER PRODUCTS -- 5.62%*<F8>
5,544 The Gillette Company(2)<F12> 280,693
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E-COMMERCE -- 3.20%*<F8>
3,070 Ask Jeeves, Inc.(4)<F14>**<F9> 92,683
7,988 DoubleClick Inc.**<F9> 67,019
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159,702
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EDUCATIONAL PRODUCTS -- 1.96%*<F8>
2,100 School Specialty, Inc.(4)<F14>**<F9> 97,650
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HOME HEALTHCARE -- 0.97%*<F8>
1,400 Apria Healthcare Group Inc. **<F9> 48,496
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INFORMATION TECHNOLOGY -- 2.80%*<F8>
6,150 The Titan Corporation(2)<F12>**<F9> 139,851
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INSURANCE -- 1.47%*<F8>
13,400 Skandia Forsakrings AB(1)<F11>(4)<F14> 73,585
----------
MEDICAL DEVICES -- 10.34%*<F8>
5,300 Guidant Corporation(3)<F13> 356,690
2,390 INAMED Corporation(2)<F12>**<F9> 160,058
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516,748
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OIL & GAS EXPLORATION -- 5.12%*<F8>
2,280 Penn West Energy Trust(1)<F11> 53,927
3,100 Unocal Corporation(3)<F13> 201,655
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255,582
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OIL REFINING & MARKETING -- 1.04%*<F8>
700 Premcor Inc.(5)<F15> 51,926
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PHARMACEUTICALS -- 4.03%*<F8>
5,509 Transkaryotic Therapies, Inc.(4)<F14>**<F9> 201,519
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PHARMACY SERVICES -- 2.45%*<8>
2,700 Accredo Health, Incorporated(2)<F12>**<F9> 122,580
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RETAILING -- 11.89%.*<F8>
4,020 Brookstone, Inc.(4)<F14>**<F9> 75,898
2,500 Electronics Boutique Holdings Corp.(2)<F12>**<F9> 158,725
4,375 May Department Stores Company(2)<F12> 175,700
900 The Neiman Marcus Group, Inc. -- Class A 87,228
3,650 Toys "R" Us, Inc.(4)<F14>**<F9> 96,652
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594,203
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SHIPPING -- 1.97%*<F8>
1,450 Koninklijke P&O Nedlloyd NV(1)<F11>(4)<F14> 98,538
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STEEL -- 0.39%*<F8>
824 Mittal Steel Company NV -- Class A - NYS **<F9> 19,562
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TELEPHONY -- 11.95%*<F8>
4,500 MCI Inc.(2)<F12>**<F9> 115,695
4,870 Nextel Communications, Inc. -- Class A(2)<F12>**<F9> 157,350
11,995 Price Communications Corporation(5)<F15>**<F9> 207,514
2,750 Western Wireless Corporation -- Class A(5)<F15>**<F9> 116,325
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596,884
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TRUCKING -- 2.02%*<F8>
2,350 Overnite Corporation(4)<F14> 101,003
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TOTAL COMMON STOCKS (Cost $4,066,854) 4,173,002
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PRINCIPAL
AMOUNT
------
TAX ESCROW NOTES -- 0.06%*<F8>
$ 4,979 NextWave Wireless LLC Secured Note 2,738
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TOTAL TAX ESCROW NOTES (Cost $2,738) 2,738
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CORPORATE BONDS -- 3.29%*<F8>
ADELPHIA COMMUNICATIONS CORPORATION:
24,000 9.38%, 11/15/2009 D<F10> 21,360
104,000 10.25%, 06/15/2011 D<F10> 93,860
55,000 Toys "R" Us, Inc. 7.88%, 04/15/2013 49,225
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TOTAL CORPORATE BONDS (Cost $166,683) 164,445
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TOTAL INVESTMENTS (Cost $4,236,275) $4,340,185
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*<F8> Calculated as a percentage of net assets.
**<F9> Non-income producing security.
D<F10> Security in default.
NYS - New York Shares
(1)<F11> Foreign security.
(2)<F12> All or a portion of the shares have been committed as collateral for
open short positions.
(3)<F13> All or a portion of the shares have been committed as collateral for
written option contracts.
(4)<F14> All or a portion of the shares have been committed as collateral for
short foreign currency contracts.
(5)<F15> 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
JUNE 30, 2005
(UNAUDITED)
SHARES VALUE
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1,505 ALLTEL Corporation $ 93,731
4,999 Dialysis Corporation of America 108,228
1,065 Energy Select Sector SPDR Fund 47,361
1,362 Federated Department Stores, Inc. 99,807
1,900 GameStop Corporation -- Class A 62,149
1,650 Gartner, Inc. -- Class A 17,523
3,910 IAC/InterActiveCorp 94,035
1,508 Johnson & Johnson 98,020
810 Medco Health Solutions, Inc. 43,222
3,150 Medicis Pharmaceutical Corporation -- Class A 99,950
1,040 News Corporation -- Class B 17,534
510 Pernod Ricard SA 81,477
5,450 The Procter & Gamble Company 287,487
6,330 Sprint Corporation 158,820
11,625 UniCredito Italiano SpA 61,456
310 Valero Energy Corporation 24,524
1,254 Verizon Communications Inc. 43,326
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TOTAL SECURITIES SOLD SHORT
(Proceeds $1,350,092) $1,438,650
----------
----------
See notes to the financial statements.
THE MERGER FUND VL
SCHEDULE OF OPTIONS WRITTEN
JUNE 30, 2005
(UNAUDITED)
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- -----
CALL OPTIONS
14 Apria Healthcare Group Inc. $ 630
Expiration July 16, 2005, Exercise Price $35.00
Cablevision Systems Corporation:
9 Expiration July 16, 2005, Exercise Price $32.50 180
23 Expiration August 20, 2005, Exercise Price $32.50 1,380
Guidant Corporation:
1 Expiration July 16, 2005, Exercise Price $70.00 60
3 Expiration August 20, 2005, Exercise Price $70.00 578
45 MCI Inc. 3,600
Expiration July 16, 2005, Exercise Price $25.00
6 Mittal Steel Company NV 150
Expiration July 16, 2005, Exercise Price $25.00
19 The Titan Corporation 570
Expiration July 16, 2005, Exercise Price $22.50
Unocal Corporation:
16 Expiration July 16, 2005, Exercise Price $65.00 1,520
15 Expiration August 20, 2005, Exercise Price $65.00 2,550
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TOTAL OPTIONS WRITTEN
(Premiums received $16,204) $11,218
-------
-------
See notes to the financial statements.
THE MERGER FUND VL
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2005
(UNAUDITED)
ASSETS:
Investments, at value (Cost $4,236,275) $4,340,185
Deposit at brokers for short sales 947,170
Receivable from brokers for proceeds on
securities sold short 1,339,341
Receivable for investments sold 400,230
Receivable for written options 5,285
Receivable for forward currency exchange contracts 6,586
Receivable from investment adviser 1,348
Dividends and interest receivable 1,387
Prepaid expenses 318
----------
Total Assets 7,041,850
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LIABILITIES:
Securities sold short, at value (Proceeds of $1,350,092) $1,438,650
Options written, at value (Premiums received $16,204) 11,218
See accompanying schedule
Payable to custodian 19,602
Payable for equity swap contracts 5,961
Payable for dividends on securities sold short 2,480
Payable for investment securities purchased 526,096
Accrued expenses and other payables 42,927
----------
Total Liabilities 2,046,934
----------
NET ASSETS $4,994,916
----------
----------
NET ASSETS Consist Of:
Accumulated undistributed net realized gain on investments sold $ 176,042
Net unrealized appreciation (depreciation) on:
Investments $ 103,910
Short positions (88,558)
Written options 4,986
Equity swap contracts (11,087)
Foreign currency translation 1
Forward currency exchange contracts 6,586
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Net unrealized appreciation 15,838
Paid-in capital 4,803,036
----------
Total Net Assets $4,994,916
----------
----------
NET ASSET VALUE, offering price and redemption price per share
($4,994,916/458,249 shares of beneficial interest outstanding) $10.90
------
------
See notes to the financial statements.
THE MERGER FUND VL
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)
INVESTMENT INCOME:
Interest $ 13,437
Dividend income on long positions
(net of foreign withholding taxes of $110) 3,849
--------
Total investment income 17,286
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EXPENSES:
Investment advisory fee $ 20,433
Transfer agent and shareholder servicing agent fees 31,589
Federal and state registration fees 362
Professional fees 37,180
Trustees' fees and expenses 6,013
Custody fees 590
Administration fee 20,010
Reports to shareholders 4,254
Dividends on short positions 5,946
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Total operating expenses 126,377
Less: Expenses waived (Note 6) (97,547)
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Total expenses 28,830
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NET INVESTMENT LOSS (11,544)
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REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions 130,371
Short transactions (12,461)
Option contracts expired or closed 17,366
Equity swap contracts (758)
Foreign currencies (5,428)
--------
Net realized gain 129,090
Change in unrealized appreciation / depreciation on:
Investments 62,295
Short positions (67,904)
Written options 5,933
Equity swap contracts (11,693)
Foreign currency translation 2
Forward currency exchange contracts 7,940
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Net unrealized loss (3,427)
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 125,663
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $114,119
--------
--------
See notes to the financial statements.
THE MERGER FUND VL
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED PERIOD MAY 26, 2004(1)<F16>
JUNE 30, 2005 THROUGH
(UNAUDITED) DECEMBER 31, 2004
---------- -----------------
Net investment loss $ (11,544) $ (2,358)
Net realized gain on investments sold, option contracts
expired or closed, foreign currency exchange contracts,
securities sold short and equity swap contracts 129,090 60,854
Change in unrealized appreciation / depreciation
on investments, foreign currencies, forward currency
exchange contracts, short positions, equity swap
contracts and written options (3,427) 19,265
---------- ----------
Net increase in net assets resulting from operations 114,119 77,761
---------- ----------
Net increase in net assets from
capital share transactions (Note 4) 3,519,264 1,183,772
---------- ----------
Net increase in net assets 3,633,383 1,261,533
NET ASSETS:
Beginning of period 1,361,533 100,000
---------- ----------
End of period (including accumulated undistributed
net investment income of $0 and $248, respectively) $4,994,916 $1,361,533
---------- ----------
---------- ----------
(1)<F16> Commencement of Operations.
See notes to the financial statements.
THE MERGER FUND VL
FINANCIAL HIGHLIGHTS
FOR THE PERIOD
SIX MONTHS MAY 26, 2004,(1)<F17>
ENDED THROUGH
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
(UNAUDITED)
PER SHARE DATA:
Net Asset Value, beginning of period $10.60 $10.00
------ ------
Income from investment operations:
Net investment loss (0.03) (0.02)
Net realized and unrealized gain on investments 0.33 0.62
------ ------
Total from investment operations 0.30 0.60
------ ------
Net Asset Value, end of period $10.90 $10.60
------ ------
------ ------
Total Return 2.83%(3)<F19> 6.00%(3)<F19>
Supplemental data and ratios:
Net assets, end of period (000's) $4,995 $1,362
Ratio of operating expenses to average net assets
including dividends on short positions:
Before expense waiver 7.72%(2)<F18> 43.30%(2)<F18>
After expense waiver 1.76%(2)<F18> 1.62%(2)<F18>
Ratio of operating expenses to average net assets
excluding dividends on short positions:
Before expense waiver 7.36%(2)<F18> 43.08%(2)<F18>
After expense waiver 1.40%(2)<F18> 1.40%(2)<F18>
Ratio of net investment income to average net assets
Before expense waiver (6.67)%(2)<F18> (42.14)%(2)<F18>
After expense waiver (0.71)%(2)<F18> (0.46)%(2)<F18>
Portfolio turnover rate(4)<F20> 265.15% 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
JUNE 30, 2005 (UNAUDITED)
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, as
amended (the "1940 Act"). 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 June 30,
2005 97.8% 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
sale 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 sale price. Securities not listed on an exchange are
valued at the last sale price as of the close of the New York Stock Exchange.
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), subject
to the supervision of the Board of Trustees, 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 June 30, 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 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 Fundto 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 six months ended June 30, 2005 the Adviser reimbursed $97,547
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
12/31/08 $ 97,547
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:
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 2005 DECEMBER 31, 2004
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Sold 349,075 $3,726,468 119,198 $1,191,029
Redeemed (19,311) (207,204) (713) (7,257)
------- ---------- ------- ----------
Net Increase 329,764 $3,519,264 118,485 $1,183,772
------- ---------- ------- ----------
------- ---------- ------- ----------
NOTE 5 -- INVESTMENT TRANSACTIONS
Purchases and sales of securities for the six months ended June 30, 2005
(excluding short-term investments, options and short positions) aggregated
$10,653,755 and $7,190,351, 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 six
months ended June 30, 2005, were as follows:
PREMIUM NUMBER OF
AMOUNT CONTRACTS
------ ---------
Options outstanding at December 31, 2004 $ 17,132 70
Options written 158,111 908
Options closed (26,745) (199)
Options exercised (113,802) (540)
Options expired (18,492) (88)
--------- -----
Options outstanding at June 30, 2005 $ 16,204 151
--------- -----
--------- -----
NOTE 7 -- FORWARD CURRENCY EXCHANGE CONTRACTS
At June 30, 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 $6,586 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 JUNE 30, 2005 BE RECEIVED JUNE 30, 2005
- ----------- ------------ --------------- ----------- --------------
8/19/05 24,310 British Pounds $ 43,494 43,831 U.S. Dollars $ 43,831
8/31/05 54,400 British Pounds 97,296 98,788 U.S. Dollars 98,788
9/16/05 176,307 British Pounds 315,239 319,428 U.S. Dollars 319,428
7/21/05 65,632 Canadian Dollars 53,606 52,910 U.S. Dollars 52,910
9/30/05 323,350 Canadian Dollars 264,645 259,174 U.S. Dollars 259,174
8/26/05 82,650 Euros 100,279 103,575 U.S. Dollars 103,575
7/19/05 418,450 Swedish Krona 53,624 57,018 U.S. Dollars 57,018
9/30/05 138,600 Swedish Krona 17,839 17,884 U.S. Dollars 17,884
-------- --------
$946,022 $952,608
-------- --------
-------- --------
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 June 30, 2005, the Fund had the following open equity swap
contracts:
UNREALIZED APPRECIATION
TERMINATION DATE SECURITY SHARES (DEPRECIATION)
--------------- -------- ------ --------------
8/09/05 Allied Domecq 32,350 $ (8,388)
12/31/05 London Stock Exchange 1,650 74
12/31/05 London Stock Exchange 2,750 (438)
8/30/05 Scottish Radio 5,000 (1,276)
7/15/05 Skandia Forsakrings AB July Call (10,100) (1,847)
9/16/05 Skandia Forsakrings AB September Call (3,300) (22)
9/30/05 Telesystems Internation Wireless Inc. 16,200 810
--------
$(11,087)
--------
--------
For the six months ended June 30, 2005, the Fund realized losses of $758 upon
the termination of equity swap contracts.
THE MERGER FUND VL
APPROVAL OF ADVISORY CONTRACT
On April 19, 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 concluded that the
Adviser fulfilled all of the foregoing factors and responsibilities in
accordance with its obligations under the Advisory Contract.
The Board also evaluated the investment performance of the Fund relative to
the S&P 500 Index and a group of alternative-investment mutual funds, including
those that engage in merger arbitrage, since the Fund's inception.
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 since the
Fund's inception, less expenses allocated to other funds managed by the
Adviser's affiliate, adjusted total expenses, net income and profit margin. The
Board also reviewed comparisons of the rates of compensation paid to a group of
alternative-investment funds and 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. Based on the information provided, the Board
determined that the Fund has been unprofitable to the Adviser, and, hence, the
Fund's fee structure was reasonable compared to funds with similar investment
goals and strategies. It was noted that the Fund's management fees and expense
ratio (after the fee waiver and expense reimbursement) are within the average
range compared to its peer funds. The Board also 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 July 1, 2013.
The Board considered the issue of economies of scale and noted that, given
the very small size of the Fund, consideration of fee breakpoints was premature.
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 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, 2005 will be available after August 31, 2005 on the SEC's
website or by calling the toll-free number listed above.
AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULE
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
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
Roy D. Behren, Chief Compliance Officer
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.
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 trustees.
ITEM 11. CONTROLS AND PROCEDURES.
- ---------------------------------
(a) The Registrant's President/Chief Executive Officer and Treasurer/Chief
Financial Officer have reviewed the Registrant's disclosure controls
and procedures (as defined in Rule 30a-3(c) under the Investment
Company Act of 1940 (the "Act")) as of a date within 90 days of the
filing of this report, as required by Rule 30a-3(b) under the Act and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of
1934. Based on their review, such officers have concluded that the
disclosure controls and procedures are effective in ensuring that
information required to be disclosed in this report is appropriately
recorded, processed, summarized and reported and made known to them by
others within the Registrant and by the Registrant's service provider.
(b) There were no significant changes in the Registrant's internal
controls over financial reporting that occurred during the
Registrant's last fiscal half-year that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting.
ITEM 12. EXHIBITS.
- ------------------
Not Applicable.
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
------------------
By (Signature and Title) /s/ Frederick W. Green
----------------------
Frederick W. Green, President
Date August 12, 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 August 12, 2005
---------------
By (Signature and Title) /s/ Bonnie L. Smith
-------------------
Bonnie L. Smith, Treasurer
Date August 12, 2005
---------------